The Corner

The Tale of the Whale

Mr. Brennan beat me to the punch on J. P. Morgan, and I do indeed suspect that he is right that this “London whale” episode will be used to argue to for regulations that would have done nothing to prevent it.

The odd thing about this is that it is now considered somehow scandalous when a business loses money. It’s a scandal when banks make profits, and it’s a scandal when they make losses. The only thing financial firms do that Democrats do not object to is write checks to Barack Obama. (Nearly a million bundled by Jon Corzine of MF Global? Yep.)

But losses are part of business. Even big losses. Failure, bankruptcy — all part of the normal life cycle.  

J. P. Morgan, like any large and complex firm, attempts to mitigate, or “hedge,” certain kinds of risks. This is a normal business practice — but J. P. Morgan did not turn out to be very good at it, at least in this instance. That also is not that unusual: If 2008–09 showed us anything, it is that financial firms are not as good at managing risk as they had supposed. (Which is why stronger leverage limits seem to me the simplest useful regulatory reform.) Markets may do a pretty good job of assessing risk in the long run, but it is crucial that we remember the distinction between the market and the individual firms participating in it. I would not go so far as Simon Johnson on the question (“all megabanks should be presumed incapable of managing their risks appropriately”), but rather would suggest that we think of Wall Street firms as being like any other business: prone to human failing. They’re used-car dealerships — very big used-car dealerships.

J. P. Morgan’s shares are taking a beating, which is to be expected, but those who would use this investment loss as an excuse to further extend the reach of the federal government should keep it in perspective: While the losses probably will grow larger than the current estimate, they are unlikely to go as high as $10 billion. J. P. Morgan watchers are forecasting that this fiasco will amount to a loss of about $1 per share. It’s a $144 billion company that recently ran a 20 percent profit margin. The losses will sting, but the market probably can handle this one without intervention from Barney Frank et al.


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