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Thursday, May 17, 2012

Lighting Money on Fire and Romney's Idea of 'Over-Regulation'

It was one of the dumber things the Romney campaign said this week and it's getting almost no coverage. On NBC's Today show, campaign adviser Eric Fehrnstrom said that the JPMorgan trading debacle was no reason to go and start regulating Wall Street banks. "The leadership of that company will be held accountable for this trading loss, but we don't want to punish companies," he said. "There was no taxpayer money at risk. All of the losses went to investors, which is how it works in a public market."

Fehrnstrom apparently has no earthly idea "how it works in a public market." Plenty of people who weren't investors in JPMorgan are harmed by this -- most notably you.

First, let's let NPR's Planet Money explain what happened:

The trade came to light earlier this year, when reports surfaced of a "London Whale" — a trader at JPMorgan who had accumulated a position so big it was affecting the whole market.

The trade involved an index of corporate credit default swaps. These are essentially insurance policies that pay off if a company can't make payments on its debts. (Credit default swaps became a household name during the financial crisis, when they were central to the blowup of AIG, a giant insurance company.)

JPMorgan took the big hit when it tried to back off from the trade and had to sell at a loss.

Here's what I want to make extremely clear here: JPMorgan didn't get screwed on some deal by someone who outsmarted them. No one out there is $2 billion dollars richer because of this. The bank might as well have stacked up $2 billion in American wealth -- that's two and nine zeros -- and put a match to it. It's just gone. $2 billion taken out of the US economy and nothing to show for it.


Except it's not $2 billion. JPMorgan lowballed how much they lost. It's more along the lines of $3 billion.

Any of this sounding familiar? Yeah, we've been down this road before. Everyone mocked Wall Street for the absolute idiocy that is credit default swaps -- and here's JPMorgan again, having learned nothing at all, throwing money at dangerous get-rich-quick schemes. The titans of finance are titanically stupid.

Is any of this legal? Well, technically no. And technically yes. And either way, not yet. Planet Money again:

The Volcker Rule, adopted after the financial crisis, will ban commercial banks from "proprietary trading" — using their own money to make speculative bets.

But the rule allows banks to make trades to hedge their risks. JPMorgan, not surprisingly, argues that this trade was a hedge gone wrong, not a speculative bet.

So the Volcker Rule could be so weak that by engaging in semantics, you can completely sidestep it. What's the difference between a hedge and a bet? Well, that's very complicated; see one's called a "hedge" and one's called a "bet" and that's that. And remember that bit about the "London Whale?" Yeah, "whale" is a gambling term for someone who bets huge amounts of money. It wasn't a hedge. Whales don't do that.

But to go back to Romney, "regulation" is a bullshit term Wall Street and corporations have gotten everyone to use. It's a synonym for "law." Saying that a Volcker Rule that's less of a joke means "regulating" commerce is a lot like someone complaining about how Big Government "regulates" theft or rape. There are things that should be against the law. It's just common sense. "Free market" does not mean an anarchistic market, where everyone can do whatever they damned well please and you get to shut up about it. What we've come to call "regulation" means laws against doing things that needlessly harm others.

And that's the point here. When Team Romney says no one but investors were hurt by JPMorgan's idiot gamble, they're just plain wrong. There's a smoking $3 billion hole in the economy and, bad as that is, this time we got lucky.

The last time something like this happened it dragged the entire US economy into recession. If you want a measure of how serious Mitt Romney is about economics, you've got one. He's not very serious at all.


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[Image credit: adapted from a photo by Images_of_money, via Flickr]
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