"Do You Want a Repeat of the Financial Crisis?"
JP Morgan Loss Shows Why We Need Tougher Rules On Wall Street
You’ve probably heard by now that JP Morgan Chase lost a whopping $2 BILLION on a single bad bet in just a matter of weeks. What you may not have heard is that JP Morgan, and its CEO Jamie Dimon, have been among of the most vocal opponents of tougher regulations on Wall Street. The bank has spent nearly $10 million since the beginning of 2011 on lobbying, focusing largely on the Volcker Rule, a regulation that would largely prohibit risky proprietary trading at federally-insured banks (like JP Morgan). The trade that caused JP Morgan’s losses would likely still have been legal under the Volcker Rule, but only because of a loophole that JP Morgan lobbied for.
As the Atlantic’s Derek Thompson points out, just this one losing gamble cost JP Morgan far more – at least four times more – than even what it claimed would be the onerous costs of complying with Wall Street reform:
It’s also worth noting that the “costs” JP Morgan estimated to be associated with Wall Street reform are probably wildly overblown. They also aren’t really compliance costs so much as lower profits due to less risk-taking. It’s true that banks can sometimes make more money when they place riskier bets, but that also means taxpayer-insured institutions like JP Morgan also open up taxpayers to bigger losses when these bets go wrong. Regulations on the financial industry balance out these potential costs and benefits.
JP Morgan claims the loss came as part of a legal “hedging” strategy meant to reduce risk; however, as David Wessel, economics editor at the Wall Street Journal, pointed out this morning, this explanation doesn’t hold up:
Especially from the outside, it’s incredibly hard to tell the difference between a hedge, where you’re offsetting some risk you take in your business, and simply going to the casino and making a bet — in the hopes of making a profit. And there a lot of people outside JP Morgan who said, look, that’s what they were doing.
And, just as a reminder, JP Morgan is a bank with federally-insured deposits (more than a $1 TRILLION worth), meaning risky bets once again threaten to put the taxpayer on the hook in the event of a crisis.
Conservatives’ reactions to the troubling news have been mixed. For his part, the chairman of the Republican National Committee responded that the incident shows we need less regulation of Wall Street, not more. Sen. Bob Corker (R-TN), who voted against Dodd-Frank, has called for a Senate investigation of the $2 BILLION loss. Mitt Romney, of course, believes we should not only repeal Dodd-Frank outright, but also get rid of additional rules that were put in place in the wake of the collapse of Enron and accounting scandals at other large corporations.
The obvious response to clear evidence that Wall Street may be going back to its bad old ways before the economy has even recovered from the last mess they created is that we need tougher rules on Wall Street. And that’s exactly the case President Obama made today on The View:
“JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion and counting,” the president said. “We don’t know all the details. It’s going to be investigated, but this is why we passed Wall Street reform.”
“This is the best, or one of the best-managed banks. 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,” Obama said. “That’s exactly why Wall Street reform’s so important.”
Treasury Secretary Tim Geithner also weighed in today, saying the bad bet “helps make the case” for tougher financial regulations:
“The Fed and the SEC and the other regulators — and we’ll be part of this process — are going to take a very careful look at this incident of course, and make sure that we review the implications of what that means for the design of these remaining rules,” Geither said, adding that the review will be “not just for the Volcker Rule, which is important in this context, but the broader set of safeguards and reforms.”
IN ONE SENTENCE: JP Morgan’s loss underscores why we needed to pass Wall Street reform in the first place — and shows why we need to speed up and strengthen its implementation.
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