Losses as High as 8 Billion

JPMorgan’s shares are down about 20% since the bank announced a $2 billion loss from derivatives trades on May 10

JPMorgan Chase’s originally reported $2 billion loss from bad bets on derivatives has not only continued to climb, but recent market gyrations have exacerbated the situation. Since JPMorgan CEO Jamie Dimon first announced the losing trades on May 10, JPMorgan has lost roughly $30 billion of its market value. Shares of JPMorgan have dropped nearly 20% during that same time period.

As the overall market has worsened, it has cost JPMorgan even more to sell protection against possible bankruptcies on corporate bonds. Over the past two weeks, the cost of providing that protection has jumped by about $1 billion for every $100 billion of protection, which could put JPMorgan’s losses as high as $8 billion. Just a few weeks ago, sources were telling CNNMoney that the losses could be in the $6 billion to $7 billion range.

JPMorgan CEO Jamie Dimon, who is testifying before the Senate Finance Committee, recently said he wouldn’t provide a running tally to the public, making it unlikely to know the real extent of JPMorgan’s losses before the bank reports its second-quarter results in mid-July.

Lack of Risk Controls To Blame

Federal regulator Thomas Curry, Comptroller of the Currency, whose office had 65 on-site examiners at the bank when the losses occurred, blamed the losses from risky bets on “inadequate risk management. Janet Tavakoli, president of Tavakoli Structured Finance states that JPMorgan lacked risk controls:

The real issue here is lack of oversight, reasonable standards and risk control for which Dimon is answerable. It’s not about these particular trades.

It Could Get Worse Yet

One piece of good news for the bank, according to CNNMoney, is that hedge funds and other banks have slowed down their opposing bets – they bet heavily against the bank immediately after JPMorgan disclosed its bet on May 10. Now, several traders and fund managers said investors are in a wait and see mode, since JPMorgan is old news right now, and investors have moved on.

However, several market watchers warn if JPMorgan comes under pressure to unwind its trade, hedge funds may reverse direction and once again drive up those costs and the bank’s related losses.  As Janet Tavakoli, president of Tavakoli Structured Finance, put it:

The thing about derivatives is if you take a huge position, size becomes the problem. If people know you need to liquidate, it hurts you.

With The Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Federal Bureau of Investigation looking into JPMorgan’s trade, the end is not in sight. Stay tuned.

The trading errors that led to a more than $2 billion loss at JPMorgan Chase made national headlines. But what may not be immediately obvious is the impact this may have on the average bank customer.

5 Ways JPMorgan’s Massive Trading Loss Could Affect You:

An article by Money-Rates.com, “5 ways JPMorgan’s troubles may affect you” explains that JPMorgan’s loss could be yours too.

1. Lower Savings and Money Market Rates

When the lending or investment environment is strong enough for banks to put that money to profitable use, they try to attract deposits by offering higher interest rates on deposits. But this kind of news s a reminder of the weakness of the investment environment, and will make your bank less likely to do so.

2. Scaling Back Branches

Bank branches are already a target for bank cost-cutting, as shown by last year’s sale of 195 HSBC branches.  A $2 billion loss will put a damper on JPMorgan’s earnings, and the more earnings come under pressure, the more of this kind of cost-cutting you can expect.

3. Less Free Checking

Banks that are struggling through the investment environment try to raise revenues by charging for services that used to be free, such as checking accounts.

4. New Fees

Last year, Bank of America made an abortive attempt to implement a debit card fee and stirred up a storm of bad publicity, but banks continue to look for new types of fees they can charge, while raising traditional fees, such as checking account fees.

5. Regulatory Change

One positive effect might be to encourage stricter implementation of the Volcker Rule, which is designed to restrict the use of bank deposits for speculative investing, especially now that JPMorgan CEO Jamie Dimon and others who have been lobbying to water down the Volcker Rule have now lost much of their credibility.

Since the average customer has much to lose from high-stakes bank investing, rules to separate such speculative activity from traditional banking operations would benefit customers who depend on products like checking and savings accounts. The Volcker Rule doesn’t go far enough toward reinstating the provisions of the recent Glass Steagall Act and other anti-speculative legislation that the big bank CEOs lobbied Washington to dismantle. Failure to regulate derivatives was another cause of the recent mortgage crisis, whose timeline is shown here.


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