The front page of almost every news and financial paper or website carried that story of JP Morgan’s (NYSE: JPM) $2 billion trading loss. As MarketWatch described it, “The losses stemmed from trades at the bank’s chief investment office, where a single trader — dubbed the ‘London Whale’ — was reported to have taken large positions for the bank in credit-default swaps.”
The news took JP Morgan shares down by 6%, which eliminated $10 billion in the bank’s market cap. The domino effect of worry about the trade moved global markets down as well. The news also raised new debate about the value of the Volcker Rule, which would push proprietary trading further outside the doors of major banks. This, proponents say, will keep incidents like the JP Morgan one from undermining global market confidence in the financial system, which blew apart so badly less than four years ago.
JP Morgan CEO Jamie Dimon said the Volcker Rule was not breached by his firm’s trade debacle. Whether or not he is correct is academic, to the extent of the damage the swaps have done. Dimon’s most important comment was that he and his management would be more vigilant. The problem would not be repeated.
The silver lining is that Dimon and every bank CEO will go back to the trading floors to see if there are any more time bombs ticking. They will go back more often and scrutinize positions more carefully. So, whatever damage JP Morgan has suffered will be a caution to the rest of the financial services industry, both in the United States and abroad.
The temptation is to look at the JP Morgan disaster as an isolated incident, just one set of decisions that went awry. Actually, it will be the trigger for a level of governance that may prevent a repeat of a similar incident, at least until the situation fades from memory. Then the risk of a similar problem will return.
Douglas A. McIntyre