Updates
May 14, 2012: JP Morgan is "one of the best-managed banks." -- President Obama.
May 14, 2012: It appears that before this is all over, Jamie Dimon may be in more trouble than it appears at the moment.
May 11, 2012: As the dust starts to settle, or the clouds start to clear, pick your metaphor, the JP Morgan story becomes clearer. This from the WSJ today, print edition, front page:
The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred whle JP Morgan tried to scale back that trade.The big story, for most of us, is not that JP Morgan bet wrong and lost $2 billion, and more to come. (In fact, as the dust settles, the $2 billion seems more than manageable: "... we still earned approximately $4 billion after-tax this quarter give or take," according to Mr Dimon. The bank earned $5.38 billion in the first quarter. -- WSJ.
The big story for most of us is how JP Morgan bet wrong. The company bet "on a continued economic recovery." Earlier this week the word "recession" started appearing more often in business circles.
Original Post
At 4:30, Jamie Dimon says there would be a conference call at 5:00 p.m. regarding JPM quarterly earnings.
It turns out JPM took a "whale" of a loss on derivatives trading. We are given the numerator ($2 billion, and possibly an additional $1 billion later) but no denominator. But apparently it's a huge, huge, huge hit.
See Wall Street Journal. In that short article a trader's name is mentioned: Bruno Michel Iksil. Now, google that name.
A blog.
Who knows where this will lead? But I keep thinking of the CNBC theme all day today: that the individual, retail investor is not smart enough to do his/her own investing, and that "we" need to trust our money with the professionals.
Just saying.
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From another source:
There had been media reports that a single JPMorgan trader in Europe, known in the bond market as "the London whale," was making massive bets that were influencing prices in the $10-trillion market.And some folks in Congress are concerned about speculators influencing the price of oil.
I read Liar's Poker and figured that I was likely to get blown up by a professional investor since I was a small account. I would get the dogs and the big investors would get the good stuff. I don't invest because I don't have to but if I did I would make the decisions.
ReplyDeleteThirty years ago it was tough to invest intelligently, but now with all the internet resources, etc., it is amazing how much information one can find.
DeleteI seem to recall that in the last major bear market, the government had to bail out banks and other security trading companies, i.e. the smartest of the smart (going over board on derivatives) had to be bailed out.
DeleteThe truly smart investment advisers that avoided that mess, are extremely rare, and are the only ones who are worthy of our respect and trust.
Instead, it seems to me that another generation of "snake oil" investment advisers are being trained, to take advantage of the next generation of naive trusting investors.
In this case, it seems the smartest of the smart simply "blew" it. It would be interesting if this turns out to be due to one rogue trader.
DeleteBruce, I like your lead in to the JPM loss news. Yes, I want them managing my money too..... ??? With all the noise Congress and the White House made after the 2008 near miss total collapse they have done nothing to address the actual problems. JP Morgan may be able to eat this loss, but how many more can they (or anyone) digest, "Fortress Balance Sheet" or not.
DeleteI am in the market and I'm not Debby Downer by nature. Yet here is some food for thought, back in 2008 it was estimated there is about $750 TRILLION (no typo) in derivatives being traded. Unfortunately it's estimated that amount has risen. You may want to keep those numbers in mind next time the talking heads say again; "I think this is an attractive time to get back into financials".
Hey they may be right, if the next "London Whale" always makes all the right calls they'll make a killing. What are the odds they could make another bad call? It is always a case of Risk vs Reward. What's your risk tolerance? Personally, Trillions in derivatives make me nervous. Just one former investment advisor's simply observation.
Nice post, thank you. It's 1:00 a.m. here on the East Coast. You are either up real early in London or late evening on the Pacific Coast, USA.
DeleteIt will be an interesting day tomorrow, listening to the talking heads on CNBC try to sort this one out. I'm sure the CNBC editors/producers are working all night to put a story together for their news readers.
And something tells me we will never know the real story.
To their credit, JPM appears to be very frank about what happened.
DeleteAlso, the link below to a NYT article, which reports on how earlier in the year, JPM successfully lobbied for the very rule that allowed them to make the derivative trades that specifically lead to the 2 Billion loss - known as "portfolio hedging" as opposed to the classical specific investment hedging.
http://www.nytimes.com/2012/05/12/business/jpmorgan-chase-fought-rule-on-risky-trading.html?_r=1&partner=rss&emc=rss
I agree completely: JPM has been very frank. As we go forward, their CEO and spokesmen may be a bit more circumspect in their comments: a) the questions will get more specific; and, b) any number of entities will be investigating.
DeleteI will probably be proved wrong (I usually am on things like this) but I think this story is being blown out of proportion. Yes, the reputation of the Jamie Dimon (now a household name) and JPM may be an issue, but, as a talking head on CNBC said yesterday, $2 billion is a rounding error for this company. That's a bit of hyperbole but the WSJ said they will still earn $5.3 billion this quarter.
The question for investors: is the new share price a buy, or will regulators/Congress/others stomp on JPM so hard that the stomping will be worse than the reason for the stomping?
For an analogy, I think the actions taken by the federal govt after the spill in the Gulf in 2010 caused a greater economic problem for the Gulf states than the original spill. Those actions continue to reverberate.