J.P. Morgan Chase $2 Billion Loss Raises Fears of Government Actions

Last week the news of the $2 billion trading loss suffered by J.P.Morgan Chase hit the country like another nasty slap in the face to a nation already facing an economic downturn that is the worst one in a lifetime.

The $2 billion bandied about by the media is not likely the end of that loss, either. This was only the first round of losses due to these bad derivatives trades and more losses are likely yet to come.

For some insight on this mess I exchanged some emails with Sandra Smith of Fox Business Network.

Smith said that the bank “characterized the trades as legitimate hedges of risks elsewhere in the banking group that went awry,” but this understated explanation won’t likely suffice for those out for the heads of those working in our financial sector.

“Legitimate hedges” or not, the bank’s own internal management and risk controls failed miserably.

Smith also noted that whatever is coming, this news has already hurt the banking giant.

“J.P. Morgan shares plunged 9 percent in Friday’s trading session and brought shares of other financial stocks down with it as worries spread of wider repercussions in the financial system,” she said.

That isn’t all.

Late Friday, J.P. Morgan received a one-notch downgrade by ratings firm Fitch. J.P. Morgan CEO Jamie Dimon and his firm have long been seen as pillars of strength in the financial community, and in a way, this news serves a big blow to Dimon’s credibility and the track record of his firm.

Another concern here, at least for the bank, might be in litigation. There were over 800 million shares of the bank traded between April 13 and the bank’s disclosure on May 10. Could this leave the bank open to civil liability? Some sources are saying yes.

Smith notes there is also other trouble brewing outside the J.P. Morgan boardrooms.

Now, as the SEC investigates J.P. Morgan’s accounting practices following the loss and lawmakers call for more regulation in the banking industry, there is a growing fear the government could use this loss as a reason to bring on even more regulation, restricting business in the financial community.

This is likely the biggest fear in the whole of the financial sector. The Obama administration has never made any bones about the fact that the President is ever on the lookout for more ways to regulate the financial and banking sector. He’s spent every year of his presidency so far attempting to get his hands around the neck of that portion of our economy and now with this news many fear he has yet one more excuse to do so. And it’s an election year in a political climate where Obama’s poor handling of the economy gives him an extra incentive to blames others and Wall Street is a prime target.

And what of Jamie Dimon? Smith says his fate has yet to be determined.

So far, the market isn’t calling for Dimon’s head as a result of the trading loss, but there are and will be questions about what happened leading up to the losses, and the extend to which Dimon was briefed on the trades. This story is far from over.

Far from over, indeed. On Friday and Saturday calls for more regulations and oversight of Wall Street reached yet another crescendo.

The first of those to leave the bank already happened today. The bank’s chief investment officer, Ina Drew, “retired” today after 30 years at the company.

The long knives are out. But for a bit of perspective, while the loss is huge, J.P. Morgan Chase won’t go bankrupt over it. The Wall Street Journal reports that the bank made quite a lot more than it lost earning $5.38 billion in the first quarter. In that same report Dimon noted that the bank made at least “$4 billion after-tax this quarter.”

For one other bit of perspective, the U.S. Post Office lost over $3 billion in its most recent quarter and politicians don’t seem too worried about that!

You ask me, I’d bet that more government interference could be more harmful in the long run than this loss could ever be.

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  • herddog505

    Wait… I thought that the wonderful financial law that recently passed that Barry and the dems were so proud of was supposed to stop this sort of thing happening.


    • Jay

      If you mean the JOBS act, that thing is so abysmal as to allow fraud for 5 years for “small businesses”.

      And this may be the first time that you’re right that this is the fault of the Dems.  They got railroaded into supporting this after the O. Administration stated support for this bill.

      Of course, the Republicans also wanted this but good gracious is it a bad piece of legislation…

      • herddog505

        Actually, I referred to Dodd-Frank, aka Wall Street Reform and Consumer Protection Act (snort!).

        But I must echo Warner Todd Huston: the USPS lost more money than J.P. Morgan – ALL of it taxpayer money – and that seems to trouble libs not one whit.  It may be that, if Uncle Sugar would get the hell out of giving money to banks / businesses that are “too big to fail”, we wouldn’t have to worry quite so much when they DO have trouble.

