JPMorgan Is in a No-Win Situation of Its Own Creation


NEW YORK ( TheStreet) -- JPMorgan Chase reports second-quarter earnings before the opening bell on Friday, and I can tell you right now that no matter what kind of numbers it reports, it is going to be dumped on.

If JPMorgan's $9-billion-and-counting trading loss is a drag on earnings, it is going to be dumped on. If it isn't, it is going to be dumped on.

As a matter of fact, you might say that JPMorgan -- and all the major banks, for that matter -- are in a pretty much no-win situation during earnings-reporting season. If they make a ton of money, it calls attention to the fact that the banking sector is thriving while the rest of the economy is suffering because of a recession that they helped create. If they don't make money, they are criticized for being inept or inattentive, just as JPMorgan has been for that credit-derivatives trading loss that keeps getting bigger.

JPMorgan CEO Jamie Dimon is the first to decry the bad rap that the banks are getting, and on the face of it, it doesn't seem especially fair or even rational. After all, it is argued, shouldn't we be happy that at least one sector of the economy is doing well -- so well that even a $9-billion-and-counting trading loss isn't likely to do the bank very much damage?

The answer is "no." We shouldn't be happy. We should be furious. The public has every reason to be resentful about how the banking sector and Wall Street are flourishing when the rest of the economy is suffering and unemployment is still stubbornly hovering above 8%. There are two reasons for this:

1. JPMorgan is a government-subsidized institution, and;

2. It treats its customers like dirt.

According to a study by the International Monetary Fund and some numbers-crunching by Bloomberg, JPMorgan gets a $14 billion-a-year subsidy from the U.S. taxpayer.

In recent decades, you see, the government has stepped in to be sure that all bank creditors are paid in full. See, that's one of the unseen advantages of being too big to fail. The system is so interconnected that international banking becomes like one big game of dominoes, so that the collapse of one can cause the entire banking system to go "pfffft," as the Eli Wallach character pointed out in Oliver Stone's Wall Street sequel, Money Never Sleeps.

Bank creditors -- and not just insured depositors -- "assume the government will always make them whole, so they become willing to lend at lower rates, particularly to systemically important banks." The value of this implied subsidy increases with each successive crisis and bailout. So now, according to a study by researchers at the IMF and a German university, the "we won't let you fail" factor shaves 0.8 percentage point off large banks' borrowing costs. That's a 0.6 percentage point increase since before the 2008 financial crisis.

Imagine that. The financial crisis throws people out of their homes and jobs, shuts businesses, makes bankers reluctant to loan to small businesses (who aren't on the bailed-out list) while actually lowering borrowing costs for the fat cats that aren't loaning out money to boost the economy.

Multiplying that 0.8 percentage point subsidy by the total debt and deposits of all the 18 major banks adds up to $76 billion a year, of which JPMorgan gets $14 billion -- 77% of its net income for the past year.

And that doesn't count the other goodies that JPMorgan gets from the federal government. One is the refinancing bonanza, thanks specifically to a program from the Obama administration -- you know, the administration that the bankers and Wall Street are ganging up to depose. Obama's Home Affordable Refinance Program, or HARP, is designed to make it easier for hard-off homeowners to lock in lower interest rates.

Banks like JPMorgan and Wells Fargo are among the biggest participants in this worthy program, which refinanced $275 billion in mortgages in the second quarter alone. But they're not doing it because they've suddenly fallen in love with hard-up homeowners. They're doing it because they love fees. According to one estimate, banks that refinance mortgages under HARP could rake in $12 billion in revenue this year, thanks to loan-origination fees and other goodies known to every homeowner who has undergone a refinancing.

But if you really want to understand why JPMorgan and the other major banks are in a no-win situation, and why people get steamed at their profits, just glance through the links I placed in this space back in October 2010, in which I described the groundswell of consumer resentment that was building over thuggish collection tactics used by credit card companies, including JPMorgan. Then move on to this series in the American Banker last March.

While major banks' accumulation of $76 billion in interest rate subsidies is almost charmingly refined in its finesse and subtlety, their treatment of people who fall behind on credit card payments (or even people who don't owe them a cent) is more what you'd get from a street-corner loanshark -- a street-corner loanshark who uses the court system and credit-reporting agencies instead of a baseball bat. I honestly am not sure which one collection methodology is worse -- breaking kneecaps or ruining credit ratings -- but the usurious interest rates being charged by the credit card companies definitely bear a resemblance to the six-for-five charged on the street.

When you read documents like this -- a JPMorgan whistleblower's account of the bank's slimy collection tactics -- you can understand the depth of frustration that Americans feel when they read about banker profits, or learn about yet another Jamie Dimon rant.

JPMorgan's credit card collection tactics are under investigation, reportedly by the FBI. Don't hold your breath. The Obama administration, vilified as it has been by Dimon, isn't about to call the bankers to account for the shabby way they've treated the American public. Which is yet another reason why nobody celebrates much when the banks trot out their fantastic quarterly numbers.

Gary Weiss's most recent book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press.