Top of the Agenda: JP Morgan in $2 Billion Trading Loss
JP Morgan Chase & Co.--the largest U.S. bank by assets--revealed yesterday an unexpected trading loss of at least $2 billion, a result of risky positions taken by a trader in the bank's Chief Investment Office. JP Morgan CEO Jamie Dimon called the hedging strategy "poorly reviewed, poorly executed, and poorly monitored" (WSJ). The hefty loss pushed JP Morgan shares down about 6.5 percent in after-hours trading, with Citigroup down 3.6 percent and Bank of America down 2.6 percent. The incident comes as large commercial banks are combating U.S. and international efforts to regulate them by cracking down on high-risk trading. The Volcker rule--a provision of the 2010 Dodd-Frank Wall Street Reform Act that prohibits banks from engaging in proprietary trading--is set to come into effect on July 21.
Analysis
"Even as Mr. Dimon put the blame squarely on his bank, his arguments on Thursday seemed intended to leave the impression that it was poor execution, not the risks inherent in accumulating big trading positions, that caused the huge loss. In fact, he went out of his way not to blame market shifts or trading reverses," writes Nelson D. Schwartz for the New York Times' DealBook.
"The danger of Volcker, as rendered by Washington and as suggested in the Fed's recent letter, is the danger that exists throughout Dodd-Frank. It is the taxpayer danger that results when regulators prone to capture by the industries they regulate are vested with huge authority and discretion to favor some activities while disadvantaging others, and to help some firms while harming others," says this Wall Street Journal editorial.
"There is plenty here for enemies of modern banking to grab hold of though. Corporate offices invest the deposits that government guarantees make the public feel confident enough to give to banks. In other words, this is subsidized capital the likes of JPMorgan then put at risk to earn large rewards. Of course, banks try to hedge these investments. But this time $2bn has been lost in a matter of weeks," say the Financial Times' Lex column.
This shows how much volatility still prevails on hedging side. Cannot imagine the worlds renowned institutions failing. It is very clear the US Government allowed the institution of this stature to freely do whatever they feel. It is merely a poor risk assessment. Lehman Brother is another example. Today in our country State Bank of India would have gone through similar turmoil had it not due to strong Government controls. We criticize Indian Government many time but should thank for strong controls. In that sense our financial institutions are in very strong and less volatile than US financial Institutions. Slow and steady India can rise provided we control corruption.
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