How can we avoid "too big to fail"?

cbs

(MoneyWatch) COMMENTARY For supporters of the Volcker rule, JPMorgan's $2 billion loss was further evidence of the need for increased regulation of our nation's largest banks. (The fact that JPMorgan CEO Jamie Dimon has been one of the Volcker Rule's most outspoken opponents was a particularly rich irony for this group.) Volcker opponents, however, point out that it's nowhere near clear that these trades would have been forbidden if the rule were in place. 

Who's right? We might never get a firm answer, but the entire episode highlights the near-impossibility of trying to rely on rule-making to prevent another banking sector meltdown. The problem is that any rule designed to prohibit speculative trading -- no matter how well-written and strictly enforced -- will inevitably have loopholes that will be discovered by bankers with a large financial incentive to find them. The profits produced by such trades can have an enormous impact on the banks' bottom line, which means they also have a large impact on the compensation of the banks' senior managers. Further, all it takes is one or two of our nation's largest banks to aggressively pursue such profits, for doing so will put pressure on the others to follow suit, lest their own profits (and compensation) end up lagging.

What JPMorgan's loss means to you
Time to shrink the big banks
How does anyone lose $2 billion anyway?

As hard as it is to believe, four years after the federal government had to take unprecedented steps to prop up banks that were deemed "too big to fail," we have little to show as evidence that we've learned our lesson. Attempts at reform have been fought tooth-and-nail by a well-entrenched and heavily-financed financial sector, and yesteryear's "too big" banks are even bigger today. What's the answer? One of the best options would probably be to reinstate the Glass-Steagall Act. The Depression-era regulation firmly separated traditional banking from investment banking, which meant that a dumb bet by an investment banker didn't imperil the deposits of millions of mom-and-pop banking customers -- the risk of such behavior was borne entirely by the investment bank's owners. And a recognition that such a risk was real served as a natural governor on the size of those firms.

But Glass-Steagall was repealed in 1999, when Wall Street successfully convinced Washington that this supposedly antiquated relic of a bygone era was imperiling its ability to compete globally. And we all know what happened next. A handful of firms grew to such a size that the mere possibility that they might collapse sent shivers through the global financial markets. Given the amount of money that Wall Street pours into Washington, there's virtually zero chance that we'll see a return of Glass-Steagall. That, combined with the ultimate futility of relying on regulators to prevent another crisis, means that we'll need the market to do some self-correcting. The owners of our largest banks clearly believe today that the federal government will come riding to their rescue in the event of another crisis. Only clear evidence that the government is willing to let those institutions fail -- despite the myriad second- and third-hand casualties that would inflict -- will change this belief.

Is this the best solution to ultimately cutting our nation's largest banks down to size? No, but given how business is done in Washington, it's probably the only option we have left.

[hope4agape]

Let me see if I understand your point.
A bank that has 2 trillion in revenueand earned 18.9 Billion had a loss in one quarter 2 billion. So you get that the 2 billion is not a big deal right. I mean this year they will only earn after tax profit of 17 Billion .
But your answer to the one time loss is they need the government that runs on an annual deficit of 2 trillion to help them figure out how to run thier business...RIGHT ...do you also believe in leprechans and Unicorns ?

[mfundinsider]

Hi hope4agape. No, you didn't understand my point. I'm not sure what kind of circles you run in in which a loss of at least $2b on a single trade is "not a big deal," but I assure you that Jamie Dimon and JP Morgan's owners believe it to be quite a big deal. Regardless, I never said that I wanted the government to "help them figure out how to run their business." What I want is to eliminate a situation where these trading profits are privatized but the losses are socialized via a gov't bailout. Such an arrangement has a way of perverting incentives.

[yooperfem]

As long as the TBTF banks can count on taxpayer bailouts, there is nothing to stop them from betting on long shots (or favorites, either). Once they understand that they, and only they, are on the hook for their imprudent practices, they will clean up their act. sell off their assets when bets lose, or go out of business when they reach the point of no return.

[LeeMcD22]

See...Who's Afraid of the Big Bad Bank?: An Uncensored Investigation of the US Federal Reserve Banking Cartel--one of the most controversial institutions of our time...(Self-Serving its Country Since 1913)...

http://www.youtube.com/user/BaitAndSwitchTV?feature=mhee#p/u/12/_M_Rh_fgKEQ

Or try SubPrimal Scream Therapy:
http://www.youtube.com/user/BaitAndSwitchTV?%20%20feature=mhee#p/u/4/Ec3E0YLwcSU

Or see The Proud, The Rich, The Reserves (the Federal Reserve)...
http://www.youtube.com/user/BaitAndSwitchTV?feature=mhee#p/u/1/6oNvlYhDlgw

Also see: The Real Housewives of Tent City (A Hot New REALITY Show---Global Depression Edition)--Spoiler Alert--this is about what the Federal Reserve has done, not the Housewives!):

http://www.youtube.com/user/BaitAndSwitchTV?%20%20feature=mhee#p/u/2/NH_WqjgoJLY

Or you might like Banking On It (New Republican Seinfeld-esque Comedy Series):

http://www.youtube.com/user/BaitAndSwitchTV?%20%20feature=mhee#p/u/3/4gV_1rbOMWo

And dont forget Superfriends Superfrauds: The Injustice League:
http://www.youtube.com/user/BaitAndSwitchTV?feature=mhee#p/u/52/Yp0moVKFENw