May 11, 2012

JP Morgan's Beautiful Loss

Hester Peirce

Former Senior Research Fellow
Summary

After the markets closed yesterday, JP Morgan’s chief executive officer, Jamie Dimon, convened a conference call to announce an embarrassing $2 billion trading loss. After what we have been through during the past several years, a couple billion dollars is not that jarring, but a mistake of any magnitude by JP Morgan gets everyone’s attention. Some have seized upon the mistake as a reason for more regulation. But if anything, it is an argument for less regulation.

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After the markets closed yesterday, JP Morgan’s chief executive officer, Jamie Dimon, convened a conference call to announce an embarrassing $2 billion trading loss.  After what we have been through during the past several years, a couple billion dollars is not that jarring, but a mistake of any magnitude by JP Morgan gets everyone’s attention.  Some have seized upon the mistake as a reason for more regulation.  But if anything, it is an argument for less regulation.

Markets are excellent at punishing bad trading decisions, regardless of who makes them.  A regulator is far less likely to prevent another such trading loss than Jamie Dimon’s desire to avoid making another call like this anytime soon.  As he admitted, “this trading … violates the Dimon principle.”  His blunt language on the call made clear that he is quite focused on bringing the firm back in line with the Dimon principle.

Regulators, no matter how many rules they write, cannot exert more effective discipline than the market does.  Regulations often end up shielding investors from their own bad decisions or from the market’s reaction to those decisions.  When that happens, investors who have done something “stupid” (Mr. Dimon’s word, not mine) don’t get the painful reminder they need to help them be more careful the next time around.

Let’s not assume that every time somebody loses money, the government needs to write a new regulation.