See Also How Goldman Sachs Blew The Facebook IPO GEITHNER'S FULL OF CRAP: The Bank Bailout Wasn't "Profitable" -- It Will Cost Taxpayers $120 Billion Jamie Dimon Takes A Massive Shot At All Politicians Yesterday's JP Morgan implosion has now put any lingering questions to rest.
Wall Street banks simply cannot be trusted to manage the massive risks they are taking.
After the financial crisis, when most of the world's banks were revealed to have been run by reckless gamblers, a couple of institutions stood above the fray.
JP Morgan was one of them.
The idiocy of a handful of gamblers should not be construed as a problem with the system as a whole, institutions like JP Morgan said.
Well-run banks should be trusted not to be so colossally reckless and stupid. Well-run banks should be allowed to manage their own risks. Well-run banks should not be hammered with straight-jacket regulations that would stymie their marvelous and creative innovation. Well-run banks should be free to look after themselves, like responsible adults.
And the banking lobbying engine rushed this message to Washington and threw money around. And the lobby quickly persuaded Congress that Wall Street was fine, that the financial crisis was an aberration, that Wall Street should be left alone.
KPLU885
Jamie Dimon.
JP Morgan was the prime engine of this message. And its brilliant CEO, Jamie Dimon, was Wall Street's defiant Adult-In-Chief.Dimon had credibility, because unlike all the other incompetent banks, his bank hadn't imploded and brought the system to the edge of catastrophe.
And unlike all the other CEOs, to his great credit, Dimon actually talked like a human, with language and confidence that persuaded even skeptics that he knew what he was talking about.
But now JP Morgan has blown up.
So we finally know the truth about Wall Street, a truth most Wall Street observers have known all along:
Wall Street can't be trusted to manage—or even correctly assess—its own risks.
This is in part because, time and again, Wall Street has demonstrated that it doesn't even KNOW what risks it is taking.
In short, Wall Street bankers are just a bunch of kids playing with dynamite.
There are two reasons for this, neither of which boil down to "stupidity."
The first reason is that the gambling instruments the banks now use are mind-bogglingly complicated. Warren Buffett once described derivatives as "weapons of mass destruction." And those weapons have gotten a lot more complex in the past few years. The second reason is that Wall Street's incentive structure is fundamentally flawed: Bankers get all of the upside for winning bets, and someone else—the government or shareholders—covers the downside.The second reason is particularly insidious. The worst thing that can happen to a trader who blows a huge bet and demolishes his firm—literally the worst thing—is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm.
Meanwhile, if the trader's bet works—and the bigger the better—he'll look like a hero and collect an absolutely massive bonus.
If you had those incentives, you would do exactly the same thing that Wall Street traders do: Bet the company, day after day. (It's not your company, after all, so who the heck cares?)
So, what's the solution?
It's very simple.
Congress needs to:
Radically increase bank capital requirements, so even massive bets can't threaten the system Once again, separate "banking" from Wall Street gambling. Glass Steagall worked very well for 70 years—let's bring it back. Lay out a plan, in advance, to manage the failure of even the largest financial institutions—by stepping in, seizing the bank, firing management, zeroing out shareholders, haircutting bondholders, and then injecting new SENIOR capital (fully protected) and re-floating or selling off the firm. This will allow the entity to keep operating, and it will stick the losses where they belong—with the idiots who bought the bank's stock or loaned it money. Meanwhile, the systemic threat will be eliminated.That's the answer.
And now that JP Morgan has proven that even "the best" banks haven't the faintest idea what they're doing (or don't care), it's time for Congress to finally make it happen.
That nothing changed after the financial crisis is outrageous. But if nothing happens now, our entire government should resign in shame.
