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Playing with Dynamite

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.

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2 Comments

  1. PatriotSGT wrote:

    I couldn’t agree more. Separate “banking” from “investing”.
    I was always taught (and I assume most people know) that investing has risk. Years ago, I tried my hand at being a broker, passed the series 7 exam to enable me to buy/sell/trade virtually any equitiy, bond or commodity. Rule #1 I learned is none of those is guaranteed and to tell a client anything different is breaking the law. If you want guarantees, by US gov’t bonds, (which is what most retirees should be in). The firm I worked for made sure this point was stressed since I began working there the year after the infamous “black Friday”. There are different degrees of risk with all investments, some have less then others. But all have risk and can go to 0.

    Monday, May 14, 2012 at 11:57 am | Permalink
  2. ebdoug wrote:

    Elizabeth Warren is pushing for an updated version of Glass Steagall. I like everything I read about her.

    Before Obama made all the money from his books, he had the extra put in US Treasuries. He invested in this country. His people have diversified his earnings more now. He is still very conservative.

    I’ve seen tax return after tax return after tax return where people spend the year “playing the market” and have a $500 profit. Just doesn’t work. In for the long haul or buy preferred stocks which are what the companies that hold your money buy. The preferred stocks are a combination of bonds and stock. Buy below par like a bond.

    A broker can only be a broker if he/she has no conscious.

    Monday, May 14, 2012 at 8:20 pm | Permalink

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  1. Political Irony › Financial Animals on Friday, May 18, 2012 at 11:24 am

    [...] after the great recession, JP Morgan CEO Jamie Dimon was considered the best and brightest of the bankers. He argued that new regulations were not needed and that his company shouldn’t be penalized [...]