JP Morgan Claims $2 Billion In Losses, Dodd Frank – Volcker Rule Speculation Rises:
JP Morgan chief executive officer Jamie Dimon revealed to the press yesterday that the company would be taking deep losses in the next quarter due to errant trading that cost the company billions. Investors were caught off guard when JP Morgan announced the news after trading hours Thursday and Dimon claimed the company was “stupid”, language often not heard on Wall Street from company execs.
JP Morgan’s earnings were released just 2 weeks ago and Dimon appeared on CNBC with a positive attitude about the future of the company and his overall outlook. Financial stocks fell in sympathy with the JP Morgan news in the after hours session and investors may decrease their appetite for equities short term based on perceptions other financial firms have unbalanced books or trading losses.
The bigger issue regarding JP Morgan’s reported $2 billion dollar losses, for a company that makes $19 billion yearly, are the political economy issues related to the Dodd-Frank bill and the Volcker rule which seek to curb bank trading activities. JP Morgan’s trading losses could reach the $4 billion dollar mark or more and it’s unclear how oversight for this occurred for the company that created the “credit default swap” that helped usher in the 2007-08 financial crisis.
The intermediate likelihood that Dodd Frank, Volcker Rule legislation occurs has increased and will rise if other firms claim losses.
The new regulations for financial firms could cut risky behavior on the part of banks and keep them from trading with their own assets. After the last banking crisis, skepticism has increased that banks are still making bad bets that may cost the tax-payer and classic economics theories of moral hazard expressed by the likes of Hank Paulson were warranted. Paulson was more Schumpeterian than his colleges with a ‘let them fail’ approach and leaned towards a no “too big to fail” doctrine.
While its too early to tell if risks are systematic, it’s another reason why sentiment towards how finance is done in a political year could swiftly change momentum. If bailouts and the repercussions of bank failures, and rogue trading become a focal point in November, this could be negative for the industry for years to come. Financial stocks and home builders should be monitored medium-run and our overall outlook on the U.S. economy has been lowered.