Calls to toughen regulation follow JPMorgan's mammoth trading loss
WASHINGTON — JPMorgan Chase faced intense criticism Friday for claiming that a surprise $2 billion loss by one of its trading groups was the result of a sloppy but well-intentioned strategy to manage financial risk.
More than three years after the financial industry almost collapsed, the colossal misfire was cited as proof that big banks still do not understand the threats posed by their own speculation.
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“It just shows they can't manage risk, and if JPMorgan can't, no one can,” said Simon Johnson, former chief economist for the International Monetary Fund.
JPMorgan is the largest U.S. bank and was the only major bank to remain profitable during the 2008 financial crisis. That lent credibility to its tough-talking CEO, Jamie Dimon, as he opposed stricter regulation in the aftermath.
But Dimon's contention that the $2 billion loss came from a hedging strategy that backfired, not an opportunistic bet with the bank's own money, faced doubt Friday, if not outright ridicule.
“This is not a hedge,” said Sen. Carl Levin, D-Mich., chairman of a subcommittee that investigated the crisis. He said the trades were instead a “major bet” on the direction of the economy, as published reports suggested.
On Friday, Dimon told NBC, for an interview airing Sunday on “Meet the Press,” that he did not know whether JPMorgan had broken any laws or regulatory rules. He said the bank was “totally open” to regulators.
The head of the Securities and Exchange Commission, Mary Schapiro, said the agency was focused on the JPMorgan loss but declined to comment further.
JPMorgan's disclosure Thursday recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system when they falter.
The JPMorgan loss did not cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers investment bank. But it shook the confidence of the financial industry.
Within minutes after trading began on Wall Street, JPMorgan stock had lost almost 10 percent, wiping out about $15 billion in market value. It closed down 9.3 percent.
Fitch Ratings downgraded the bank's credit rating by one notch, while Standard & Poor's cut its JPMorgan outlook to “negative,” indicating that a credit-rating downgrade could follow.