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  • Morning Bell: Don't Fear the Free Market

    The lingering headline on the front pages this week is that JP Morgan Chase suffered a massive loss on a hedging strategy, costing them $2 billion. That’s no small mistake, and it’s an example of how bad decisions in the free market can cost big money. But just because mistakes have consequences doesn’t mean that the mighty hand of government needs to step in to save us from ourselves. However, that’s what some on the left are now calling for.

    The news of this blunder hit last week when JP Morgan CEO Jamie Dimon revealed that the bank took a $2 billion loss over the past six weeks in a strategy intended to hedge against risks to the bank’s assets that could come from market volatility caused by the Euro crisis. On Sunday’s Meet the Press, Dimon admitted, “In hindsight, we took far too much risk. The strategy we had was badly vetted. It was badly monitored. It should never have happened.”

    The company is certainly paying the price in losses, as are those responsible for the bad decision making. The Los Angeles Times reports that the bank’s stock fell 12% since it disclosed the loss last week, the executive who oversaw the department responsible for the loss retired on Monday, and JP Morgan’s reputation as an extremely well managed bank has been damaged.

    But does the flawed strategy and the resulting loss mean that Washington should step in with more regulation of Wall Street? Yesterday, White House press secretary Jay Carney used the news of JP Morgan’s loss to call for more regulations, remarking, “The president fought very hard against Republicans and Wall Street lobbyists to get Wall Street reform passed . . . I think that this event merely reinforces why the President was right to take on this fight and why we still need to make sure it’s implemented.”

    Likewise, former Obama adviser Elizabeth Warren called for Dimon to resign from the New York Federal Reserve Board and slammed Wall Street. “What happened here is not just about JP Morgan case, it’s about the kind of attitudes, that the bank should be regulating themselves instead of having real oversight,” Warren said. “We have to say as a country, no, the banks cannot regulate themselves.”

    What’s needed is some perspective, not more regulation from Washington. Heritage’s David C. John explains that while JP Morgan’s loss represents a clear failure of management, it’s not a systemic problem that requires or would be fixed by additional regulation. For starters, JP Morgan is a $2.3 trillion bank with a net worth of $189 billion, meaning that this loss reduced the bank’s capital ratio from 8.4 percent to 8.2 percent. In other words, the bank can absorb the loss, and it’s nowhere close to needing any form of federal intervention.

    Some more perspective could be gleaned by examining the $3.2 billion loss the U.S. Post Office experienced in the most recent quarter, or the billions lost on risky green energy bets made by President Obama and Energy Secretary Steven Chu. Only those losses weren’t incurred by private investors, but by you the taxpayer.

    What’s more, John explains, the regulations that are now being called for — particularly the so-called Volcker Rule — would not have prevented the losses since it would not have affected this transaction. Finally, John writes, the system worked as is. “JPMorgan Chase losses were not discovered by regulators; they were discovered by the bank itself conducting its own management reviews.”

    What America is witnessing is the left using the news of JP Morgan’s bad judgment as an excuse for more government regulation. But as even Carney acknowledged, regulations “can’t prevent bad decisions from being made on Wall Street.”

    For all the wrangling over JP Morgan’s loss, John points out that the bank is still expected to make a healthy profit for all of 2012. Yes, it made a mistake, and yes, that mistake cost a lot of money. But risks, mistakes and costs are part of capitalism. They’re the price we pay for all the benefits that a free market affords us.

    Quick Hits:

    Posted in Economics [slideshow_deploy]

    46 Responses to Morning Bell: Don't Fear the Free Market

    1. Charles Nesbit says:

      The banks brought much of this call for regulation on themselves by engaging in risky activity and then going to the government for bailouts when the house of cards came crumbling down. Limited regulation or deregulation should mean bankruptcy when the bank makes bad decisions, not a bailout at taxpayer expense.

    2. CCD says:

      The markets will right the wrong, while California's $10 Billion dollar missed budget revvenue makes JPM's miss look like child's play in comparison. I would put my money on JM anyday over the fools in the California Jell-o mould building!

    3. Turner says:

      Congress shouldn't regulate themselves either!

    4. Pete Houston says:

      JP will take the hit and should make the changes internally to prevent making those types of mistakes again. What does the government do when they make mistakes of this caliber. Raise taxes and promote the people the make the mistakes because they are now experienced mismanagers.

      We should have let the auto companies reorganize/fail as well as the banks that needed to. The companies that are solid will survive and the ones that don't will fall to the side. That is the only way to ensure that the country continues to move forward. We have taken alot of steps backwards in the last 20 years with government intervention into industry.

