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Too Big to Fail?

JPMorgan CEO, Jamie Dimon, on Meet the Press

Over the weekend a big blow hit Wall Street, the largest bank in America, JPMorgan Chase, squandered two billion dollars in trading losses.  Does this reflect the same risky business that lead to the spiraling downturn in the economy?  Maybe, but by no means is JPMorgan in trouble.  The business will continue to thrive, but this situation must be taken as an example of the lack of regulation on Wall Street.  If such a respected company can do this, what is to say that another will not.  Sunday on Meet the Press Jamie Dimon, the CEO of JPMorgan,was interviewed by David Gregory to discuss the mistake.  The executive once praised as one of the best risk managers, successfully leading a company through a recession, acknowledged that they “took far too much risk,” “badly monitored” investments, and suffered a major blow to their credibility.

Hedge fund investments are meant to, as noted on JPMorgan’s website itself, “minimize risk and guarantee seamless execution”.  Sen. Carl Leven, D-Mich. on Meet the Press said, “This was not a risk-reducing activity that they engaged in.  This increased their risk.”  It is important to note that while JPMorgan lost two billion dollars, that is only two percent of the entire 100 billion dollar bet they made.  This is an astronomically large bet, given the stock market itself can go up or down two percent within week.  As a result Sen. Leven said, “they loose the battle to weaken the rule,” the rule being less regulation on Wall Street.

The major issue is not the loss to JPMorgan, but the potential of other companies to follow the same pattern, creating greater destruction.  The difference is many other CEOs might not have the courage to come out, and be so upfront about their problem, especially since bank scandals are not that uncommon.  Ultimately, it is tax payers who take the hit for poor

judgement on Wall Street by flipping the bill for billions of dollars in bailouts.  Tens of millions went to JPMorgan itself, with a total 23.7 TRILLION dollars in tax payers’ money going to bailouts during the heat of the financial crisis in 2008. Americans deserve the respect and confidence that there are no loopholes, and that Wall Street can not walk away with their money.  The institutions of America, including Washington and Wall Street, have let Americans down, and it is time for solutions.

Banks are large companies that are too big to manage, and their complexity is overwhelming.  Andrew Sorkin, author of Too Big to Fail, characterized bets like these as the “casino element.”  This is reminiscent of the risky business that lead to the financial crisis, of which government has worked to restrict in the years since.  The Dodd-Frank law was put in place, as  Lis Smith, an Obama campaign spokeswoman said, “[to] promote transparency, limit the types of risky investments that can be made with deposits insured by federal taxpayers, and prevent investment losses at one bank from threatening the whole financial system.” The JPMorgan trading loss shows the lack of effectiveness of this law.

Wall Street investors recklessly gamble with tax payers money thinking they are too big to fail

In my recent studies of government, above all else, I have learned nothing is as easy as it seems.   From the division of power between the president and congress, to the complexity and strategy behind political ads, the institutions running America have many parts, and they do not always work properly, or efficiently.  In many ways, business and government go hand in hand, for the government sets the laws, but without businesses America would be at a dysfunctional standstill.  It is a delicate balance between business and government that requires collaboration with a shared vision.

As the presidential campaign heats up, the United States is slowly coming out of its worst recession in decades, and the economy continues to be one of the most talked about issues.  However, I think focus will shift from how to come out of the current recession, to how to avoid such an economic disaster in the future.  Maybe its not merely regulation, but more accountability.

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