Putting policy implications aside (I will get to that later), here’s what I would advise Mitt Romney to say about JP Morgan Chase’s trading loss of at least $2 billion from a failed hedging strategy:
Today’s news of huge losses on Wall Street highlights the failure of Obama-Dodd-Frank to fix the broken U.S. financial system and prevent a repeat of the financial crisis. As president, I will repeal this well-intended but poorly-executed law. But we must go further. In the past, I have expressed skepticism about the wisdom of breaking up, shrinking, or otherwise limiting the activities of America’s very largest financial institutions. But when a bank like JP Morgan that most experts think is America’s best run can suffer a loss like this, it’s clear changes must be made. It’s time for radical surgery.
With each passing year, the banking industry has become more concentrated and more interconnected. Half of the entire banking industry’s assets are now on the books of five institutions. Their combined assets presently equate to roughly 58 percent of the nation’s gross domestic product. The combined assets of the 10 largest depository institutions equate to 65 percent of the banking industry’s assets and 75 percent of our GDP. Under Obama-Dodd-Frank, the “too big to fail” problem has gotten worse. And we simply cannot afford another bailout or Great Recession caused by a second financial meltdown.
So, I have concluded there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit. As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these mega-institutions into more manageable size. And as president, I will order my Treasury to immediately begin negotiations to that end.
A Nixon-to-China moment. In one fell swoop, Romney would undercut the charge that he’s a creature of Wall Street and the financial superelite. And given how many hedge fund managers and other investment pros dislike the mega-banks, Romney probably wouldn’t even take a fundraising hit. At the same time, he would outflank Obama on the financial reform issue by portraying Obama-Dodd-Frank as a sop to the big banks that failed to fix the problem. Another example of Obamanomics being more about rhetoric than results.
But might Romney actually do this? Certainly there are plenty of conservative thinkers who favor such an action and could justify it on policy grounds.
Still, I doubt it. I am guessing that Romney simply thinks this would be a terrible idea. I wonder if he sees the issue the same way as Ed Conard, the former Bain Capital exec who just wrote a book, Unintended Consequences, that will be out next month. I got an early copy of the book, and here’s what Conard says about breaking up the big banks:
Busting up big banks will only reduce our economy’s competitiveness. A fragmented banking industry may have worked when the economy was highly regionalized, but today the world continues to progress to a more integrated whole, with or without us. … London has already overtaken New York as the world’s center of finance. To strengthen our leadership in the world, we need financial institutions that can successfully serve, lead, finance, and compete in this increasingly integrated and growing market. And these institutions will necessarily be too big and too integrated to fail.
I don’t for a second think a President Romney would let a bank go under if he thought it would shock the financial system, much less multiple banks as may have been the case in 2008. As Romney said in his book, No Apology: The Case for American Greatness: “Secretary [Hank] Paulson’s TARP prevented a systemic collapse of the national financial system.” But to avoid another bank bailout, Romney would do what, exactly? Maybe JP Morgan’s troubles will given him an idea …
There’s an obvious disconnect between a free, unregulated market and a bailout when the market dictates that a participating firm should fail. To the extent the government is willing to step in and pay the bill when a risk doesn’t pay off, it makes sense to intervene in the market on the front end, as well.
True, it might limit the efficiency of our banking system, but it seems like you either pay now or pay later.
” I doubt it.” Why would Romney (or any other Republican) reverse the Republican party’s committment to too-big-too-fail, too-big-to-succeed, rent-seeking, ever-more-destructive BIG, BIG BANKS?
Obama should push that.
You mean the Wall St banks who are Obama’s biggest donors?
Both parties have skin in the game, Dems more than Republicans. Neither side wants the banks to fail, there’s too much at stake in the world markets. If we fail, the rest of the world follows. Obama cannot risk looking like a vulture. The “big, bad Republicans”ploy will not work. Dodd-Frank has been a disaster and has not produced the result they wanted, so Obama risks throwing his own under the bus by taking that road. He cannot afford to eat his own at this point.
Obama WAS warned to “push that” by Volker and Brooksley Born early in 2009. He flubbed the opportunity. So much for hope and change…
@mnjam:
Because that’s just a democrat talking point and has no basis in reality. It’s the Democrats that are intertwined in Big Wall Street, not the Republicans.
Dodd Frank hasn’t been implemented or at least not the parts that would have fingered this trade. As for Pethokoukis’s suggestion that the big banks should be broken up, is this guy out of his mind?
yes
Yes, Dodd/Frank is so complicated that it is nowhere close to being fully written, much less implemented, so why, pray tell, are the Dems arguing that the JP . . .Chase event proves we need MORE regulation?
The problem with breaking up big banks is who decides how big is too big? It all seems very arbitrary. I better alternative would be to reform the FDIC. First of all prevent FDIC insured funds from being from any activity outside traditional mortgages to a prime lender with 20% min down payment. Second create a new FDIC insurance that would insure all bank assets and the premium would be based on how much risk a bank is exposed to. The higher the risk the higher the premium. Since the banks would then pass the cost to the consumer in higher fees it would create a market incentive for banks not to make risky investments or loans.
This column is pure evil, and it is a recipe for American decline. How can anybody who works for a supposedly right-wing organization advocate something like this? You cannot force the market to be safe, wealthy, healthy, or great. The only way out of the too-big-too-fail conundrun is to completely deregulate. I do not care if Mr. Pethokoukis wants to hear this or believe it or not. It is the reality.
BREAKING UP big banks won’t solve the problem of autocorrelation when nearly all banks engage in the same risky behavior. DF is terrible. Maybe if government stopped putting a thumb on the scale, there wouldbe less risky behavior!
