Three weeks after CEO Jamie Dimon said “tempest in a teapot” when asked about the company’s renewed interest in credit derivative swaps, J.P. Morgan revealed that such trades resulted in over $2 billion in losses. The market immediately punished J.P. Morgan, by wiping out nearly 10% of its stock value in a single day.
Two facts make this loss all the more stark. First is that J.P. Morgan isn’t just an investment house. In the latter twentieth century J.P. Morgan benefited from deregulation, which allowed almost unlimited horizontal integration within the financial industry. As a result, J.P. Morgan is now the largest bank in the U.S.
“Too big to fail” almost doesn’t do it justice.
Secondly, we now know the lengths to which Dimon and company went in order to weaken the so-called “Volcker Rule,” which is designed to limit the amount of its own capital a bank can risk. It’s clear now that loopholes in the Volcker Rule, which J.P. Morgan lobbied heavily for, permitted precisely the sort of trading that just cost the company $2 billion.
There’s one hopeful glimmer, though. Perhaps heeding the Golden Rule of Public Relations (i.e., own up to your mistakes, immediately), Jamie Dimon is loudly and publicly admitting the company’s error.
“We were dead wrong,” he said on Meet the Press. “We made a terrible, egregious mistake. There’s almost no excuse for it.”
What comes next? Probably a lot less lobbying to weaken financial regulation. J.P. Morgan and others in the industry recognize this incident does far more to damage their credibility than it could ever do to their bottom line. So they probably won’t want to be seen jockeying for more loopholes, at least not in the short term.
And maybe that’ll lead to the ideal outcome: a financial industry governed by rules that quash recklessness while still encouraging growth. That is, after all, exactly what financial regulations are supposed to do.
The C4:
- J.P. Morgan announced last week that credit-derivative trading has cost the company more than $2 billion over the course of about six weeks.
- The day after the announcement, shares in JP Morgan lost nearly 10% of their value.
- CEO Jamie Dimon quickly admitted culpability and promised a thorough investigation.
- Only a robust system of financial checks and balances, that encourages growth through responsible business practices, can prevent those “too big to fail” from dragging us back into the nightmare of 2008.
