Shares of JP Morgan Chase (JPM) tumbled Friday morning after the firm shocked investors Thursday evening by disclosing a $2 billion trading loss.
The revelations provide more evidence “the banks cannot manage their risk,” says MIT Sloan School professor and former IMF chief economist Simon Johnson. “We need to get our [banks] out of this crazy business before they do more profound damage to all of us.”
As with many others, Johnson says JP Morgan’s big loss prove the need for more stringent regulation of banks’ trading activities. “Anyone who opposes the Volcker Rule now should be exposed to repeated and complete public ridicule,” he says.
(On Thursday’s conference call, JP Morgan CEO Jamie Dimon said the hedging that led to the loss would not have violated the Volcker Rule, but that has only emboldened proponents of tougher restrictions on banks. “The enormous loss JP Morgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making,” said Sen. Carl Levin (D-MI).)
Beyond the need to strengthen the Volcker Rule, Johnson says JP Morgan’s big loss means “the Fed’s approach to bank capital and stress test has completely failed.”
More surprisingly, Johnson says the buck stops with Jamie Dimon and argues the famed CEO should lose his job over this loss, which many observers believe will ultimately cost the bank far more than $2 billion.
“At any other company in any other industry under these circumstances the CEO would resign,” Johnson says. “If Boeing or Caterpillar or any other reputable company were to lose this much money relative to operations in a haphazard manner on activities that were so contrary to the principles in which the CEO stood? Yes the person in question would resign. If he didn’t resign, the board would remove him.”
Barring that, Johnson said regulators should remove the responsible executives. “But that’s not going to happen in banking; that’s the power and privilege that goes with being ‘too big to fail,'” he says.
Again, Johnson’s views do not represent the consensus, which is that JP Morgan will move on from this, albeit with a hit to earnings and a blemish on Dimon’s once-sterling reputation.
Still, several sell-side analysts seem to agree with his view that “risk management totally broke down at JPM Chase.”
KBW’s David Konrad called Thursday’s news “a black eye for management” and Rochdale Securities Dick Bove dubbed it a “body blow,” even as he maintained a “buy” rating on the stock.
Bernstein analyst John MacDonald cut his price target on JP Morgan to $44 from $56, writing: “Although the financial impact of this looks manageable for JPM, we feel that the size and sudden nature of the losses call into question multiple aspects of the company’s risk management systems, and to some extent the business model that gives rise to the need for such large investments and hedges.”
Indeed, many questions remain about how an alleged hedge — which is supposed to mitigate risk — went so wrong, so quickly in a period of relative calm in the credit markets.
“These are huge losses given where we are on the global credit cycle,” Johnson says. “There’s not that much stress on the market compared with what could come our way. Yet JP Morgan is sitting on a massive loss and I guess they plan to sit on it.”
Referring to the potential for a real “credit event” emanating from Europe, Johnson ridiculed the Federal Reserve for allowing banks to reduce their capital base and effectively increase leverage in recent months. “It’s about time people running the Fed stood up and took proper responsibility here,” he says.
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