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  • JPMorgan Chase Losses: No Reason for More Regulation

    JPMorgan Chase’s announcement that it has lost $2 billion in a failed hedge strategy sent shock waves through the financial world yesterday. And in Washington, the reaction has had a political tone, with calls to accelerate adoption of the “Volcker Rule” limiting investments by banks. But policymakers should take a breath before taking out the regulatory pen. While the case clearly reflects a management failure, it is not a systemic problem that requires or would be fixed by additional regulation. As JPMorgan Chase’s Chairman Jaime Dimon said, “Just because we’re stupid doesn’t mean everybody else was.”

    A few points about this situation:

    • The Volcker Rule would not have prevented the losses, since it would not have affected this transaction. JPMorgan Chase’s losses were due to hedging, an activity designed to reduce the chance of losses from other bank activities. Such hedging would not be restricted by the Volcker Rule.

    While in this case the hedging produced losses rather than protecting against them, the activity is an extremely valuable way to protect the bank against many types of market risk. Hedges are often very complex and require an expert to understand. Chase did a bad job of structuring the hedge. As Dimon said, “There were huge moves in the marketplace, but we made these positions more complex and they were badly monitored.”

    • The losses can easily be absorbed by Chase. There is no danger that Chase will fail or of any kind of systemic collapse. This will not become another federal bailout. A $2 billion loss is huge, but Chase has more than enough capital to absorb it. As a $2.3 trillion bank with a net worth of $189 billion, this $2 billion loss reduced the bank’s capital ratio from 8.4 percent to 8.2 percent. The bank is nowhere close to needing any form of federal intervention.

    In addition, for all of 2012, the bank will still produce a healthy profit. One bank analyst says that he expects JPMorgan Chase to earn about $4.70 a share, down about 40 cents from previous predictions, while another expects about a 5 percent drop.

    • The system worked: The JPMorgan Chase losses were not discovered by regulators; they were discovered by the bank itself conducting its own management reviews.

    Mistakes that cause losses are part of capitalism, but they should be handled responsibly by the company that made the error. This is what happened here.

     

    Posted in Featured [slideshow_deploy]

    8 Responses to JPMorgan Chase Losses: No Reason for More Regulation

    1. limey5 says:

      I disagree that JP Morgan Chase losses are not indicative of systemic problems. This is just one example of many possible. Volker's recommendations only reinforce the fact that regulations, and rules of play such as the Glass-Steagle (G.S.) act in it's original form, was a definite positive and enforceable environment in which to conduct business. If G. S. was still in place, we may have have avoided many of the issues we are experiencing today. Remember the roaring 80's! Boom years! Then more deregulation… (ie; G.S. in 91) In business, if it is legal and there is an opportunity for profits, and government will absorb or mitigate your losses why not gamble on making those profits. It would not surprise me if their hedge was heavy in Derivatives, an especially muddy game. All games must have rules. Otherwise how do you know who is cheating? Of course the cheater knows he is… obviously he will "find" his "errors" better to self report and ask forgiveness than be found out and asked for explanations. Makes investors nervous. Just because you can absorb the loss, doesn't make it a non-issue. The investors lose.

    2. KJinAZ says:

      We don't need more regulations, we need less with more teeth. If your entrusted to take care of money for people and you cheat once that's it. You loose your license…end of story. This is what the democrats bill called Dodd-Frank has allowed. Not oly should is the a crime, it's a violation of the public trust. These people should be jailed for life, and should have to work to pay back the money they stole. Also everyone who voted for this lame bill should be locked up as well. They are just as gulty in my eyes for failing to do their jobs of protecting the people. Hang them all in a public square, then maybe some of these crooks in business will think twice about stealing from their clents.

    3. Bobbie says:

      In today's America it's a subtle relief yet exceptional to hear about a private investment firm with people that have integrity in work ethics to step “forward.” No offense but one is too many privately owned businesses irresponsible decisions running to government for handouts and by forced government rule someones' man made consequences are unjustly put on people uninvolved while the business makes a profit even as it collapses! Not GM who runs government deep.

