I opened "My Portfolios" last Friday morning to check how my stocks were projected to do and JPMorgan Chase stock was down significantly. With my sweats on, I then began my exercises and turned on CNBC's Squawk on the Street, and the big news was Morgan Bank. It seems that a bond trader nicknamed "The London Whale" had acquired positions in bonds through a series of complicated buys, sales, swaps, and the like, and those positions had resulted in an estimated loss of $2 billion. The market, analysts, and news commentators were all atwitter, literally.
- What would this mean for the pending legislation?
- Should the Securities and Exchange Committee regulate banks more stringently?
- Was James Dimon, Morgan's CEO, now transformed from "Golden Child" to "Ninny?"
- Were other banks also ready to announce the same mistake?
- How could we protect against such things in the future?
And on it went. The pontification and blather rambled on ad nauseam.
Here are a few observations that do not require prophetic gifts.
First, as we have created banks too big to fail, we have also now created banks too big to manage. There is little evidence to believe that James Dimon is an incompetent idiot. To the contrary, there is every reason to believe he is extraordinarily competent. His enterprise, as large as it is, is simply too big to ensure that it will never make a large mistake. If he managed it so tightly that it could never make a large mistake, then it would probably be relegated to the heap of mediocre performers who never do anything extraordinary. This problem is a good argument for smaller banks, not larger ones.
Second, we do not need more government regulation to fix this problem. It is a pipe dream to believe that federal employees of any sort could have prevented what daily reviews by dedicated Morgan employees missed. Remember, this is the same government that has been unable to pass a budget for the last three years, has cost overruns so often that it is a celebratory event when a project is completed on time and on budget, and is currently still trying to compete in the relatively simple business of delivering mail, and is consistently losing money day by day.
Third, the risk of this mistake needs to be borne by the shareholders of JPMorgan and no one else. I decided to buy a share of ownership, and I placed my trust in Dimon and his management team. They made a serious mistake, but they also have a long string of very wise decisions leading up to this debacle. I can decide to sell my position, vote to oust current management, or buy more stock, believing that in the long run, they will revert to form. I may lose all my money, or make a good return.
I do not want the government to bail me out. I should not want, my neighbors to bail me out, either. Our system if left alone, allows me to fail as well as win. I am OK with that.