JP Morgan's $2 Billion in Losses Just the Beginning?
JP Morgan announced $2 Billion in losses caused by a trade gone bad. The news hit with some force because JPM had been the darling of the financial crisis - until now. I say "darling" because the bank appeared to be weathering the storm better than most.
CEO Jamie Dimon, head of the darling of the financial crisis, has been called the "King of Wall Street", perceived as the top Wall Street bank manager. Has he lost his touch? Did he ever really have a "touch" to lose?
So what happened?
Essentially a derivative trade went bad. The trade was reported as a "complex" trade betting on continued recovery and growth of the economy. The justification for a bank making such a trade would be that they were somehow "hedging" themselves. On the other hand, if they were betting on an economic scenario (recovery/growth), I'm not sure how that can be called a "hedge." I'm sure a debate will commence over this. We'll be hearing - yet again - how banks deemed "too big to fail" ought not engage in this sort of "risky" activity.
But the real story can be found in this quote from Dimon in the Wall Street Journal story today. He called the trade
If we think about what he's saying we can cut through the debate being waged on whether the trade was a legitimate "hedge" or not, or whether the bank should have engaged in this sort of activity. Look at what Dimon just said. He's saying that the trade got away from his people. It was beyond their ability to manage.
So you might say that, well, it was just one trade. But that's really the point here, isn't it? We're looking at just one trade of thousands of complex trades out there. And the folks at JPM aren't amateurs who put on these trades. Yet they let this one get away.
But here's the important point: there are over $700 trillion of these sorts of trades sitting out there. This one got away from the traders. What about all the others? Are there more out there on the verge of getting away from their traders?
Another important point: we don't know and have no way of knowing. These sorts of trades aren't executed in a public market like a stock exchange. They're done privately, out of sight, so to speak. And if they're out of sight, they're out of anyone's oversight.
Dimon's comment then seems a bit ominous doesn't it?
If the supposedly best bank managed by the best bank manager, can't stay on top of this sort of trade, what about all the other banks, bank managers. And you have to believe that JPM traders aren't a bunch of idiots. At that level, these are (or should be) the cream of the crop. And yet they put together something "...flawed, complex, poorly reviewed, poorly executed and poorly monitored." Scary, isn't it?
Dimon goes on to say that "We will admit it, we will fix it and move on." But what does that really mean? It frankly sounds like a lot of blather. Move on to what? Is he saying there are no more trades at JPM that might blow up like this one? How does he know? He didn't know about this one? And even if he did, what could he have done about it?
The $700 trillion + of derivatives hanging out there are an accident waiting to happen. Is this an isolated incident or the first crack in the damn? Sure, they'll patch this crack up now. But will it hold? Is the damn ready to blow?
Fourteen years ago, the hedge fund Long Term Capital put on derivative trades that almost caused the world's financial system to collapse. Derivatives were involved in the 2008 collapse. Nothing has been done to change the way derivative trades are executed and monitored. Dimon's comment that this particular trade was
could be applied to other such trades. How many? No one knows.
People make a lot of money putting on these trades. Every attempt to curb them has been successfully rebuffed by Wall Street. What has to happen for this to be seriously addressed?
While it might seem incredible, it looks like these trades will continue until one of them does finally blow up the world's financial system, once and for all. I don't know about you, but I'd want to make darn sure I was prepared for that possibility.
CEO Jamie Dimon, head of the darling of the financial crisis, has been called the "King of Wall Street", perceived as the top Wall Street bank manager. Has he lost his touch? Did he ever really have a "touch" to lose?
So what happened?
Essentially a derivative trade went bad. The trade was reported as a "complex" trade betting on continued recovery and growth of the economy. The justification for a bank making such a trade would be that they were somehow "hedging" themselves. On the other hand, if they were betting on an economic scenario (recovery/growth), I'm not sure how that can be called a "hedge." I'm sure a debate will commence over this. We'll be hearing - yet again - how banks deemed "too big to fail" ought not engage in this sort of "risky" activity.
But the real story can be found in this quote from Dimon in the Wall Street Journal story today. He called the trade
"...flawed, complex, poorly reviewed, poorly executed and poorly monitored."
If we think about what he's saying we can cut through the debate being waged on whether the trade was a legitimate "hedge" or not, or whether the bank should have engaged in this sort of activity. Look at what Dimon just said. He's saying that the trade got away from his people. It was beyond their ability to manage.
So you might say that, well, it was just one trade. But that's really the point here, isn't it? We're looking at just one trade of thousands of complex trades out there. And the folks at JPM aren't amateurs who put on these trades. Yet they let this one get away.
But here's the important point: there are over $700 trillion of these sorts of trades sitting out there. This one got away from the traders. What about all the others? Are there more out there on the verge of getting away from their traders?
Another important point: we don't know and have no way of knowing. These sorts of trades aren't executed in a public market like a stock exchange. They're done privately, out of sight, so to speak. And if they're out of sight, they're out of anyone's oversight.
Dimon's comment then seems a bit ominous doesn't it?
"...flawed, complex, poorly reviewed, poorly executed and poorly monitored."
If the supposedly best bank managed by the best bank manager, can't stay on top of this sort of trade, what about all the other banks, bank managers. And you have to believe that JPM traders aren't a bunch of idiots. At that level, these are (or should be) the cream of the crop. And yet they put together something "...flawed, complex, poorly reviewed, poorly executed and poorly monitored." Scary, isn't it?
Dimon goes on to say that "We will admit it, we will fix it and move on." But what does that really mean? It frankly sounds like a lot of blather. Move on to what? Is he saying there are no more trades at JPM that might blow up like this one? How does he know? He didn't know about this one? And even if he did, what could he have done about it?
The $700 trillion + of derivatives hanging out there are an accident waiting to happen. Is this an isolated incident or the first crack in the damn? Sure, they'll patch this crack up now. But will it hold? Is the damn ready to blow?
Fourteen years ago, the hedge fund Long Term Capital put on derivative trades that almost caused the world's financial system to collapse. Derivatives were involved in the 2008 collapse. Nothing has been done to change the way derivative trades are executed and monitored. Dimon's comment that this particular trade was
"...flawed, complex, poorly reviewed, poorly executed and poorly monitored..."
could be applied to other such trades. How many? No one knows.
People make a lot of money putting on these trades. Every attempt to curb them has been successfully rebuffed by Wall Street. What has to happen for this to be seriously addressed?
While it might seem incredible, it looks like these trades will continue until one of them does finally blow up the world's financial system, once and for all. I don't know about you, but I'd want to make darn sure I was prepared for that possibility.
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