Friday, May 18, 2012

Learning for Indian companies from JP Morgan's trading loss

'Scale and diversification' versus 'gigantic and complex'. This is a never ending debate for companies. It is good for them to scale up operations and diversify their businesses as it is taken as a sign of stability. But when does it put a brake on increasing its size? Is there an ideal size that does not let the company go into the category of being too complex? Unfortunately there are no answers to this except for experience. And the bitter experience of sub-prime crisis tells us that gigantic financial institutions can become too complex to regulate. The latest reminder of this is the huge trading loss borne by JP Morgan.

As per Federal policymaker, Mr Bullard, JP Morgan should be split into a smaller size. He states that rather than trying to change regulations as per the complexity of the business, it is best to make the business smaller. Hence making it easier to regulate. We could not agree more with Mr Bullard's view. Higher the complexity in a business, greater the possibility of something going wrong. It is easier to simplify the business structures and run them efficiently. That is the need of the hour. Not more regulations which can be bypassed through complicated structures. 

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