For a smart guy, this is a pretty lame solution. While the goal may be admirable, the suggestion that Government should simply mandate Corporate dissolution is rather pedestrian.
A return to simple regulation would be a step in the right direction. Simply raise liquidity requirements, and enforce them. No special consideration for various types of loans, holdings, or investments.
The current regulatory environment (Obama/Dodd/Frank) is so poorly conceived that not a single new bank was created in 2011, and only one in 2010. (50 new banks/yr were the average in prior to Dodd Frank) The best way to break up big banks is to remove the absurd regulations that make it impossible to form new banks. Given a choice people will move their money, and the Big Banks will recede – from market decisions – not totalitarian mandates.
who cares how big the banks are?
it’s the trading areas that they have gotten into that’s the problem.
there is just a fundamental problem with allowing a bank to be heavily involved in trading (oh excuse me “risk management”) while they hold billions of dollars of FDIC insured deposits.
in addition, as the head of the Dallas Fed pointed out , the largest banks get access to the Fed lending window at basically free money rates.
what was it? 6 -7 years after repealing Glass-Steagall and we’re faced with a Depression era size problem of banks facing collapse? and still suffering the aftermath 5 years later.
Glass-Steagall 2.0 , split the traditional banking activities and traditional “Wall Street” activities and end the “too big to succeed” era we are in now.
I think the conservative positions are: too big to fail is too big to exist; concentration is akin to monopoly and is inherently bad; and that bailout of a business means the government owns that business, and should then sell it as quickly as is reasonable.
You realize that your hopes have no chance with someone like Romney?
Dodd – Frank left Frannie and Freddie untouched and the too-big-to-fail banks untouched.
Bring back Glass-Steagall, liquidate Frannie and Freddie an breakup the too big to fail banks.
This is from the most fiscally conservative guy you’ll meet.
The problem began with the repeal of the intrastate banking laws under carter. then the savings and loan biz was destroyed. Anyone remember the S&L crisis? In the end the politicians can extort money more easily this way. The country had more strength globally using the old method and ruled the banking world. In the end it is easier to steal money from one pile than fifty.
You think Romney should become a Democrat.
This is the stupidest thing I’ve read yet this campaign season.
Perhaps some of those commenting above or this erstewhile business partner of Mr. Romney might enlighten us as to what benefits are to be had from the intense concentration of
1. Household consumer lending;
2. Residential mortgage lending (for households);
3. Commercial lending for small businesses.
—
Households are not getting any larger, yet all over the places were I live you can see branches of national and international megabanks (HSBC, Chase, and BoA) where once you would have seen branches of banks local to one or two metropolitan zones (e.g. M & T or Key Bank). Cannot help but notice that the most problematical institutions appear to have been Citigroup ($2,200 bn in assets + whatever they had on off-balance sheet entities), Washington Mutual ($300 bn) and Countrywide ($211 bn).
We have a set of institutions (e.g. the FDIC) which can deftly handle the shocks from insolvent deposits-and-loans institutions – provided these banks are not engaged in activities the conduct of which is outside of the institutional memory of these authorities. Just why is it that our ‘competitiveness’ is dependent on having insured deposits-and-loans banking appended to proprietary trading, prime brokerage, or private equity?
Mighn’t we have a system of national banks which engage in lending, securities underwriting, treasury services, pension fund administration, & c. for corporations, foundations, and governments and leave households and small businesses out of it? Why not tell those who wish to speculate in securities or in futures and options that they are welcome to do that and do that at their own risk and stay away from the rest of the financial sector (and the real economy)?
Leave the market alone!
Reduce State and Federal Government Size. There is No closed-shop Unions allowed when Tax payer money is used to pay salaries and benefits. any contract with a union which involves taxpayer money is by definition Unconstitutional..both because of the “special class of citizen” resulting in unequal application of law and because union-administration is between the public employee and the work hired to be performed by that employee…who is dictated to by the administrator who becomes an quasi-government who regulates the right of a citizen to work or not depending on internal hierarchy as well as power of “in-arrears” dues….confiscation.
Just think how much money could be saved! Just removing ‘closed-shop’! the biggest myth perpetrated on the taxpayer by part of representative government reaching well beyond enumerated powers for union over private… And how much would all Americans gain if government went Private….rather than the other way around!!! Novel idea, huh?! Accountability gets built-in because if the work is not done…it isn’t paid for! Taxpayer $$$$$$$$$$$$.00 don’t give Grants–or give away their earnings for the benefit of those other ‘special citizens’. Responsibility returns to Person! Accountability to self as conscience and accountability to God or to the morality of life if that person doesn’t have a supreme Lawgiver.
The financial industry has been th single most morally bankrupt group of thugs and criminals for the last 3 decades.
Unfortunately, there is no credible threat of punishment for most of these crooks so there is no incentive to stop the dishonest wheeling and dealing on Wall Street.
Until money and financial management by third parties is considered a sacred trust and those who manage that money for large payouts face serious, life altering jail time and fines when they step out of line, nothing will change.
Its time that Wall Steet and white collar criminality is treated with the same ruthless punishment that we deal out to rapist and street dealers) they will be laughing all the way to the bank.
Romney should be front and center calling for a wall to be built between the regulators and the regulated and an end to cronyism. he can start by suggesting that the entire IRS enforcement machine being created to enforce Obamacare, should be shifted to chasing the bankster and the crooks in hedge funds and oth investment houses.
The Occupy Movement and the Tea Parties can at least agree upo this point.