Dimon in the Rough: JPMorgan’s Trading Loss in Perspective

JP MorganChase $2 billion trading loss is the political gift that keeps on giving. The big bank’s botched trading hedge [...]

June 20 2012 by ChiefExecutive.net


JP MorganChase $2 billion trading loss is the political gift that keeps on giving. The big bank’s botched trading hedge by a London-based trading team may yet reveal that loss may widen to another $1 billion according to sources on Wall Street. Although two billion sounds like a lot of money it is actually fairly small when one figures that the bank earned $25 billion pre-tax last year. The loss is about one hundredth of its $190 billion net worth. Looking at it from an asset point of view it is about one thousandth of the $2.3 trillion of the bank’s assets. So the hit to shareholders and risk to depositors and creditors is hardly significant.

Yet judging from the media and reaction from the political elites in Washington one would think that the best-managed bank in America is experiencing a disaster like that of Jimmy Stewart’s hapless S&L in the film, It’s a Wonderfull Life. To be sure Jamie Dimon’s reputation has taken a tumble now that it is revealed that his battle to bring the London office to heel resulted in unexpected trading losses. According to reports in The Wall Street Journal, the bank had been aware of the rogue unit’s activities since late 2010. There are even estimates that when completely unraveled the bungled trade could cost as much as $5 billion. Testifying before a Congressional committee Dimon struck a contrite tone, was treated civilly by members and attoned by suggesting there will be pay clawbacks from the offending executives. But again, the loss will be borne by JPMorganChase’s shareholders, not by depositors, creditors, customers or more to the point, and most important—not by taxpayers.

All of this begs the question, what’s really going on here? By focusing on what ,in fact, is a small mistake government can chastise banks for not being regulated enough. Nevermind that no amount of regulation can prevent people from making botched or foolish decisions. Even the Volker Rule within Dodd Frank, which was to eliminate proprietary trading, would have had no effect on the outcome here, since the wording of the rule is in some ways ambiguous. Nor did this episode in any way represent a risk for the larger financial system. In a white paper for the Brooking Institute, Douglas Elliott, senior fellow and a supporter of Dodd-Frank argues that much has been done to strengthen the financial system over the last two years:

“To take one very important example, Morgan alone added $52 billion in tangible common equity (a conservative measure of net worth that excludes the value of some assets that are hard to monetize) between the end of 2008 and last quarter, or 26 times the recent pre-tax loss and some higher multiple of the after-tax loss. This occurred despite maintaining nearly flat levels of total assets and risk-weighted assets over the period, meaning that the additional equity is available to cover roughly the same volume of risk.”

At the recent Yale CEO Summit at the NYSE, where some 80 business leaders meet bi-annually, a number of CEOs asked out loud why is public attention focused on a $2 billion nominal loss when both the government and media are stone silent over the $4 trillion loss represented by Fannie Mae and Freddie Mac, the twin darlings that precipitated the financial collapse in the first place. To date there have been no hearings and no one at either institution has been indicted. That money has pretty much disappeared and ripped a huge torpedo-like hole in the nation’s financial ship. $4 trillion as former Illinois Senator Everett Dirkson would have said, is real money. So where’s the outrage?

Read: $2 Billion Later: Policy Implications of JP Morgan Chase’s Trading Loss

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Read: James and the Giant Losses

Read: NY Times People : Jamie Dimon