SEE ALSO: How Goldman Sachs Blew The Facebook IPO
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600px wide (preview) <iframe src="http://www.businessinsider.com/embed?id=4fad1d10eab8ea9e0100000f&width=600&height=430" width="600" height="430" border="0" frameborder="0"></iframe> 400px wide (preview) <iframe src="http://www.businessinsider.com/embed?id=4fad1d10eab8ea9e0100000f&width=400&height=430" width="400" height="430" border="0" frameborder="0"></iframe> 300px wide (preview) <iframe src="http://www.businessinsider.com/embed?id=4fad1d10eab8ea9e0100000f&width=300&height=430" width="300" height="430" border="0" frameborder="0"></iframe> // setup button event listeners // embed post var widgetSizes = [ "", "", "" ]; embedWidgets(widgetSizes); Blackboard Home » Goldman Sachs Summary The Goldman Sachs Group, Inc. is a global investment banking and securities firm focused on investment banking, securities services, investment management and other financial services primarily with institutional clients.... More » Jamie Dimon Summary Jamie Dimon is the Chief Executive Officer of JPMorgan Chase since December 31st 2005. He also became chairman of the board on December 31st 2006. Dimon had been Chief Executive Officer of Bank One Corporation, the... More » Merrill Lynch Summary Merrill Lynch is the investment banking division of Bank of America. The firm was acquired by Bank of America in 2008, during the financial crisis. It provides investment banking, capital markets and advisory services, as well... More » Morgan Stanley Summary Morgan Stanley is a global financial firm. Its clients are governments, corporations, institutions and individuals. The company operates in three business segments: Institutional Securities, Global Wealth Management Group, and... More » Tim Geithner Summary Timothy Franz Geithner is the current U.S Secretary of the Treasury in the Obama Administration, and an economist, banker, and civil servant. Prior to his role as Treasurer, he was President of the Federal Reserve Bank of New... More » Henry Blodget is CEO and Editor-in-Chief of Business Insider. Contact: e-mail: hblodget@businessinsider.com Subscribe to his RSS feed | twitter feed Ask Henry a Question Recent Posts Why The Heck Doesn't Google... UH OH: Facebook IPO Seeing ... Bizarre Sea Monster Capture... The Water Cooler 94 Comments 71 2 Flag as Offensive DrRyan on May 11, 10:35 AM said: Now we know? Greedy men with inferiority complex playing with other peoples money. What could possibly go wrong? Reply 67 3 Flag as Offensive Real problem: Unproductive Capital on May 11, 10:54 AM said: @DrRyan: JPM has nearly 400 Billion cash in the CIO. In an economy where banks lend money to businesses to produce things, this massive horde would be buying productive widgets. Instead it is being spent on imaginary index derivatives. Until Banks lend money into the real economy instead of trading vapor, our nations wealth will stagnate. Reply 36 11 Flag as Offensive Devin on May 11, 10:55 AM said: @DrRyan: Go back to having banks being regulated by the State and not the Fed. Banks can lend only within their own state. This will ensure that they don't get to be TBTF Reply 27 1 Flag as Offensive John1066 on May 11, 10:56 AM said: @DrRyan: And again it shows the problem with banking. They care about one thing their bonuses. They want to limit their own risk and push that risk onto the tax payers. Also any costs go to the tax payers. They know they are too big to fail so if things get ugly the tax payers have to come to the rescue. If not the economy falls off a cliff. Then banks fail they take other banks with them. That causes bank runs. And in this day and age bank runs will only take a few day. Mom and pop will not have time to get to the bank to get that money. It will be gone. Reply 42 1 Flag as Offensive Glass Steagall on May 11, 11:24 AM said: @DrRyan: The repeal of Glass Steagal was what started all of this. Look at all the charts since the repeal of Glass Steagall. Risk, Income Disparity, TBTF, ... Reply 16 3 Flag as Offensive White Lion on May 11, 11:28 AM said: @DrRyan: " And now that JP Morgan has proven that even "the best" banks haven't the faintest idea what they're doing (or don't care), it's time for Congress to finally make it happen." Henry , you are right but Congress will never make this happen as long as they are also benefiting from the insider trading that exists in our government. Reply Showing first 5 of 13 replies. View All $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 45 3 Flag as Offensive G2 on May 11, 10:35 AM said: Well said Henry...should have been the solution from day one of this mess...and it would seem to be something both sides of the aisle could agree on...but for the fact that they are all bought and paid for by Wall St! Keep up the good editorials. Reply 48 1 Flag as Offensive Bring Back Glass-Stegal on May 11, 10:42 AM said: @G2: Can't be done unless you ban the lobyists from congress. Reply 25 6 Flag as Offensive Gary Anderson What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. (URL) on May 11, 10:44 AM said: @Bring Back Glass-Stegal: Thank you Henry. We can't trust Dimon or any of them. The merits of a return of Glass-Steagall are real. Yet the UK City of London is without governance. No government in the world has control of the real estate where Jamie Dimon incurred these losses. I don't think the Square Mile is the friend of US interests. JMO. Reply 2 31 Flag as Offensive Thurston Howell III on May 