By David Weidner, MarketWatch
NEW YORK (MarketWatch) — And then there were none.
J.P. Morgan Chase & Co. (NYSE:JPM) , the last bank on Wall Street with any semblance of industry dignity for how it managed and comported itself in the financial crisis, on Thursday became the latest confidence-shaking bank on Wall Street to get waylaid by today’s financial system.
It’s a system that by now is so obviously out of control that you have to wonder if we should just call off the charade of regulation. Credit-default swaps, interest-rate swaps, massive derivative hedging bets, dark pools all run by algorithms — the markets are so run amok, they’re humiliating the smartest guys on Wall Street. And there is none smarter than Jamie Dimon at the top of an institution.
Reuters
That isn’t to say over the next few days there will be an effort to brush this one off, just as the financial media and Wall Street salesmen glossed over the failure of Bear Stearns and Lehman Brothers.
Already two alternate narratives are making their way into the media. The first is that J.P. Morgan’s $2 billion trading loss and $800 million or more blow to earnings is the result of some rogue in England known in the markets as the London Whale. See MarketWatch report on J.P. Morgan loss.
The second narrative is one told by The Financial Times in the aftermath: that this loss is inconsequential.
“So far the numbers are not enough to dent J.P. Morgan’s balance sheet, nor its capital-adequacy ratios much, nor its ability to return money to shareholders,” the publication said in its “Lex” column, adding that it would only serve to give “ammo” to bank critics.
The problem with both explanations isn’t that they’re wrong — to the contrary, it’s that they are very likely right.
J.P. Morgan: London Whale losses?
J.P. Morgan’s whale causes ripples in global financial markets after reports that he clocked up as much as $2 billion of trading losses.
First, this “London Whale” and its enormous positions in the debt markets has been the subject of worry in the markets for months. So, the suggestion that he, or they, had somehow “gone rogue” is troubling. For it wasn’t just J.P. Morgan that was aware of the risk, it was anyone — the public, regulators and investors — bothering to look at the headlines who saw the potential coming.
Second, the FT is right. This blunder is “ammo” for bank critics. Indeed, it’s ammo as intercontinental nuclear missiles are “ammo.”
A bank has so little internal controls that for weeks it knows about a dangerous market position and still loses $2 billion in a humiliating way? What could be worse? A trading firm that collapses losing $1.6 billion in client money? Oh yes, M.F. Global was just another “extraordinary” Wall Street “anomaly.”
(And isn’t it ironic that J.P. Morgan seemed to have a better handle on M.F. Global’s finances than its own.)
But even if you buy the spin that J.P. Morgan’s whale of a trade is just small potatoes and the cost of doing business, it’s hard to ignore Dimon himself. On the aftermarket conference call, Dimon sounded like his old self, defiant and brutally honest: “Just because we were stupid, doesn’t mean anyone else was.”
Dimon may sound contrite and honest, but the truth of the matter is that this trading loss is more than some lost house money at the bank. J.P. Morgan is one of the biggest retail banks in the U.S. market. It’s a major part of the Federal Reserve system, which is our nation’s monetary system.
Because J.P. Morgan didn’t nearly go under during the financial crisis, Dimon has used whatever implied clout that distinction carries as a bully pulpit. He’s railed against regulation. He stood before Ben Bernanke and suggested the Fed chairman might strangle the economy with bank rules.
Dimon, when asked about a new set of rules in the Dodd-Frank Act, said Paul Volcker didn’t “understand the markets.”
Volcker is too dignified to say “I told you so,” but I’m not. Volcker knows more about the markets, not because he’s astute to the daily gyrations, but because he recognizes that the system is so far beyond the ability of any individual or institution to understand or manage. Read MarketWatch First Take commentary on J.P. Morgan and the Volcker rule.
Dimon’s problem — and this one goes way back — is that he is almost always the smartest guy in the room, and he knows it.
But something has happened along the way. The financial system that Dimon and his Wall Street counterparts built became too big to be controlled, much less understood.
Heaven only knows whether Dimon was just that much smarter or just luckier that J.P. Morgan didn’t suffer an embarrassment of this scale until now.
Either way, it doesn’t matter. What matters is who we trust now.
I’d suggest starting with the person who admits he or she doesn’t have a clue about what’s going on.
