News that JP Morgan lost $2 billion trading synthetic credit securities is spreading like wild fire. Shares of JPM are deeply in the red. The stench of Volcker is in the air:

"It's a pretty stunning admission for a company that prides itself on its risk management systems and the strength of its balance sheet. The timing couldn't be worse for the industry. At the end of the day, it will have ramifications across the broker-dealer community." Sterne Agee analyst Todd Hagerman.

What makes the story even more interesting is that it comes after JP Morgan's Bruno Iksil received media attention for reportedly taking some very bold market positions, and also after Mr. DImon ignored (was unaware?) of the danger in some of the company's hedges.

"Dimon has previously scoffed at media reports calling the firm's risk profile into question..." Barron's

Given that this isn't a case of a rogue trader but a rogue hedging strategy (a strategy that mysteriously 'morphed' into something else), the questions beg: when did the outspoken Mr. Dimon know things were going wrong and how intimately was he involved in trying to hedge the intial hedge(s)?

"In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought." Dimon. JP Morgan Conference Call

Along with the more popular snippits from yesterday's call, also consider that Mr. Dimon said that "It could get worse" (twice), and "hopefully...not be an issue by the end of the year". These statements suggest the company may be closer to the classification rather than the remediation stage of unsuccessful-strategy-unwinding.

There was also the fascinating exchange that took place when a perplexed caller had the audacity to ask about the possibility of simply unwinding the suspect positions. Dimon, conceding only that another billion or so in losses could be coming, would have none of it.

"We've got staying power, and were ready to use it." (15:45)

In a rare moment of sinking-ship confidence usually reserved for U.S. policy makers during a financial calamity, that Mr. Dimon was compelled to use the term 'staying power' is astonishing. How does a presumeably isolated $2 billion loss for a $155 billion company that is still highly profitable translate into JPM being forced to sell any of its positions at an inopportune time?

The Man Who Knew Nothing

While certain to provide fodder for those that contend the banks should be broken up (which they should be), there is a more simple observation that highlights the overly secretive and untransparent nightmare that is the giant U.S. financial companies:

Mr. Dimon just spent more than 28 minutes apologizing for something he couldn't talk about. The size of the trades in question, the markets involved, the liquidity situation, the exposures, who is/has gotten fired, etc...are these really secrets that must be kept under lock and key?

In short, based upon any alignment of the numbers, JP Morgan has all the 'staying power' an 'egg-faced' CEO could dream of. But even before yesterday happened this would not be saying much.

"Some banks do some things and some do others, but...to invest those excess deposits you buy securities. It's been going on for a hundred years in banking" Dimon

BWillett@fallstreet.com

By Brady Willett
FallStreet.com

FallStreet.com was launched in January of 2000 with the mandate of providing an alternative opinion on the U.S. equity markets. In the context of an uncritical herd euphoria that characterizes the mainstream media, Fallstreet strives to provide investors with the information they need to make informed investment decisions. To that end, we provide a clearinghouse for bearish and value-oriented investment information, independent research, and an investment newsletter containing specific company selections.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.