JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon plans to testify before Congress this week about his firm’s $2 billion trading loss. His Wall Street colleagues don’t understand why.
“Occasional losses are inevitable,” said Blackstone Group LP’s Stephen A. Schwarzman, 65, CEO of the largest private-equity firm. “Publicly excoriating JPMorgan serves no purpose except to reduce people’s confidence in the financial system.”
The loss sliced $27 billion from JPMorgan’s market value in the month after the May 10 disclosure, while triggering at least five federal probes and two planned Capitol Hill hearings with Dimon. It also renewed debate about whether curbs on trading by bankers were tightened enough after their wrong-way bets pushed the system to the brink of collapse in 2008.
Executives, lobbyists and analysts said in more than a dozen interviews that the public stir is an overreaction to a minor misstep.
“I kind of shrug,” said Bill Archer, 58, a former co-chairman of Goldman Sachs Group Inc.’s capital markets committee and now a partner at buyout firm Veronis Suhler Stevenson LLC in New York. “That’s just the way the world is.”
JPMorgan shares dropped 17 percent through last week after the New York-based bank, the largest in the U.S., disclosed the losses on credit derivatives held by its chief investment office. Dimon, 56, had shifted the unit from a conservative manager of unused cash into a profit center that bet on riskier assets, former employees have said. Some wagers became so large that they were driving prices in the $10 trillion market and couldn’t easily be unwound, Bloomberg News reported.
Bigger or Safer
U.S. banks can be tiny and safe or big global competitors that make mistakes, Archer said. “There are wrongs that come with too-big-to-fail, but there are a lot of rights,” he said.
Executives who say the loss is small for a firm that earned $19 billion last year are missing the warning it represents about unwieldy large lenders, said Richard Sylla, a financial historian at New York University’s Stern School of Business.
“Even a great banker like James Dimon can’t really manage such a huge operation,” Sylla said. “They convince themselves that everything is fine because they’re making money.”
U.S. Comptroller of the Currency Thomas J. Curry told the Senate Banking Committee last week that the loss raises “questions about the adequacy and rigor” of the bank’s risk management. Treasury Secretary Timothy F. Geithner last month called it a “pretty significant risk-management failure.”
Government investigations include the Federal Reserve studying organizational issues, the comptroller looking into trading, and the Securities and Exchange Commission examining why the bank changed internal risk gauges earlier this year. The Department of Justice and the Commodity Futures Trading Commission are also conducting inquiries, Bloomberg reported.
Joseph Evangelisti, a JPMorgan spokesman, declined to comment for this article.
Dimon, who averaged more than $1.9 million a month in salary and bonuses in 2010 and 2011, dismissed initial concerns and news reports as “a complete tempest in a teapot” on an April 13 call with analysts. Dimon later said on May 10 when he disclosed the loss that he should have paid more attention.
The market’s response and media coverage since then have been overwrought considering the size of the loss and its actual impact, said a JPMorgan executive who wasn’t authorized to speak on internal views. Quarterly profit is projected at $3.7 billion, according to the average estimate of analysts surveyed by Bloomberg.
“If they had made $4 billion no one would have noticed, but everyone screams when they lose $2 billion,” said Jay Dweck, who led a modeling group for sales and trading at New York-based Morgan Stanley until last year. The alarm “is irrational and unfair,” he said.
Richard Marin, former head of asset management at Bear Stearns Cos., which was taken over by JPMorgan during the 2008 financial crisis, would recommend shares of the bank to anyone who has traded them away. “If you sold the crisis, buy the reality,” Marin said. “Lapses do occur.”
Losses come and go every few years, said Philip Keevil, a former head of European mergers at Citigroup Inc. Advocates of tightening the so-called Volcker rule, which restricts banks’ proprietary trading, want “to use it for their own ends” and have been “piling on,” said Keevil, now a partner at Compass Advisers Group LLC in New York.
“I don’t think it’s a big issue,” BlackRock Inc. Chairman Larry Fink told CNBC June 7. Steven Rattner, co-founder of private-equity firm Quadrangle Group LLC, mentioned his friendship with Dimon in a May 14 Financial Times commentary before calling the JPMorgan loss “small beer.”
The bank still has support of analysts including Wells Fargo & Co.’s Matthew Burnell, who affirmed his buy rating the day of the loss announcement. A 6 percent after-hours drop in the stock price was “somewhat outsized,” he said then. In the days that followed, Credit Suisse Group AG and Royal Bank of Canada labeled the loss a “blemish,” with RBC and Goldman Sachs repeating their buy ratings in reports that both called JPMorgan “down but not out.”
“Anyone can run the numbers and see,” Citigroup said in a May 21 report, calling JPMorgan an “absolute buy.” Estimates of losses more than doubling are “getting a bit carried away.”
Investors and bankers, including Dimon, have speculated that the loss may hurt efforts to soften restrictions imposed by the 2010 Dodd-Frank Act and its Volcker rule, which were designed to head off a repeat of the financial crisis. Dimon will face the Senate Banking Committee on June 13 and the House Financial Services Committee June 19.
“Everyone needs to take a half step back,” said Rob Nichols, CEO of the Financial Services Forum, a Washington-based lobbying organization. “Since the crisis there have been numerous reforms that have improved the safety, the soundness, that make our system more safe and more secure.”
His group, led by Goldman Sachs CEO Lloyd C. Blankfein, includes heads of 20 global financial firms. Dimon is a member.
The market’s punishment of JPMorgan’s stock is effective and an “argument for less regulation,” Hester Peirce, a researcher at the Mercatus Center at George Mason University, wrote last month. Mercatus is funded by billionaire Charles Koch, according to the Koch Family website.
“There is no law that says you can’t lose money,” said H. Frederick Krimendahl II, chairman of New York-based real estate investor Petrus Partners Ltd. and a former Goldman Sachs management-committee member. “The reason that I shrug is that I don’t think anybody got badly hurt in this” except JPMorgan.
Schwarzman, New York-based Blackstone’s chief, said losses can’t be prevented “by legislation, regulation, supervision or other forms of planning.” JPMorgan’s loss amounts to about 7 percent of its pretax earnings expected this year, he said.
Dismissiveness is dangerous, according to Simon Johnson, a former International Monetary Fund chief economist who teaches at the Massachusetts Institute of Technology.
“Complacency was at the heart of the problems that almost brought down the system,” he said. “No one considered that there was a serious problem.”
Analysts who’ve expressed concern include Chris Wheeler at Mediobanca SpA, the Milan-based investment bank, which downgraded JPMorgan to neutral on June 6. Bank analysts tend to be positive about the industry because they work in it, said Wheeler, who co-wrote the Mediobanca report.
“I’m not screaming from the hilltops that Jamie Dimon has major problems,” he said. “But, in this particular case, something went very badly wrong.”