11, 11:12 AM said: @Gary Anderson: @Gary Anderson: Glass-Steagall has nothing to do with this. Actually, Glass-Steagall wouldn't have prevented the bank failures during the Depression so it was about as useless as Sarbanes-Oxley. Glass-Steagall wouldn't have prevented the financial melt-down either. As a matter of fact, with it, the crisis would have been much more severe because you wouldn't have been able to merge Bear, Lehman and Merrill (the non-bank firms that caused the problem) with the big banks to stabilize the financial system. More useless regulation isn't the answer. Reply 24 1 Flag as Offensive jamesusnvet on May 11, 11:23 AM said: @Thurston Howell III: It is not useless regulation to separate customer money from wall street gambling. If you can keep them from gambling with other people's money then there is less of a reason the bank needs a bailout. This will allow the banks to go under with less risk to the economy as a whole. But I am sure that this fact isn't lost on the banksters who are dead set against this happening (such as yourself I am sure). Reply 17 3 Flag as Offensive Bull... on May 11, 11:27 AM said: @Thurston Howell III: you are wrong. Glass-Steagall did prevent this as it prevented the gambling that goes on in the markets from risking the populations deposits in the banks. That is where the real risk to the system lies. Look at the charts of what has happened since the repeal of Glass-Steagal Reply Showing first 5 of 12 replies. View All $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 14 8 Flag as Offensive ChrisRossini on May 11, 10:35 AM said: Not bad...until I got to "Congress needs to.." The entire fiat system is a giant pile of dynamite. Neither Congress, The President, The Fed, nor Wall Street can change that unless they go back to sound money.....which they won't....until the market forces them to. Reply 11 3 Flag as Offensive Former CU Writer on May 11, 10:39 AM said: @ChrisRossini: Given that gold is globally traded and easily manipulated, how is it more sound than fiat currency again? Reply 7 4 Flag as Offensive jamesusnvet on May 11, 11:24 AM said: @Former CU Writer: Gold can be manipulated but MUCH less easily then paper that can be printed at will, or 1's and 0's typed into a computer. Reply 4 0 Flag as Offensive Newt from the Moon on May 11, 12:00 PM said: @ChrisRossini: Congress needs to examine why the Fed is lending these banks money at 0% interest. If Etrade gave me a margin account of a few hundred thousand at 0% interest you can bet I'd be making some bets. Or Fed is doing that with our banks. The whole system ceased to be banking (lending money deposited) a long time ago. Reply 2 0 Flag as Offensive crusader75 on May 11, 12:02 PM said: @Former CU Writer: Limited supply. Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 13 11 Flag as Offensive TrailerParkRedneck on May 11, 10:36 AM said: The only action Obama plans to take with bankers is to solicit more campaign donations from them and threaten them with reprisals if they have the audacity to give any money to Romney. How's that hopey changy thing working, huh? Reply 9 5 Flag as Offensive Charlie L. on May 11, 10:37 AM said: Take a deep breath Henry. JPM has hardly "blown up". Reply 6 7 Flag as Offensive Gary Anderson What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. (URL) on May 11, 10:45 AM said: @Charlie L.: Compared to Euro banks you are probably right. But JPM needs to stay away from the UK casino or who knows what could happen. Reply 7 2 Flag as Offensive HAHA What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. on May 11, 11:08 AM said: @Gary Anderson: why would JPM stay away from the "UK casino" when Bernanke has already implicitly guaranteed all the bets. They screw up bad, just go to Uncle Ben and ask for more money...THEY CAN'T LOSE! Reply 4 0 Flag as Offensive Gary Anderson What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. (URL) on May 11, 11:35 AM said: @HAHA: JPM needs to be forced to stay away from the casino. Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 9 1 Flag as Offensive Tru Dat on May 11, 10:37 AM said: Oh Henry come back to me....how are you planning to accomplish that when Obama says "I'm here to help" to the bank CEOs at the White House meeting? You know the system is rigged. Reply 3 2 Flag as Offensive Former CU Writer on May 11, 10:38 AM said: I'll fully concur with point three. This absolutely should have happened last time around and there is no reason for it to not be the solution for any future blowup. Point one needs some clarification. Radically increasing capital requirements for everybody will be extremely detrimental to well-run community and even regional banks. If you mean only for SIFIs, then that's fine. Glass-Steagall is imperfect and you well know that. An updated version could be workable. Reply 20 1 Flag as Offensive sbenard on May 11, 10:41 AM said: Good article! Thanks! There is no longer any perception of risk on Wall St! I've spent considerable time studying the topic of what causes crises. I've studied both complexity theory and chaos theory, amongst others. When there is no longer any perception of risk because Wall St is so convinced that the Fed will never permit any bad things to happen, and bad news like JPM's announcement last night is seen as GOOD news (see today's stock market RALLY), then we know we are back in bubble territory. PMI was another disappointment this morning, but stocks are RALLYING! Jim Grant last night called this an "UNreality"! These are mirage markets, and we are being set up for another VERY REAL crisis! Reply 5 0 Flag as Offensive Paul on May 11, 11:13 AM said: @sbenard: Great comment. Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 16 7 Flag as Offensive Mr Thrifty on May 11, 10:45 AM said: >It's time for the government to act. Because the government is smarter than business? Because we need to hire another 10,000 clueless bureaucrats with gold-plated pensions to micromanage private banks at taxpayer expense? Just let them effin fail when they screw up. Period... Reply 21 3 Flag as Offensive Henry Blodget on May 11, 10:49 AM said: @Mr Thrifty: I'll settle for that. Reply 12 2 Flag as Offensive Gary Anderson What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. (URL) on May 11, 11:03 AM said: @Mr Thrifty: But they have to fail in an orderly manner. These banks should be shrunk by government as we speak, not subjecting the world to another financial crisis. Reply 12 2 Flag as Offensive HAHA What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. on May 11, 11:05 AM said: @Henry Blodget: Privately owned Fed Reserve will never let that happen Mr. Thrifty. That is so far out of their realm of possibilities, they will never consider letting JPM fail. The Fed is the problem. JPM risk is insured for free by Bernanke. Reply 5 0 Flag as Offensive nologin on May 11, 11:21 AM said: @Mr Thrifty: too big to fail needs to stop!!!! unfortunately the government needs to make it happen.. since they prevent it from happening by rescuing them. Time to break up the big banks. Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 6 2 Flag as Offensive Greg on May 11, 10:51 AM said: Good Plan. Now though, the real problem. It is not hard for most of us to see what should be done. However, the incentive structure of our elected representatives is even more perverse and insidious than the one on wall street...so they won't do it. You can't fix this either...because while their incentives are not good for the country they are lucrative, and they would be the ones to have to change it and as I mentioned. Reply 9 0 Flag as Offensive fresno dan on May 11, 11:14 AM said: @Greg: I think your insight is correct. And I think the situation is hopeless. We are now seeing why great countries discontinue being great... At some point for the entire society, great principals (freedom, equal justice under law) became less important than making great money. Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 5 6 Flag as Offensive Yesac13 on May 11, 10:58 AM said: I disagree. Seriously, the most important lesson that I learn from this: Don't do bailouts. The Fed is bad. Banks should rely on their creditors only. Mind you, creditors do not include Government. Governments should not be a creditor to banks in the first place. Central Banks shouldn't even exist in the first place, they are nothing more than "last ditch tools" for large politically connected banks. Banks must do it all by their own. No more borrowing money at zero to .25% from central banks and lending it at a higher percentage to debtors. These banks should have borrowed from the people, not from a central bank which prints money. Having more government regulations will do next to NOTHING because the whole system is rotten. The whole fiat currency system itself is rotten, large central governments and central banks INCLUDED. More government regulations will merely ensure that no more new small banks will grow up and the large players get more entrenched (might be divided up, though). The whole system is rotten, things like this is a symptom of it. More regulations ain't going to help in the end. Reply 7 3 Flag as Offensive Gary Anderson What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. (URL) on May 11, 11:05 AM said: @Yesac13: I say regulation (Glass-Steagall, here and in the UK) would be better than letting them fail in a disorderly fashion. Reply 5 4 Flag as Offensive mole on May 11, 11:30 AM said: @Gary Anderson: Abolish the fed and it stops, but as long as these wall street banks that own the fed can have the fed create money out of thin air and bail themselves out and lay the debt on the americans taxpayers , the corruption will never end. Reply 4 2 Flag as Offensive Gary Anderson What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. (URL) on May 11, 11:38 AM said: @mole: Before the Fed there were problems with banks and gambling. So, not sure they would not find a way around it. Abolishing the Fed will terminate the 30 year fixed mortgage. Are we ready for that? Reply 1 1 Flag as Offensive Yesac13 on May 11, 11:50 AM said: @Gary Anderson: Disorderly? 2008 wasn't that orderly. I don't think you can legislate or regulate away disorderly. Humans are crazy. Things blow apart periodically, no matter what the regulations are like. In my opinion, with the central banks (and governments) as the ultimate backstop, there are no limits to how large banks can grow. Then when they inevitably blow up, things get worse compared to smaller banks going bad. That is the point I am trying to make... this whole system enabled banks to get so large that they're a hazard. More regulations for those giant banks is like closing the gates after the pigs went running. Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 5 6 Flag as Offensive usalltheway on May 11, 11:02 AM said: Yeah we should definitely listen to this guy about banks.. great track record in the industry... Reply Read Full Article »