When banks generate huge profits, they are exploiting the American people, engaging in unadulterated greed and, needless to say, in need of more regulation. And when banks lose too much money? Yep, they’re being insatiably greedy — but stupid, too — and, naturally, in need of more regulation.
The unscrupulous can’t win for losing, apparently.
So when JPMorgan Chase & Co. suffers about $2 billion in losses (probably more) via complex derivative trades that were used by an obscure unit within the bank to hedge against risk, everyone in Washington seems quite excited about the political possibilities. Yet, JPMorgan’s problems prove that finance works without any meddling from Washington.
Rather than have someone point out the obvious — “hey, that’s how it’s supposed to work”; “that’ll teach ’em”; “neat, someone made 2 billion bucks on JPMorgan’s stupid bets” — we have the Justice Department opening an inquiry into the matter, the president calling for tighter regulations, Republican Sen. Bob Corker calling for hearings and a bunch of pundits falsely claiming that if the Wall Street reform bill had been fully implemented, we wouldn’t have these kinds of “risky” transactions — as if we should want to stop them in the first place.
The $2 billion hasn’t sunk JPMorgan (and with $127 billion in equity, it hasn’t come close), but if this kind of thing constitutes a national emergency, we should have better sense than to allow folks who squander $2 billion on their lunch breaks to concoct the solution.
Unlike our friends in Washington, JPMorgan Chase paid a price for its bad choices; in this case, it cost a couple of billion dollars, caused the company’s stock to drop, caused some executives to lose their jobs and damaged the reputation of the firm (though not very much) — and if shareholders don’t like how their money is being handled, they can take their business elsewhere or vote to make changes. This is how it would occasionally work without politics distorting the process.
New York Times columnist Paul Krugman, who believes trillions of taxpayer dollars should spread haphazardly around the economy as stimulus, also believes that a $2 billion loss by a private equity firm is why Washington must regulate. “Banks are special,” you see, “because the risks they take are borne, in large part, by taxpayers and the economy as a whole.” (Banks are special. Select car companies are special. The health care sector is special. The energy sector is special. Boeing is special. Etc. You may have noticed many industries getting special attention.)
If banks are too big — and many economists I trust say they are — they’ve only gotten bigger of late. The nation’s five largest banks held assets of about 43 percent of the economy before the bank bailouts. They now control assets of 56 percent of the economy. And big is how Washington likes them. It’s this kind of “special” relationship that allows politicians easier control and offers pliable donors in return. In the end, we are institutionalizing Too Big To Fail.
Richard W. Fisher, president of the Federal Reserve Bank of Dallas, and others argue that massive banks are incubators for crony capitalism and bad decisions and should be broken up. Sounds like a good idea.
But the kerfuffle surrounding JPMorgan’s losses helps ensure that politics will become an even bigger part of finance. Whereas Washington once created an environment in which big banks could act recklessly knowing full well they would be saved by taxpayers, now CEOs, such as JPMorgan’s Jamie Dimon, may find themselves increasingly shying away from taking smart risk (or from hedging risk, which credit default swaps do), because any loss will be scrutinized by regulation-happy politicians looking to score points.
Now, I have no idea whether JPMorgan Chase is a “well-managed” bank as the president claims, but rather than turning banks into “special” cases, Washington should be working to let them sink or swim on their own.