Jamie Dimon heads to Congress today to testify about The Whale. The bank had a trader make a large bet in the over the counter derivatives space. In past years, they made a lot of money on that bet. This year, it crumbled costing the bank a couple of billion dollars.
Does it matter?
In past years, it wouldn’t have. The bank would have taken a hit on earnings and the stock price would have decreased once the trade loss was disclosed. But we are in a different time. Dodd-Frank gives anyone in government the power to investigate anything at any time. Jamie Dimon is no different.
The question is where does it stop? Venture capitalists make bad bets all the time. Should we comb through their due diligence prior to the investment to see where they made their error? How about angel investors? Private equity investors?
What about regulated markets? If I am a trader with a boatload of capital and take a massive position I can afford to hold, what happens if I lose a bunch of money on it and cause a ripple through the market? Does the trader have to make the trek to Washington DC to sit in front of the Senate Finance Committee and explain exactly what they were seeing when they put the trade on?
This is an exercise in stupidity. It gives the “fairness” people a bully pulpit to try and dictate CEO salaries and bank practices.
The real elephant in the room is that government policy over the past 20 years has created the big banks and “too big to fail”. It’s as if the Senators, Representatives, and bureaucrats didn’t have anything to do so they came up with new regulations and rules to give themselves something high and mighty to do. Artificial importance.
There is no “fairness” in a capitalistic society. The winner wins. Winning comes down to not only good ideas, but great execution of those ideas. In the capital marketplace, bad strategies eventually get sniffed out by the market. If regulations let the market work.
Fairness means there has to be a referee. That means a referee(appointed bureaucrat) judges what’s going on and deems it appropriate or not. This brings variation to rulings. What I think might be fair isn’t what you think might be fair. Fairness invites crony capitalism.
If we look at the recent government track record of investments in things like Solyndra we can see where things are going. By definition, the government cannot invest. It only can spend. Governments are almost immune to the effects of the marketplace until they get in desperate straits like Europe. Besides, when government spends money on things like Solyndra, they fail 100% of the time.
Unfettered free markets are unyielding. When they decide what’s fair there is no picking of winners and losers. They allocate capital efficiently. They are uncaring to variables like skin color, who has what or started with what. The best execution with the right risk/reward balance takes the prize. The losers fail and start over.
Entrepreneurs know this. They live and die by the knife of the marketplace. Create a good business and execute correctly, they win. Mess it up and they fail. Money is lost. But they learn from failure and start again.
Maybe that’s the core problem. Everyone wants to de-risk the economy. Everyone wants to eliminate failure. When you take away the risk, and take away the failure, know what you get? No growth.
They have done a really good job of that over the past several years.