The 10 Smartest Things I Read About JPMorgan's Trading Ordeal
May 15th 2012 3:00PM
Updated May 15th 2012 4:36PM
If you've wondered whether people still care about the intersection of banking and politics, look no further than JPMorgan Chase's (NYS: JPM) $2 billion trading loss. The losses -- part of a derivatives trade by JPMorgan employee Bruno Iksil, dubbed the London Whale -- have sparked literally thousands of news articles, blog posts, and analyst reports dissecting what it all means for the bank, its CEO Jamie Dimon, and too-big-to-fail peers Citigroup (NYS: C) and Bank of America (NYS: BAC) .
Here are 10 quotes from some of the better ones I've read:
Former FDIC Chairwoman Sheila Bair, BusinessWeek: "Banks have all these really cheap deposits right now because of the Fed's zero-interest rate policies, and so what are they doing with those deposits? It used to be that banks would take their excess deposits and put them in very safe Treasury securities or Treasury-backed securities. But with interest rates so low now on the really safe investments, they're going to higher-risk securities to maximize the return they're getting. I think this is a macro trend that regulators should be very, very focused on. We are in very uncertain times against a protracted period of zero interest rates and it can have unintended consequences."
Jonathan Weil, Bloomberg: "Either Dimon misled the public about the gravity of the festering trades during his company's first-quarter earnings call last month. Or he didn't know what was happening inside the bowels of his own company. History tells us the latter is the norm for Wall Street bosses, though it's hard to say which is worse."
Noam Scheiber, The New Republic: "Stupidity, in Dimon's mind, is always isolated and explainable, not systemic and unavoidable."
Holman W. Jenkins, The Wall Street Journal: "Hardly mentioned is that a $2 billion paper loss this quarter might still become a profit in future quarters, or that $2 billion is 0.1% of JP Morgan's assets and 1% of shareholder equity. A systemic crisis this is not."
Joe Nocera, The New York Times: "But in his hubris, Dimon was never willing to acknowledge that just because he had sidestepped yesterday's problems didn't mean he was going to sidestep tomorrow's. Or that institutions that are ultimately backstopped by the taxpayer have a special responsibility to the country to stay out of trouble. Even if it means a lower share price. Or a smaller pay package. Or less risk-taking. Keeping banks from harming themselves is exactly what Dodd-Frank is intended to do."
Henry Blodget, Yahoo! Daily Ticker: "Yet again we are reminded that the worst thing that can happen to you if you make some dumb trade and lose billions of dollars is, oops, you lose your job. Next week you're at a hedge fund, you're making a lot more money -- your personal risk is almost zero in these things, other than having to switch your business card, basically. That is a real problem ... all of these people had huge bonuses last year. Are they going to have to give that back? No, of course not. ... Bankers get all of the upside for winning bets, and someone else -- the government or shareholders -- covers the downside."
Michael Hiltzik, Los Angeles Times: "The Whale affair shows that JPMorgan doesn't understand how to manage risk. When you're making multibillion-dollar bets using inherently volatile and unpredictable financial devices, nobody does -- JPMorgan's own risk models showed that its exposure had suddenly doubled in a period of weeks prior to its disclosure, which means either that the risk models were hopelessly outclassed, or that risk models can't ever be reliably accurate under all conditions."
Felix Salmon, Reuters: "How did Iksil's trade go so horribly, massively, wrong? Partly it's because his position was so big and so public. When hedge funds worked out what he was doing, they managed to get the word out, using stories in Bloomberg and the WSJ. And then it was just a matter of watching the market do what it always does, when it smells blood: I'm told that Boaz Weinstein's Saba, for one, made a lot of money taking the other side of Iksil's trade."
Jim Rickards, author: "I'm sure glad Jamie Dimon is on the board of the [Federal Reserve Bank of New York] where he can oversee risk at all those other banks. Comforting thought."
Editors, Boston Herald: "Still, [Rep. Barney] Frank noted that JPMorgan has previously claimed complying with Dodd-Frank would cost $400 million to $600 million -- a pittance compared to what the bank just lost. 'In other words, JP Morgan Chase -- entirely without any help from the government -- has lost in this one set of transactions five times the amount they claim financial regulation is costing them,' Frank said."
And a happy schadenfreude to you, too.
At the time this article was published Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Citigroup. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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