$2 billion gone just like that. And people are supposed to accept that everything is ok because it was just traders being traders?
This excuse is one we haven’t heard in awhile. But in 2008 and 2009, as the financial system melted down, it was a refrain sung in Manhattan with great gusto. When somebody gets a $150,000 loan by forging some papers, that’s fraud. But when an investment bank with $600 billion in debt blows up, well that’s just stupid bankers doing stupid stuff — no reason for anybody to go to jail.
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But as excuses go, stupidity is a pretty poor one — especially for banks. In fact, I’d argue that the relative lack of criminality in the credit bust was one of the factors that made it so devastating to confidence. Criminals are outliers. By definition, they’re rogue actors who operate outside of norms and take pains to avoid detection. Their activity comes to a halt once they are caught and charged and prosecuted. Companies, investors and society have certain defenses against criminals. Criminals serve jail time, or pay fines and other penalties. They repay their debts to society.
Stupidity, however, is much more harmful. There is no redress or compensation for someone who has an “oops” moment. Just as happens in sports, people in finance who set billions of dollars on fire believe it’s sufficient to hold up their hand and say, “My bad,” resign with their bonuses intact and pursue other interests. But banks aren’t like baseball games. The stupid defense leads us to conclude that there’s something wrong and suspect with the legitimate activities a company is engaged in. It reinforces the notion that the people running these giant vessels at very fast speeds just aren’t paying that much attention, and don’t really know how their business works. If Dimon didn’t have a handle on a unit that could run up such large losses so quickly, what other problems could be lurking out there?