JPMorgan Chase CEO Jamie Dimon made a shocking disclosure Thursday night that some of the company's bets on credit markets have gone bad to the "significant" tune of $2 billion. The losses stemmed from a hedging strategy at the company's chief investment office in London, where outsize bets by a trader named Bruno Iksil — known variably as "the London Whale" and "Voldemort" — have been roiling markets for weeks.
"We have egg on our face," Dimon told reporters on a conference call. "We deserve any criticism we get." Just a few weeks ago, Dimon called concern about the trading risks "a complete tempest in a teapot."
Dimon claimed that because the trades were part of a hedging strategy, designed to reduce risk rather than reap profits, the bank did not break the Volcker rule against proprietary trading. But bank critics and advocates of reforming the financial industry were quick to jump on the news as evidence the system is still broken.
“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making,” said Senator Carl Levin. Dimon himself has been Wall Street's biggest critic of the Volcker rule. “Paul Volcker by his own admission has said he doesn’t understand capital markets,” he told Fox Business earlier this year. “He has proven that to me.”
Shares of JP Morgan fell more than 8 percent on Friday morning, along with other U.S. banks, in part owing to fears that U.S. regulators could clamp down further on risky trading that might necessitate future government bailouts.
This loss only goes to show how weak the Volcker Rule is ... JP Morgan more or less invented risk management. If they can’t do it, no bank can. And no sensible regulator can ever trust the banks to self-regulate.
Two billion dollars is a big loss even for JP Morgan. So why call it hedging? Presumably because the Volcker Rule allows proprietary trading for the purposes of hedging. This turns out to be a big loophole.
The problem here is uncertainty. We don’t know WTF is going on inside the big bank balance sheets, and just when we start to (maybe) gain some measure of comfort that the crap may have been cleaned up, a grenade like this blows up in our faces and the fear comes back.
Whatever the repercussions, it's a personal debacle for Jamie Dimon, whose bank emerged mostly unscathed from the financial crisis. He has been Wall Street's most combative defender of banks' prerogative to trade as they always have. But with a $2 billion hole in his balance sheet caused by the very practices he has advocated, the face sopping up the most egg is his own.
And as he said on the conference call, the losses "could easily get worse."
Additional reporting by Joe Coscarelli.