By Simon Johnson
Experienced Wall Street executives and traders concede, in private, that Bank of America is not well run and that Citigroup has long been a recipe for disaster. But they always insist that attempts to re-regulate Wall Street are misguided because risk-management has become more sophisticated – everyone, in this view, has become more like Jamie Dimon, head of JP Morgan Chase, with his legendary attention to detail and concern about quantifying the downside.
In the light of JP Morgan’s stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model. But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed.
JP Morgan claimed to have great risk management systems – and these are widely regarded as the best on Wall Street. But what does the “best on Wall Street” mean when bank executives and key employees have an incentive to make and misrepresent big bets – they are compensated based on return on equity, unadjusted for risk? Bank executives get the upside and the downside falls on everyone else – this is what it means to be “too big to fail” in modern America.
J.P. Morgan Malinvests Free Federal Reserve Money: Market Crash, Bailout & Printing Incoming
At this point, evidence is mounting that the illuminist internationalists in the financial sectors and their media-tycoon spokespersons are doing everything they can to abet an across-the-board selloff in financial markets, with attempts made by news media outlets to say markets are falling when they are steady and the most recent announcement at J.P. Morgan that they are sustaining major trading losses.
The casino gulag prison guard bank, JP Morgan, has again mismanaged their free money from the Federal Reserve. Whilst mainstream reports tout trading losses as the reason for the glut, perhaps a continuation of lavish partying or even getting it on with the boys over at Morgan Stanley with under-age prostitutes has led to, at least, some of the losses.
The bank’s shares have slumped 9.1% in the wake of their announcement of $2 billion in trading losses in just the past six weeks. The bank informed the Federal Reserve and the Financial Services Authority of Britain about the trading activities when media reports surfaced in April about a London-based trader with outsized positions, who was referred to as the “London Whale” and “Voldemort.”
J.P. Morgan has sustained battle wounds over the last year as allegations of their role in commodity manipulation have been made public and led to lawsuits. Nevertheless, the media has made a half-hearted attempt to shield the bank by suggesting that, just like the May 6 Flash Crash, Guantanamo Bay, etc., the bank’s trading losses are the fault of a rogue trader, a bad cookie.
The company said it could face further losses, totaling $3 billion in losses in the second quarter due to market volatility.
Chief Executive Jamie Dimon spoke in a conference call of a “flawed, complex, poorly reviewed, poorly executed and poorly monitored” hedging strategy. He said that the bank remains profitable despite large losses.
JPMorgan’s $2B Loss: ‘Stupid’ Bet, Big Fallout
By SUZANNE MCGEE, The Fiscal Times
That clanging sound you just heard was Jamie Dimon’s halo falling to the floor.
Dimon and his firm, JPMorgan Chase (JPM), seemingly couldn’t make a wrong step for years, even during the worst of the financial crisis. As other banks blew up, Dimon’s reputation was burnished and JPMorgan became the model for risk management on Wall Street. The firm, once known as the “The House of Morgan,” was dubbed “The House of Dimon” in recognition of that fact.
But that immunity came to a crashing halt yesterday, when Dimon held a conference call to reveal that the bank had taken a $2 billion trading loss in the last six weeks – and that it may end up reporting another $1 billion in losses this month as the volatile markets make closing out some of those positions very costly. The culprit? Derivatives bets using credit default swaps on a portfolio of corporate debt. “They were egregious mistakes; they were self-inflicted,” Dimon admitted during the relatively brief conference call. The trade wasn’t just complex but also “flawed” and “poorly reviewed.”
Dimon apologized profusely, particularly to analysts he had met with in recent days and whom he couldn’t inform of what was going on for legal reasons. He also took responsibility for the losses, and warned against drawing too sweeping a conclusion from it. “Just because we were stupid, doesn’t mean anyone else was.”
The problem is that apologies and humility after the fact aren’t enough. Nor is it good enough for the bank to decide that the “value-at-risk” model it once saw as the ne plus ultra of risk management isn’t adequate and announce it will be reverting to an older strategy for trying to identify excessively risky activities before they blow up in the face of the institution.