To be fair, JPMorgan’s $2 billion loss isn’t as bad as it sounds at first…at least not to a bank with more than $2 trillion in assets (and the largest bank in the US). And it’s not that bad when losing $2 billion is offset by gains and really boils down to a loss of around $800 million for the quarter (as it’s estimated). And when that number is matched up against the fact that the bank made $5.4 billion in the first quarter of this year, the loss will not come anywhere close to sinking the bank.
But the dollar amount of the loss isn’t so much the issue. It’s the implications and it’s the message it sends.
Last week when the firm disclosed the trading loss, which stemmed from a failed hedging strategy, it was a stinging about face for the bank, and for CEO Jamie Dimon. In early April, Bloomberg and The Wall Street Journal reported on large, market-moving trades that were occurring at the banks’ Chief Investment Office (CIO). The CIO’s job is to manage risk for the bank….basically by acting kind of like insurance. The CIO makes sure that when the bank makes a big bet, the risk is hedged in the event the bet goes bad. Dimon was dismissive of the reports, calling them “a complete tempest in a teapot”. And he called the CIO the “sophisticated” guardian of the firm’s assets.
But that tempest in a teapot quickly turned into a windstorm. And now just a few weeks later, in the face of a glaring loss, Dimon was forced to acknowledge that the firm has ‘egg on its face’. He said of the loss: “there were many errors, sloppiness and bad judgment. These were egregious mistakes, and they were self-inflicted”. The presumably stellar guardian proved capable of a massive failure.
And don’t overlook the irony here: JPMorgan navigated through the fallout of 2008 without reporting a loss. It recently passed the Fed’s latest stress tests (leaving a hint of egg on the Fed’s face). The firm was considered to have solid risk management systems. That the institution considered among the ‘smartest’ on Wall Street could let this happen doesn’t speak well to the financial sector.
It’s no longer just a question of ‘too big to fail’. It’s also a question of too big to manage. And it’s not just that Dimon didn’t see it coming. It’s the fact that just a few years after the financial crisis, big risks are being taken again…and going terribly wrong, again. There should be a little more take away from the 2008 meltdown.
This is far from over. It could take the firm months to unwind the trades that caused all the trouble in the first place, and the losses could end up being greater. The loss, and the trades that caused it, have raised more than a few regulatory eyebrows. And, no doubt, regulators will be sharpening their pencils.
Prior to last week’s fallout, the bank’s stock was up 23% so far this year. And while the selloff was overdone, and the stock is being overpunished, I am not looking at this as an opportunity to buy.