JP-Morgan Delivers a Shocker and Voldemort was responsible
The biggest US bank, JPMorgan has reported a trading loss of
at least $2bn on Thursday. The CEO Mr. Jamie Dimon said in the press conference arranged after the markets closure, “errors, sloppiness and bad
judgment” were committed by the bank that caused the monumental loss, which
“could get worse”. The bank had adopted a risky hedging strategy which could
take the total loss to $3bn. The strategies adopted have been "riskier,
more volatile and less effective" than originally thought.
Net losses, after accounting for all other inflows and outflows, are expected to cross $800 million by the end of the second quarter.
Net losses, after accounting for all other inflows and outflows, are expected to cross $800 million by the end of the second quarter.
The news of the loss caused JPMorgan’s shares to slide by
9%. Effects were also felt by other banks in US and Europe with Bank of
America’s shares falling by 2.4%, Barclays 3.5% and Deutsche Bank 1.6%.
JPMorgan’s business unit called Chief Investment Office
(CIO) is responsible for hedging the bank’s portfolios of individual holdings.
Fluctuations in prices can decrease the value of an asset which can be very
costly to a business or individual. To reduce this risk, banks and other
financial institutions practice “hedging” whereby the cost of an asset is
mutually agreed and maintained by two or more parties to eliminate the risk of
any future price fluctuations.
JPMorgan’s CIO unit was responsible for hedging the risks.
Mr. Bruno Michel Iksil, a JPMorgan trader based in London who was responsible
for making bets as part of his hedging strategy, which is often practiced by
the bank, but this time it failed. Mr. Iksil is a well known within the trading
circles and is often referred to as the “London Whale” and “Voldemort”.
The Bank is not expected to report any profit, or breakeven,
in the first quarter of 2012. It is not
only embarrassing for JPMorgan but the entire banking industry. It was one of
the few banks that had enjoyed consumer confidence and was able to rise up from
the 2008 global recession more quickly than its rivals. Potential investors and
regulatory authorities might think that if JPMorgan could do this, then what
about other financial institutions? The news is bound to invite even tighter
financial rules.
According to the New York Times, the Federal Reserve and Financial
Services Authority, UK’s banking regulator, came to knew about the trading
losses a month ago and were having discussions with the concerned bank.
Impact on Volcker Rule
The Volcker rule is one of the primary provisions of the
2010 Wall Street Reform law originally proposed and named after the former
Federal Reserve chairman Paul Volcker. The provision aims to put restrictions
on banks on making speculative and risky investments that might not benefit the
customers or the shareholders. There have been news about banks and other
financial institutions lobbying to soften the clauses of Volcker rule but the
current events will put an end to such activities. The law is currently being
finalized and will be implemented from the third week of July, 2012.
JPMorgan has earlier claimed that tougher financial
regulations come with a hefty price tag for the banks and increase their costs
up to $600 million. The bank has often publicly criticized the Volcker rule.
Rep. Barney Frank, one of the authors of the rule has said, “The
argument that financial institutions do not need the new rules to help them
avoid the irresponsible actions that led to the crisis of 2008 is at least $2
billion harder to make today”.
All eyes on JPMorgan
The shocking news of the trading loss has attracted
attention not only of the global media but regulators, analysts, economic
pundits, and above all the Securities and Exchange Commission. Its chief Mary
Schapiro has said, “I think it's safe to say that all the regulators are
focused on this."
Ratings Downgrade
Fitch, one of the leading credit rating agencies, have downgraded JPMorgan's long term and short term debt. The ratings agency believes that although the loss is "manageable" but the bank will face some short term liquidity problems.
Standard and Poor have revised the bank's ratings to "negative", indicating a possible decline in ratings in future.
Your comments and feedback are always appreciated.
Sarfaraz A.K.