IT’S BEEN ABOUT a month since JPMorgan Chase, the nation’s largest commercial bank, announced a $2 billion loss in a dubious series of trades that were supposed to hedge against risks. The embarrassment for the bank and its chief executive, Jamie Dimon, was acute: Mr. Dimon had not only previously dismissed concerns about the bank’s activities as “a tempest in a teapot,” but he had also opposed efforts to regulate such trades more tightly, arguing that restrictions would do more harm than good.
Given this history, a congressional hearing into the busted trade was all but inevitable, and much of Mr. Dimon’s testimony before the Senate Banking Committee on Wednesday had an equally predictable quality. He apologized for the bank’s mistakes while insisting that they did not alter the argument over regulation. Mr. Dimon said in prepared testimony: “We will lose some of our shareholders’ money — and for that, we feel terrible — but no client, customer or taxpayer money was impacted by this incident.”
We tend to believe both Mr. Dimon’s contrition and his promises of an internal cleanup. The financial media have focused recently on reported changes in internal risk-management models that might have facilitated the failed strategy; no doubt the Senate, the Securities and Exchange Commission and others will investigate that issue thoroughly. But we doubt the inquiries will alter the basic picture: This was the sort of accident that can happen when even the most cautious banks entrust extremely complicated transactions to employees who, for all their talent, are only human — with all the defects, greed included, that flesh is heir to. That, we assume, is what Mr. Dimon meant when he said, repeatedly, that the original transaction, designed to provide nothing more than insurance against the cumulative risks in the bank’s overall portfolio, “morphed” into something more like a hedge-fund’s market play.
Where we disagree with Mr. Dimon is on the implications for regulation. In the debate over the Volcker Rule, which is designed to prevent large, federally insured banks from gambling in the markets on their own accounts, Mr. Dimon and other leading bankers have insisted that there should be an exception for the kind of “portfolio hedging” that his bank was engaged in before the hedge “morphed.”
Portfolio hedging is still a necessary and valid tool, Mr. Dimon argues; the ease with which it “morphed” at his bank, however, suggests otherwise. Yes, the losses this time were manageable and confined to the bank’s shareholders. What about the next time, though? If federally insured banks must reduce risk through other means, including assembling less risky credits on their balance sheets in the first place, so be it.
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