Jamie Dimon, the CEO of JP Morgan Chase, will be subjected to a very public tongue-lashing when he testifies before the U.S. Congress later this week. The $2 billion “tempest-in-a-teapot” trading loss is the reason why, but Dimon’s banking sector colleagues are at a loss to understand the need for a public chastisement over something that they deem an inevitability in the business. According to one critic, it serves no purpose other than to reduce investors’ confidence in the U.S. financial system in general, and in JP Morgan Chase, in particular.
But some economists say that the bankers who argue that the government is unfairly singling out Dimon, and that a $2 billion loss is inconsequential relative to JP Morgan’s 2011’s $19 billion earnings are missing the point. According to Richard Sylla of NYU’s Stern School of Business, the trading loss represents a clear warning shot that not everything is under control in an organization of the size and scale of JP Morgan, even in spite of sizable operating profits.
Moreover, it brings into question Dimon’s risk management strategy, which had been praised before this incident as one of the best in the financial sector. U.S. Secretary of the Treasury Timothy Geithner recently called Dimon’s strategy a “significant risk-management failure,” while other critics are more concerned about the Dimon’s complacency, saying that it was complacency which brought the 2008-2009 banking sector crisis to a head.
It’s clear that confidence in JP Morgan has eroded, and analysts say there’s a good possibility that investors’ negative sentiment could contaminate the sector as doubts grow over effective and appropriate risk management techniques.
Dimon will be among the first to admit that the loss may have hurt the collective efforts by a group lobbying the U.S. Congress to relax certain financial sector restrictions under the 2010 Dodd-Frank Act. One proponent of the group’s efforts noted that the markets’ “punishment” of JP Morgan shares was an effective deterrent and a solid argument for less regulation. The head of Blackstone Group, Stephen Schwarzman, also shrugged off the public outcry, saying that losses such as JP Morgan’s couldn’t be prevented or contained by any amount of legislation.
Since the trading loss, the company’s market value has been markedly cut, by as much as $27 billion and the value of its publicly traded shares has lost 17%. Despite the loss, the bank continues to have the support of many analysts, including those from Wells Fargo, Royal Bank of Canada and Goldman Sachs who said that they are still calling shares in JP Morgan a buy. Only time will tell whether or not investors have decided to accept that analysis and will forgiven JP Morgan its transgressions.
