Massive derivatives loss at JPMorgan fuels calls to tighten Wall Street regulation

Newark Star-Ledger ^ | Saturday, May 12, 2012, 8:05 PM | Ed Beeson

[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 couldn’t 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 bank’s 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. …

[Fee]

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.

[M-cubed]

bring back the Glass-Steagall Act!

[nc28205]

>>>government-backed firms

>>That's the first problem right there, until you fix that there's no point even discussing the regulatory situation.

Yes, if we could get rid of the socialist notion of federal deposit insurance, then bank failures would be of less concern to the governement and they wouldn't have to step in to back these firms.

[Woodman]

Here is how they will respond:

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.