Skip to comments.Massive derivatives loss at JPMorgan fuels calls to tighten Wall Street regulation
Posted on 05/12/2012 5:39:26 PM PDT by Olog-hai
The only Wall Street titan to emerge from the financial crisis without a black eye headed into the weekend with a concussion.
JPMorgan Chase, fresh off the surprise news that it lost more than $2 billion in recent weeks to a complex trade in credit derivatives, saw its stock value plummet Friday more than 9 percent. The massive loss also reportedly led regulators to open up inquiries about the trading strategy and caused a downgrade of its credit by the rating agency Fitch, which in turn sent its stock lower in after-hours trading.
To top it off, the reported loss renewed calls on Washington regulators to finish a key tenet of the Dodd-Frank financial reform law that JPMorgan has fought tooth-and-nail against: the so-called Volcker Rule.
The timing couldnt have been worse. In recent weeks, Jamie Dimon, chief executive of JPMorgan, led a cadre of Wall Street chiefs to the Federal Reserve Bank of New York to press for changes to the provision that would ban government-backed firms such as his from running hedge funds and engaging in proprietary trading.
They reportedly were met with utter silence.
Proprietary trading, or betting on the markets with the banks own capital, has been the source of huge profits for Wall Street, but it also was a major driver of the damaging risk-taking that contributed to the financial crisis.
(Excerpt) Read more at nj.com ...
something about the way this is being handled in the media tells me it’s a one-off — it’s like Dimon said, it’s JP’s problem. maybe precisely because the media is trying to make it 2008 all over again.
Last guy got out let’s close the door.
there must be a better way than more regulation
What makes them think the regulators will be smarter than the guys doing the investing?
That's the first problem right there, until you fix that there's no point even discussing the regulatory situation.
Free market my ass!
There is nothing wrong with modest regulatory legislation, if it’s coming from a disinterested government.
Canada, thanks to its regulatory system, came out unscathed from the financial system.
The derivatives market does set up an economy for a big fall. Derivatives amplify the success or failure of the market like the Bucket Shops of the past. There must be a way to moderate their effect.
Letting them fail is better. The "more regulation" crowd will be squaking about this, but this loss was created in London which has less strict regulations in some cases. Most big firms here have London offices just to avoid US regulations and play in the London market, so more strict regulations here would do exactly nothing to stop this particular incident. Letting them fail, however, will stop them.
I heard I guy on TV who said this event is minor stuff. It's not really that much money. This is basically what hedging is -- win some, lose some. He said there was no law breaking. He said existing regulations were followed.
He said he was at a loss as to why the media was making a big deal out of this event. He said that he would advise people to buy JP Morgan, because it is a strong company and right now the stock is down for no good reason.
I'm pretty cynical -- and, yes, I do think the world is about to end. BUT I had the sense that the guy was right about this particular event.
The key, I think, is that the media is pushing Obama's agenda. Due to this MASSIVE crisis, the US government may just HAVE to seize further control of the economy.
i get nervous when too many people agree with me...
Admittedly, this stuff is way over my head, but my instincts tell me that if Morgan had made a $2B profit on this, they’d be screaming just as loudly for more regulation, which makes me dubious about the value of it.
Yes. Oil companies are evil because they make money. JPMorgan is evil because it lost money. You can’t win — no matter what happens, the answer is always: tax hikes and bigger government.
From Marginal Revolution blog:
The banking unit of JPMorgan Chase alone made $12.4 billion last year. The holding company has over $2.26 trillion in assets and is the largest U.S. bank and 8th largest in the world. The holding company made $29.9 billion in operating income and just over $20 billion in net income for 2011.
So, this initial loss of $800M [TC: with more to come] represents approximately 4% of its total net profit for all of 2011, less than 2.7% of its operating income. Certainly its not a good thing. But the reported losses, in and of themselves, are not likely to have a dramatic impact on JPMorgans long-term financial stability.
Here is more, hat tip to Angus as well. A $2 billion loss is about one percent of their equity and about 0.1% of their assets.
Yah. I’ll bet Maxine Waters understands the the complexity of the deal just perfectly.
You cannot let JPM as currently constructed fail. They are too huge (on the commercial banking side) and the fallout with the counter parties would be catastrophic. What you can do is break them up and separate investment banking from commercial banking. Reinstate Glass-Steagall and that would do it. Then you can let the IB side fail when they do stupid stuff. BTW the $2 billion loss is minuscule to JPM’s overall results.
Anything. You name what it is you need and want everyday and you can thank Wall Street derivatives markets for the fact that it is generally there when you want it or need it.
People putting capital at risk to produce what you want and need every day will not do so unless they can hedge their investment.
We are 200+ years advanced from subsistence farming and we cannot retreat from where we are back to subsistence farming without losing most of the population.
They hedge this stuff @100:1. Based on he pricing on Friday alone, they had another 1-1/2 billion loss on Friday. The ONLY thing can do is hold until maturity and hope the trade goes the right way.
This could be very bad for the market.
It is call no bailout and jail time if separate customer accounts are raided to pay for the losses. Note of caution, JPM losses are probably larger, CEO are known to float a lower number out to test public reaction to their stock price. Bottom line for JPM statement is they brought all these swaps and the financial instruments are losing value (2 billion) and they cannot get a buyer for them (meaning additional losses added to the 2 billion already loss as time goes on). What is ominous is the five large US banks met with the Fed Reserve a month ago, and possibly JPM losses were discussed, or the other four banks with JPM are caught in the same scheme and are informing the Fed Reserve for a potential bailout vs bank collapse scenario. See how the markets react on Monday morning as they analyze the situation over the weekend.
The person, persons who created the hedge strategy will be asked to leave or let go with a sweet severance package.
They will lay off an additional 10% of their support staff of which 10% will be front office, 15% will be back office, and 75% will be IT.
In IT for every 10 people they lay off, they will bring in 2 domestic consultants (probably H1’s) and will spend half their savings on outsourcing.
The Outsourcers will provide approximately 15 people for that money.
Net/Net in IT they will end up with 17 people off their payroll for every 10 they cut, save a little money from their budget, and get a less expensive system of software designed to monitor their trading for this kind of risk.
Problem is either the software or their risk model will be flawed and they will lose $4 billion next time around. Then the cycle will begin again. It's like the song that never ends and is most likely what got them here in the first place.
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