US banks under fire after JP Morgan's $2-B loss

WASHINGTON (AP) – JPMorgan Chase faced intense criticism for claiming that a surprise $2 billion loss by one of its trading groups was the result of a sloppy but well-intentioned strategy to manage financial risk.

More than three years after the financial industry almost collapsed, the colossal misfire was cited as proof that big banks still do not understand the threats posed by their own speculation.

“It just shows they can’t manage risk – and if JPMorgan can’t, no one can,” said Simon Johnson, the former chief economist for the International Monetary Fund.

JPMorgan is the largest bank in the United States and was the only major bank to remain profitable during the 2008 financial crisis. That lent credibility to its tough-talking CEO, Jamie Dimon, as he opposed stricter regulation in the aftermath.

But Dimon’s contention that the $2-billion loss came from a hedging strategy that backfired, not an opportunistic bet with the bank’s own money, faced doubt on Friday, if not outright ridicule.

“This is not a hedge,” said Sen. Carl Levin, D-Mich., chairman of a subcommittee that investigated the crisis. He said the trades were instead a “major bet” on the direction of the economy, as published reports suggested.

On Friday, Dimon told NBC News, for an interview airing Sunday on “Meet the Press,” that he did not know whether JPMorgan had broken any laws or regulatory rules. He said the bank was “totally open” to regulators.

The head of the Securities and Exchange Commission, Mary Schapiro, told reporters that the agency was focused on the JPMorgan loss but declined to comment further.

JPMorgan’s disclosure Thursday recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system when they falter.

The JPMorgan loss did not cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers investment bank. But it shook the confidence of the financial industry.

Within minutes after trading began on Wall St., JPMorgan stock had lost almost 10 percent, wiping out about $15 billion in market value. It closed down 9.3 percent.

Fitch Ratings downgraded the bank’s credit rating by one notch, while Standard & Poor’s cut its outlook JPMorgan to “negative,” indicating a credit-rating downgrade could follow.

Morgan Stanley and Citigroup closed down more than four percent, and Goldman Sachs closed down almost four percent. The broader stock market was down only slightly for the day.

Dimon gave few details about the trades Thursday beyond saying they involved “synthetic credit positions,” a type of the complex financial instruments known as derivatives.

Enhanced oversight of derivatives was a pillar of the 2010 financial overhaul law, known as Dodd-Frank, but the implementation has been delayed repeatedly and will not take effect until the end of this year at the earliest.

JPMorgan’s trades show that the derivatives market remains too opaque for regulators to oversee effectively, said Rep. Barney Frank, D-Mass., one of the law’s namesakes.

“When a supposedly responsible, well-run organization could make such an enormous mistake with derivatives, that really blows up the argument, ‘Oh, leave us alone, we don’t need you to regulate us,’” he said.

No one seemed to suggest Friday that JPMorgan had broken a law. But the mistake added a wrinkle to the still-unsettled discussion about how the financial industry should be regulated in the aftermath of 2008.

“This just tells you that we are a long, long way from getting our arms around this whole ‘too big to fail’ issue,” said Cliff Rossi, a former top risk executive for Citigroup, Countrywide and other big financial companies.

Immediately after the crisis, a time of popular outrage over bailouts and investment losses, there was broad public support for an overhaul of bank regulations.

The changes promoted by the Obama administration were in many cases similar to what the financial industry had sought before the crisis: Consolidation of regulators and oversight of the multi-trillion-dollar marketplace for derivatives.s