JPMorgan Chase – $2 Billion = Apology
In a nutshell, that’s what JPMorgan Chase CEO Jamie Dimon will tell Congress Wednesday as he testifies before the Senate Banking Committee. Dimon has to explain how the bank lost $2 billion in trades. Not in 2008. In December 2011.
Dimon expressed regret over losses in the bank’s chief investment office, saying that its trading strategy was “poorly conceived and vetted” by senior managers who were “in transition” and not paying adequate attention.
This is the same man who “railed” against an increase in capital requirements last year, concurrently with JPMorgan Chase “using derivatives to hedge more than $1 trillion of loans and bonds.”
The U.S. Justice Department, the Commodity Futures Trading Commission and the Securities and Exchange Commission have announced investigations of the hedging activity undertaken by the JPMorgan chief investment office (CIO).
In 2008, the Federal Reserve made it possible for JPMorgan Chase to buy Bear Stearns, to prevent its bankruptcy. According to cNet, “Bear Stearns CEO James Cayne made $61.3 million from selling his shares a day after the JP Morgan bailout.” There is no honor among thieves or bankers.
Analysts have been taking swipes at JPMorgan Chase, both for its actions and Dimon’s apology.
JPMorgan’s trades got around the Volcker rule, which tries to prevent banks from speculating in financial derivatives, by labeling as “hedges” bets that were clearly not hedges.
As Black puts it, JPMorgan is now defining as a hedge “something that performs in exactly the opposite fashion of a hedge.” A hedge is supposed to reduce risk, but according to Black, the losses came from deals that “dramatically increased risk by placing a second bet in the same direction, which compounded the risk.”
The Too Big To Fail banks’ triple play of lobbying, campaign donations and lucrative jobs for family and friends of Washington officials, elected and appointed, blocks real regulation… Washington regulators are looking for problems in all the wrong places, when they are looking at all.
It does seem however that our initial perspective on this being a systemic risk hedge (i.e. a ‘delta-hedged’ senior tranche position as opposed to some easily managed and understood pairs trade) that rapidly grew out of control due to risk control inadequacies, is absolutely correct – though we suspect that is as close to the real truth anyone will ever get.
I’d like to say that it matters who wins the WhiteHouse when it comes to regulating Wall Street, but neither Bush nor Obama did much to push back against Wall Street interests.