Shadowland Will Take Care of JP Morgan
By Roy Smith, Kenneth Langone Professor of Entrepreneurship and Finance & Professor of Management Practice
... both regulators and pundits should relax and let the rules they have already in place, and others to be implemented soon, de-risk systemically important banks.
The furore over JP Morgan Chase’s surprise trading loss – $2bn gross, $800m net – maybe larger after unwinding – has been overdone for two important reasons: it was not a systemic event by any measure, and the bank moved quickly to clean up the mess after clearly indicating that the loss exceeded its tolerable limits on the $400bn portfolio involved.
In the shadows...
The loss, trivial relative to JP Morgan’s $189bn of shareholders’ equity, was the result of changes in the market value of assets used as hedges. It will probably be offset by comparable changes in the bank’s debt value adjustment – a recurring accounting treatment required to mark liabilities to market. In the first quarter of 2012, this was a $900m loss. The market largely ignores DVA.
But, nevertheless, JP Morgan lost $27bn of market value in a week and, as Jamie Dimon predicted, the event stimulated an avalanche of comment from pundits, politicians and others.
The disclosure, described by its chief executive as an “egregious” operational failure, does highlight some concerns of regulators and measures taken to address them.Read full article as published in Financial News.
More Opinions from Roy Smith
- "Investors Gain the Ear of the Listening Banks," 6.3.13
- "Make No Mistake, Size Matters with Systemic Risk," 5.6.13
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- "The Ideal Christmas Gift for Mark Carney," 12.17.12
- "Wall Street Survives One Storm But Now Faces Another," 11.12.12
- "At last, Citi’s board takes over," 10.18.12
- "Dodd-Frank will test both Romney and Obama," 10.8.12
- "Barclays must address the strategic dilemma," 8.13.12
- "Time for Europe-wide FDIC Fund – and Quick," 6.18.12
- "Shadowland Will Take Care of JP Morgan," 5.28.12
- "Once and Future Investment Banks," 5.4.12
- "S-factor Spotlights Banks’ High Systemic Risk," 4.16.12
- "Bold Action Needed Over Bank of America," 3.5.12
- "Pandit Should Learn a Lesson from Reed," 1.9.12
- "Careful Where You Cut, a Bonanza Awaits," 11.14.11
- "Dimon’s Bank Can Ride a Storm of Rules," 10.17.11
- "Break Up the Banks, Even Goldman," 9.5.11
- "Dodd-Frank Shows Teeth on First Birthday," 7.4.11