Banks fail, taxpayers bail (wash, rinse, repeat)
The basic idea behind regulation requires a high amount of transparency of the event(s), insight/understanding of the issue(s) at hand, and the pain of punishment(s) should compliance be ignored. For example, think about how law enforcement is used to regulate speeds on interstate highways.
Now shift your brain to banking. Based on the above hypothesis (and the fact Eric Holder says it’s dangerous to pursue legal action against TBTF banks), it appears Dodd-Frank is wholly inadequate to remedy America’s TBTF banking situation. Or in other words, transparency is absent, regulatory understanding is insufficient, and punishment is avoidable.
The banking regulators – in this [the JPMorgan Chase] case, the Office of the Comptroller of the Currency – are clearly unable to keep up with this form of “financial innovation” (which is really just clever ways to misreport risk).
Did JPMorgan Chase’s top management do this intentionally? Did they mislead investors, particularly in the fateful conference call on April 13, 2012? This is a fascinating question on which the courts will no doubt rule. (You should also review this report by Josh Rosner of Graham Fisher, with the link kindly provided by Better Markets.)
Jamie Dimon will survive because JPMorgan Chase remains profitable. But it is profitable precisely because it receives implicit subsidies from being too big to fail. JPMorgan Chase disputes the precise scale of these subsidies – as I discussed here last week. Let’s just call them humongous.
As Jesse Eisinger sums up the JPMorgan Chase mess with its multibillion-dollar trading loss last year, “Regulators remain their duped and docile selves.” The view that “smart regulation” can rein in excessive risk-taking is completely implausible.
On a variation on the theme, as a mislead investor here in the real world, I’m tempted to go to 100% cash with my equities except for the not completely insane thought that a government intervention/hyperinflation-fail scheme/stock market bailout of some sort will occur and yours truly (among the many other little people who still have to pay taxes) will be left holding the bag.
Meanwhile, crony capitalists/socialized risk & privatized profit types like Warren Buffett and Jon Corzine make out like insider-trading bandits. Does it seem government intervention has skewed things beyond any rationality and the fixes are in?
And if the fixes are in—or will be put in—which position(s) should be taken? It seems that traditional ideas of saving and investing are being replaced by paying off the referees in order to assure financial victory and, as the saying goes, if you ain’t at the table, you’re on the menu.