At the root of JPMorgan’s difficulties was a unit whose goal is to reduce risk throughout the bank — by buying and selling investments that would offset other positions the bank had taken. Hedging, as it is known, is a common practice encouraged by regulators.
The question is whether what happened in JPMorgan’s London office — where traders went far beyond normal hedging and appear to have become trapped in a money-losing position — was just a mistake, or an example of how banks continue to gamble recklessly even after the financial crisis.
“It’s basically a perception problem: How can anyone trying to prevent themselves from losing money end up making such a big mistake?” said Jaret Seiberg, an analyst at Guggenheim Securities. “Two billion sounds like a really big number if you don’t understand the bank is enormous and 2 billion is not catastrophic.”
But other financial experts said that the JPMorgan fiasco was more than a matter of perception. “If they’re too big to hedge, you have to at least ask the question: Are they too big?” said a former Treasury official who spoke on the condition of anonymity to protect his current business relationships.
At a taping of the television show “The View” on Monday, President Obama made the case that JPMorgan’s experience shows why there needs to be tough financial regulations.
“JPMorgan is one of the best managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion dollars,” Obama said. “Even if you’re smart, you can make mistakes, and since these banks are insured, backed up by taxpayers, we don’t want you taking risks where eventually we might end up having to bail you out again, because we’ve done that, been there, didn’t like it.”
Since disclosing the losses Thursday, JPMorgan has been going through a series of mea culpas. Its chief executive, Jamie Dimon, one of the giants of Wall Street, has been apologetic and welcomed outside scrutiny.
On Monday, the bank announced that Chief Investment Officer Ina Drew, who oversaw the London unit, would leave the firm, which she has served for 30 years.
Dimon lamented the loss. “Despite our recent losses in the CIO, Ina’s vast contributions to our company should not be overshadowed by these events,” he said.
The bank also announced that Mike Cavanagh, a top executive, would lead a team of officials to investigate the losses.