By David Weidner, MarketWatch
NEW YORK (MarketWatch) — And then there were none.
J.P. Morgan Chase & Co. JPM -7.46% , the last bank on Wall Street with any semblance of industry dignity for how it managed and comported itself in the financial crisis, on Thursday became the latest confidence-shaking bank on Wall Street to get waylaid by today’s financial system.
It’s a system that by now is so obviously out of control that you have to wonder if we should just call off the charade of regulation. Credit-default swaps, interest-rate swaps, massive derivative hedging bets, dark pools all run by algorithms — the markets are so run amok, they’re humiliating the smartest guys on Wall Street. And there is none smarter than Jamie Dimon at the top of an institution.
Reuters
That isn’t to say over the next few days there will be an effort to brush this one off, just as the financial media and Wall Street salesmen glossed over the failure of Bear Stearns and Lehman Brothers.
Already two alternate narratives are making their way into the media. The first is that the J.P. Morgan’s $2 billion trading loss and $800 million or more blow to earnings is the result of some rogue in England known in the markets as the London Whale. ( See MarketWatch report on J.P. Morgan loss. )
The second narrative is one told by The Financial Times in the aftermath: that this loss is inconsequential.
“So far the numbers are not enough to dent J.P .Morgan’s balance sheet, nor its capital-adequacy ratios much, nor its ability to return money to shareholders,” the publication said in it’s “Lex” column, adding that it would only serve to give “ammo” to bank critics.
Big money at the big banks
Take a look at how much money the big banks scored in the first quarter, and consider what Bank of America's founders would think about the B. of A. of today? Photo: Getty Images.
The problem with both explanations isn’t that they’re wrong — to the contrary, it’s that they are very likely right.
First, this “London Whale” and its enormous positions in the debt markets has been the subject of worry in the markets for months. So, the suggestion that he, or they, had somehow “gone rogue” is troubling. For it wasn’t just J.P. Morgan that was aware of the risk, it was anyone — the public, regulators and investors — bothering to look at the headlines who saw the potential coming.
Second, the FT is right. This blunder is “ammo” for bank critics. Indeed, it’s ammo as intercontinental nuclear missiles are “ammo.”
A bank has so little internal controls that for weeks it knows about a dangerous market position and still loses $2 billion in a humiliating way? What could be worse? A trading firm that collapses losing $1.6 billion in client money? Oh yes, M.F. Global was just another “extraordinary” Wall Street “anomaly”
(And isn’t it ironic that J.P. Morgan seemed to have a better handle on M.F. Global’s finances than its own.)
But even if you buy the spin that J.P. Morgan’s whale of a trade is just small potatoes and the cost of doing business, it’s hard to ignore Dimon himself. On the after-market conference call, Dimon sounded like his old self, defiant and brutally honest: “Just because we were stupid, doesn’t mean anyone else was.”
Dimon may sound contrite and honest, but the truth of the matter is that this trading loss is more than some lost house money at the bank. J.P. Morgan is one of the biggest retail banks in the U.S. market. It’s a major part of the Federal Reserve system, which is our nation’s monetary system.
Because J.P. Morgan didn’t nearly go under during the financial crisis, Dimon has used whatever implied clout that distinction carries as a bully pulpit. He’s railed against regulation. He stood before Ben Bernanke and suggested the Fed chairman might strangle the economy with bank rules.
Dimon, when asked about a new set of rules in the Dodd-Frank Act, said Paul Volcker didn’t “understand the markets.”
Volcker is too dignified to say “I told you so,” but I’m not. Volcker knows more about the markets, not because he’s astute to the daily gyrations, but because he recognizes that the system is so far beyond the ability of any individual or institution to understand or manage. ( Read First Take commentary on J.P. Morgan and the Volcker rule. )
Dimon’s problem — and this one goes way back — is that he is almost always the smartest guy in the room, and he knows it.
But something has happened along the way. The financial system that Dimon and his Wall Street counterparts built became too big to be controlled, much less understood.
Heaven only knows whether Dimon was just that much smarter or just luckier that J.P. Morgan didn’t suffer an embarrassment of this scale until now.
Either way, it doesn’t matter. What matters is who we trust now.
I’d suggest starting with the person who admits he or she doesn’t have a clue about what’s going on.
David Weidner covers Wall Street for MarketWatch.
J.P. Morgan reveals surprise $2 billion trade loss
By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) — J.P. Morgan Chase & Co. is looking at a $2 billion trading loss that will eat into second-quarter results, pressuring shares of the bank after-hours Thursday.
Shares of J.P. Morgan JPM -6.97% fell 6.8% to $37.98 in after-hours activity.
What would Giannini think of B.of. A.?
MarketWatch columnist David Weidner visits Mean Street and ponders what Amadeo Giannini, the founder of what is today's Bank of America, would think of the bank today. Photo: Reuters.
The losses stemmed from trades at the bank’s chief investment office, where a single trader -- dubbed the “London Whale” -- was reported to have taken large positions for the bank in credit-default swaps. Read earlier WSJ article on the “London Whale.”
J.P. Morgan Chief Executive Jamie Dimon said in a surprise conference call after the market closed Thursday that the loss was a “big mistake” but that it did not violate the Volcker Rule. Read commentary on J.P. Morgan loss and Volcker Rule.
“These were egregious mistakes, they were self-inflicted,” Dimon said, adding that the losses could easily get worse this quarter and beyond. Read live blog of call.
With the $2 billion loss, Dimon said capital positions under Basel III will fall to 8.2% from 8.4%.
Earlier in a regulatory filing late Thursday, J.P. Morgan said it had “significant” mark-to-market losses in its synthetic credit portfolio.
In the Securities and Exchange Commission filing, the bank said its synthetic credit portfolio had proved to be riskier and more volatile than expected. J.P. Morgan said losses have been partially offset from sales in the chief investment office’s available-for-sale securities portfolio.
J.P. Morgan Chase now expects to lose $800 million within the corporate/private equity segment, down from prior guidance of net income of $200 million.
Trader Bruno Iksil had earned the nickname “the London Whale” in recent months by selling huge amounts of credit-default swaps to hedge funds, a strategy that soured in recent weeks.
The news also hit shares of several other large banks after hours.
Shares of Bank of America Corp. BAC +0.71% , Citigroup Inc. C -2.61% , Goldman Sachs Group Inc. GS -2.73% , Morgan Stanley MS -3.21% , and Wells Fargo & Co.WFC +0.15% were down about 2% or more after hours.
Wallace Witkowski is a MarketWatch news editor in San Francisco.
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