JPMorgan's $2 Billion Loss

     So a debate is raging right now over whether the big Wall Street firms need tougher regulations in the wake of JPMorgan's losing $2 billion dollars. For those interested in this issue, financial regulation is really a fascinating subject. From looking at the history of the financial system, we see that if you regulate too little, all sorts of corruption and chaos ensues. Regulate too much though, and you end up stifling and hamstringing the financial system.

     We saw, in the aftermath of the 1929 crash, how a lot of corruption had occurred in the financial system, and legislation was passed to address the problem (which included the creation of the SEC). Then, in the 1980s, when the Reagan administration sought to deregulate the financial industry, some of the most ardent oppoenents of the deregulation were the big banks. The reason was because the extensive banking regulations protected these banks from competition. Undoing them opened them up to new competitors. At the same time, however, this meant limiting innovation and creativity in the financial system. One such innovation was high-yield debt, which was really brought to the forefront by Michael Milken, and derisively called "junk bonds."

     So the question then is how to go about regulating these big financial institutions we have now in a way where they can remain large and competitive, but at the same time, not be too big to fail. Some question whether this JPMorgan loss is really a big deal, as it wasn't taxpayer money or customer money that was lost, it was the institution's (shareholder's) money, but the concern is that it was lost on something that was supposed to be about managing risk, which would mean the institution doesn't know how to really manage risk.

     Critics of regulation point out though that if a big bank has trouble managing risk, how is a government regulator going to be able to spot it? Some also question whether you even can legislate risk out of the system. The loss is a blow for the firm's CEO, Jamie Dimon, who has been a major critic of further regulation over the financial system. It has hurt his credibility a lot, which had been built up in the aftermath of the 2008 crisis in which JPMorgan did not struggle much to maneuver its way through the crisis.