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 …