JP Morgan Chase just lost $2 billion in a derivatives trade. The long knives are out with the president and the treasury secretary crowing that if Dodd-Frank had been fully implemented, this would have never happened. You want to bet? No amount of regulation has ever prevented mistakes from happening among the regulated or the regulated figuring out a way to get around the law in the first place. Jaime Dimon, head of Chase has said that the company’s trading did not violate Dodd-Frank. Also, the loss was in the investment banking arm and not in the bank itself. Since the bank was not affected, what is the big deal? Actually there is no big deal. The bank lost is own money from its investment bank and not any money from its deposit bank so the FDIC is not involved. So now the question is whether it should be illegal for investment banks to use their own money to make money. That seems to be an issue for the board of directors and the shareholders and not for the government to decide. Moreover, the total assets of the bank is $2.2 trillion so it is no surprise that its quarterly dividend will not be affected and the stock price has started moving back up. Yet you would not know this if you listen to the president who wants even more heavy handed regulation. The president has said that JP Morgan was making bets while Dimon says that the bank was hedging against financial risk. Banks hedge against risk all the time. If the administration were to step in and ban all derivatives then the banks would actually be more exposed to financial risk of interest rate changes – but the administration is apparently ignorant of this fact. Well a relevant question is how much money has the Obama administration lost in its ill-fated green initiatives? I bet you it is many times the $2 billion loss of JP Morgan Chase. In Chase’s case, the head of trading has been fired and replaced. How many Obama administrators have been fired for their bad decisions? Precious few if any. While the GSA head has been placed on paid leave for his waste of taxpayers money, if he were at Chase, he would be collecting unemployment rather than being on what amounts to a paid vacation.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com