Thursday, May 24, 2012

JP Morgan Losses: A Crisis Done Right

By Preston Cooper


Photo courtesy of Wikipedia
Last week's $2 billion (now likely much higher) trading loss at megabank JP Morgan Chase sent the financial world into a frenzy. The bank's stock plunged more than twenty percent, and regulators in Washington leaped at the opportunity to call for stronger oversight of Wall Street. Many have called for the resignation of JPM's CEO, Jamie "Panache" Dimon, from the New York Fed's Board of Governors.

I don't see what the hullabaloo is about.

Yes, JPM's trading loss was large, but the bank will likely still turn a profit in the second quarter. This will not cripple the company by any means. What's more, had something like this happened at JPM's two ugly stepsisters - Bank of America and Citi - it would probably not even make headlines.

JPM remains a very well-managed bank. It will not be needing a taxpayer bailout anytime soon. The company will absorb its own losses, the managers responsible for the damage will resign, and business will eventually return to normal. This is how a crisis should be done. The tumult in the media and on Wall Street is unnecessary.

Moreover, the response of Washington regulators reveals that the loss has had a good effect - it is inspiring discussion about how to improve the financial regulatory system. This is good - conservatism does not oppose regulation; it opposes inappropriate or inefficient regulation. Good regulation is healthy for the economy, as it mitigates damage in times of crisis.

As far as I'm concerned, financial regulation has two aims:

1. To protect depositors' money. When you deposit money in a bank, you should - and do - have a guarantee that your money is safe. The government has a duty to make sure banks' practices do not jeopardize the money you're saving for college or retirement.

2. To protect the economy from the failure of systemic institutions. If the failure of an institution will have a major negative effect on the country, it is necessary for the government to ensure that the institution does not incur undue risk of collapse. However, under no circumstances is it appropriate for the government to bail out a failing institution with taxpayer money.

If regulation of the financial sector does not pertain to one of these two goals, it is bad regulation and is most likely antithetical to the free market. JP Morgan is a systemic institution as well as a savings bank, so increased oversight of its trading practices may be necessary to ensure that it does not put depositors' money or the larger economy at risk. However, I am confident that JPM will emerge from this setback stronger, an exemplar of how to properly navigate a crisis.

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