Calls to toughen regulation follow JPMorgan loss

In this 2009 file photo, James Dimon, chair­man and CEO of JP Mor­gan Chase & Co., speaks in New York. JPMor­gan Chase, the largest bank in the United States, on Thurs­day, said that it lost $2 bil­lion in the past six weeks in a trad­ing port­fo­lio designed to hedge against risks the com­pany takes with its own money. (AP Photo/Mark Lenni­han, File)

DANIEL WAGNER

AP Busi­ness Writer

WASHINGTON — JPMor­gan Chase faced intense crit­i­cism Fri­day for claim­ing that a sur­prise $2 bil­lion loss by one of its trad­ing groups was the result of a sloppy but well-intentioned strat­egy to man­age finan­cial risk.

More than three years after the finan­cial indus­try almost col­lapsed, the colos­sal mis­fire was cited as proof that big banks still do not under­stand the threats posed by their own speculation.

“It just shows they can’t man­age risk — and if JPMor­gan can’t, no one can,” said Simon John­son, the for­mer chief econ­o­mist for the Inter­na­tional Mon­e­tary Fund.

JPMor­gan is the largest bank in the United States and was the only major bank to remain prof­itable dur­ing the 2008 finan­cial cri­sis. That lent cred­i­bil­ity to its tough-talking CEO, Jamie Dimon, as he opposed stricter reg­u­la­tion in the aftermath.

But Dimon’s con­tention that the $2 bil­lion loss came from a hedg­ing strat­egy that back­fired, not an oppor­tunis­tic bet with the bank’s own money, faced doubt on Fri­day, if not out­right ridicule.

“This is not a hedge,” said Sen. Carl Levin, D-Mich., chair of a sub­com­mit­tee that inves­ti­gated the cri­sis. He said the trades were instead a “major bet” on the direc­tion of the econ­omy, as pub­lished reports suggested.

On Fri­day, Dimon told NBC News, for an inter­view air­ing Sun­day on “Meet the Press,” that he did not know whether JPMor­gan had bro­ken any laws or reg­u­la­tory rules. He said the bank was “totally open” to regulators.

The head of the Secu­ri­ties and Exchange Com­mis­sion, Mary Schapiro, told reporters that the agency was focused on the JPMor­gan loss but declined to com­ment further.

JPMorgan’s dis­clo­sure Thurs­day recharged a debate about how to ensure that banks are strong and com­pet­i­tive with­out allow­ing them to become so big and com­plex that they threaten the finan­cial sys­tem when they falter.

The JPMor­gan loss did not cause any­thing close to the panic that fol­lowed the Sep­tem­ber 2008 fail­ure of the Lehman Broth­ers invest­ment bank. But it shook the con­fi­dence of the finan­cial industry.

Within min­utes after trad­ing began on Wall Street, JPMor­gan stock had lost almost 10 per­cent, wip­ing out about $15 bil­lion in mar­ket value. It closed down 9.3 percent.

Fitch Rat­ings down­graded the bank’s credit rat­ing by one notch, while Stan­dard & Poor’s cut its out­look JPMor­gan to “neg­a­tive,” indi­cat­ing a credit-rating down­grade could follow.

Mor­gan Stan­ley and Cit­i­group closed down more than 4 per­cent, and Gold­man Sachs closed down almost 4 per­cent. The broader stock mar­ket was down only slightly for the day.

Dimon gave few details about the trades Thurs­day beyond say­ing they involved “syn­thetic credit posi­tions,” a type of the com­plex finan­cial instru­ments known as derivatives.

Enhanced over­sight of deriv­a­tives was a pil­lar of the 2010 finan­cial over­haul law, known as Dodd-Frank, but the imple­men­ta­tion has been delayed repeat­edly and will not take effect until the end of this year at the earliest.

JPMorgan’s trades show that the deriv­a­tives mar­ket remains too opaque for reg­u­la­tors to over­see effec­tively, said Rep. Bar­ney Frank, D-Mass., one of the law’s namesakes.

“When a sup­pos­edly respon­si­ble, well-run orga­ni­za­tion could make such an enor­mous mis­take with deriv­a­tives, that really blows up the argu­ment, ‘Oh, leave us alone, we don’t need you to reg­u­late us,’” he said.

Crit­i­cism of the bank did not stop with its tra­di­tional cho­rus of detrac­tors. It also came from Sen. Bob Corker, R-Tenn., a promi­nent mem­ber of the Sen­ate Bank­ing Com­mit­tee who has received $10,000 since Jan­u­ary 2011 from JPMorgan’s polit­i­cal action com­mit­tee, the most any can­di­date has received.

