Such a significant loss by one of Wall Street’s most respected banks shocked chief executive Jamie Dimon, who was praised for steering his bank through the 2008 financial crisis without any losses.
“We know we were sloppy. We know we were stupid. We know there was bad judgment,” Dimon said in an interview with NBC television which is due to be broadcast on “Meet the Press” on Sunday.
He added it wasn’t clear whether the bank had broken any laws or violated any rules. “We’ve had audit, legal, risk, compliance, some of our best people looking at all of that.”
JPMorgan’s loss demonstrated that at least some big banks are engaged in the same sort of behavior that almost crashed the financial system in 2008, if on a smaller scale.
“This is a smaller version of the same betting that went on in 2006,” said Will Rhode, a principal and director of fixed income at The Tabb Group, a financial-markets research and advisory firm.
“Ultimately, this is about banks being dissatisfied with the single-digit returns on equity that are associated with their conventional lending businesses, and trying to find other ways to make money with risk, once again, taking a backseat to potential reward,” said Daniel Alpert, founding managing partner at investment bank Westwood Capital.
The episode has provided ammunition to those calling for new regulations, the part of the Dodd-Frank financial reform act which is also known as the Volcker Rule, suggesting a ban on proprietary trading by federally insured banks, writes The Huff Post.
The rule is to take effect in July, though Federal Reserve Chairman Ben Bernanke said regulators will probably miss the deadline. Part of the delay is due to a barrage of pressure from lobbyists, who have helped to complicate and water down the rule.
“This latest debacle at JPMorgan demonstrates that the banks cannot police themselves, and should not be trusted to do so,” said law professor Frank Partnoy, director of the Center on Corporate and Securities Law at the University of San Diego.
“At minimum, they should be required to disclose details about their derivatives, so their shareholders can understand what risks they are taking.”
According to sources, by Friday, lawmakers were setting to make a similar argument.
“If the regulators do what [the Volcker rule] says … this activity would not be permitted,” Sen. Carl Levin (D-Mich.), one of the authors of the Volcker rule, told CNBC. “The purpose of Dodd-Frank was essentially to bring back a cop on the beat on Wall Street.”
“This makes the Volcker rule a foregone conclusion,” he added. “The entire financial community is holding their heads in their hands saying this JPMorgan event could not have happened at a worse time.”
However, what is difficult to predict is exactly how widespread the practices are that got JPMorgan into trouble – as without any financial reforms, the riskier objects of Wall Street are still just as fragile as they used to be before the 2008 crisis.
“We never hear about these things if they profit from it,” said William D. Cohan, a former managing director at JPMorgan. “They never call a five o’clock press conference saying we made $4 billion on a London Whale trade.
He went on: “We’ll never know who else is doing it, and this is one of the big problems. It’s an opaque black box.”
The JPMorgan incident also raises speculations considering one more problem still lingering from the crisis: Too-big-to-fail banks engaging in risky behavior that could possibly lead to government bailouts.
“We have to decide whether we want these banks to be large public utilities — very safe, not generating humongous returns,” said Alpert of Westwood Capital, “or do we want these institutions to engage in speculation and put our system at risk?”