Last week, the largest bank in the US admitted that it had made a very stupid and risky investment and had lost an incredible $2 billion. What makes this ironic is that JP Morgan has been one of the strongest voices arguing against regulations on banks. Indeed, Morgan had weathered the 2008 financial meltdown relatively unscathed, and argued that they shouldn’t be punished for the stupidity and risk taking of other banks.
In a must-read editorial, Henry Blodget, the CEO of Business Insider, points out the obvious:
So we finally know the truth about Wall Street, a truth most Wall Street observers have known all along:
Wall Street can’t be trusted to manage—or even correctly assess—its own risks.
This is in part because, time and again, Wall Street has demonstrated that it doesn’t even KNOW what risks it is taking.
In short, Wall Street bankers are just a bunch of kids playing with dynamite.
After all, just a few weeks ago, JP Morgan was denying that there was any problem. It is a very bad sign that even a cautious and responsible bank can’t figure out what risks it is taking.
Blodget gives a simple solution to this problem:
Congress needs to:
- Radically increase bank capital requirements, so even massive bets can’t threaten the system
- Once again, separate “banking” from Wall Street gambling. Glass Steagall worked very well for 70 years—let’s bring it back.
- Lay out a plan, in advance, to manage the failure of even the largest financial institutions—by stepping in, seizing the bank, firing management, zeroing out shareholders, haircutting bondholders, and then injecting new SENIOR capital (fully protected) and re-floating or selling off the firm. This will allow the entity to keep operating, and it will stick the losses where they belong—with the idiots who bought the bank’s stock or loaned it money. Meanwhile, the systemic threat will be eliminated.
That’s the answer.
The Dodd-Frank bill was supposed to prevent any new bank problems, but it was watered down by bank lobbyists. It is time to get serious about taking the matches away from the kids playing with fire.
UPDATE: Good followup article. Also points out that Romney has been virtually silent about the issue.
Also, an interesting interview with Elizabeth Warren on what needs to be done.