On April 9th we reported that hedge funds and other serious investors were falling victim to a trader in London who was making huge bets with JP Morgan Chase’s (JPM) massive chest of money. Although this menacing trader was just one man, Bruno Iksil (better known as “Voldemort” or “The London Whale” by his market peers for his ruthless market domination) the bank claimed that his positions were just conservative hedging techniques not intended to make the bank profits, but instead to protect the bank if other investments go bad. The trader’s positions were mainly in credit default swaps (CDS), which are financial derivatives that allow the bank to collect a payment if other investments fail, like an insurance policy. JPM CEO Jamie Dimon had an emergency conference call today to explain up to $2 billion in trading losses that Iksil’s Chief Investment Office (Slytherin house) has incurred in the past several weeks. News of this enormous loss and subsequent tail-between-the-legs explanation by the CEO has sent JPM’s stock tumbling over 5% after the market closed.
Not only is this a swelling black eye to the normally untouchable “King of US Banks,” but the news will be eaten up by proponents of the Volcker Rule as evidence that large banks should not be able to bet their own money for extra profits, or “proprietary trade.” The Volcker Rule was part of the 2010 Dodd-Frank financial regulation bill and is hotly contested by many in the finance community since it handicaps a bank’s ability to make profits. It rules that big banks should not be able to make profit-seeking market investments with their own money, because taxpayer money will have to bail them out if things head south. The sheer enormity of the loss reported by Dimon today hurts JPM’s claim that the positions taken by the bank were intended to hedge (hedging is completely legal and prudent for a bank) since buying “insurance policies” shouldn’t lead to ridiculous losses. JPM seems to be caught red-handed and they know it looks bad – for Mr. Dimon, an outspoken opponent of the Volcker Rule, the timing of this $2 billion “egregious error” could not be worse and this incident will play right into the hands of the pro-Volcker rule camp.
On a very official show of hands, not a single guy here at MarketSnacks would like to be the London Whale right now or anyone else about to feel the iron fist of Jamie Dimon. You can imagine he will come out swinging against his team of traders who, in his own words, had “flawed” strategies, “executed poorly,” and exhibited “sloppiness,” “bad judgement,” and “stupidity”… tell us how you really feel, Mr. Dimon.
Check out the Street’s JPMorgan Reveals $2 Billion Derivatives Loss