Bank stocks hurt after surprise US$2b JPMorgan trading loss
Source: Agencies |
May 12, 2012, Saturday
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JPMORGAN Chase stock lost as much as more than 9 percent of its value yesterday after the bank, the largest in the US, revealed a monster US$2 billion loss in a trading group that manages the risks the bank takes with its own money.
More than three years after the financial crisis, the surprise disclosure quickly revived debate about whether banks can be trusted to handle risk on their own.
US Senator Carl Levin, chair of a subcommittee that investigated the crisis, said the loss was "just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."
Mary Schapiro, the head of the Securities and Exchange Commission, said the agency was focused on the JPMorgan loss but declined to comment further.
Some analysts were skeptical that the trading was designed to protect against JPMorgan's own losses, as CEO Jamie Dimon contended on Thursday in a conference call with stock analysts and reporters. The analysts said the bank appeared to have been betting for its own benefit, a practice known as "proprietary trading."
Dimon said the type of trading that led to the US$2 billion loss would not be banned by the so-called Volcker rule, which is still being written and is expected to ban certain types of trading by banks with their own money.
The Federal Reserve said last month that it would begin enforcing that rule in July 2014. Bank executives, including Dimon, have argued for weaker rules and broader exemptions.
JPMorgan has been a strong critic of provisions that would have made this loss less likely, said Michael Greenberger, former enforcement director of the Commodity Futures Trading Commission, which regulates some derivatives.
"These instruments are not regularly and efficiently priced, and a company can wake up one day, as AIG did in 2008, and find out they're in a terrific hole. It can just blow up overnight," said Greenberger, a professor at the University of Maryland.
Yesterday, bank stocks were hammered in Britain and the US, partly because of fear that the JPMorgan loss would lead to tougher regulation of financial institutions.
Shortly after yesterday's opening bell, JPMorgan shares dropped more than 9 percent, making it the biggest loser among the 30 stocks in the Dow Jones industrial average.
In Britain, shares of Barclays and Royal Bank of Scotland fell more than 2 percent.
JPMorgan stock was the hardest hit, but its American counterparts suffered, too: Citigroup and Goldman Sachs both fell about 4 percent in early trading, while Bank of America initially dropped about 3 percent before rebounding.
Stock analysts said that bank stocks were hurt mostly because of regulatory fear, not because there was reason to believe other banks would discover similar losses.
"The regulatory and political environment is already a headwind, and clearly this doesn't help," Deutsche Bank said in a note to clients.
The trading loss was an embarrassment for JPMorgan, which came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.
More than three years after the financial crisis, the surprise disclosure quickly revived debate about whether banks can be trusted to handle risk on their own.
US Senator Carl Levin, chair of a subcommittee that investigated the crisis, said the loss was "just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."
Mary Schapiro, the head of the Securities and Exchange Commission, said the agency was focused on the JPMorgan loss but declined to comment further.
Some analysts were skeptical that the trading was designed to protect against JPMorgan's own losses, as CEO Jamie Dimon contended on Thursday in a conference call with stock analysts and reporters. The analysts said the bank appeared to have been betting for its own benefit, a practice known as "proprietary trading."
Dimon said the type of trading that led to the US$2 billion loss would not be banned by the so-called Volcker rule, which is still being written and is expected to ban certain types of trading by banks with their own money.
The Federal Reserve said last month that it would begin enforcing that rule in July 2014. Bank executives, including Dimon, have argued for weaker rules and broader exemptions.
JPMorgan has been a strong critic of provisions that would have made this loss less likely, said Michael Greenberger, former enforcement director of the Commodity Futures Trading Commission, which regulates some derivatives.
"These instruments are not regularly and efficiently priced, and a company can wake up one day, as AIG did in 2008, and find out they're in a terrific hole. It can just blow up overnight," said Greenberger, a professor at the University of Maryland.
Yesterday, bank stocks were hammered in Britain and the US, partly because of fear that the JPMorgan loss would lead to tougher regulation of financial institutions.
Shortly after yesterday's opening bell, JPMorgan shares dropped more than 9 percent, making it the biggest loser among the 30 stocks in the Dow Jones industrial average.
In Britain, shares of Barclays and Royal Bank of Scotland fell more than 2 percent.
JPMorgan stock was the hardest hit, but its American counterparts suffered, too: Citigroup and Goldman Sachs both fell about 4 percent in early trading, while Bank of America initially dropped about 3 percent before rebounding.
Stock analysts said that bank stocks were hurt mostly because of regulatory fear, not because there was reason to believe other banks would discover similar losses.
"The regulatory and political environment is already a headwind, and clearly this doesn't help," Deutsche Bank said in a note to clients.
The trading loss was an embarrassment for JPMorgan, which came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.
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