- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -
JPMorgan Chase Losses: No Reason for More Regulation
Posted By David C. John On May 11, 2012 @ 5:19 pm In Featured | Comments Disabled
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:
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.”
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.
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.
Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2012/05/11/jpmorgan-chase-losses-no-reason-for-more-regulation/
URLs in this post:
 Image: http://blog.heritage.org/wp-content/uploads/JP-morgan.jpg
 Volcker Rule: http://www.heritage.org/research/reports/2010/02/the-volcker-rule-not-the-solution-to-reducing-financial-risk
 said: http://i.mktw.net/_newsimages/pdf/jpm-conference-call.pdf
 very complex: http://blogs.reuters.com/felix-salmon/2012/05/10/jp-morgan-when-basis-trades-blow-up
 to 8.2 percent: http://www.marketwatch.com/story/jp-morgan-reveals-surprise-2-billion-trade-loss-2012-05-10
 says: http://www.marketwatch.com/story/jp-morgan-shares-slump-after-2b-trading-loss-2012-05-11
Copyright © 2011 The Heritage Foundation. All rights reserved.