Business Government and Society

180 Part Four Business and Public Policy

Key Terms

Internet Resources

antitrust laws, 171 cost-benefit analysis, 175 deregulation, 177 Dodd-Frank Act, 170 economic regulation, 170 fiscal policy, 167

www.businesslink.gov.uk business.usa.gov www.cato.org www.consumerfinance.gov www.economywatch.com www.federalreserve.gov www.ftc.gov mercatus.org www.ncpa.org www.reginfo.gov www.regulations.gov www.un.org/en/law www.usa.gov

market failure, 169 monetary policy, 168 natural monopolies, 169 negative externalities, 169 predatory pricing, 171 public policy, 164

Better Regulation Business USA Cato Institute

regulation, 168 reregulation, 177 social assistance policies, 168 social regulation, 172

U.S. Consumer Financial Protection Bureau Economy Watch Board of Governors of the Federal Reserve U.S. Federal Trade Commission Mercatus Center, George Mason University National Center for Policy Analysis U.S. Office of Information and Regulatory Affairs Regulations.gov International law, United Nations Government Made Easy

Discussion Case: Derivative Losses at JPMorgan Chase JPMorgan Chase (sometimes referred to by its short name, JPMorgan) was one ofthe larg· est banks in the United States and the only major bank to remain profitable during the 2008 financial crisis. In May 2012, the bank surprised the financial community and the American public when it announced that one of its derivative trading groups had lost an astonishing $2 billion of the bank's money. Derivatives were financial instruments that derived their value from changes in the price of commodities (such as wheat), the level of interest rates, or an underlying asset such as mortgages. They were bought and sold-usually by big institutions such as pension funds or sovereign wealth funds-which were essentially making a bet on whether the prices of the underlying assets would go up or down. The leading creators and brokers of derivatives were five large Wall Street banks-JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup. These banks also traded derivatives for their own investment portfolios, seeking to profit from their own insights into market movements. The derivative business produced about $20 billion in revenues for the five major banks in 2010.

Within minutes after JPMorgan's announcement of their losses, the company's stock lost almost 10 percent of its value, wiping out about $15 billion in market value. Fitch Rat· ings downgraded the bank's credit rating by one notch and Standard & Poor's cut its out· look of JPMorgan to "negative," indicating that a credit-rating downgrade would follow. Other banks were caught in the decline in confidence. Morgan Stanley, Citigroup, and Goldman Sachs stock all closed down about 4 percent. Critics of the banking community