-By Warner Todd Huston
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.