JPMorgan’s $2 billion loss could have broad implications for financial industry

KEITH BEDFORD/REUTERS - Jamie Dimon, chairman and chief executive of JPMorgan Chase, speaks at an event in New York May 3. The company's shock trading loss of at least $2 billion from a failed hedging strategy knocked financial stocks across the globe on Friday, as well as the reputation of the biggest U.S. bank by assets and its CEO Jamie Dimon.

The announcement by JPMorgan on Thursday that it had suffered $2 billion in trading losses due to “errors, sloppiness and bad judgment” may not pose an existential threat to America’s largest bank.

But the losses could have broader implications for the financial industry. The bank’s head, Jamie Dimon, was Wall Street’s most prominent chief executive and one of the most effective opponents against strict financial reforms in Washington. Now his credibility is at stake.

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JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money.

JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money.

Video

Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talks about JPMorgan Chase & Co.'s $2 billion trading loss. Brown speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talks about JPMorgan Chase & Co.'s $2 billion trading loss. Brown speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

The loss, Dimon conceded in a conference call Thursday, “plays right into the hands of a whole bunch of pundits out there.”

As a Chicago Democrat and former supporter of President Obama, Dimon in recent years has made splashy headlines with his disillusionment with the administration’s approach to banking.

What’s more, JPMorgan emerged from the financial crisis far healthier than other banks and quickly repaid its $25 billion federal bailout, a fact that seemed to give Dimon’s arguments more cachet with many Democrats.

On Thursday, Dimon held a conference call with analysts to announce that JPMorgan’s chief investment office had lost $2 billion in the first quarter of 2012, with another $1 billion in losses possible in the weeks and months ahead. The trading desk in question, which was designed to manage risk, had been trying to hedge its exposure to corporate bonds.

“These were grievous mistakes, they were self-inflicted,” Dimon said.

Democrats in Congress are already using the incident to call for strong regulations. “The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too-big-to-fail’ banks have no business making,” said Sen. Carl Levin (D-Mich.).

At issue is the so-called Volcker rule, which is still being crafted by federal regulators and is, in theory, supposed to prevent federally guaranteed banks from making certain kinds of speculative bets for their own benefit. It is still unclear whether the Volcker rule would have restricted JPMorgan from making the bets at issue.

In the past, Dimon has been an ardent opponent of tighter regulations on banks. And he’s been able to do so in part because he had outsized sway with Democrats in both Congress and the White House.

In the early days of his administration, Obama praised JPMorgan as an example of a well-run bank. “You know, keep in mind, though there are a lot of banks that are actually pretty well managed, JPMorgan being a good example, Jamie Dimon, the CEO there, I don’t think should be punished for doing a pretty good job managing an enormous portfolio,” Obama told ABC News in February 2009.

But as Congress moved forward with financial regulations, Dimon and JPMorgan fought hard against the rules. In 2009, lawmakers in the House were debating whether to regulate derivatives, financial instruments that allow investors to bet on price movements of other assets. According to an article in the New Republic, JPMorgan played a key role in weakening the regulations by recruiting ordinary businesses that relied on derivatives — like airlines — to lobby Congress on the issue.

Dimon’s relationship with Obama soon soured. In July 2009, Obama told “60 Minutes” that he “did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” The next day, according to the New York Times, Dimon was at a White House meeting of chief executives and expressed his discontent. “President Lincoln could have denigrated all Southerners,” Dimon reportedly told Obama. “He didn’t.”

There are signs that Dimon, who was once rumored to be on the short list as Obama’s Treasury Secretary, has turned against Obama. Last fall, he was spotted with Mitt Romney. The New York Post reported that Dimon has not made any contributions to Obama in this election cycle — instead, he has been meeting with Republican candidates.

And Dimon is still making the case against Dodd-Frank, the financial regulation bill that Congress passed in 2010. In a recent long article in the Economist, Dimon argued that the law was likely to cost his bank $400 million to $600 million per year. And he has blasted the Volcker rule.

“Paul Volcker by his own admission has said he doesn’t understand capital markets,” Dimon told Fox Business earlier this year. “He has proven that to me.”

One of the trickier aspects of the Volcker rule is that it is supposed to limit bank activity unless it is hedging risk on behalf of its customers. Dimon, among others, has complained that it is often difficult to distinguish what trades do and don’t count. “If you want to be trading,” he told CNBC earlier this year, “you have to have a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something.”

In April of this year, after Bloomberg reported that a JPMorgan trader, Bruno Iksil, had made giant bets on U.S. corporate bonds that would be difficult to unwind, Dimon dismissed concerns as a “tempest in a teapot.” But on Thursday, after admitting the losses were indeed large, Dimon told analysts that the bank had “egg on its face.”

Barney Frank, one of the authors of the 2010 financial regulation, sent out a statement Friday that mocked Dimon’s assertion in the Economist that government rules were hurting the bank.

“The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today,” Frank said.

 
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