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Friday, 11 May 2012

JPM make the case for Glass Steagall

The content and tone of JP Morgan chief Jamie Dimon’s telephone call to analysts explaining JP Morgan Chase’s regulatory filing to the Securities and Exchange Commission reporting a $2 billion loss in derivative trading demonstrates that the true cost to the bank should be measured in ideational and reputational terms.

The trading loss was an “egregious” error, the result of ‘self-inflicted’ mistakes that ‘violate our own standards and principles’ and which “plays right into the hands of a whole bunch of pundits out there,” he conceded.

The reputational damage is magnified by the fact that the losses reflected poor risk management within what the firm terms its Chief Investment Office. Buried within the filing (page 9), the firm notes that the “CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed.”

The frank admission of “sloppiness and bad judgement,” and determination that the firm would “admit it, we will learn from it, we will fix it, and we will move on” was an exercise in damage limitation.

Or in other words, banks that take government guaranteed deposits cannot be trusted to trade the funds they hold. If JPM, source of Value at Risk and the credit swap can mess up to the tune of $2 billion, what are the chances of the 1st Investment Bank of Mudville not making the same mistake?  It is hard to see a $2 billion loss arising on a portfolio of secured loans to medium sized industrials.  At least, not as an "egregious error" that pops up overnight.

Meanwhile, JPM directors have effectively overstated prior trading profits by $2billion and trousered the ensuing bonuses and LTIP payouts.

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