J.P. Morgan’s Piddling $2B loss

Having spent a little while thinking and talking about J.P. Morgan’s $2 billion loss announced recently, I went from thinking it didn’t matter all to thinking it indeed has some larger significance for the post-financial crisis world.  At first, my stance was simply that it was a prop trading loss that while quite large in nominal dollar terms, is more or less immaterial to the health and profitability of one of America’s largest banks.  Some heads roll, some rich douchebags get golden parachutes, some hedge funds get to make some money off of J.P. Morgan’s getting-rolled-ness, and life goes on.

However, what it says about the post-crisis financial system does have some relevance and is not particularly reassuring.  To wit:

  • JPM doesn’t understand its value at risk, and potentially no other bank does either.  Apparently they have, in response to this, scrapped their VaR model and gone back to an old one. That is the opposite of reassuring for a taxpayer-backed institution.
  • JPM doesn’t understand or control its prop trading. Again, very distressing for a taxpayer-backed institution.
  • JPM has almost certainly lost substantially more than $2B, since they have fairly wide latitude to lie in their financial disclosure thanks to post-2008 changes in accounting rules.  This is more a concern for JPM shareholders than taxpayers.
Even if everything goes as well as could be expected and worldwide depression does not result, a potential Greek default or Eurozone exit would probably cause massive chaos in all sorts of asset classes.  The fact that small movements in a spread of corporate credits vs. CDS could hammer JPM for $2B is not, again, reassuring.  Nor is the fact that they didn’t recognize that exposure.  All in all, it bodes poorly for the health of the American financial system should the shit completely hit the fan in Europe.

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