Given that JPMorgan made it through the crash of 2008 relatively unscathed and is supposed to be one of the better run US banks, this admission - made in a regulatory filing - has prompted renewed calls for tougher bank regulation. And given the nature of the losses, it may be pretty hard for even Dimon to argue convincingly against those calls.
The losses were made by the bank’s Chief Investment Office, which with splendid and distinctly un-American irony was set up to minimise exposure to risk. Using the bank’s own money, the CIO hedged against some of the banks supposedly more risky other trades.
This kind of hedging involves effectively making counter bets as a kind of insurance against the prospect of other larger bets going bad. Only in this case the counter bets seem to have turned out more risky and expensive than the losses they were supposed to be insuring against.
Oh dear - we thought bankers were supposed to be really, really clever, isn’t that why they command such large salaries? On the other hand, given that the people on the other end of all those hedges were probably working for rival banks, perhaps some of them are.
There is speculation a London trader nicknamed the ‘London whale’, who was making such big trades that he was moving prices in the $10tn market, is partly responsible for the loss. But when the trader’s activities were revealed a month ago, Dimon denied there was a problem, and called the situation a ‘tempest in a teapot’.
The bank now forecasts an $800m loss in the second quarter – a most unwelcome turnaround from the $200m profit it originally planned. Given that Dimon has carefully built a reputation for JPMorgan based on superior risk management, the nature of this loss could hardly be more embarrassing. It has fuelled renewed calls for a strict and total enforcement of the Volcker Rule banning prop trading, due to come into force in the US with the rest of the Dodd Frank Act in July.
Investors both in the US and Europe were quick to offload their banking shares after the news broke. The UK’s four biggest banks – RBS, Lloyds, Barclays and HSBC – all saw their stock drop between 1%-2% this morning. In the US, Citigroup was down 3.3% in after-hours trading, Bank of America was down 2.9%, and Morgan Stanley and Goldman Sachs were also affected.
‘We will admit it, we will learn from it, we will fix it, and we will move on’, Dimon said, doing his best to sound contrite. Not so much egg on his face as up to his neck in it, MT reckons.