JPMorgan's loss renews push for Wall Street reform
JPMorgan Chase chief executive Jamie Dimon’s announcement late last week that the bank has sustained a loss up to $3 billion in derivatives trading over the past six weeks has had serious repercussions for the firm. On Monday, the bank released a statement that the firm’s chief investment officer Ina Drew, who was in charge of the group designed to hedge against risk, would be retiring. The bank’s stock has sunk by some 11% since the loss was disclosed last week, and US fund manager Saratoga Capital Management filed a class-action lawsuit against JPMorgan Chase on Wednesday, accusing the bank of misleading shareholders and investors.
According to SIIA Council Member Joseph Tan, "JPMorgan, perception-wise, was seen as one of the better managed banks in the past few years. Post-2008, they emerged from the crisis relatively unscathed, and were also relatively unaffected by the Eurozone. So it's certainly a surprise for the market."
He added, "There will be immediate downward pressure to derivatives and key assets globally. We have political pressure as well, with leadership questions in Europe. The mood in the present market is soft."
"What are the implications? I don't think this is system wide, it won't lead to systemic failure. It's a firm-specific incident," said Joseph Tan. "But it could warrant further regulatory supervision from the federal reserve. Banks will be further under the microscope."
The US Federal Reserve and the US National Bank Agency have said that they will be investigating the losses, and will also be evaluating risk management strategies and practices at other large banks to validate their understanding of risk levels and controls. Moody’s Investors Service will, too, be reviewing JPMorgan’s case, and the business models and risk management models of other banks to ensure that a similar situation would not occur again.
Moody’s last announced in February that JPMorgan’s long-term rating may be cut by two notches. Last Friday, Fitch Ratings cut JPMorgan’s credit ratings by one notch to A-plus.
US President Barack Obama said that JPMorgan’s situation is the reason why the state “passed the Wall Street reform”. He added that the fact that bank lost $2 billion or more under the leadership of Mr. Dimon, whom he considers “one of the smartest bankers”, solidifies his case for financial reform. However, while the reform was passed two years ago, most of its regulations have yet to be implemented.
The US Congress' Senate Banking Committee has plans to hold hearings in the coming weeks on the Wall Street reform, during which it will also look into the trading losses at JPMorgan from a regulatory angle. There have been accusations that JPMorgan would have violated the Volcker rule of the Wall Street reform, of which Mr. Dimon is known to be outspokenly against. The rule forbids making speculative bets with firm money although it exempts trades done to hedge risk. Although the rule will only be implemented this July, a few senators have said that the losses could have been prevented if the rule had already been in place.
Mr. Dimon is expected to speak to investors and shareholders today over the fallout. There are expected to be more resignations following Ms. Drew’s, with Mr. Dimon’s position itself on the line.
Analysis: JPMorgan loss could spark more bank downgrades: analyst [Reuters, 14 May 2012]
Report: Obama weighs in on JPMorgan loss [CNN, 14 May 2012]
Report: JPMorgan makes Wall Street regulation a campaign issue again [CNN, 14 May 2012]