For those who thought our financial system was out of the woods after the 2008 disaster, the JPMorganChase debacle–the tab of which is at least $2 billion–is a bucket of ice water.
In 2008, the Lehman Brothers collapse shocked the financial system. The stock markets responded with very sharp drops in the midst of a Presidential election season. Bush teamed up with Bernanke and Paulson and both houses of Congress, foisting TARP–a $700 billion bailout of the banking system–on the American taxpayer. No major politician–with skin in the game–opposed it. McCain and Obama each supported it. Sarah Palin clicked her heels and assented. We were told that the financial system was ‘saved’, and that Great Depression II had been averted.
Would that were the case.
Since then, we have had the Obama Stimulus, Cash for Clunkers, HAMP, HARP, QE, and QE2. Obama has spent more money in 3 years than Bush spent in 8 years. Still, we have banks and hedge funds taking very big risks for the purposes of profit (MF Global) and hedging (JPMorganChase) and failing.
JPM ws considered one of the healthiest of the American banks.
Now, we have the outcry from lawmakers–again in a Presidential election year–about the quality of oversight provided by regulators.
Jim Cramer–the consummate Wall Street whore–is now calling for the return of Glass-Steagall.
Denninger–not without merit–is using the occasion to bring attention to (a) promoting a return to Glass-Steagall and (b) implementation of his “One Dollar of Capital” standard.
Meanwhile, The Nihilist in Golf Pants–at Fraters Libertas–seems to get it about the incompetence of regulators.
Nihilist is correct, with three caveats.
(1) Our financial regulators aren’t dummies. Unfortunately, they they work for large organizations that lack the institutional agility to adjust to rapid changes in the economic landscape. Bureaucracies are good for processes that don’t change much–payroll and HR–but not for overseeing entities and processes that are part of very rapidly-changing landscapes.
(2) The nature of regulation–especially in the financial sector–is largely reactive. The SEC is like a coroner. A coroner–just like your family physician–is a trained physician; the problem is that the coroner–(hopefully) unlike your family physician–is only good at examining people who no longer need medical care.
(3) Making matters worse, proactive regulation is itself a crapshoot, as it would require regulators who have foresight into developments that profit-seekers don’t often have. This would make the “cure” potentially as bad as the “disease”.
But here’s another angle: why must we assume that, every time a big corporation goes Tango Uniform, that “better regulation” would have saved the day?
Fact is, Enron, Worldcom, Dynegy, and every Dot-bomber that failed between 1999-2002 had provided plenty of financial disclosure. There were problems in their 10-K reports and 10-Q reports that suggested a plethora of “earnings management” behind their “profits”. The use of Special Purpose Entities–one of the major downfalls for Enron–was tantamount to consumers using credit cards to shuffle debts around. The disclosure was there, and yet many investors were wiped out even though Enron’s Special Purpose Entities were documented in their SEC filings (albeit in the footnotes).
Sure, regulators were slow. But the disclosure was already there. An investor who lost money on Enron has only himself to blame. If you made a trade–without understanding the financial reports–because Jack Grubman, or some other Wall Street pimp–touted it, and lost, then it isn’t the regulator’s fault.
Why is it when you are making money you are a “wise investor”, but–when you lose–it’s the regulator’s fault?
No…quit blaming the regulators here. This is about personal responsibility.
More regulators won’t keep the JPMs or the MF Globals of the world from making bad bets. If we wish to have a society where economic prosperity is feasible for the masses, then we need to get sober about what really matters:
(a) We need to demand sound money. That means we need to stop enabling our government’s deficit spending by printing money. That means we need to square our expectations of government with what government can actually deliver for what we are willing to pay.
(b) We need to prosecute fraud where it exists. Jon Corzine should be wearing an orange jumpsuit right now, not pimping for Obama. We need to go after banks that fraudulently foreclose on homes. We need to go after banks that used fraud to securitize mortgages. The punishments need to go beyond fines; execs who fostered the culture need to do some hard time.
(c) We need to let bad companies fail. The Nihilist (at Fraters Libertas) says we should keep companies from getting “too big to fail”. We don’t need regulators for that, though; we already have the necessary tool in place: the free market. If a company is sufficiently large, then the next interest rate spike is going to bring them down to size. (Can you say “Bye Bye Wal-Mart”?) After that, companies will know their risks and adjust accordingly, as having a company of large size will be inherently risky.
(d) We need to quit demanding the right to the assets of others. Social Security and/or Medicare and/or Medicaid will be dead before I am old enough to retire. Yes, you read that correctly: in 20 years, at least two of those programs will be gone. Anything that will exist will be a shadow of what it is today. I know this because we lack the money to sustain those programs as they exist today.
(e) No financial lender should receive a government backstop of any type. That goes for home loans, credit cards, and even student loans. If I wish to borrow for my education, then the loan officer would be wise to evaluate my social skills (in one or more interviews), references, credit history, work history, school grades, college major, years completed, and the expected income after graduation, to arrive at both the amount of my loan and the interest rate. If I wish to borrow for a house, then it becomes a question of how much equity I have (including the down payment), my work history, my credit history, my criminal record, and anything else that the lender believes impacts my ability to service a loan.
(f) All debts (including student loans) should be fully-dischargeable through bankruptcy. This would put all debts on the same field, and both lenders and borrowers would have skin in the game. Student loan peddlers would be more prudent in their lending if they knew that (a) defaults would not be backstopped by the government, and (b) students could, if the defecation hit the circulation, shove the bad debts down the lenders’ throats.
Yes, all of this will hurt. Badly. Prices, wages, and asset values would plummet. Foreclosures and bankruptcies would skyrocket. Unemployment would easily exceed Great Depression levels, at the very least for a few months. I would not be left unscathed, as I would probably lose my job and my house.
After 2 years, if cooler heads prevailed, we would emerge as a free country again, with unprecedented levels of prosperity. Manufacturing would return to the United States with a vengeance. The family farm would be back, as Big Agribusiness would be a shell of what it is today. Full employment would be back after 3 years. Government would be smaller, and we would have all the risks–and benefits–thereof.
How does that square with the alternative? If we keep bailing out banks, nations, industries, and even quasi-government agencies, sooner or later the money will run out. Investors will stop buying the bonds. This will result in either the former scenario or a governmental printing frenzy that ends in hyperinflationary disaster. We’ll all be trillionaires–or quadrillioinaires–but will barely be able to afford a loaf of bread.