JP Morgan loss could play into regulators' hands
The $2bn trading loss on credit derivatives incurred by JP
Morgan's chief investment office, which hedges the global group's
loan portfolio and invests excess deposits, could toughen the
resolve of regulators seeking to put the brakes on perceived
high-risk activities.
In a conference call on 10
May,Chief Executive of the bank, Jamie Dimon, warned the losses
could get worse in the next few quarters. "The markets and our
decisions will be a critical factor" in putting right the losses,
he said, while adding "to put this in perspective, this is the
reason we have a fortress balance sheet - to handle surprises". Mr
Dimon said the bank's Basel III core capital ratio will be amended
down from 8.4% to 8.2% of risk-weighted assets, but that the bank
would continue to meet its Basel I and Basel III capital ratio
targets, which are conservative.
Mr Dimon described the losses as "egregious" and
"self-inflicted".
In a statement, US Senator Carl
Levin, who is chairman of the Senate Permanent Sucommittee on
Investigations and one of the authors of the Volcker Rule, which is
designed to restrict US banks from making certain types of
speculative investments, said: "The enormous loss JP Morgan
announced today is just the latest evidence that what banks call
'hedges' are often risky bets that so-called 'too big to fail'
banks have no business making. Today's announcement is a stark
reminder of the need for regulators to establish tough, effective
standards to implement the Merkley-Levin language to protect
taxpayers from having to cover such high-risk bets."
Mr Dimon acknowledged in the conference call that the loss would
"play into the hands of ... pundits out there" who have called for
tighter regulation of the financial industry. He said: "This
trading may not violate the Volcker rule but it violates the Dimon
principle."
The Volcker rule is often characterised as a ban on proprietary
trading by commercial banks, whereby deposits are used to trade on
a bank's personal accounts, although a number of exceptions to this
ban were included in the Dodd-Frank Act.
Gordon Kerr, founder of Cobden Partners, a UK-based firm that
undertakes sovereign advisory work, told Bloomberg that tighter restrictions on
proprietary trading are likely to result from the JP Morgan loss,
but 'micro rules' would not solve the problem. He argued that
managers and directors should be made personally responsible for
losses. "The degree of complexity and the innovation skills of
bankers will always beat the regulators," he said. Credit default
swaps and credit derivatives that are linked to loan portfolios
were the primary driver of systemic banking failure and a loss such
as JP Morgan's could easily happen again, he warned.
David Marshall, a senior analyst at research firm CreditSights
in Singapore, was more upbeat, saying JP Morgan is a very large
bank that could easily absorb such a
loss.
"All banks are vulnerable to fraud and rogue traders, but this
loss appears to have resulted from the size and complexity of the
risks JP Morgan was trying to manage. It will lend support to
critics of the big banks that rely on their own models to predict
market volatility. There will be more scrutiny from
regulators."
The announcement of the loss came on the same day as the release
of the latest Harris Poll, which surveys Americans about Wall
Street. An overwhelming majority of 82% of the 1016 adults surveyed
said recent events (the poll was conducted before the JP Morgan
loss) showed that Wall Street should be subject to tougher
regulation. However, 62% said Wall Street was absolutely essential to the US economy.
In other findings, 78% of people believed Wall Street
firms should pay bonuses only when they are doing well and making
good profits and 70% believed most people on Wall Street would be
willing to break the law if they believed they could make a lot of
money and get away with it.
Mr Dimon said he and a senior management team at JP Morgan would
work on the investment office problem: "we will learn from it, fix
it and move on", he said.