By SIMON CONSTABLE
By now you must have heard about J.P. Morgan Chase’s $2 billion trading loss. You’ll also have heard the screams of outrage and the calls for more banking regulation. Maybe the regulation is part of the problem. But it’s not all of it: Not by a long way.
What you may not know is that at least part of the problem comes from what economists call “agency cost.” That’s the cost of having someone run the business who doesn’t own it.
The owners — J.P. Morgan shareholders — have goals that are vastly different from those of the employees — in this case the traders. Employees want big bonuses. Shareholders want steadily growing profits.
The fact is, the people at J.P. Morgan who made the bad bets, and lost all that money, were gambling with someone else’s cash. They also were doing so in a way that wasn’t in the best interests of shareholders.
If the trades do well, the traders get huge bonuses. If the trades go poorly, the shareholders suffer and maybe, just maybe, the traders lose their jobs.
If the traders were the owners, or were heavily supervised by the owners, then in all likelihood crazy bets wouldn’t get made.
In fact, decades ago that’s how it was on Wall Street, brokerage houses were partnerships. If you were trading, you were doing so with your boss’s money. You bet he or she was keeping a close eye on the situation.
So blame lack of regulation all you want, but also have a thought for getting Wall Street firms off Wall Street and back into partnerships.
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