Corker, a leader of a failed effort last year to block a Fed­eral Reserve rule that slashed bank prof­its from debit cards, called for a hear­ing “as expe­di­tiously as pos­si­ble” into the events sur­round­ing JPMorgan’s loss.

Tim Ryan, pres­i­dent of the Secu­ri­ties Indus­try and Finan­cial Mar­kets Asso­ci­a­tion, a trade group, said it was impos­si­ble to leg­is­late or reg­u­late risk out of the finan­cial system.

“My hope is that this is viewed as bona fide hedg­ing, but it went wrong,” he said in an inter­view. “A mis­take was made. Money is going to be lost. It’s not cus­tomer money. It’s not gov­ern­ment money. It’s JPMorgan’s money, the share­hold­ers of JPMorgan.”

No one seemed to sug­gest Fri­day that JPMor­gan had bro­ken a law. But the mis­take added a wrin­kle to the still-unsettled dis­cus­sion about how the finan­cial indus­try should be reg­u­lated in the after­math of 2008.

“This just tells you that we are a long, long way from get­ting our arms around this whole ‘too big to fail’ issue,” said Cliff Rossi, a for­mer top risk exec­u­tive for Cit­i­group, Coun­try­wide and other big finan­cial companies.

Imme­di­ately after the cri­sis, a time of pop­u­lar out­rage over bailouts and invest­ment losses, there was broad pub­lic sup­port for an over­haul of bank regulations.

The changes pro­moted by the Obama admin­is­tra­tion were in many cases sim­i­lar to what the finan­cial indus­try had sought before the cri­sis: Con­sol­i­da­tion of reg­u­la­tors and over­sight of the multi-trillion-dollar mar­ket­place for derivatives.

Reg­u­la­tors are still draft­ing hun­dreds of rules under the 2010 law. As Wall Street has returned to record prof­its, and exec­u­tives to million-dollar bonuses, banks have fought to soften those rules.

In par­tic­u­lar, the indus­try has fought hard against a few pro­vi­sions that might have pre­vented the prob­lems at JPMorgan.

One is the so-called Vol­cker rule, which will pro­hibit banks from trad­ing for their own profit. The rule is still being writ­ten, and the Fed­eral Reserve has said it will begin enforce­ment in 2014.

JPMor­gan said that its bets were made only to hedge against finan­cial risk. Dimon con­ceded that the strat­egy was “egre­gious” and poorly mon­i­tored. But ana­lysts, for­mer bank exec­u­tives and many law­mak­ers disagreed.

“This is an exact descrip­tion of pro­pri­etary trading-style activ­ity,” Sen. Jeff Merkley, D-Ore., told reporters Fri­day. “This really is a text­book illus­tra­tion of why we need a strong Vol­cker rule firewall.”

Nancy Bush, a long­time bank ana­lyst at NAB Research and a con­tribut­ing edi­tor at SNL Finan­cial, said the trades prob­a­bly crossed that line because they were mak­ing money for JPMorgan.

“So they made money on hedges and then they hedged some more,” she said. “At some point it goes from being a hedge to being a moneymaker.”

JPMor­gan was seen as a sav­ior of weaker banks dur­ing the finan­cial cri­sis and the only big bank to escape rel­a­tively unscathed. His rep­u­ta­tion enhanced, Dimon, 56, has been embold­ened to chal­lenge efforts to toughen regulation.

In an inter­view with the Fox Busi­ness Net­work ear­lier this year, Dimon said that Paul Vol­cker, the for­mer Fed­eral Reserve chair­man for whom the rule is named “doesn’t under­stand cap­i­tal markets.”

Last year, he ques­tioned the cur­rent Fed chair, Ben Bernanke, about the rules and said they might be delay­ing the recov­er­ing of the finan­cial sys­tem and the broader economy.

“Has any­one both­ered to study the cumu­la­tive effect of all these things?” he asked.

Dimon, who grew up in the Queens bor­ough of New York and was groomed by the for­mer Cit­i­group chief exec­u­tive San­ford Weill, has also chafed against Occupy Wall Street protesters.

“Act­ing like every­one who’s been suc­cess­ful is bad and that every­one who is rich is bad — I just don’t get it,” he said at a con­fer­ence ear­lier this year.

On Thurs­day, at about the same time he was break­ing news of the $2 bil­lion loss to Wall Street, Dimon sent an email to JPMorgan’s 270,000 world­wide employ­ees assur­ing them that the com­pany was “very strong.”

Posted by AP News on May 11 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.