JPMorgan 'Rogue Trader' Losses Send Chills Through Markets

May 11, 2012
Originally published on May 11, 2012 9:46 am

"It was a bad strategy. It was badly executed."

The words of JPMorgan Chase's CEO, Jamie Dimon, as he admitted late yesterday that the investment bank — or, more precisely, a single "rogue trader" working for the bank, had lost some $2 billion in the last six weeks in risky hedge-fund trades.

The news has sent chills through the markets. Shares of JPMorgan Chase, the largest U.S. bank, lost 7 percent in after-hours trading and British bank Barclays lost 2.9 percent, while more than 2 percent was shaved from Royal Bank of Scotland.

NPR's Jim Zarroli reports, the trades at JPMorgan Chase:

took place in a unit of the company that is supposed to manage or hedge risk. But this time the unit employed an unusually complex strategy that ended up backfiring on the bank.

The losses are especially embarrassing for Dimon because he had taken pains to deny the rumors circulating around the bank.

"We operate in a risk business and obviously it puts egg on our face and we deserve any criticism we get, so feel free to give it to us and we'll probably agree with you," he said in a conference call yesterday.

The Wall Street Journal elaborates:

[the losses] stemmed from trades in the bank's chief investment office, where a single trader — dubbed the "London Whale" — reportedly took massive positions in credit-default swaps.

Mr. Dimon, who in April had described news reports of the trader's leviathan market exposure as a "tempest in a teapot," on Thursday called the losses "egregious mistakes" and said the losses could deepen this quarter and beyond.

Dimon acknowledged yesterday that he had been speaking to bank regulators about what had happened and that they are likely to launch an investigation.

The losses at JPMorgan Chase come as Congress is debating the so-called Volcker Rule. Named after former Federal Reserve Chairman Paul Volcker, it is designed to prevent certain kinds of high-risk trading, but it's not clear if the rule would cover the precise trades that got JPMorgan Chase in trouble. Dimon has been a big critic of the rule.

The Wall Street Journal's MarketWatch says:

Dimon denied on a hastily convened conference call that the trading activity of the bank — which in part were bets that the corporate credit on an index of 125 companies — violated the Volcker Rule, part of the sweeping Dodd-Frank bank reform measures passed after the financial crisis.

There's one good reason for Dimon's contention: The Volcker Rule isn't in effect for another two years. In fact, Paul Volcker, the former Federal Reserve chairman, was in front of Congress just Wednesday defending the still-to-be-implemented regulation against ferocious attacks.

...

But Dimon may have been right even if the Volcker Rule were in effect today. That's because the rule does permit trading on behalf of a client. It's going to be down to judgment calls by regulators as to whether trading is proprietary or not.

The most significant damage to JPMorgan Chase may not be the $2 billion in trading losses or the even bigger hit it's likely to take from shareholders in the next few days. The image of JPMorgan Chase as one of the best-run investment banks is also going to be tarnished.

Salon says:

Until now JPMorgan was renowned for the excellence of its risk management strategies. It was one of the few big banks to come out of the financial crisis stronger than before the meltdown. While other banks collapsed or sought shotgun mergers, J.P. Morgan was the killer whale gobbling up the weakened predators around it. Dimon even complained mightily about being forced to take a government bailout. His bank didn't need it, he said, and he returned the money as fast as he possibly could.

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