Is JPMorgan blunder tip of the iceberg?

Monday, May 14th, 2012 By

London Whale

"The London Whale." JPMorgan's investments made of sand. Image: kgibson/Flickr/CC BY

In the wake of JPMorgan Chase’s admission last week of a $2 billion blunder, many analysts are saying Wall Street is taking huge risks again, gambling with stockholder money in the same way it did before the economy tanked. With so much at stake, Massachusetts Senate candidate Elizabeth Warren is calling for JPMorgan CEO Jamie Dimon’s head.

‘London Whale’

JPMorgan‘s losing trades were carried out by its chief investment office in London, which has since been dubbed the “London Whale.” The trades involved credit default swaps, essentially the same kinds of instruments that brought down AIG in 2008.

Who to be the watchdog?

Dimon has been one of the most vocal supporters of self-regulation for financial institutions. Massachusetts Senate hopeful Elizabeth Warren, who set up the new regulating Consumer Financial Protection Bureau, pointed out the irony of Dimon’s stand Monday on CBS’s “This Morning”:

“Jamie Dimon has been the one who has led the charge in order to say, ‘nope, no more regulation, fight back against regulation, call the regulation un-American, try to resist, try to put loopholes into regulation, hire an army of lobbyists.’ This has really got to stop.”

Call for Dimon’s head

Warren also called for Dimon’s resignation:

“I’d like to see some real accountability here. I’d like to see Jamie Dimon, for example, resign from his position as a Class A director of the New York Federal Reserve Bank.”

Hindsight is $2 billion

Dimon himself admitted Sunday, in an interview with David Gregory on NBC’s “Meet the Press,” that JPMorgan had taken too great a gamble:

“In hindsight, we took far too much risk. The strategy we had was barely vetted. It was barely monitored. It should never have happened.”

A history of risk

However, JPMorgan has made a habit of risky investments in recent memory. Janet Tavakoli, president of Tavakoli Structured Finance, said:

“For some time, JPMorgan has been taking huge positions in commodities, currencies and credit derivatives. It looks to me this was being run as a prop desk, not to hedge the firm’s overall risk.”

Tip of the iceberg?

Many are saying JPMorgan’s misstep can only be the tip of the iceberg, and that the financial services industry, already bailed out by tax-payers for its failed taste for risks, is up to its old games.

Mike Mayo, a bank analyst at Credit Agricole Securities, told CNN:

“If this type of problem can happen at JPMorgan Chase, which has better risk management, it can happen over time at others with weaker infrastructures, such as Citigroup and Bank of America.”

Mayo also warned that JPMorgan’s blunder is not an anomaly:

“We’ve seen it before and we’ll see it again.”

The end result of the banking industry’s short memory could be another hit to an already badly wounded economy. That is something none of us can afford.

Sources

Politico
CBS
CNN

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