Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!
What the president and his allies miss is that recent events at JPMorgan illustrate how the system should -- and does -- work.
Let's compare two cases. In September 2003, when warned of problems at Freddie Mac and Fannie Mae, then-House Financial Services Chair Barney Frank stated, "I want to roll the dice a little bit more in this situation." Well, Chairman Frank did indeed "roll the dice," and now the American taxpayer is almost $200 billion poorer.
JPMorgan rolled the dice, betting that the U.S. economy would improve -- essentially a bet on Obama's economic agenda. That bet went south. JPMorgan lost $2 billion, one hundredth of the losses so far on Fannie Mae and Freddie Mac.
But the losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan. The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.
This is the way the system should work. Those who take the risk, take the loss (or gain). It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.
The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees. Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis. In fact, some of the most incompetent, such as the previous president of the New York Federal Reserve Bank, actually got promotions.
Talk about twisted incentives. In the private sector, you gamble, you take the loss, and you may lose your job and your career. In the public sector, you gamble and the taxpayer takes the hit, and you might even get a promotion out of it.
President Obama has warned that "you could have a bank that isn't as strong, isn't as profitable making those same bets and we might have had to step in." Had to step in? What the recent JPMorgan losses actually prove is that a major investment bank can take billions of losses, and the financial system continues to function even without an injection of taxpayer dollars. It is no accident that many of those now advocating more regulation are the same people who advocated the bailouts. Banks need to be allowed to take losses.
The president also sets up a ridiculous standard of error-free financial markets. All human institutions, including banks and even the White House, are characterized by error and mistake. Zero mistakes is an unattainable goal in any system in which human beings are involved.
What we need is not a system free of errors, but one that is robust enough to withstand them. And the truth is that the more small errors we have, the fewer big errors we will have. I am far more concerned over long periods of calm and profit than I am with periods of loss. The recent JPMorgan losses remind market participants that risk is omnipresent. It encourages due diligence on the part of investors and other market participants, something that was sorely lacking before the crisis.
One should also remember that while JPMorgan lost just over $2 billion, somebody made $2 billion. Net losses in the system were zero. The event was in no way "systemic," even under the very loose definitions pushed by Treasury and the Fed. Someone is correct, they make money; another other party is incorrect, so they lose money.
But it isn't just a gamble. JPMorgan was engaged in hedging activity in the corporate bond market, which ultimately helps increase liquidity in that market; helping corporations to grow and expand employment.
Just as the Dodd-Frank Act used the cover of a crisis to reward special interests and ignore the actual fault lines in our financial system, President Obama and others are attempting to use JPMorgan's recent losses to cover up and distract from regulatory failings. If Dodd-Frank had actually ended Too-Big-To-Fail, as the president promised at the time, then JPMorgan's losses would be irrelevant. Rather than point the finger elsewhere, the president should admit his mistake, call for the repeal of Dodd-Frank and begin the process of actually fixing our financial system.
Mark A. Calabria is director of financial regulation studies at the Cato Institute.
Huh? The problem is Obama hasn't pointed the finger at ANYONE.
Nothing is anyone's fault!
The first is the inability of the regulators to fully comprehend what is going on in an entity the size of JP Morgan Chase.
The second is the inability of the managements of these too-big-to-fail institutions to fully comprehend what is going on.
And third, and most importantly, these too-big-to-fail banks have short institutional memories. They quickly forget what led to their problems the last time it got tough for them.
And here we are again with a too-big-to-fail bank losing $2+ billion of its “own” money — and under the leadership of CEO Dimon who is one of those most vocal against limiting the banks’ proprietary trading under proposed regulation/legislation. What did CEO Dimon learn about risk management from our most recent financial crisis? Nothing?
It’s time we revisit the separation of real banking activity and everything else that banks want to do. This might eliminate, or at least restrain, much of the burden that is now placed on US taxpayers to correct the “sloppy” and “stupid” decisions (CEO Dimon’s own adjectives) that have been made by the too-big-to-fail banks in the post-Glass-Steagall era.
See more on my blog @ “The View from the Middle of the Road” on blogspot.com/.
No they haven't....because Jamie Dimon is still CEO. Any other CEO would have been fired, just like a teller at Chase would be fired if they were short money....they would have had to pay back that money or resign.
Let me tell you the problem with Chase. It's it corporate culture. Where obscene demands on ever increasing profits and growth cause their employees to move ever away from what a bank is suppose to do. To engage in risk even if that risk is against the fiduciary responsibility that a bank has to it's own customers. Maybe this trade wasn't "technically" with client's money....but that doesn't mean it is not happening.
Read Cindy Adams column in the NY Post today, where she describes how Chase employees (who didn't seem very experienced in her words) tried again and again, very agressively, to push her into a bigger relationship with that bank then she ever wanted.
One of the reasons I personally left Chase...when all the senior executives held a sales rally where they insisted that we turn over personal information (like bank accounts, social security numbers, date of birth, income), without the client's permission....so that this "information" could be "shared" with other employees of the bank in an effort to get more business.
What's your name? Mark? Is that Really a bank where you want to put your trust in?
The bet was in fact not a bet on the american economy. It was a strategic and oversized call on an asset class, high grade corporate bonds, which is a core of any defensive portfolio that assumes credit deflation and asset market deflation. It was in fact a huge bet against Obama, against him even having a chance to get us out of the policy mess that Bush, Greenspan and Bernanke have left us.
so now, the best investment in town are high yield corporate bonds, the safe haven when things go pearshaped.
and i have to say... i cannot agree with your views on how to structure our financial system sustainable... read here why eyeofthestormbook.com/2012/05/the-london-whale-squeezes-jp-morgan/
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,”
Good point
Socializing the losses while privatizing the profits is not working for most people.
Then you must be ecstatic since the deregulation of the 80's. Before that, starting after the Great Depression, our country went through one of the longest and strongest periods of economic growth our country and the world has ever seen. It lifted all boats, by the way. Too bad it had to end so that your "free market" could displace those that shouldn't be a part of the wealthy class.
in fact cato has a filing cabinet full of fill in the blank forms to wit "the ____ for____" cannot be ____."