By Ben Cohen: The news that JP Morgan Chase lost $2 billion this quarter due to what CEO Jamie Dimon called 'errors, sloppiness and bad judgment” should come as no surprise given the state of regulation on Wall St. While regulators are trying to ensure these 'sloppy' investments don't blow up and bring the financial system down, the banks are fighting them all the way claiming that government interference would harm their productivity.
The losses incurred by JP Morgan were the result of an an extremely complicated and risky hedging strategy that involved derivative trading - a practice that regulators have tried unsuccessfully to either ban or severely curtail (thanks to pressure from Wall St). The New York Times has done a good job of summarizing what went down:
JPMorgan likely structured the trade in such a way that effectively magnified losses. Specifically, the bank bought insurance against losses on corporate debt through credit derivatives that increase in value if the underlying creditworthiness of companies is perceived to have deteriorated. But JPMorgan stumbled when it tried to modify that trade by also making an opposite bet with credit derivatives.
This type of trading where a bank essentially sells customers incredibly risky financial products then bet they will fail almost took the global economy down four years ago. JP Morgan is still bullish on this risky financial practice and Dimon has refused to budge despite calling the trade "poorly constructed and poorly monitored". Dimon has a reputation for speaking his mind, and given his successful stewardship of the banking giant thus far (it survived the financial crisis in 2008) he holds considerable sway in political circles. From the Sydney Morning Herald:
In the words of Britain’s former PM Tony Blair, who has drawn pounds 1m a year as an adviser to JPMorgan: ‘‘He’s [Jamie Dimon] somebody who’s direct. He’s not somebody who’ll sit in a meeting when someone says something he disagrees with quietly. He’ll get up and speak.’’
Nowhere has he demonstrated this more than in his attacks on the post-crisis regulatory crackdown. ‘‘Dodd Frankenstein’’ is Dimon’s phrase for the Dodd Frank Act that has increased the oversight of banks and hit them with stricter capital requirements.
‘‘I think market participants are overwhelmed by all the amount of regulation and change being imposed at one time,’’ said Dimon last year, fulminating over the ‘‘anti-American’’ behaviour of regulators, while claiming the new rules were ‘‘hamstringing economic growth’’.
As Matt Taibbi writes, this would be fine if JP Morgan's risky trading practices only hurt itself:
If you’re wondering why you should care if some idiot trader (who apparently has been making $100 million a year at Chase, a company that has been the recipient of at least $390 billion in emergency Fed loans) loses $2 billion for Jamie Dimon, here’s why: because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance. If the bank fails, someone will reach into your pocket to pay for the cleanup. So when they gamble like drunken sailors, it’s everyone’s problem.
Activity like this is exactly what the Volcker rule, which effectively banned risky proprietary trading by federally insured institutions, was designed to prevent.
This system of socialized risk and privatized profit makes a complete mockery of capitalism and free markets. This blatantly obvious contradiction seems to be lost on people like Dimon who confidently denounce the 'anti American' government then take billions of dollars from it without batting an eyelid. JP Morgan's losses this quarter may not cripple the bank, but it definitely puts a big dent in Dimon's argument. Writes Felix Salmon:
JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.
JP Morgan is now in damage limitation mode and busily getting rid of senior management, but it is losing the long term PR war because at the end of the day its ability to make money matters most, and it clearly isn't doing that very well.