JPMorgan loses $2bn in hedging 'error'

JPMorgan Chase, the largest bank in the United States, says it has lost $2bn in the past six weeks on a trading portfolio designed to hedge against risks the company takes with its own money. Al Jazeera's Kristen Saloomey reports from New York.

Matt Taibbi, Rolling Stone:

If you’re wondering why you should care if some idiot trader (who apparently has been making $100 million a year at Chase, a company that has been the recipient of at least $390 billion in emergency Fed loans) loses $2 billion for Jamie Dimon, here’s why: because J.P. Morgan Chase is a federally-insured depository institution that has been and will continue to be the recipient of massive amounts of public assistance. If the bank fails, someone will reach into your pocket to pay for the cleanup. So when they gamble like drunken sailors, it’s everyone’s problem.

Activity like this is exactly what the Volcker rule, which effectively banned risky proprietary trading by federally insured institutions, was designed to prevent. It will be argued that this trade was a technically a hedge, and therefore exempt from the Volcker rule. Not only does that explanation sound fishy to me (as Salmon notes, it's unclear just exactly how Iksil's trade could be a hedge), but it's sort of immaterial anyway: whether or not this bet technically violated the Volcker rule, it definitely violated the spirit of the law. Hedge or no hedge, we don’t want big, federally-insured, too-big-to-fail banks making giant nuclear-powered derivatives bets.

This incident is certain to reignite the debate about Dodd-Frank and may undermine the broad effort to roll back the bill, which we wrote about in the latest issue of the magazine. Staffers on the Hill started mobilizing the instant the Chase news hit the airwaves yesterday, and you can bet we'll hear more debate in the next few months about not only the Volcker Rule but the Lincoln Rule, which was designed to wall off risky swaps from the federally-insured side of these banks. I’ve heard from all sides today, with some thinking the Chase trade was Dodd-Frank compliant, and others saying it probably violated both the Volcker and the Lincoln rules.

Either way, the incident underscored the basic problem. If J.P. Morgan Chase wants to act like a crazed cowboy hedge fund and make wild exacta bets on the derivatives market, they should be welcome to do so. But they shouldn’t get to do it with cheap cash from the Fed’s discount window, and they shouldn’t get to do it with money from the federally-insured bank accounts of teachers, firemen and other such real people. It’s a simple concept: you either get to be a bank, or you get to be a casino. But you can’t be both. If we don’t have rules to enforce that concept, we ought to get some.

The bottom line is that this episode underscores the need either for a strong, loophole-free Volcker rule, or an outright return to the Glass-Steagall Act.

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