What a surprise, that biggest fighter against financial regulation of them all, JPMorgan Chase accrued a $2 billion dollar loss:
The $2 billion loss came from a complicated trading strategy that involved derivatives, financial instruments that derive their value from the prices of securities and other assets. JPMorgan said the derivatives trades were part of a hedge, meaning they were set up to offset potential losses on the bank’s large holdings of bonds and loans.
That loss was caused by derivatives and credit default swaps and in part due to a Value at Risk model. This is the same type of model which was part of the financial crisis and has been warned about repeatedly for not being mathematically complex enough to base one's gambling debts on. No surprise a VaR model was behind the loss.
It produced large losses even without extreme movements in the derivatives markets or underlying bond markets.
JPMorgan likely structured the trade in such a way that effectively magnified losses. Specifically, the bank bought insurance against losses on corporate debt through credit derivatives that increase in value if the underlying creditworthiness of companies is perceived to have deteriorated. But JPMorgan stumbled when it tried to modify that trade by also making an opposite bet with credit derivatives.
JPMorgan Chase seems to be trying to create a scapegoat of the rogue trader meme, all the while fighting against the Volcker rule and any regulations on derivatives. Payback's a bitch. It seems if the Volcker rule was actually implemented JPMorgan would have been spared from, since their losses were based on derivative structures which violate the Volcker rule.
Dimon denied on a hastily convened conference call that the trading activity of the bank — which in part were bets on the corporate credit of an index of 125 companies — violated the Volcker Rule.
It's 2012 and one of the biggest banks fighting against financial regulation just tripped over the lack of financial regulation to a $2 billion loss. Yet, in spite of this humiliating debacle, JPMorgan Chase is denying making some of this bad math derivatives plain illegal would be good for them. Separating proprietary hedging, derivatives from commercial banking can't be done according to JPMorgan Chase. Is this not like the hubris of Lehman Brothers? The Financial Times:
JPMorgan said the mark-to-market losses came in the bank’s chief investment office, a unit set up to invest excess deposits, which has drawn controversy after hedge funds alleged it was taking big proprietary bets.
Proprietary trading is set to be banned in the US by the forthcoming “Volcker rule”
Paul Volcker just testified before the Senate Banking Committee on the lack of financial reform progress.
The greatest structural challenge facing the financial system is how to deal with the wide-spread impression – many would say conviction – that important institutions are deemed “too large or too interconnected” to fail. During the crisis, creditors – and to some extent stockholders – were in fact saved by injection of official capital and liquidity in the aggregate of trillions of dollars, reinforcing the prevailing attitudes.
Few will argue that the support was unwarranted given the severity of the crisis, and the danger of financial collapse in response to contagious fears, with the implication of intolerable pressures on the real economy. But there are real
consequences, behavioral consequences of the rescue effort. The expectation that taxpayers will help absorb potential losses can only reassure creditors that risks will be minimized and help induce risk-taking on the assumption that losses will be socialized, with the potential gains all private. Understandably the body politic feels aggrieved and wants serious reforms.
The FDIC chair gave a speech which outlines their plan to liquidate large banks that have failed, which literally keeps alive the divisions and subsidiaries, and just kills the parent company and wipes out the shareholders. It is 2012, going on 5 years from the financial crisis and this is where we are with financial reform, studies, delays and speeches.
Despite bringing the globe to it's knees and losing large amounts of money, nothing really wakes up the Banksters. Of course bail outs and free money just keep the system going. Hello Bankster folks, regulation just might be good for you and profitable too!