The pattern is familiar enough. A big financial institution suffers a loss. Regardless of the cause and whether those responsible are under existing law being held accountable, lawmakers and pundits rush to declare that the situation stems from a lack of regulation. They pass new rules that may or may not have anything to do with the situation that sparked the legislation, but liberals feel satisfied they have “prevented this kind of thing from happening again.” And then, after not a lot of time has passed, another business suffers another big loss.
That’s the story behind Sarbanes-Oxley (in the wake of Enron) and Dodd-Frank (in the wake of the 2008 housing meltdown). And we are seeing history repeat itself with JP Morgan.
Jonathan Macey has an important piece on this phenomenon, aptly titled, “Losing Money Isn’t a Crime.” He argues:
The truth is that nobody should care about J.P. Morgan’s loss — nobody except J.P. Morgan stockholders and a few top executives and traders who will lose their bonuses or their jobs in the wake of this teapot tempest. The three executives with the closest ties to the losses are already out the door.
After the $2 billion in losses, J.P. Morgan still had $127 billion in equity. . . .
The particular trades that J.P. Morgan was making were designed and intended to protect the bank’s balance sheet against losses from its exposure to the apparently increasing risk of some of its European assets, including approximately $15 billion in European distressed debt.
Outlawing or restricting hedging will make the banking system more, rather than less, risky. That is why the Volcker Rule does not outlaw hedging, at least not yet. When it made the trades that lost the $2 billion, J.P. Morgan was firmly of the view that its trades did not violate the Volcker Rule.
Macey points out that the JP Morgan deals were extremely complex and badly handled, but that “far from serving as a pretext to justify still more regulation of providers of capital, J.P. Morgan’s losses should be treated as further proof that markets work. J.P. Morgan and its competitors will learn from this experience and do a better job of hedging the next time. They will learn because they have to: In the long run their survival depends on it. And in the short run their jobs and bonuses depend on it.”
Democrats’s favorite straw-man argument is that Republicans are against all regulation. That might be the view of Rep. Ron Paul (R-Tex.), but he’s not the GOP presidential nominee, and he is leaving Congress. Just as they have accepted the social services safety net, Republicans at the national level have long accepted the role of the federal government in regulating financial firms. The real question is how much regulation and what kind of regulation do we want. But just as Republicans have accepted regulation as a necessary part of doing business, Democrats should understand that not every financial loss is a crime and not every misstep has a regulatory insurance policy to prevent its recurrence.