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07.03.2012 0

Let them fail

By Rick Manning — JP Morgan Chase is in trouble – again.

The government deemed too big to fail bank, investment and insurance firm announced in May that it  had lost $2 billion on trades from its London office that went badly.  Now, the New York Times is reporting that those bad trades may actually end up costing the company $9 billion.

At the same time as the Wall Street behemoth has been caught with its pants down and is being spanked by investors, BusinessWeek reports that JP Morgan Chase benefits from lower borrowing costs than its smaller competitors due to its “too big to fail” status with the federal government.  A status that saves the company $10 billion in corporate debt borrowing costs.

This largesse is on top of the $25 billion the company received in the 2008 bailout, which they subsequently paid back using a portion of the $110.4 billion they received from the Federal Reserve to purchase their toxic mortgage securities.

The “too big to fail” assumption is based upon the U.S. government policy that deems certain financial institutions so big and important that it would be catastrophic to the economy should they fail.  As a result of this operating policy, the U.S. Treasury Department and the Federal Reserve work diligently to offset stupid gambles made by JP Morgan Chase and its brethren in the small “too big” club.

But does keeping a JP Morgan Chase out of bankruptcy really “save the company” or does it just prolong unsustainable corporate cultures, or contracts and debt that is drowning the company?

At JP Morgan Chase, a bankruptcy judge might break up the various divisions and sell them off to the highest bidder with bondholders getting a bigger share and shareholders (the company owners) getting pennies  on the dollar for their investment.

While a sad occasion, it would also serve the purpose of divesting the losses from the toxic assets where they rightfully belonged, onto those who were hoping to profit from the rewards they’d hoped those bets would generate.

The recently deceased Ann Schwartz, who was Nobel Prize winner Milton Friedman’s co-author of the classic, “Monetary History of the United States” spoke eloquently about the dangers of bailouts in 2008 when she said, “Firms that made wrong decisions should fail. You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich, [but] that’s not the way the world has been going in recent years.”

Instead, the bi-partisan philosophy of encouraging the riskiest of investments by taking away the price of failure has taken root in our nation.  And when you socialize the downside risk, while rewarding individuals for those bets that payoff, you effectively destroy all rational brakes to imprudence, and turn the conservative money manager into a fool.

It is time to put an end to irrational government policy that encourages billion dollar risks to avoid a continual cycle of costly bailouts that accelerate our nation’s plummet from greatness.

It’s time to let them fail.  The cost to our nation of separating investment risk from reward is just too damaging.

Rick Manning (@rmanning957) is the Communications Director of Americans for Limited Government

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