Last week, JPMorgan Chase (
) announced in its quarterly report that its London
desk lost $2 billion in a risky series of financial transactions
that hedged the bank against losses in a basket of credit-default
a hedge against potential losses in the bank's corporate
The news slammed the bank's shares down 9.28 percent in Friday
trading and wiped $14 billion off JPMorgan's total
Within days, chief
officer Ina Drew tendered her resignation, and
reports that the entire London trading staff may get the axe within
a few days, citing an anonymous insider.
In a statement, JPMorgan chief executive officer Jamie
Dimon stated that the unit's strategy was "flawed, complex,
poorly reviewed, poorly executed and poorly monitored." In an
interview with Meet the Press on Sunday, Dimon said "there's almost
no excuse for it."
So what will this particular disaster mean for the largest bank in
the United States?
Aside from the loss of
cap, $2 billion in red ink will surely draw regulatory eyes on both
sides of the the Atlantic.
The New York Times
reports that the strategy JPMorgan applied was allowed through
a loophole in the Volcker Rule portion of the Dodd-Frank
financial reform law called 'portfolio hedging.' This loophole
effectively grants banks a carte blanche to take positions in
to offset potential losses across their full portfolio, opening the
door for situations such as the one that came to light Thursday.
Politicians who favor tighter regulations - such as Senate
candidate Elizabeth Warren of Massachusetts - will doubtless sense
an opportunity to make political hay out of JPMorgan's losses.
Indeed, Warren has already stated she believes Dimon should depart
the board of the New York Federal Reserve as "he advises the
Federal Reserve on the oversight of the financial industry." The
candidate is one of Wall Street's nemeses, as her rise to
prominence largely came on the back of her fierce advocacy for
consumer rights and her equally fierce condemnation of the
JPMorgan will certainly face something of a leadership crisis, with
Dimon's reputation for ironclad
and good stewardship during the 2008 financial crisis deeply
shaken. Though Dimon's departure seems unlikely at the moment, much
will depend on the post-mortem and any potential leaks from within
the bank, especially if the entire London staff is indeed fired.
will probably feel less sanguine - while some of them likely
against JPMorgan and making money off its failed hedges, redoubled
scrutiny will fall on the whole industry.
The scandal may also hasten a trend in which the biggest profiteers
and rainmakers in the mainstream
jump ship for the more profitable and less regulated world of hedge
reported last week that more than 20 of Wall Street's Masters of
the Universe departed for greener pastures at hedge funds and other
firms in the last year.
The relative opacity and lighter regulatory touch on the hedges
means that these traders can get higher offers without attracting
public scrutiny, accountable only to management and investors
rather than to stockholders and the entire regulatory apparatus
which oversees the big bank holding companies.
This, in turn, could accelerate the rise of the shadow banking
system, which plays a major role in the
industry and the construction and sale of collateralized debt
default swaps and a variety of synthetic trading vehicles. Bad bets
in the shadow banking system infamously helped bring down
Management, so JPMorgan's $2 billion loss could well have deeper
repercussions in the future.