JPMorgan Hedges Were Really Prop Trades, Whitney Says

JPMorgan Chase & Co. (JPM)’s $2 billion trading loss stemmed from profit-seeking bets rather than hedges meant to mitigate loan losses, as Chief Executive Officer Jamie Dimon has described them, banking analyst Meredith Whitney said.

“It’s very hard to argue that what Jamie Dimon is now on the Hill for is a hedge,” Whitney said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt as the bank chief testified at a hearing of the House Financial Services Committee in Washington. “A credit hedge in banking should be a loan-loss provision, plain and simple. Anything else is a proprietary bet.”

Dimon has described the loss as stemming from a hedge that “morphed into something I can’t justify.” He has publicly opposed the so-called Volcker rule, a Dodd-Frank Act provision meant to limit deposit-taking lenders from making proprietary trades, or bets with their own money.

“Of the large banks, JPMorgan has the lowest loan-to- deposit ratio,” said Whitney, CEO of Meredith Whitney Advisory Group LLC. “It didn’t frankly seem to bother anyone there because they clearly were making money in this trading book.”

Whitney, 42, also disputed Dimon’s claim that bank regulation may curb lending. Dimon, 56, confronted Federal Reserve Chairman Ben S. Bernanke at a public forum last year, blaming excessive regulation for slowing the U.S. economic recovery.

“It stymies the velocity of money in the system, you have to hold more capital,” Whitney said. “But in terms of lending, absolutely not.”

Dimon’s performance at a Senate hearing last week went more smoothly than Whitney expected, she said. The New York-based bank’s shares rose 1.6 percent after his testimony last week and advanced again today, climbing 2.1 percent to $35.36 at 2:37 p.m. in New York trading.

“I was very surprised because it’s a very difficult trade to explain,” she said. “He charms, he’s incredible. He gave the senators a massage, they gave him a massage back.”

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.

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