      • Joseph McKennan says:

        I am in complete agreement with you on the auto companies. Auto companies in the US have been asking the government for handouts for as long as I can remember. I think the UAW is eqivalent to the mafia but they have a political voice.

    5. Lindbergh Hodges says:

      The Federal Governments loses much more than two billion a day, so why should they try to regulate big business. However, seriously, we have allowed many Companies to keep merging and get too BIG to manage. Big banks should be broken into smaller entities like AT&T did many years ago.

    6. It doesn't matter to the media what actually occurs, if they can find a negative, they'll pounce upon it without considering the consequences.

    7. Pat Raulin says:

      Question: The 2 Billion that JP Morgan "lost"–where did it go? Who made the 2 Billion profit? Why should we be concerned when one entity's bad judgement is another entity's killing?

    8. Fustrated in SC says:

      And lets not forget Fannie and Freddy Mac. When they make bad mistakes, the administration looks for a bailout without regulations and more controls. When the industry does the same, they slam them, call for resignations and calls for more regulations.

    9. A free market and an entrepreneurial spirit is the basis for Americas economic success. Capitalism has evolved into an anchor on the American economy and will drag America into an existence as a second-rate economy. Capitalism is failing just as Communism failed. They both failed to allocate capital assets to their most productive use and as a result capital has fled to other countries. Greed alone will only result in concentration of capital to decision makers who have only their self interest in mind, the truly greedy. We have been seeing the results for the past 10 years as sharp economic decline and concentration of capital management to the truly greedy, the F9 monkeys, who only care about their own personal enrichment at the expense of everyone else. When a bunch of 'monkeys' are making a country's economic decisions it is time for a change.

    10. Frank says:

      "Don’t Fear the Free Market"

      Exactly! Just because JP Morgan Chase suffered a massive loss on a hedging strategy, costing them $2 billion, does not mean we need more government regulation. In fact, JUST BECAUSE they suffered & could weather this loss is a good example of why the Free Market works! People that make bad business decisions need to pay the price, not get bailouts or more government regulations. They will have a great incentive to not make the same mistake twice.

    11. Lloyd Scallan says:

      What was it Obama's former chief lackey said, "never let a crisis go to waste"? Well, here we go again.
      Another made up cirsis and another government intention to take over freedom.

    12. chukker says:

      What’s needed is some perspective, not more regulation from Washington. Heritage’s David C. John explains that while JP Morgan’s loss represents a clear failure of management, it’s not a systemic problem that requires or would be fixed by additional regulation. . . . Some more perspective could be gleaned by examining the $3.2 billion loss the U.S. Post Office experienced in the most recent quarter, or the billions lost on risky green energy bets made by President Obama and Energy Secretary Steven Chu. Only those losses weren’t incurred by private investors, but by you the taxpayer." These were all fine points and well articulated, but I'm wondering to whom were they advanced? In Enterprise and Free Markets only?

      Preaching to the choir is all fine and dandy to keep us informed, but we need wisdom such as this to be pounded into the psyches of policy makers who have the power to change our lives for the better or worse. It seems our side is so good at whining to like-minded others, while the side of darkness and oppression is everywhere – they beat their drum until fiction becomes truth.

    13. Daniel Bente says:

      This is what I call "economic Darwinism"… people who invest know they can lose money. Corporations/Banks that make shoddy deals know they can lose money… either way, both know they can lose money. IF they lose enough money in the process; they remove themselves from the economic gene-pool.

      • Wayne Peterkin says:

        They can also make money, and usually do. This is a story only because the outcome was bad instead of good. Would the same people be whining today if Chase had turned those same risky investments into a two billion profit? Of course not.

    14. Victor Barney says:

      I don't fear the free market. Rather, I fear the 70%ter's of our society, who are "gatherer's, living to be given things from the "RICH" and who currently support this self-named "Anti-Christ"(Marxist) & "forbidden foreigner" that promised our 70%ter's to destroy u.s.! Just saying…

    15. tensace says:

      I'll gladly take a a $2B mistake over $15 TRILLION. Congressional oversight? It would be funny, but I lost my sense of humor for Congress about $5Trillion ago.

    16. CPB says:

      Something else that should be pointed out, while the JP Morgan Chase lost $2 billion, they system allowed an undisclosed party to earn the same amount. But barry does not understand derivatives so he has not clue what happened.

    17. Jim says:

      as it says in the article, not a peep out of D.C. about Solyndra losses or the other "green company" losses or the U.S. postal service losses. Just aimed at capitalism and the drumbeat of another "crisis" for D.C. to regulate.

