Friday, May 11, 2012

$2 billion trading loss seen as another black eye for financial services industry; 'doesn't reflect well'


Without transparency it is always a bet, like the the toss of a coin. Aivars Lode

JPMorgan fluff could tar advice industry

By Mark Schoeff Jr.

May 11, 2012 3:01 pm ET
JPMorgan Chase

Faith in Wall Street diminished further following a $2 billion loss by JPMorgan Chase & Co. on a derivatives bet – a situation that has Washington Democrats calling for implementation of a strong regulation to prohibit such trading by banks.

“When a giant investment bank with lots of smart people can't figure out how to manage their own risks, it doesn't reflect well on the financial services industry in general,” said Michael Kitces, director of research at Pinnacle Advisory Group Inc., on the sidelines of the National Association of Personal Financial Advisors annual conference in Chicago. “It's unfortunate but true.”

On Thursday, JPMorgan chief executive Jamie Dimon said that the firm lost $2 billion by holding losing positions on synthetic credit securities and could face $1 billion more in losses over the next few months. Dimon blamed “sloppiness and bad judgment” for the “grievous mistakes” and “self-inflicted” wounds, according to a Bloomberg News report.

“The whole notion of re-establishing trust in the bailed-out financial services system took a hit [Thursday],” said Kurt Schacht, managing director of the CFA Institute. “We're a little stunned by it. It seems as if JPMorgan wanted to play it off as an honest mistake rather than engaging in precisely the types of behavior the Volker rule is trying to limit.”

JPMorgan's problems may end up benefiting investment advisers, according to one financial planner.

“The more that Wall Street slips up, the more people will look for the objective advice that RIAs provide,” said Sheryl Garrett, found of Garrett Planning Network Inc. “I don't wish ill on anyone, but Wall Street is dysfunctional. Average Americans see Wall Street and Main Street as very different. This does not look good for Wall Street.”

Mr. Dimon has been one of Wall Street's chief opponents of the so-called Volker rule, a provision of the Dodd-Frank financial reform law that would restrict proprietary trading by banks and other non-bank financial companies that are supervised by the Federal Reserve. Named after former Fed Chairman Paul Volker, the rule also would limit the financial institutions' relationships with hedge funds and private equity funds.

Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, said that JPMorgan's stumble undermines its criticism of the costs incurred by Dodd-Frank regulation. Mr. Frank said that the bank estimated they would be $400 million to $600 million.

“JPMorgan Chase, entirely without any help from the government, has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them,” Mr. Frank said in a statement on Friday. “The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today.”

Mr. Dimon has said that the JPMorgan will be able to cover the loss, according to published reports. There is no evidence that the massive losing bet on derivatives is destabilizing the financial markets.

But the incident has renewed calls by Democrats in Washington for the implementation of a muscular Volker rule. The 530-page proposal has generated 17,000 comments.

Regulators have warned that they probably will not meet the July 21 deadline for finalizing the regulation. The Federal Reserve recently gave banks a two-year window to come into compliance with the rule, whenever it is promulgated.

Sen. Jeff Merkley, D-Ore., a member of the Senate Banking Committee, said that JPMorgan's derivatives position was inappropriate for a bank whose deposits are federally insured.

“This really is a textbook illustration of why we need a strong Volker-rule firewall between traditional banking…and hedge fund-style investing,” Mr. Merkley told reporters on a Friday conference call.

In the same briefing, Sen. Carl Levin, D-Mich., said that Dodd-Frank allows banks to hedge particular assets but prohibits the kind of position that JPMorgan took.

“This kind of hedging on the direction of the economy is not allowed,” Mr. Levin said.

Mr. Merkley and Mr. Levin said that so-called portfolio hedging, which is how they describe JPMorgan's moves, exists in the draft Volker rule draft. They urged regulators to change the language – so that it conforms with congressional intent – before issuing a final rule.

“You need bright lines, and you can't have loopholes like portfolio hedging,” Mr. Merkley said.

JPMorgan's stumble has given Democrats more leverage to push back against what they say are industry attempts to water down the Dodd Frank law.

“The fact that this can happen at a bank with a solid reputation like JPMorgan is evidence that our banking regulators must remain vigilant, and why opponents of Wall Street reform must not be allowed to gut important protections for the financial the financial system and taxpayers,” Senate Banking Committee Chairman Tim Johnson, D-S.D., said in a statement.

Volker rule skeptics -- House Financial Services Committee Chairman Spencer Bachus, R-Ala., Sen. Richard Shelby, R-Ala., ranking member of the Senate Banking Committee, and the Securities Industry and Financial Markets Association were not immediate available for comment.

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