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Mitt Romney: Losing Billions of Dollars Is What Makes America Great!

May 17, 2012

Oh, goody: Mitt Romney has now weighed in on the multi-billion dollar gambling loss recently revealed by JP Morgan Chase.

Presumptive Republican presidential candidate Mitt Romney on Wednesday defended a shocking $3 billion loss on derivatives by JPMorgan Chase & Co. by saying it was just “the way America works.”

“I would not rush to pass new legislation or new regulation,” Romney said during a Wednesday interview with Hot Air blogger Ed Morrissey. “This is, in the normal course of business, a large loss but certainly not one which is crippling or threatening to the institution.”

“This was not a loss to the taxpayers of America; this was a loss to shareholders and owners of JPMorgan and that’s the way America works,” the former Bain Capital executive explained. “The $2 billion JPMorgan lost, someone else gained.” (The Raw Story)

Wrong, wrong, and wrong. First, Mitt is wrong about the case this episode makes for regulation. Secondly, he is wrong about how such a loss endangers a financial institution. And finally, he is wrong when he implies that the American people have no stake in this.

Normal course of business? Not quite. While Mr. Dimon would like us all to believe that this incident wouldn’t be covered by the Volcker Rule anyway because it was “just a hedge”, that is patently untrue. A hedge is supposed to eliminate risk, not create it. There is really nothing to call this but a gamble — a big gamble which JP Morgan lost. What makes this of particular concern is that with JP Morgan Chase (one of the best run institutions in the world, if President Obama is to be believed) we see a division of the organization which is supposed to be tasked with insuring the company against risk – simultaneously being tasked with turning a profit.

…proponents of stronger U.S. financial rules say Dimon and others continue to cloud the debate by portraying the trading that went wrong as a hedge – a strategy designed to reduce risk – rather than as financial speculation aimed at generating large profits.

“It is a huge, self-serving myth to say this was a hedge,” said Michael Greenberger…former director of trading and markets at the U.S. Commodity Futures Trading Commission, which oversees the complex financial instruments that were apparently central to JPMorgan Chase’s errant strategy.

… the incident highlights the importance of a pending rule required by the 2010 Dodd-Frank financial overhaul. Named for Paul Volcker, the former Federal Reserve chairman who proposed it, the “Volcker Rule” is supposed to draw a bright line barring commercial banks from speculating with assets protected by deposit insurance and other government guarantees. (Philadelphia Inquirer)

It’s not just about the Volcker Rule, though. The fact that this episode won’t kill JP Morgan Chase is directly attributable to the fact that the firm has deep enough capital reserves to absorb the loss. Guess where that comes from: the much-maligned Dodd-Frank financial regulation bill.

But the more important reason why it’s nuts to go to the “reform-is-irrelevant” place is that at the heart of Dodd-Frank is something I’ve written about a lot here: deeper capital reserves.  To their credit, JPM had enough of a capital cushion on hand to absorb a large loss like this.  But that’s no accident.  It’s a direct outcome of Dodd-Frank’s capital reserve requirements and the subsequent actions by large banks to build up their reserves in anticipation of the new rules.

The fact of inadequate reserves–overleveraged banks whose bets couldn’t be covered by their capital on hand–was a major factor in the crash, and if anything, this episode reminds us just how important it is to get this right going forward. (Jared Bernstein – On The Economy)

And yet, we are constantly battling demands from the GOP for the repeal of Dodd-Frank. Failing that, they manuever to stall its implementation and starve it of funding. Mitt Romney has, in fact, vowed to repeal the legislation. In other words, in a Romney administration, regulation would be back where it was in 2008, and a loss like JP Morgan’s  “hedge” could very well spell disaster.

As for Mitt’s assertion that when JP Morgan lost, someone else gained, methinks the man doth think we all are fools. If finance were a closed system, one might consider this a zero sum gain and these losses no one’s problem or concern but JP Morgan. But finance isn’t a closed system. Bad investments mean a ding in the economy’s efficiency, which in turn means financial losses for everyone. We proved that in 2008.

Finally, I’d like to point out that while Mr. Romney may see nothing wrong with JP Morgan Chase shareholders losing money on this bet gone bad, the shareholders themselves may see this quite differently. Though Mr. Dimon may claim that the firm is being run with the express purpose of “maximizing shareholder value” (a dubious goal in the first place), the truth is that poor decisions like this come from a desire to maximize C-suite bonuses. Executive compensation is a key driver of dangerous risk-taking.

As long as JP Morgan Chase remains “too big to fail” (especially as it is now bigger than ever) the United States taxpayer is very much on the hook. The solution? One word, Mr. Romney: regulation.

2 Comments leave one →
  1. mikey2ct permalink
    May 17, 2012 9:27 pm

    Mitt says he gets it. He doesn’t. There are 535 people in Congress. The GOP avg. annual income is $950,000; the Dems is $875,000. The avg. for the USA avg. Joe is $96,000.In reality, the avg. family income is maybe half of that.

    I’m a new follower and like a lot of your posts.

  2. May 17, 2012 1:33 pm

    Reblogged this on Leaning Left.

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