A Failure Too Big

By tamara on
dimon jp morgan

Last week JPMorgan announced trading loss of 2 billion dollars.  This news knocked the wind out of Wall Street and unnerved its investors.  The market punished JPM with almost a 10% decrease in its stock price and a downgrade of its credit rating by Fitch.  Others rating agencies will undoubtedly follow and although it was confirmed that no client money was at stake, JPMorgan will lose clients as a result of this.

JPMorgan is a solid institution and its fortress balance can withstand this hit.  JPMorgan’s reputation will suffer a blow, but the firm will endure and over time it will recover.  But this event has greater impacts and the losses transcend across the entire industry.  Poor public image of investment banking continues to soar and it is underscored by mistakes such as this one.

JPMorgan is arguably one of the best risk management houses on Wall Street having made business decisions about risk, which protected the firm against losses during the financial crisis.  Jamie Dimon is also one Wall Street’s greatest CEOs, who is known for being risk-averse and has implemented a diversified business model which made JPMorgan a defensive company for investors.  So when a firm like JPMorgan loses such a substantial amount of money in such a short amount of time, it is truly alarming.

Furthermore, these losses occurred in JPM’s CIO business which is the group that is responsible for protecting the firm’s balance sheet and ensuring that its risks are properly mitigated.  But in short, what this group essentially does is proprietary trading.

Prop trading is the very type of trading that the Volker Rule will prohibit once implemented; but the implementation, which was scheduled to take effect this summer, has been postponed because of the strong bank lobby against it.  Jamie Dimon is one of leaders of this lobby.  He has also been one of the most vocal opponents against government regulation of Wall Street.  And this is where the greatest pain point of JPM’s losses will be felt.  The banking industry has just lost one of its most credible lobbyists.

Now, I know Jamie’s role against government regulation followed by JPM’s trading losses seems like a slippery slope, but government regulation is not the solution that will protect depositors against Wall Street risk-taking.  Government regulation will merely add layers of bureaucracy, increasing operating costs which banks will recoup from consumers by increasing fees.   And while our government is busy watching to what Wall Street’s right hand is doing, its left hand will continue to innovate new and risky products.

2 comments

  1. This will give impetus and power to the volcker rule. The perception is that JPM takes federally protected deposits and makes substantial proprietary bets. There are a lot of questions out there. People will question JPM risk controls and it is a big dent in their reputation. Why are taking such huge positions if it is truly a hedging group?

  2. I’m also afraid that Captain Cheapo’s boot camp would find him hainvg all the attendees hit the default/reset button as their first act, since- just like our insolvent, Third World country- virtually all their debt can never be paid. Yup! When your debt far exceeds your ability to pay it off, better to follow the trail blazed by our banksters and their paid puppets in DC. Moral hazard is a real b1tch. Today, Bernanke, Paulson and Geightner look like miracle workers. Tomorrow they’ll be lucky if they get a larger prison cell than Madoff.Trust me when I tell you that I only put 10% down on the new house, when I realized that I erred in my ways when I put 20% down on my multi in Montclair. I would have strategically defaulted and killed my 800+ credit score since I would have saved enough money to pay cash for anything that I would and could have needed. Someone mentioned it a couple of weeks ago. If I defaulted on both of my properties, the multi would bring me in approximately $36,000 per year after insurance and taxes. Figure, to rent my new GR home would cost around 3K per month to rent (if not a little more), so after taxes figure I would save $24,000 per year. That’s $180,000 pocketed after 3 years. After renting for 3 or 4 years, I could easily have the cash to buy a 450K home in all cash. So which way am I better off? In 2018, I can either still owe probably close to $550,00o on my two homes. Or I can have $500,000 cash in my pocket with damaged credit and not owe any bank a shiny penny. Moral hazard is coming home to roost. I’d have to do some research on protecting my retirement money since I’m guessing the banks would go after it, but worst case scenario, I could convert it into shiny and hide it somewhere, like in a Swiss or Singapore bank. The only reason things aren’t nearly as bad they should be yet is because the populace is too dumb to do math. It’s much easier to watch Dancing with the Stars while simultaneously play Angry Birds.

Leave a Reply

Your email address will not be published. Required fields are marked *