Saturday, May 12, 2012

Businesses lose money all the time

Chase loses $2 Billion

On May 11th JP Morgan Chase announced that their investment bank made some bad bets and that could result in losses of up to $2 billion. This has reignited the call for more oversight of banks and stiffer regulation, along with the possible breakup of "large" banks.

What I don't understand is why this loss is any one's concern other than Chase, its management, its employees,  its creditors, and its shareholders. Businesses lose money all the time. They make mistakes and sometimes go out of business because of it. Sure $2 billion is a lot of money, but Chase made over $5 billion in profits in the first quarter of 2012. At that pace a loss of $2 billion will be less than 10% of 2012 profits.

But Barney Frank and the rest of the democrats are lauding this event as proof that banks need the government looking over their shoulder to ensure that mistakes like this don't happen again. But why is it their concern? If shareholders are upset, they can sell their stock and buy something else. If employees are upset they can find new jobs. The responsibility of correcting this mistake and ensuring that it doesn't happen again does not lie with the U.S. government, but with Chase's management and board of directors.

If we start looking at financial mistakes made in the private sector as reasons for government intervention then soon it may be impossible for anyone to go out of business. If a coffee shop makes a mistake and has to close down, maybe Mr. Frank can write some regulation to make sure that no coffee shop goes out of business ever again. We can have government agencies monitoring all industries to ensure that no mistakes are ever made again. Ever. I mean look at the great work the government did watching Fannie and Freddie.

Pundits are saying that Mr. Dimon, CEO of Chase, has no leg to stand on when it comes to criticizing more regulatory oversight anymore. But I disagree. Bank management did not promise that they would never make mistakes, and mistakes like Chase's will always occur, even with more regulation. But businesses that make mistakes and lose money should not be subject to some special government monitoring disguised as "protection". I hope that Mr. Dimon continues to speak out against the pitfalls and burden of more regulation. I also hope that more people join him.

Losing money is a necessary part of capitalism. There is profit and there is loss. If we try to eliminate the latter I am not sure what system we are using, but it certainly isn't capitalism.

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