        • Excellent points!

          • Guest

            hahahaha, that figures….

        • Jay

          the USPS lost more money than J.P. Morgan – ALL of it taxpayer money – and that seems to trouble libs not one whit.

          Wasn’t the entire thing with the USPS the fact that they had to fund their retirement plans by a ridiculous amount that is not even based in reality?  Given that they’re the main source of jobs for vets, it’s rather sad that they’re being destroyed..

          It may be that, if Uncle Sugar would get the hell out of giving money to banks / businesses that are “too big to fail”, we wouldn’t have to worry quite so much when they DO have trouble.

          That we agree.  They should start arresting some of the people at the top and holding them for failing their companies.

        • Guest

          “But I must echo Warner Todd Huston: the USPS lost more money than J.P. Morgan – ALL of it taxpayer money”

          Nope. That’s more right wing bullshit and lies.

          First off, the USPS is not run by the US government

          And second, it’s not costing taxpayers much at all.

          The USPS does get some taxpayer support. Around $96 million is budgeted annually by Congress for the “Postal Service Fund.” These funds are used to compensate USPS for postage-free mailing for all legally blind persons and for mail-in election ballots sent from US citizens living overseas. A portion of the funds also pays USPS for providing address information to state and local child support enforcement agencies.

          Under federal law, only the Postal Service can handle or charge postage for handling letters. Despite this virtual monopoly worth some $45 billion a year, the law does not require that the Postal Service make a profit — only break even. Still, the US Postal Service has averaged a profit of over $1 billion per year in each of the last five years. Yet, Postal Service officials argue that they must continue to raise postage at regular intervals in order make up for the increased use of email.

          And Jay (below) is correct. Were it not for the Congressional mandate that the USPS fully-fund its pension obligations, something that is absolutely unheard of anywhere else in the U.S.

          Surely Jay and I are not the only people who read this blog who can recognize this kind of BULLSHIT when we see it, but why is it this kind of BULLSHIT goes completely unchallenged by the conservative readers on this blog.?

          Do you not know the truth, or just not care that its BULLSHIT?

          It’s an amazing display of misinformation and lies, and I guess it’s just what you come to expect and aren’t bothered by the fact that its BULLSHIT?


          • herddog505

            Quite aside from the repeated cries of BULLSHIT…

            From November, 2010:

            It’s the biggest civilian employer after Walmart, but apparently the U.S. Postal Service is not too big to fail. Today, the Postal Service said that without Congressional action, it could be bankrupt by the end of next year.
            “We will continue our relentless efforts to innovate and improve efficiency. However, the need for changes to legislation, regulations and labor contracts has never been more obvious,” Postal Service Chief Financial Officer Joe Corbett said in a statement.

            The venerated 235-year-old institution is deep in the red. It lost $8.5 billion last year, shedding 105,000 jobs. In the next ten years, the agency could lose a whopping $238 billion.


            From a year ago:

            Facing a projected $6.4 billion loss this year, the Postal Service is expected to hit its own debt ceiling by the end of this fiscal year on Sept. 30.

            The federal government will then have to choose between letting the agency default on its massive pension obligations or bailing it out to the tune of more than $50 billion.


            The USPS has stayed afloat by borrowing $12 billion from the U.S. Treasury. This year it will reach its statutory debt limit. After that, insolvency looms.

            On Mar. 2, Postmaster General Patrick R. Donahoe warned Congress that his agency would default on $5.5 billion of health-care costs set aside for its future retirees scheduled for payment on Sept. 30 unless the government comes to the rescue. “At the end of the year, we are out of cash,” Donahoe said. He noted that the unusual requirement was enacted five years ago by Congress before mail started to disappear.


            From last month:

            The Senate offered a lifeline to the nearly bankrupt U.S. Postal Service on Wednesday, voting to give the struggling agency an $11 billion cash infusion while delaying controversial decisions on closing post offices and ending Saturday delivery.

            By a 62-37 vote, senators approved a measure which had divided mostly along rural-urban lines. Over the past several weeks, the bill was modified more than a dozen times, adding new restrictions on closings and cuts to service that rural-state senators said would hurt their communities the most.
            The issue now goes to the House, which has yet to consider a separate version of the bill.

