J. P. Morgan Loses $2 Billion! Call Out the Regulators!

You’ve heard the big shocking news: J. P. Morgan bank lost $2 billion on some financial bets!! Holy Cow! Enthusiasts for government regulation are dancing in the streets, to the tune of “We told you so,” and the Dodd-Frank law, aimed at these things, is vindicated and sanctified.

This Morgan story is big news only because some people (see above) want it to be. They want it to seem like “too big to fail” all over again, with Wall Street yet again threatening to devour Main Street.

Some facts: Morgan’s annual revenues are about $100 billion; annual earnings about $12 billion; total assets believed to be around $2 trillion. In that context, a $2 billion loss is piddling. I repeat: piddling. It does not threaten Morgan’s financial viability, and certainly does not impinge on the larger economy. (Note, if Morgan lost a $2 billion bet, some other financial players gained $2 billion.)

Morgan is a private company and, given the foregoing, while the loss may be of concern to its shareholders, it is of no concern to the broader public.


Morgan’s Houston Headquarters

The way any bank makes money is basically by parlaying its assets into other investments. It’s in the nature of investments – all investments – that there is risk, and some don’t pan out. On this one, Morgan bet wrong and lost money. But amid all the hysteria about the $2 billion loss, has anyone thought to inquire how many other such bets Morgan has made that entailed gains? What’s important is not how one investment turns out, but how they perform in the aggregate. (I certainly wouldn’t want to be judged on my one worst stock pick.)

Nevertheless, we’re told this Morgan episode proves the need for Dodd-Frank’s regulatory scheme; this is exactly what Dodd-Frank was supposed to prevent. So why wasn’t it prevented? Because Morgan’s bet slipped through a loophole in Dodd-Frank. Now there’s a shocker! Who could imagine a 2400 page law with loopholes its legislators failed to foresee?

The tragedy of Dodd-Frank is that while it ostensibly targets the “too big to fail” Wall Street behemoths (whose screw-ups really did harm the whole economy), there is immense collateral damage to thousands of smaller financial institutions all across the country that simply lack the armies of lawyers and accountants and other resources to cope with the law’s highly complex and burdensome regulatory requirements. Further, it makes all financial institutions overly cautious lest they inadvertently run afoul of Dodd-Frank’s labyrinthine restrictions. Innovation and enterprise are stifled. All of this greatly harms our economy.

 That might be a price worth paying if we actually got the intended benefits, of preventing the kinds of abuses that were so damaging in 2008. Conceivably, a simple, clean, straightforward, carefully targeted law might have done it. But Congress felt that the vast complexity of the world of finance called for a regulatory scheme of equivalent complexity. That was doomed from the start, because the law’s very convolutedness guaranteed its ineffectuality, not to say dysfunctionality – as, once again, the Morgan episode sadly demonstrates.

So what this actually proves is not the need for regulation like Dodd-Frank, but the folly of it.

You can stop dancing in the streets now.

2 Responses to “J. P. Morgan Loses $2 Billion! Call Out the Regulators!”

  1. Lee Says:

    I agree with you 100%. Alas, the real medicine was politically dead on arrival.

    A highly leveraged position that starts to lose money needs to be unwound somewhat, which, in turn, causes the position to lose more money, which requires further unwinding, etc., with significant damage to the economy. So, a rule that prohibits any company from borrowing more than, say, 10 times its assets, whether that borrowing is via actual debt or via synthetic means (via derivatives, stock shorts, corporate holding companies, etc.), would go a long way towards solving the problem.

    Morgan would still be free to lose its $2 billion.

    [FSR comment: AIG made a bet which, if lost, would bankrupt the company. They thought it couldn’t happen. They were wrong. THAT was bad. Morgan’s mistake was nowhere near like that.]

  2. Marcos Says:

    great submit, very informative. I wonder why the other specialists of this sector do not
    realize this. You must continue your writing.
    I am sure, you have a great readers’ base already!

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