Mega-bank JPMorgan Chase apparently made ′egregious mistakes′ according to CEO Jamie Dimon who spoke yesterday in a conference call explaining a $2 Billion dollar loss. A hedge fund trade in ′synthetic derivatives′ some six weeks ago is the reason for the loss, which Dimon admits ″could easily get worse.″ Derivatives, as we all know, are essentially side-bets on the market. A synthetic derivative is a side bet on something you technically do not own or possess. News from Europe are pointing the finger of blame on a single trader in the UK, known as ′the London whale′, who may have been trying to manipulate a $10 Trillion dollar market with his/her trades. As news of this broke out late Thursday after the markets on Wall Street closed, overseas markets responded quickly, with JPMorgan-Chase stock prices falling 6%. Some are calling this a clear example of why the Volcker Rule is needed.
That Dimon was quick to own-up to the JPM problem is telling of the new attitude and fear on Wall Street. He said during the conference call that JPMorgan will unwind the synthetic credit products and essentially eat the losses, even it it hurts JPM′s next quarterly report or two. The situation returns the focus back on the concept of ′too-big-to-fail.′ A variety of scenarios can easily be calculated which question the soundness of our banking system, now more than three years after the Crash of 2008. Many economists and economic pundits, such as myself, have been voicing concerns that there has been no real progress in resolving much of the toxic assets which still remain on the books of the ′mega-banks′ like JPMorgan.
If the news from late Thursday were not bad enough, other news from Europe sours the pool. The newly elected Socialist president of France, Francois Hollande is now threatening U.S. companies like General Motors to not lay-off French workers. He is also now suggesting that the economic woes of France may be far worse than previously thought. We have seen this movie before when there was a change in government in Greece. Speaking of Greece, the new Parliament has yet to form a new government, and all indications are now that there will be another round of elections soon. But already it is becoming more apparent that any deals for fiscal responsibility through austerity may be dead on arrival.
So the markets are all down today as the impact of CEO Jamie Dimon and JPMorgan-Chase losing $2 Billion dollars in the last 6 weeks sinks in with investors. Thanks to a synthetic derivative hedge fund trade gone bad, the mega-bank has made ′egregious mistakes′ and could being facing two or more fiscal quarters of negative numbers. The Volcker Rule probably would not have prevented the problem. But do not worry. Goldman Sachs says that JPM is a ′BUY′! Yeah, right! Like I believe them, too…, NOT!