JP Morgan's "Whale" of a trade

[Jan Klimkowski]

So, JP Morgan, the very heart of global finance, the Big Beast of WASP capitalism, is in the hole big time:

JP Morgan chief reveals $2bn trading loss caused by 'sloppiness'

Chief executive Jamie Dimon issues apology to stock analysts over company's 'embarrassing' errors and 'bad judgment'

Jill Treanor and agencies

guardian.co.uk, Friday 11 May 2012 07.50 BST

JP Morgan Chase, America's biggest bank, issued a surprise trading update after US markets had shut on Thursday, admitting it had incurred $2bn (£1.2bn) of trading losses in the past six weeks.

Jamie Dimon, chief executive of the bank which was praised for its handling of the 2008 banking crisis, cited "sloppiness" "bad judgment" and "many errors".

During a hastily arranged conference call, he described the mistakes as "egregious". The bank expects to take an additional $1bn in losses in the second quarter and said the losses occurred in its chief investment office, a part of the bank intended to manage risks. The trading position causing the losses involved credit default swaps, which insure against losses when companies or governments collapse.

In after-hours trading, JP Morgan Chase shares fell almost 7% and dragged other banks such as Citigroup and Bank of America lower.

Dimon said: "The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought. There were many errors, sloppiness and bad judgment."

The trading loss is an embarrassment for a bank that came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.

The loss came in a portfolio of the complex financial instruments known as derivatives, and in a division of JP Morgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

Bloomberg reported in April that a single JP Morgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in the $10tn market.

Dimon said the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader. Dimon also said the company had "acted too defensively," and should have looked into the division more closely.

The Wall Street Journal reported last month that JPMorgan had invested heavily in an index of credit-default swaps, insurance-like products that protect against default by bond issuers.

Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss. The losses came in part because financial markets have been far more volatile since the end of March.

Partly because of the $2bn trading loss, JPMorgan said it expected a loss of $800m this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200m.

The loss is expected to hurt JPMorgan's overall earnings for the second quarter, which ends on 30 June. Dimon apologised for the losses, which he said occurred since the first quarter, which ended 31 March.

"We will admit it, we will learn from it, we will fix it, and we will move on," he said.

Among other bank stocks, Citigroup was down 3.3% in after-hours trading, Bank of America was down 2.9%, Morgan Stanley was down 2.4%, and Goldman Sachs was down 2.2%.

So far, the official story is tedious and familiar.

Then Market Ticker's Denninger cuts to the chase by identifying that Morgan's ridiculous "whale" of a trading position is still live

Why The JPM Trade Matters

We've all heard about the JP Morgan "rogue" trade by now -- the "hedge" that was not really a hedge.

But what's not been discussed are two aspects of this -- that this is a "slow burn" sort of story, and second, how it came to happen in the first place.

Let's deal with the first -- the "whale" trade was first reported in April. It "simmered" until it blew up into a huge mess yesterday.

The problem is the position is still on and now everyone knows that JP Morgan has this position and it's going against them. Expect people to press into this.

And draws the obvious conclusion about unregulated market capitalism:

But the real problem is found in how the bank got this position on and funded it in the first place. That's a problem.

There is no solution to this issue found in the current paradigm for banking. As I have often put forward the only fix is to enforce a "One Dollar of Capital" standard for all banks that want to do business in the United States, demanding that any institution with banking exposure here adhere to this rule.

We continue to see example after example that even after 2008 there is no regulatory supervision that matters over these firms. The only way to prevent bad behavior such as this is to make it unlawful and enforce the posting of the bank's capital against all unbacked positions, without exception.