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Opinion

Shadowland Will Take Care of JP Morgan

By Roy Smith, Kenneth Langone Professor of Entrepreneurship and Finance & Professor of Management Practice

roy smith opinion article

... 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.