JP Morgan Loses $2 Billion on Proprietary Trading; Proves Critics Right
This is a really big deal. America had an economic crisis in 2008 due to reckless banks that used their own profits to make big, risky bets and it brought down the world economy. The anti-regulation brigade fought tooth and nail to prevent any meaningful regulations from happening but the Obama administration was able to push through massive reforms via the Dodd-Frank Act which would be enacted in pieces over the matter of several years. Banks have complained that the regulations were too constricting and would ultimately restrict their ability to lend. President Obama’s opponent – Mitt Romney – has made repealing the Dodd-Frank Act and the restrictions covering Wall Street a major part of his platform. The bill passed in the Senate 59 to 39 with 39 Republicans voting AGAINST financial reform. You can see the breakdown of the bill HERE.
Fast forward. The Chairman and CEO of JP Morgan Chase Jamie Dimon is constantly lauded as Wall Street’s smartest banker with the best set of controls and an ability to avoid losing on big bets…until now. JP Morgan Chase is taking a loss of $2 billion this quarter with another potential $1 billion in the coming quarter on speculative proprietary trades i.e. using their own money to bet on big, risky bets. You may remember – it is this kind of behavior that led to the world economic collapse in the first place. Due to many capital requirements enacted into law courtesy the Dodd-Frank law….banks must have more money on hand to handle any potential shocks to the system. In July of this year – regulators will write the final rule on proprietary trading i.e. the Volcker rule which banks have been lobbying and buying off politicians left and right to modify. Oh great irony.
“The issue is about control. What does this say about controls at a bank that is better than average? With major markets moves this quarter this is a preview of potentially more issues to come as it relates to basic asset-liability management.”~Mike Mayo, analyst at CLSA
Bloomberg has the story HERE:
The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an addtional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.
The $2 billion loss occurred in London under multiple traders, according to an executive at the bank, who spoke on the condition of anonymity. Dimon wasn’t immediately told about their shift in strategy and didn’t know the magnitude of the losses until after the company reported earnings April 13, the executive said. As the position deteriorated rapidly, the bank gathered internal analysts and examiners to investigate, and Dimon grew more distressed by the day, the executive said.
Definition for proprietary trading:Web definitions:Proprietary trading is trading done by a financial firm for its own account, as an investment or as a speculation, as opposed to trading done strictly to fill clients’ orders.
Salon gives even more detail – article HERE:
Finally to top it all off, there’s the nature of the trade itself — a huge bet on credit default swaps. Cue the credit crunch flashbacks! Details are sketchy, but what we know so far indicates that a London-based J.P. Morgan trader made a complicated bet on an index of corporate bonds that assumed that the individual corporations were likely to do well in the near future. The trader was essentially selling insurance protection on that index of bonds. If the companies did badly J.P Morgan would have to pay off the buyers of that protection.
For weeks, there was scuttlebutt in the financial markets that a group of hedge fund sharks had figured out the strategy and were executing their own bets in a fashion designed to put pressure on Morgan. At the time Dimon and his chief financial officer casually dismissed the rumors. On April 13, Dimon called it “a complete tempest in the teapot.” Ooops!
We don’t know exactly what happened, yet, but in this case, it looks like the sharks savaged the killer whale.
So there you have it: the most arrogant of Wall Street’s investment bankers, a virulent critic of the notion that Wall Street’s sorry record of speculation in complex financial derivatives needed any kind of government regulation, gets brought back to earth by a taste of the meltdown’s worst medicine. As Dimon, no dummy, acknowledged on the conference call: ” “It’s very unfortunate … It plays right into the hands of a bunch of pundits out there, but that’s life.”
Here is some video of Jamie Dimon questioning Fed Chairman Ben Bernanke at a press conference. He basically said there were too many regulations and it was impeding the economic recovery:
Here is video of Mitt Romney saying that he wants to repeal the Dodd-Frank Act but doesn’t say what he would put in place to prevent future economic meltdowns like what we experienced under the Bush presidency:
Mitt Romney’s website shows what he has made a platform of his candidacy – repealing the Dodd-Frank Act which regulates Wall Street after the Bush financial crisis of 2008.
Fucking wankers. Can we just burn them all alive? Use the pyre to heat the homeless in the cold months?