It’s Not the Trade, It’s Too-Big-To-Fail

Many of us recall the now-famous campaign slogan from the 1992 Clinton campaign—“It’s the economy, stupid.” Bill Clinton used it to great effect. Recently, I was reminded of that slogan when I read a couple of opinion pieces that attempted to downplay and “pooh-pooh” the JPMorgan Chase trading blunder. The pieces were filled with syllogisms and misdirection. If taken at face value, one would conclude that $2 billion is chump change and business as usual in banking. These pieces, written by two state banking executives, were nothing more than smoke screens, apology pieces designed to take the reader’s eye off the true issue—the fact that certain financial firms are not only too big to fail, but also too big to manage and too big to regulate effectively.

As I finished reading these opinion pieces, I wanted to call out to the authors, “It’s not about the trading blunder, it’s about too-big-to-fail!” They trivialize the JPM trade blunder in order to trivialize the real issue of too-big-to–fail! They want to steer the reader away from a serious discussion about systemically dangerous firms and focus attention on a symptom—the trading blunder. In other words, they don’t want to examine the disease and treat it.

The question these association executives should be asking is what caused a firm like JPM, which is one of the best-managed firms in the world, with a whip smart senior executive team, to allow one overconfident trader to extend the firm into such a precarious position? It is not the $2 billion (now estimated at $5 billion) that is the issue here, it is the culture and hubris that allowed the trades to happen in the first place. That kind of culture and hubris only thrive when a firm becomes so large that it knows implicitly that it will not be allowed to fail. And the counterparties that took the trades knew this too, which is why they agreed to the high-risk trades to begin with—because they knew they would not be hurt. It is this too-big-to-fail, too-big-to-manage and too-big-to-regulate-effectively disease that must be cured.

When one of these apologists for Wall Street offers solid ideas for how to end too-big-to-fail policies and the government’s implicit protections of systemically dangerous firms, then perhaps a real public policy debate can begin. Until then, those who trivialize $2 billion and $5 billion losses don’t get it. They don’t get that it is not the trade, “it is too-big-to-fail, stupid.”

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