            “The Postal Service is an iconic American institution that still delivers 500 million pieces of mail a day and sustains 8 million jobs,” said Sen. Joe Lieberman, I-Conn., a bill co-sponsor. “This legislation will change the USPS so it can stay alive throughout the 21st century.”

            The mail agency, however, criticized the measure, saying it fell far short in stemming financial losses.Postmaster General Patrick Donahoe said if the bill became law, he would have to return to Congress in a few years to get emergency help.


            From last week:

            The U.S. Postal Service said its loss widened to $3.2 billion in the first three months of 2012 and repeated on Thursday its warning that it will likely default on payments to the federal government unless Congress passes legislation offering some relief. [all emphases mine – hd505]


            Yep, an organization in the pink.  Yessir, TOTALLY solvent.  Profitable.  A model for the rest of the country – nay, the WORLD – to admire and emulate.  NOT!

            But don’t worry too much about those nasty ol’ pensions (gosh, WHAT a burden it must be to actually fund pensions instead of – as so many other government agencies around the country have – just ignoring them and hoping that the taxpayers would pony up when the time comes):

            From last June:

            The financially troubled Postal Service is suspending its employer contribution to the Federal Employee Retirement System.

            The agency said Wednesday it is acting to conserve cash as it continues to lose money. It was $8 billion in the red last year because of the combined effects of the recession and the switch of much mail business to the Internet. It faces the possibility of running short of money by the end of this fiscal year in September.


            Uncle Sugar has a monopoly worth $45 billion per year and STILL managed to lose his a**.  And we trust these clowns to run our health care system???

            Oh, should we arrest the Postmaster General?  What about his boss?  I can supply the address for the arrest warrant:

            1600 Pennsylvania Ave. NW
            Washington, DC

          • Guest

            And your statement that the USPS lost billions of taxpayer money is BULLSHIT.

            “But I must echo Warner Todd Huston: the USPS lost more money than J.P. Morgan – ALL of it taxpayer money”

            Nope. That’s BULLSHIT. Don’t let mr cut and paste fool you with his voluminous amount of bullshit trying to cover up his misinformation.

            The USPS has not lost billions in taxpayer money as Herdpuppy stated.

          • herddog505


          • Jay

            Herddog, you’re focusing on the losses, but you’re not going into the nit and gritty that explains these losses.  The losses are not justified when they have to prefund retiree health benefits.  Again, the entire situation wouldn’t have happened had it not been for a mandate caused by Congress that caused these losses.

          • herddog505

            Well, I think that the USPS’s semi-official position – which makes a great deal of sense – is that the losses are basically due to the increased use by Americans of e-mail, texting, and other electronic forms of communication that don’t pass through the post office; I believe that the Postal Service has had something like a 20% drop in volume over the past few years.  That’s a LOT of stamps that people WEREN’T buying.

            But the WHY of the USPS losing money isn’t the point here: it’s that it IS losing money, contrary to what Grumpy asserts.

          • And the taxpayers are indeed being stuck with the bill.

  • GarandFan

    Wasn’t Jamie Dimon a big Obama supporter in 2008?

    Oh, and the problem appears to be in “derivatives”. Where have we heard that word before?

  • “Just Another Day in Paradise.”  Get used to it.  This isn’t going to stop because we will be funding the fix for the big boys who donate to the bigger boys.  

    • ackwired

      Exactly!  Any “reforms” resulting from the housing collapse have been completely diluted or eliminated by the Wall Street bankers lobbyists.  There has been no reform.  The banks own the legislators.  David Stockman is predicting a bond market meltdown resulting from the excessive abritration of the overnight interest rate vs. the long term rate, and the leverage necessary to conduct the trades. 

      Many thought that the housing crash and near meltdown of the world economy would have caught people’s attention.  It looks like it will take another world wide depression before any meaningful reform can be put in place.

      • herddog505

        What “reform”?  The people who have written every “reform” bill since the Great Depression – hell, since the FED was created – have been all of the same stripe.  They haven’t gotten it right so far; what makes you think it’s possible to get it “right”?

