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.