JPMorgan shares slump 6.5pc after chief Jamie Dimon reveals $2bn trading loss

The Telegraph ^ | 5/10/2012 | Richard Blackden

[bruinbirdman]

Eh, eh. I read that earlier from a URL on the comments at The Telegraph. Very interesting. The Whale had some help, eh, like Jamie Himself.

yitbos

[RetiredTexasVet]

Somehow I have this feeling that this is just the tip of the TBTF iceberg!

[The Duke]

Some of the losses have been offet by gains of about $1bn from the sale of other financial assets, according to the bank,...

This statement is laughable. If they sold assets then all they did was exchange one asset for another (cash).

[Stentor]

Here's something for you in your spare time. ZeroHedge just tweeted it.

The J.P. Morgan Guide to Credit Derivatives

This came fully formed from the forehead of The Wicked Witch herself.

[Wyatt's Torch]

The sold assets for a book gain which is reported as income. This partially offsets the MTM losses.

[Wyatt's Torch]

J. P. Morgan’s Loss: New Ammo for Regulators?
By Patrick Brennan
May 11, 2012 12:05 P.M.

Yesterday, J. P. Morgan announced that its chief investment office has experienced a paper loss of $2 billion on its synthetic credit holdings (meaning securities whose values are derived from various credit products like corporate debt). Especially because J. P. Morgan CEO Jamie Dimon has been a particularly vociferous critic of banking regulation, this has predictably given rise to more calls for further regulation of banks, especially in terms of the investments they can make on their own account. But the particular kind of regulation that liberals are fighting for at the margin wouldn’t really have prevented J. P. Morgan’s huge loss. Dealbook explains their case:

JPMorgan Chase’s $2 billion trading loss, which was disclosed on Thursday, could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business.

“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making,” said Senator Carl Levin, a Michigan Democrat who co-wrote the language at the heart of the battle between the financial and government worlds, in a statement. “Today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards.”

The centerpiece of the new regulations, the so-called Volcker Rule, forbids banks from making bets with their own money, and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view, banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name, in this case for the purposes of hedging and market-making.

The problem for reformers, though, is that they shouldn’t really claim this as an example (though of course they still will) of why we need less proprietary trading, and less risky types of it, via a stricter Volcker Rule. That’s because the CIO’s positions here were a couple steps removed from what the Volcker Rule will actually consider proprietary trading. The debate about the Volcker Rule is what activities constitute banks’ trading on their own account, for profit, and what constitutes market-making, that is, the positions the bank has to take on its own account in order to execute trades for its clients. The latter can realize large profits as well, and lead to the banks’ taking on serious amounts of risk; thus, some regulation proponents would like to see these activities severely restricted as well, while free marketeers claim this would clam up capital markets.

But the problem at J. P. Morgan wasn’t the size or riskiness of the bank’s underlying bets (the CIO was hedging against the bank’s whole portfolio risk). It was extremely poorly executed hedging of those underlying bets, and that kind of activity shouldn’t be restricted by even a very zealous Volcker Rule. That said, one could call for stricter regulations about how closely banks’ own risk officers must oversee traders — indeed, it’s fairly obvious that J. P. Morgan should have reined in the CIO’s bets long before it got to this point. One particular trader, the size of whose (eventually catastrophic) positions earned him the sobriquet “the London Whale,” clearly should have had a Captain Ahab looking over his shoulder a long time ago, hounding him to rein in his risk. Whether federal regulators should be standing over his shoulder, too, is a separate question. For the most part, though, in order to justify that, you’d have to prove that the banks’ positions represent a significant risk to the U.S. or global financial system and therefore must be overseen or reined in, which, again, wasn’t really the case here.

[dfwgator]

Reinstitute Glass-Steagall, problem solved.

[Wyatt's Torch]

I don’t have a problem with that. Let the investment firms go down alone and let the banks do what they were intended to do. The “too big to fail” (and I am 100% behind TARP and the bailouts) was a result of the investment sides risking dragging down the entire banking sector which would have been catastrophic. JPM and their “fortress balance sheet” are not at risk currently but if it were to come to that we could not allow JPM to fail as currently constructed. If their CIO arm was a separate entity then let them fail and the risk would be somewhat contain (save the counterparties of course).

[bruinbirdman]

" it’s fairly obvious that J. P. Morgan should have reined in the CIO’s bets long before it got to this point"

Insiders say Jamie Dimond knew about this all along. Gave it his blessing.

yitbos

[Wyatt's Torch]

From MarginalnRevolution:

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 it’s not a good thing. But the reported losses, in and of themselves, are not likely to have a dramatic impact on JPMorgan’s 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.