JPMorgan’s loss may cost all banks

 
JPMorgan sign The loss at JPMorgan could have far-reaching consequences

JPMorgan has a reputation for being one of the better managed and more cautious of the world's huge banks.

But that reputation has taken a serious knock with the disclosure last night that a trading desk in London has lost $2bn - and perhaps more - on deals in what are known as corporate credit derivatives, or insurance against the danger of loans to companies going bad.

I am not sure it helps that the bank's chief executive, Jamie Dimon, has been refreshingly frank, blaming "errors, sloppiness and bad judgement".

Strikingly, he has not said that these transactions, carried out for JPMorgan's own benefit (or disbenefit, as it turns out) through its chief investment office, were unauthorised or down to a putative "rogue trader".

These deals were supposed to be a so-called hedge, an attempt to reduce the risks taken by the bank. That is why the incident is more than a big embarrassment for JPMorgan, although - for the avoidance of doubt - it will put a dent in the bank's profits for 2012 but won't anywhere near eliminate them.

It is the surprise factor - the shock evinced by Mr Dimon - that will reignite the debate about whether regulators need to take more decisive action to curb the complexity of investment banks, to better prevent this kind of accident.

Apart from anything else, Bloomberg and the Wall Street Journal both highlighted the big credit-derivative positions being taken by JPMorgan in London a few weeks ago, and the bank rejected the suggestion that there were serious dangers here.

So the JPMorgan trading loss will resonate and reverberate.

In the US, it will strengthen the argument of those fighting a rearguard action from the banks to water down the Volcker rule, which is supposed to prevent banks taking big investments for their own account.

In the UK, it may mean revisiting whether the proposed ring fence between retail banking and investment banking is protection enough for essential banking services.

As for big global banks, they are engaged in a fraught debate with Moody's to dissuade the ratings agency from downgrading many of them, in a way that would make it much more expensive for them to borrow and would squeeze their profits.

JPMorgan's accident won't strengthen their case that they are less risky institutions than Moody's fears.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 403.

    #399Scarf66

    Nope. - We are not saying the same thing.

    Banking relies on real world wealth creation so that it can skim.
    Real world wealth creation is hamstrung by banking bean counters gambling.

    Think about it. - Think.

    What is wealth? Is it marks on bits of paper, bits in memory?
    Because that is all money is - marks on bits of paper.

    Financiers believe those marks are wealth. - I don't..

  • rate this
    0

    Comment number 402.

    "Trolls that suggest that traders can lose billions keep their jobs and get bonuses are deluded."

    Four years. Still nobody in jail. We're paying the bills.You'll shortly be back for more bailouts.

    Doesn't sound so good does it?

    You're delusional

    Anything to add?

  • rate this
    0

    Comment number 401.

    In banking as in politics:

    Esau-like, we 'allow ourselves' inequality, force ourselves to compete in fear & greed, then wonder why 'winners' - business, banking, politics, regulation - 'let us down'

    How much more 'dumbed down' can we be made?

    We leave it to 'the clever' to call for 'some restraint', by riches freed to confess 'some embarrassment' at the state of the world made their plaything

  • rate this
    0

    Comment number 400.

    jp (398) I particularly agree with the inference of the first part of your post. Greater regulation, once it is brought in, will only be circumvented. Looking around the world today you cannot fail to think that, to some, 'rules' are not quite like pie crusts but are instead like minutes silences - to be observed only when people are looking. Greater regulation is only the 1st step!

  • rate this
    0

    Comment number 399.

    395 prude boy

    I think we're saying the same thing the banking sector does rely on all other sectors and vice versa.

    What I object to are the uneducated repeating tabloid nonsense about gambling.

    We all accept and manage risk in our lives including financial risk via pensions and investments. Trolls that suggest that traders can lose billions keep their jobs and get bonuses are deluded.

  • rate this
    0

    Comment number 398.

    This article misses a vital point. One could argue regulations aren't stringent enough to prevent unnecessary risk-taking. Realistically, banks will find ways around rules: the deals at JPM CIO were meant to be hedges, right? The problem is a cultural one, inherent in most banks. Traders are compensated on absolute return, not on their ability to hedge a portfolio. The incentives were just wrong.

  • rate this
    0

    Comment number 397.

    Nondyplomatic@393-4
    Seeing "simple v complex hedges"

    Some echo of John Lloyd @78
    "define the required end"

    John's "clean sheet" needs all to 'render unto Caesar'
    'Investment Loop' money is 'ours': from society, directing society
    At our peril we surrender democratic control

    Not by infinity of rules, spies on spies: rather Equality of stakes
    Making all free to 'make redundant' & move-on, to value

  • rate this
    +1

    Comment number 396.

