JPMorgan Chase & Co
) huge mark-to-market loss of about $2 billion in the first six
weeks of the second quarter has entangled it in numerous troubles.
The company's losses have been under intense scrutiny by the
Department of Justice, the Commodity Futures Trading Commission
(CFTC), the Federal Reserve and the FBI.
Now, the Senate Banking Committee is examining the regulators of
JPMorgan's banking activities to find out where they went wrong in
monitoring the hedging strategy, which led to such huge losses.
In May, in its quarterly regulatory filing, JPMorgan stated that
its chief investment office (CIO) incurred nearly $2 billion
mark-to-market losses during the first six weeks of the current
quarter in its synthetic credit portfolio.
This portfolio was to protect the company against the potential
losses on its large holdings of loans, deposits and bonds. However,
the company's strategy backfired as the repositioning of the credit
portfolio was poorly monitored and executed.
Therefore, since that time, daily meetings are being conducted
by the Office of the Comptroller of the Currency (OCC) with
JPMorgan's managers to reassess the bank's risk management
practices and issue remedial measures to ease the risk of such
On June 6, the first public hearing will be conducted before the
Senate Banking Committee. This will be based on the evaluation of
responsibilities carried out by the OCC, the Federal Deposit
Insurance Corp., the Federal Reserve and the Treasury Department,
prior to JPMorgan's announcement of the massive trading losses.
Senator Tim Johnson, the South Dakota Democrat leading the
committee, will give an opportunity to regulators to investigate
the losses at JPMorgan. Moreover, the committee will have a hearing
with CEO Jamie Dimon on June 13.
Further, Dimon also has a meeting with the House Financial
Services Committee on June 19. The CEO is under duress from
legislators and regulators provide reasons for the losses incurred.
Dimon is answerable to them for the strategy behind these losses,
which he stated as "flawed, complex, poorly reviewed, poorly
executed and poorly monitored."
The U.S. regulators are preparing their statements to be
presented before the Senate Banking Committee related to their
review process in connection with JPMorgan's losses.
According to OCC's statement, the agency isconducting a review
process to assess whether JPMorgan should clawback compensation
from the executives, who are responsible for these trading losses.
Moreover, the agency is also evaluating whether regulators
monitoring the company's banking activities were equipped with
sufficient information related to the trading positions, which
resulted in $2 billion losses.
No conclusion has yet been drawn by the OCC to ensure whether
the losses incurred have violated the Volcker Rule or not. The
Volcker Rule, a specific section of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, requires banks to restrict
their investments in hedge funds and private equity funds.
Moreover, proprietary trading is also prohibited under this
Further, Fed Governor Daniel Tarullo also prepared his verdict
stating that the central bank is working to determine the
weaknesses in JPMorgan's risk management strategies in other parts
of the company, though the review is not completed yet.
Woes Related to Losses
Since the announcement of the trading loss, JPMorgan has been
facing the wrath of the investors, employees and regulators alike.
Moreover, Fitch Ratings and Standard & Poor's (S&P) revised
their assessments on the company.
Additionally, JPMorgan has temporarily suspended its $15 billion
share repurchase program. Moreover, JPMorgan has decided to remove
the private equity-like operations - the special investments group
- from its CIO. Though not implicated in the trading loss, the
special investments group is banned from looking for fresh
investment opportunities like the private equity investments and
risky credit derivatives positions.
These restructuring efforts are part of the overall audit of
JPMorgan's risk management abilities.
Major banks in the country, such as
Bank of America Corporation
Wells Fargo & Company
The Goldman Sachs Group Inc.
), follow the trend set by JPMorgan. Over the last several
quarters, we have seen that even the announcements of quarterly
financial results by almost all the major banks followed the
company's footsteps. However, we hope that other banks are not
going to turn up with similar trading loss announcements.
JPMorgan runs the risk of further hedge-related losses over the
quarter. Numerous lawsuits alleging the bank of such wrongdoings
would surely dent its reputation and financials. Moreover, the
review and evaluation process completed by regulators would give
the investors a clear picture of the company for future
Currently, JPMorgan retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain a long-term Neutral rating on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
To read this article on Zacks.com click here.