May 12, 2012
JPMorgan Chase CEO Jamie Dimon on Thursday revealed that the banking giant lost a $2 billion due to a massive trade that went sour, and that the losses could climb by another $1 billion in the coming days. Mr. Dimon said on Thursday that JPMorgan’s “synthetic credit portfolio,” an amalgam of derivatives and hedging bets that blew up in recent weeks, was part of “a strategy to hedge the firm’s overall credit exposure.”
J.P. Morgan Chase & Co. told traders several months ago to make bets aimed at shielding the bank from the market fallout of Europe’s deepening mess. But instead of shrinking the risk, their complicated bets backfired into losses of as much as $200 million a day in late April and early May, culminating in the company’s announcement Thursday of more than $2 billion in losses.
The loss stemmed from a complex deal involving credit default swaps — insurance-like contracts that essentially allow firms to bet on whether a given asset will rise or fall. The credit default swaps have been described as weapons of financial mass destruction. The complicated trading strategy involved derivatives, financial instruments that derive their value from the prices of securities and other assets. The bank most likely structured the trade in a way that magnified losses (see the image).
Dimon attributed the loss to "errors, sloppiness, and bad judgment," and asserted that "we will fix it and move on." But critics of the financial industry say the loss is more than a mere error, and that JPMorgan is engaging in precisely the type of risky behavior that brought the financial system crashing down in the fall of 2008.
In 2010, Congress passed the so-called Volcker rule, part of the Dodd-Frank Act, to prevent companies from using their own money to make bets using credit default swaps. However, the Volcker rule has yet to be implemented, and banks continue to lobby against it. Dimon led the charge in vehemently and loudly opposing the Dodd-Frank Act, insisting that the near-meltdown of 2008 was a perfect storm that would never happen again.
The trading losses reverberated Friday, as J.P. Morgan shares fell 9.3%, or $3.78, to $36.96 in New York Stock Exchange composite trading at 4 p.m., erasing $14.4 billion in stock-market value. It was the biggest decline since August, and trading volume soared to its highest level since at least 1984.
(The illustration is a courtesy off The New York Times)