May 12, 2012

426 words 2 mins read

Henry Blodget Freaks Out Completely Over JP Morgan’s $2 Billion Loss

Looks like about $1.2 billion of JP Morgan’s $2 billion loss involved Henry Blodget’s 401k. freakingout

How else to explain his emotional outburst on Business Insider? Why else would he jump to the conclusion that our bankrupt federal government understands finances better than billionaires?

Here’s Blodget:

Wall Street can’t be trusted to manage—or even correctly assess—its own risks.

This is in part because, time and again, Wall Street has demonstrated that it doesn’t even KNOW what risks it is taking.

In short, Wall Street bankers are just a bunch of kids playing with dynamite.

There are two reasons for this, neither of which boil down to the “stupidity” that most people generally assume is involved. The bankers who place these bets are anything but stupid.

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Granted, Blodget makes some good points, too. Derivatives are risky, and mixing commercial with investment banking might not be the greatest idea on earth.

The problem is that Blodget thinks government can fix man’s eternal optimism by protecting him from his own failures. Here’s the toxic third point of Henry’s three-part “solution”:

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.* Read more:

Wrong, Henry.

The answer is: LET THE DAMN BANK FAIL!

As long as investors know that the non-investors will pay for their gambling losses, they will continue to gambling. Firing managers who’ve been stashing away chunks of their $12 million incomes won’t deter them from big gambles.

Only the free market, which is bigger than the banks and bigger than government (for now), can restrain recklessness. In extreme cases, the market does this by letting the weak die. Culling the herd.

I’m not proposing complete lack of control—I’m proposing removing the government safety net for billionaires. This puts the burden of risk assessment on the broader market in advance, not after-the-failure through government seizure.

Finally, I’ll close with this question to Mr. Blodget. You say that the bankers who place these bets are anything but stupid. You even call Mr. Dimon of JP Morgan “brilliant.” So if these brilliant experts who’ve created massively complex derivatives are unable to manage them, do you really think government can?