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Was JPMorgan’s London trading operation hedging or betting?Depends on your point of view.
In mid-April, Bloomberg reported how the chief investment office was increasing the size and risk of its speculative bets.
The bank said the CIO “manages the firm’s risks,” and Dimon called the shift “a tempest in a teapot.”
“The shifting role of the CIO group at JPMorgan, which reported record firmwide profit for 2011, underscores how blurry the line can be between ‘proprietary trading’ and hedging.”
The shift resembles the shift that occurred at MF Global in run-up to that firm’s collapse.
“[Jon] Corzine’s decision to boost risk-taking, including a $6.3 billion wager with the firm’s own money on European government debt, triggered the collapse,” Bloomberg reported at the time.
Other banks, including Morgan Stanley and Citibank, have proactively spun-off their prop trading desks in the past year in advance of the possible passage of the Volcker Rule, which would curttail the ability of banks to make trades with their own money.
Today, Bloomberg’s Dawn Kopecki and Max Abelson reaffirm that the office invested invested deposits the bank had not loaned, “to seek profit by speculating on higher-yielding assets such as credit derivatives,” according to five former executives.
“We want to ramp up the ability to generate profit for the firm,” a former credit expert in the chief investment office recalled being told by two executives. “This is Jamie’s new vision for the company.”
Profits surged through the end of the decade as assets quadrupled to $356 billion and employees were given proprietary- trading accounts, current and former executives said.
The CEO suggested positions, a current executive told the reporters.
A senior executive told Bloomberg that Dimon reviewed the profit-and-loss reports every day on large positions in the CIO. Before the quarter ended, Dimon and Drew were both led to believe that the losses were erratic, and the reports showed that the position swung daily between losses and gains, the executive told Bloomberg.
In Sunday’s Meet the Press interview with David Gregory, Dimon had the following exchange about the Volcker rule, which theoretically would have prohibited the bets made at the London desk.
But if the best of the best can’t manage a risk like this, does it not tell you that the banking system is still several years after the financial collapse too risky?
I don’t think so. I mean, you know, we’re– it’s a fun– it’s– the question is size. This is not a risk, which is life threatening to J.P. Morgan. This is a stupid thing that is– you know, that we should never have done, but we’re still going to earn a lot of money this quarter. So it isn’t like the company’s jeopardized. We– you know, we hurt ourselves and our credibility, yes. And that we– we gotta fully expect and pay the price for that.
But on Friday, Senators Carl Levin of Michigan and Jeff Merkley of Oregon, both Democrats, said in a conference call with reporters that as currently drafted the Volcker Rule carries a “Mack truck”-sized loophole that would allow banks to amass a single, large bet as a hedge against possible declines in an entire portfolio of securities, the New York Times reported.