        Indeed, what is “right”?  If you imagine that we can have a banking system that is completely free of risk without destroying the modern business system right along with it, then I’d say you’re dreaming.  Bankers make money by making loans.  Loans, by their very nature, entail some risk.  The banker may underestimate the risk or the adverse affect may happen, resulting in loss of some or all of the money lent.

        We’re sturnned because JP Morgan lost such a huge sum.  The obvious reason (missed by so many “smart” reporters) is that JP Morgan HANDLES such huge sums every day.  While the loss is by no means trivial, it doesn’t seem to be one that will bankrupt them.

        Given the lousy record of hacks, stooges and outright fools like Frank, Dodd, Geithner, et al, I’d sooner hand the banking system over to the mafia: at least they clearly understand how money is made.

        • ackwired

          Some basics.  Fraud should be illegal.  Banks should not be allowed to speculate with their deposior’s money.  Speculation in banking should be limited to investment banks using their own money.  Wall Street banks should not be allowed to be so large that their fallure would threaten the world economy.

          Banks lobby agains these basic reforms and R’s openly oppose them.  Maybe after the complete collapse of the world economy, we can take a realistic look at it.

  • GarandFan

    I guess Dimon is an Obama supporter; Barry gave a press statement:

     “JPMorgan is one of the best managed banks there is. Jamie Dimon,
    the head of it, is one of the smartest bankers we got and they still
    lost $2 billion and counting,” the president said. “We don’t know all
    the details. It’s going to be investigated, but this is why we passed Wall Street reform.”

    It’s been reported that Dimon hasn’t been contributing to Barry’s campaign that much, this time around.  Guess he’d better get his checkbook out.

    • herddog505

      [T]his is why we passed Wall Street reform.

      To lose two BILLION dollars???

      I agree with GarandFan: Dimon had better be getting his checkbook out.

  • MichaelLaprarie

    Fascinating fallout from this story …

    “One of the best banks, one of the smartest bankers” LOL You’d think after all the FUBAR’s with the Stimulus and “green energy,” Obama might be a bit less hesitant to put his faith wholeheartedly in the “best and brightest.”  But you’d be wrong.

    Dodd-Frank was a 2000 page monstrosity that allowed the government to butt in and control numerous areas of finance that had nothing to do with the mortgage meltdown.  But critics have long complained that it actually did very little to stop the kind of abuses we saw with mortgage instrument derivatives trading.  Are we now seeing evidence of this?

    Damn right the government is worried – now that Big Banking has been ordained “Too Big To Fail” and fully guaranteed with government bailouts.  Too bad House and Senate Dems basically allowed Big Banking lobbyists to write their “reform” bill.  What they got was a bloated piece of crap that protected Big Banking (including their shady trading and accounting gimmicks) while making it difficult for others to make money in the finance sector.

    You know the Obama campaign is working feverishly right now to find a way to blame this on Republicans.  But Dodd-Frank was a 100% Democrat production.  Sorry guys.

    • herddog505

      Blind faith in the “best and brightest” has been a democrat hallmark since the evil days of McNamara, a guy who could put up a lot of nice numbers and fancy graphs but who otherwise couldn’t find his a** with both hands and a set of instructions.

      Look, I’m a big believer in meritocracy, in finding the best man for the job. The problem with democrats is that their criteria for “best man” is… um… a little lacking.  Consider Steve Rattner, the man handpicked by Barry to oversee the restructuring of the auto industry: the man had (IIRC) never even been inside a car plant.  His credentials, the bits on his resume that marked him out as “best and brightest”, were basically serving as a political hack for Barry’s campaign.  Ditto Sototmayor and Kagan: there were far more qualified legal minds out there (compare their CV’s with that of Mr. Justice Stevens, for example), but they were hacks and that made them “best and brightest”.

      • “Best and Brightest” always loses on the D ticket to political othodoxy.

  • Hugh_G

    I say thank god to your headline. It should also include some criminal investigations of these bastards.

  • jb

    Wouldn’t the fact that all of Chase’s internal controls failed, be a good argument that we actually do need to regulate them and other banks more?

    Not all regulations are bad. Just saying. For example, Glass-Steagall. No huge financial collapse for the decades it’s in place – remove it, and a collapse the size of Black Sunday occurs within 8 years.