Monday, May 14, 2012

BBC: JPMoron's Dimon in the Rough

"Do as I say, not as I do"
I found the following BBC assessment of JPMorgan's shocking loss, announced last week, to be interesting for a couple of reasons. First of all, the trades in question took place in London, which is heavily reliant on its financial sector - one of the world's oldest and largest.  Second, England has been extremely resistant to outside trading authorities and their rules, and it is speculated that is exactly why these failing trades took place there, out of reach of American regulators.  (And if JPM is doing this offshore, you know the rest of 'em are too, probably adding exponentially more risk to the system.)  "JPMorgan Chase, the biggest US bank, revealed a trading loss of at least $2bn on complex investments made by its traders. CEO Jamie Dimon blamed "errors, sloppiness and bad judgement" for the losses and warned "it could get worse". The risky hedging strategy could cost the bank an additional $1bn, he added. The strategy taken at the Chief Investment Office (CIO) unit had been "riskier, more volatile and less effective" than previously believed, Mr Dimon said. "These were egregious mistakes," he said. "They were self-inflicted and this is not how we want to run a business. "It could get worse", he warned. "This could go on for a little bit." It is the surprise factor - the shock evinced by Mr Dimon - that will re-ignite the debate about whether regulators need to take more decisive action to curb investment banks, to better prevent this kind of accident”, wrote Robert Preston, BBC Business Editor. "The CIO is an arm of the bank used to make broad bets to hedge its portfolios of individual holdings." Hedging is an investment practice used to reduce the risk of price fluctuations to the value of an asset. Attention has focused on the activities of Bruno Michel Iksil, a London-based JPMorgan trader known as the London Whale. But a source close to the bank told the BBC: "We're not talking about a rogue trader here. His was one trade in a big portfolio of trades. It was a global hedging strategy known by the bank but executed poorly." (Hedging is making an investment to reduce the risk of price fluctuations to the value of an asset. Airlines often hedge against rising oil prices by agreeing in advance to to buy their fuel at a set price. Thus a rise in price would not harm them - but nor would they benefit from any falls.) Mr Dimon said the type of trading that led to the loss would not be banned by the so-called Volcker rule, designed to [curb] certain types of trading by banks. But he acknowledged that the errors would be particularly embarrassing, given his public criticism of the Volcker rule. Prof. Mark Williams from Boston University, and a former Federal Reserve regulator, said taxpayers should be concerned about these trading losses. "Taxpayers ultimately have to bail out these 'too big to fail' banks. And that's what JPMorgan is - it is too big to fail," he told BBC. "How could a bank that's supposed to be the premier bank allow such risk taking?"