    #394. Nondyplomatic

    "Grave error to call financial services "industry" and fool us it was so."

    Too right!

    There was a time when London had proper industries, skills too.

    Now thanks to the banks real industries and skills are being out sourced to third world countries.

    And we are being turned into one.

  • rate this
    +1

    Comment number 395.

    #392Scarf66

    "I work in Engineering but am smart enough to know how the entire business works and how financial services and risk management supports the business."

    Surely to goodness you must be smart enough to realise the whole banking sector relies on everything else for its very existence.

    Like your accounts department would not exist without the machine shop.
    But new machine shops open up.

  • rate this
    0

    Comment number 394.

    Do we need banks? P2P Banking sounds good, but how much regulation to provide adequate safeguards? In the world/system that we live there are asset inequalities that cannot be solved by bartering and I'm not sure that we want to be entirely dependent on the state for everything/anything. Maybe non-profit banks are the answer.Grave error to call financial services "industry" and fool us it was so.

  • rate this
    0

    Comment number 393.

    Responding to City and Union supporter posts, let's be clear, the 2bn loss may be another 2bn gain, but ordinary folk will be affected via pension and other institutional investments. JPM top predators will still get their fat salary and obscene bonus. There is no problem with simple hedging (e.g. GBP v USD) but complex hedges are dangerous when the algorithm may have an oversight. 400char argh

  • rate this
    0

    Comment number 392.

    387 fauxgeordie

    An example to support my argument:
    http://www.guardian.co.uk/education/2011/may/24/new-rules-for-sacking-teachers

    I work in Engineering but am smart enough to know how the entire business works and how financial services and risk management supports the business. Hedging the cost of steel to support future orders etc.

    Public sector yourself no doubt.

  • rate this
    0

    Comment number 391.

    For all those in the market Gambling is bad for you and your wealth/health
    You can seek help before you damage peoples lives.

    http://www.gambleaware.co.uk/

    It may be too late to undo what you've already done, but you all could at least have Counselling and support and slowly come off gambling altogether before its too late

  • rate this
    +1

    Comment number 390.

    If you can lose £2 billion and still make a profit, then margins in banking are absurdly high. Unlike in other industries, there is no such thing as a healthy profit - only an absolute maximum short-term max-till-the-pips squeak profit at the expense of jobs and long-term investment. delighted they've cocked up, but it won't change anything.

  • rate this
    +1

    Comment number 389.

    This trading seems to have been done in plain sight.
    No subterfuge.

    How?

    Are the oversight boys up to their job?

    Why bother having them?

    There is a broader picture here however. Iksil's job appears to demand he outsmarts others.

    Is that really wealth creating?

    Does that take the world forward?

    What are we doing allowing a company, bank, to operate in such a manner?



    We are all to blame...

  • rate this
    +1

    Comment number 388.

    As I understand things this loss was not from the casino banking division - but from the Captain Mainwaring bit.

    What it shows that big banks MUST be broken up - we need 1000 banks not one JPMorgan Chase. Crass stupidity which seems to be the root cause of this loss needs to be size limited.

    Sooner or later we (the regulators) will have to force the division of the banks.

    BoE - get on with it!

  • rate this
    +2

    Comment number 387.

    "In parts of the latter you can be incompetent, not perform and be in no danger of the sack."

    If you are working in the financial sector - as it sounds like you are - that's one of the most staggering dense posts ever to appear here.

    How much damage to the economy do you have to do before you admit you're grotesquely incompetent?

  • rate this
    +2

    Comment number 386.

    To descibe these as banks 'trading' and the disgusting indiviudals they employ as 'traders' is an abuse of language. Trading is the exchange of different commodities to the benefit of both parties and the enrichment of society - not a gamble which enriches one at the expense of the other while inflicting harm on the rest of us.

  • rate this
    +3

    Comment number 385.

    378.coram-populo-2010
    Can this monster be slain?
    -
    Yes, but only when politicians have the guts to take them on and play rough to make sure they win. The myth of the 'City' as being the bedrock of our prosperity in the modern world has been our downfall. The sooner we look to a balanced economy that makes real things to export and be strong in our own market, the better. A long haul though.

  • rate this
    +2

    Comment number 384.

    We need legislation to ensure that this new fiasco is paid for by the banks themselves and not by us! They should now suffer the losses and reduced profits and not be allowed to claw them back at our expense.
    If they go bust: TOUGH

 

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