      About controlled insubordinate government: if you're allowed any of your own money earned back, it takes personal application with personal information instead of eliminating government investment with tax paid money to avoid it all together. Hey here's a compromise, either cut the social belittlement programs or cut the government obligated tax payers investments. We don't need intentional sacrifice. Since any business is already started this government can move in, take control, have ownership and in time, take credit for it's history!

      So that's how government control will change history only this time much more delicately since yesterday finds all Obama's distortions and lies he attempts all credit is government, on America today. Brainwash works on the vulnerable of many impressionable minds to be convinced government control has anything to do with anyones' American success.

      J.P. Morgan exemplifies the integrity to admit their mistakes, the dignity to correct, the respect to inform, with the diligence to stand fully accountable. They are honorable in their business and to the people they serve. At least that's what I remember in their advertisements growing up and in my own words! How all businesses were expected to conduct themselves in America, not too long ago. But shabby governing (with no standards) outside the peoples' control gets us where we are today.
      Please stay true to your business integrity, J.P. Morgan. American businesses fell without it. Don't give into government and allow them to regulate you according to their agenda! You will be giving up your private ownership no matter how the government in control, paints it.

    4. Bruce Daniel says:

      I don't have a problem with capitalism, in fact, it is the best way to create wealth as a nation. The problem is that the banks are not operating in a capitalist system. These losses, had they been larger would again have been supported by taxpayer backed loans to help them (their bondholders, shareholders and management) through the resulting difficulties (TARP). In many of these cases, the loans have been repaid, but in others, we are still on the hook for billions. These hedging methods that JPMorgan Chase employed in this situation could have been much larger. It was only $2 billion this time. What about next time when there is a collapse of the Euro, or we go to war with Iran, or any other black swan that is lurking.

      Until we really operate in a capitalist market system and stop making private corporate losses public, banks and other "too big to fail" companies will continue to take risks knowing that they will be bailed out.

    5. Blair Franconia, NH says:

      The Volcker Rule should be done away with.

    6. J Brannigan says:

      Just because Jamie Dimon says They're not all stupid is certainly not a sentiment meant to ensure confidence in their capacity to learn and adjust their behaviors appropriately. after all this is not the first egregious WHOOPS! mistake JP Morgan has muddled through. They can brush it off easily by sacrificing a few well paid exec types. They go with parachutes no doubt. Even if Mr. Dimon was to go, it would only be a cosmetic change. He says it is not "systemic". Of course more Congressional oversight, even if it is from well paid for and well lobbied "Usual Suspects", would be useless. The financial system will continue AD Nauseum to self destruct because the people in charge are the problem. They set up the rules of the game and they referee themselves. Like the Pathological behavior: Repeating the same behavior while always expecting a different result!

    7. Mike, Wichita Falls says:

      You know the statists are just "licking their chops" on this one. If a company makes or loses too much money, they need to regulate it or make a new law to "protect the consumer". You see…it's all for our own good.

    8. P A Riley says:

      First, anyone with a reasonable grasp of basic risk management will tell you that a true "hedge" transaction cannot add risk to a transaction or portfolio. A "hedge" establishes a predetermined cost incurred to offset the larger cost of the risk that is hedged. Property / Casualty insurance is another form of a "hedge'. The insured incurs an upfront predetermined "cost"; the premium payment. In exchange the insurer assumes the cost of the risked hedged. But if the cost incurred to establish the hedge is larger than the cost of the risk being hedged or the real cost of the hedge cannot be determined with the required level of certainty, you do not have a hedge Nor do I buy the disingenuous staments by Mr. Damion about sloppiness, willful ignorance and carelessness. The reality. is that no matter how bright, diligent or conscientious someone engagdd in these transactions may be able these "hedging" transactions are highly leveraged and complex so No One what will happen. All we do know is that when the "music" stops, its the middle class that get the "bill".

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