    18. zff says:

      Obama is a joke. He fought hard for Wall Street "reform?" This from a guy who get's more money from Wall Street and has done their bidding more than any President. Far from his 'reforms' being against Wall Street, they have made bailouts of Wall Street and crony capitalism a permanent feature.

      And apparently, unless an industry can remain flawless forever and never make any major mistake, the Obama morons want more crippling and ineffectual regulation of it. Insane. And of course, this implies the government NEVER makes any mistakes themselves.

      And who are Obama and his sycophants to cast aspirations on JP Morgan and it's CEO? Obama is a guy who has made more bad investments in three years (Solyandra, LightSquared, Chevy Volt and on and on) than most investors do in 20 years. Not to mention this guy has put the country into dept and financial peril with his policies. At least Jamie Dimon had the guts to admit the mistake and face the heat, unlike Obama who refuses to admit he ever has done anything wrong or made any bad decisions, no matter how spectacularly a policy of his fails.

      Also, the banks can't regulate themselves? No, it's the corrupt and incompetent Obama administration that can't regulate THEMSELVES. Clean your own house out first, B.O.

    19. President Obama and Elizabeth Warren still haven't learned that do not own JP Morgan, the company is owned by the shareholders and they will determine who shold be relieved of their jobs in the company. The threat of more Federal Government over sight proposed by both os those individual is what is causing a problem for all companys, regardless of the number of employes they have.

      Obama had no back ground in the business community before he assumed the office of President and too many of his proposals prove that he has not learned a lot in three years.

    20. bassboat says:

      It angers me when the government acts as though they own the banks. What business is it of theirs what the bank does with its assets? The main problem that we have here is the FDIC sticking their nose where it does not belong. That deposit insurance should be bought from a private insurance company who would do a better job at overseeing the risk that a bank takes on. The depositors should have a choice as to witch bank that they want to deposit their money. The higher the risk the greater the reward. If JPMC were to make a lot of money they should be rewarded with a higher return on their deposits and none if they lose money. It is time for depositors to take responsibility for their deposits and quit passing off another freedom to the feds.

    21. Conradswims says:

      You fail to point out that under the ERISA laws we have to place pension money in the wall street casino. It is the law! So the risky crooked law is a failure and we do need to fear the way the system has been corupted.

    22. Paul says:

      Obama wants a full investigation of JP Morgan Chase, but has put his good buddy John Corzine (who simply misplaced a large sum of CUSTOMER money) in charge of handling his reelection funds. Curiouser and curiouser………………………

    23. Leith N Wood says:

      Ms. Warren thinks Mr. Dimond should resign. There is a major reason for him to stay right where he is.

    24. Excellent pts. Weep not that this private company lost money for itself & its stockholders. Just a drop in the bucket, especially compared to government spending and the B.O. Administration adding 5 TRILLION to the deficit in just 3 years!!!!!!

    25. It would be interesting how HIGH risk ventures would undertaken with others money if those that are working those ventures had HIGH risk of their OWN investments/money themselves.

    26. Juan Vega says:

      This article is right on track however we need to highlight to the public and the taxpayers that capitalism is a by-product of the FREE ENTERPRISE system and as the name implies private citicizens need to make judicious acts when investing. One can not protect stupid people or inteligent people making the same stupid decisions.
      The losses as pointed out are part of how the system punishes and rewards good and bad calls. Meanwhile, the so called " "public sector" has no financial checks and balances- losses are covered as investments and "we need more of it to dig ourselves out the hole we are in" Elizabteh 1/32 Warren should keep her trap shut- A Harvard degree is no substitute for real intelligence- the proof is in the White House.

    27. Clearhead says:

      Warren said. “We have to say as a country, no, the banks cannot regulate themselves.” Sorry, Libby, but you do not dream up what WE say as a COUNTRY.. Your statene=ment has no thoughtful basis except a very strong Democrat/Progressive possession of your thinking machine. Apparently your "party" gets their collective exercise by jumping to conclusions and running up bills.

    28. Barbara Sbrogna says:

      Unfortunately, this is the all-too-typical response from Democrats who actually believe that government knows better how to "fix" what are, in effect, normal business blunders. Of course, there needs to be oversight in certain areas and we have them. Too bad they missed the Bernia Madoff scam, among numerous other failures. The shareholders will take care of this situation, thanks very much, and the company is clearly still in good financial shape.
      Given the government's record of managing anything, the people need to begin shouting "enough"! When government gets involved in anything, it's tantamount to picking up a sledge hammer to drive a thumb tac.

