Sunday, May 13, 2012

A Trading Blow-up at JP Morgan Chase Highlights Their Risk Management Issues

A $2.3 billion trading loss announced by JPMorgan Chase on Thursday (with perhaps another $1bilion or more to come) has so far resulted in 1) a 9.3% decline in its stock on Friday, 2) a credit rating downgrade by Fitch Ratings  - citing concerns about the firm’s risk management, 3) Standard & Poor’s placing the firm’s rating on negative outlook - noting that the loss was “not consistent with what we have viewed as the company’s sound risk management practices” and 4)  increased scrutiny by a variety of government regulators.  CEO Jamie Dimon said the trading mishap was “flawed, complex, volatile, poorly reviewed and poorly monitored “and consisted of “many errors, sloppiness and bad judgment”.  Federal Reserve Bank of Dallas President Richard Fisher’s reaction to the incident was “At what point do you reach a size you don’t know what is going on beneath you?”

Many of the “too big to fail” banks, including JP Morgan, continue to struggle with lower trading volumes, contracting fees  and a lack of trust by many players outside of the world of finance. While this trade may not present “systemic risk” to the global financial system (although it reinforces the view that some bankers are gamblers rather than financiers), it decreases the confidence level in some of the system’s participants.

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