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The $2 Billion Lesson

The opinions expressed by columnists are their own and do not necessarily represent the views of

Anybody need still another argument for reviving the old Glass-Steagall Act (1933-99), with its salutary separation between commercial and investment banking? If so, JPMorgan Chase has just provided one. A big one.

The country's largest bank now has admitted losing $2 billion going on $3 billion through its investment games, aka credit default swaps.

When the problem was first spotted by wire services like Bloomberg and the Wall Street Journal last month, the bank's hot-shot CEO, James ("King of Wall Street") Dimon dismissed the story as "a complete tempest in a teapot."

Now it turns out to be a $2 billion storm, and the extent of the company's (and its investors') losses is yet unknown. What is known is that Mr. Dimon doesn't seem to know a heckuva lot about what was going on in his own far-flung company/empire.

The moral of the story: A bank that's too big to fail may also be too big to manage coherently. Where's a good antitrust law like Glass-Steagall when you need one? Answer: repealed in 1999.

If only the bank had stuck to banking -- plain, old-fashioned, conservative banking -- this trainwreck might have been avoided. If only the old wall between ordinary banking and high-flying investment banking had been maintained, this kind of thing would have been impossible, or at least illegal.

Instead, that wall was dismantled by financial masterminds like Bill Clinton and his Republican counterparts Phil Gramm and Jim Leach. The politicians and the banking lobby knew better than to trust history. And now JPMorgan Chase and investors have been handed an expensive lesson about the dangers of ignoring the lessons of the past.

Of late, the sophisticates in our chattering class -- like Thomas Mann at the Brookings Institution and Norman Ornstein at the American Enterprise Institute -- have been lamenting the end of bipartisan cooperation in this bitterly divided Congress. They grow positively sentimental about the good old days when Democrats and Republicans united to pass legislation.

If the bipartisan repeal of Glass-Steagall was an example of constructive collaboration, give me bitter polarization any time.

Whether the country will learn anything from this latest misadventure in financial empire-building remains to be seen. If our policymakers are paying attention at last, they'll once again separate banking from speculating, aka proprietary trading.

Yes, the maze known as the Dodd-Frank Act contains a watered-down version of the Volcker Rule, the modern equivalent of Glass-Steagall, but it's only a pale imitation of the real thing. And the regulators are still trying to figure out just how to enforce it, if at all.

The complex regulations that were going to prevent this kind of thing haven't even been written yet, let alone enforced. And if they ever are, will anyone be able to understand them? Or will they be as simple and clear as the Internal Revenue Code, that encyclopedic morass?

The masterminds in Washington still don't seem to have learned that simple is better than complicated. They're still calling for vague rules some day instead of drawing clear lines now.

This is what comes of tearing down walls that have stood the test of time but couldn't withstand the plans of our history-challenged politicians, and the kind of high-flying financiers whose ambitions are greater than their foresight. Or rather hindsight, for the history of the Great Depression should have taught them -- and the country -- better.

Recommended reading: "How Big Banks Threaten Our Economy" by Warren Stephens in the Wall Street Journal, May 1, 2012. His is the voice of sad experience when he concludes:

"In hindsight, eliminating the Glass-Steagall Act, the Depression-era law that separated investment and commercial banks, was a mistake."

A $2 billion mistake. And it was all too foreseeable, for those who cannot remember the past are condemned to repeat it. That warning of Santayana's has become a cliche by now, and for good reason: It's proven so relevant so regularly.

Isn't it time we learned from the past instead of ignoring its lessons? When it comes to banking, this lesson has a name: Glass-Steagall. Let's re-enact it. We've seen what can happen without it.

But how will our big banks -- like JPMorgan Chase, the biggest -- meet the need for more deposits, and be able to make more loans, and generally revive the American economy, unless they're allowed to run their own investments/hedge funds/credit-default swaps?

Have no fear. If the biggest banks have to stick with plain old, conservative commercial banking -- instead of high-stakes investment banking -- there are plenty of investment houses out there more than willing to take up the slack. And if they're not able to, new ones will spring up to fill the vacuum.

Where there are big profits to be made, and, yes, big risks to be taken, there'll always be those ready to take them, especially with other people's money.

Let's give a new crop of investors room to exercise what John Maynard Keynes called the motivating force of a thriving economy -- "animal spirits" -- and watch those entrepreneurs go. Some will only go broke, but those who succeed, the ones who back the next revolutionary innovation, the next trans-continental railroad or Internet, will improve all our lives.

The big thinkers who claim our banks have to do their own investing (proprietary trading, it's called) need to take their dusty copies of Schumpeter off the shelf and review that part about Creative Destruction. You can't have one, creativity, without the other, destruction. Not in a free market, which is the most productive kind. And the riskiest. As the whiz kids at JPMorgan Chase have just learned.

Better our bankers stick to banking, the old-fashioned kind. And leave speculation to the speculators. Each has a vital role to play in a modern economy but, like church and state, they shouldn't be mixed.

Dividing the two once again -- commercial and investment banking -- would let banks serve the interests of their investors, borrowers and depositors without taking undue risks. And let those interested in risk management manage it themselves, rather than through a federally insured bank. That is, with our money.

Good fences, like the old Glass-Steagall Act, make good bankers.

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