If you need proof that privatizing Social Security and throwing senior citizens to the wolves of Wall Street would be a huge mistake, look no further than JP Morgan’s $2 billion loss disaster yesterday. JP Morgan was supposed to be the smart player. The responsible one who didn’t get caught in the 2008 meltdown and could be trusted to regulate itself. Yet here they are three years later, losing a reckless gamble on the same sort of “creative derivative instruments” that crashed Wall Street then and wiped out the life savings of millions of Americans nearing retirement age.
Big money hedge fund investors can absorb big losses and still have enough left to keep playing and win their money back relatively quickly. But small money retirement investors can lose everything in a one day loss of that magnitude. This isn’t illegal, but it shouldn’t be allowed to happen. As Senator Carl Levin said, “The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making.”
This derative scam has become so complicated not even the banksters know how it works. But they don’t care. They have no meaningful exposure to the risk. The best article I’ve read about this explains why the banksters gamble so recklessly without fear:
The second reason is that Wall Street’s incentive structure is fundamentally flawed: Bankers get all of the upside for winning bets, and someone else—the government or shareholders—covers the downside.
The worst thing that can happen to a trader who blows a huge bet and demolishes his firm—literally the worst thing—is that he will get fired. Then he will immediately go get a job at a hedge fund and make more than he was making before he blew up the firm.
Meanwhile, if the trader’s bet works—and the bigger the better—he’ll look like a hero and collect an absolutely massive bonus.
I urge you to read the whole article at the link. It’s a good explanation of the full situation in simple, easily understood terms. It also offers a great remedy:
1. Once again, separate “banking” from Wall Street gambling. Glass Steagall worked very well for 70 years—let’s bring it back.
2. Lay out a plan, in advance, to manage the failure of even the largest financial institutions—by stepping in, seizing the bank, firing management, zeroing out shareholders, haircutting bondholders, and then injecting new SENIOR capital (fully protected) and re-floating or selling off the firm. This will allow the entity to keep operating, and it will stick the losses where they belong—with the idiots who bought the bank’s stock or loaned it money. Meanwhile, the systemic threat will be eliminated.
Proper regulation of the finance industry would help mitigate some of the risks to small investors. So would putting the criminally reckless players in jail remove some of the incentive to cheat the system. But even that would not make giving these people control of our national retirement insurance a good bet. Some greedy Wall St wolves will always find a new loophole to get around the regulations. They simply can’t be trusted. Not ever.