This incident shows the need for aggressive regulation of the financial services industry. The capability to lose large amounts of wealth for shareholders and taxpayers must be observed by responsible authorities. This is just another variation on the theme that struck the mortgage derivative market. The industry does not create any value by engaging in these kind of practices. In economic theory they are supposed to be "efficient intermediaries" between savers and borrowers. In fact they act on a different kind of rationality discovered through the "principal-agent" problem. They take on huge risks in order to maximize short term profits to also maximize bonus payouts.
By the way, Jamie Dimon of Chase has been a vocal critic of the efforts to rein in the financial services sector. Perhaps he should pay more attention to the business and less to the politics.
JP Morgan's Loss: The Explainer | Marketplace from American Public Media
Post a Comment