    29. Bobbie says:

      outside of cost and obstruction, what would government interference to increase regulations promote besides the inability to conduct business without government overreach? As the government is cheating America(ns) daily, their dereliction and incompetence has lost trillions of America's money and business careers through government control, corruption and manipulation while taking no responsibility and helping themselves to pay increases. The dictate from Jay Carney with his government control support with all experiences Americans have needlessly suffered and sacrificed, gives America no reason to trust while circumventing constitutional governing through Obama's government's hidden agenda. Let the business responsible suffer it's own consequences (like big people do) while Jay Carney and his governmental abuse, learns their constitutional role. Government is inept in oversight or America wouldn't be here.

    30. John Ames says:

      It seems that the important question to ask is what kind of transactions was Chase hedging? If it was normal international commercial banking, OK, they made a mistake and they appear to be paying for it and maybe learning from it. But, if what they were hedging was more in the nature of speculative trading, I object to them doing that with depositors money, or with funds that could otherwise risk capital that could, in larger amounts, trigger calls for a federal rescue. I don't know enough about high finance to know if Glass-Steagal was the right way to protect commercial banking, but it seems that its repeal left something unguarded.

    31. Curt Krehbiel says:

      "Yes, it made a mistake, and yes, that mistake cost a lot of money. But risks, mistakes and costs are part of capitalism. They're the price we pay for all the benefits that a free market affords us."

      But this is another chance for Obama to step up with tax payers' money as he did with General Motors and Chrysler. He will at least find some new regulations to further hamper business and commerce.

    32. Blair Franconia, NH says:

      Tell that to Democrats. They're behaving more like either European socialists, or Soviet Communists. Democrats
      hate the free market and fear the free market because they think it can't do things as efficiently as the government. Free market=bad. Government=good.

    33. Making one mistake is a hardly reason to call for regulation. Government has made far bigger mistakes, and with our voices being shut out we cannot regulate them. Good article.

    34. Thomas Paine says:

      As this artiicle rightly implies, JP Morgan Chase's $2 billion loss is trivial compared to both (1) the company's operating capital and (2) the fraud, waste, and abuse of the taxpayers' dollars every day by the federal government. What Washington must really be upset about is the diminution of JP Morgan's profits by $2 billion, which Congress cannot then tax at the corporate rate. By reducing the amount of revenue available to the government to misspend, JP Morgan would actually be performing a public service – if only the government limited its spending to its revenue.

    35. mary says:

      BOUNDARIES. When we are not expected to clean up the messes we create ourselves, the cycle repeats itself. Lessons are not learned, and usually the next time it's an even bigger mess.

    36. Wayne Peterkin says:

      No doubt Chase made a very big mistake. However, to the best of my knowledge, the company's future has not been jeopardized and Chase will survive. It's odd that the same politicians that waste more money in a day than Chase lost in total seem to think they can better run a bank than the bank professionals. Therefore, the politicians want more regulations. We're talking about politicians who have created a $16 Trillion debt and are spending more than one Trillion per year more than they have in revenue. Chase has been punished with large drops in stock prices and heads are rolling. The government should simply butt out at this point.

    37. Maxine Forum says:

      Its real simple. Here the Obama government is in debt for $16 trillion, unemployment is out of control, they have pissed away trillions, the finances of the US are in the toilet, debt continues to exceed revenue & there going to tell the private industry what to do. Are you crazy.

    38. Daryn Kent-Duncan says:

      Why should the politicians be involved in this at all? Why isn't there a total separation of the government and the economy? Politicians don't know more than bankers about banks. They obviously know nothing about how a free economy works. And even if they did, it's not their business. Let the free markets work and get the government OUT OF THE WAY. And stop using taxpayer money to subsidize or have anything to do with business and banks.

    39. Joseph McKennan says:

      Leave JP Morgan alone. This is none of the governments business. I feel more confident that JP Morgan will learn from its mistakes than the government. I firmly believe the government is made up of idiots with a checkbook that costs them nothing— from their personal accounts. iT IS EASY TO SPEND SOMEONE ELSES MONEY.

    40. Pragmatic says:

      A lot of people are missing the point of why this is a big deal. It isn't about the $2 billion loss (as this article correctly points out). It is about the interpretation of the the Volcker Rule regarding what hedges are legitimate and which ones are not. JP Morgan and other argued that this was a "hedge" against the banks entire portfolio, however, as demonstrated here, it was little more than speculation (so the argument goes; I think they had a bad risk model).

      The big deal isn't that JPMC lost $2 bil, but that other large I banks won't be able to do this same "hedge"/trade any longer because there is no way regulators are going to allow the broader interpretation any more.

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