Perspective: JPMorgan’s big losses

May 15, 2012

JPMorgan Chase’s surprise $2 Billion loss is exactly what’s not supposed to happen anymore, but we are not surprised. Before 2008, big Wall Street banks had a great deal going with the American people. If the banks bet big and won, their employees were paid handsomely; if they bet big and lost, well then, American taxpayers were on the hook. The Volcker Rule, part of the sweeping Dodd-Frank bank reform measures that were passed in response to the financial crisis, was supposed to change that by taking the ability to make big, short-term bets on risky assets away from banks that are considered “too big to fail” and, therefore, implicitly backed by taxpayer money. However, the Volcker Rule won’t take effect for another two years, and this recent blunder by JPMorgan will be additional ammunition for bank critics who want to impose more regulation.

These big bets, though, tend to be really profitable. The highly skilled traders that banks can attract, coupled with their knowledge of the markets and technological prowess, means that banks’ trading desks can win more often than Main Street investors. Given that greed tends to rule (and greed is not always bad), it’s no surprise to us that JPMorgan found its way back into the business of betting its own money in a big way. These bets have been very profitable and, up until the surprise announcement, had been almost a bragging point for JPMorgan’s revered CEO Jamie Dimon.

But there is no return without risk, and the risk finally caught up with them. Dimon attributes the loss to “many errors, sloppiness and bad judgment.” He makes it sound as though taking risk doesn’t always lead to some unexpected losses, and if they could have had “more control” over the risk they were taking, the losses wouldn’t have occurred. That’s just not true. The lesson here is that when big bets are taken, both big gains and big losses are possible, regardless of how good you are at managing risk.

 

Wealth Enhancement Group

 

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. To determine which investment(s) may be appropriate for you, consult with your financial advisory prior to investing.