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

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.

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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.