What Went Wrong At JP Morgan?

May 14 2012 @ 2:53pm

Felix Salmon's explains the $2 billion loss:

[W]hat was really going on here was that JP Morgan had hundreds of billions of dollars in excess deposits, thanks to its too-big-to-fail status. And rather than lending out that money and boosting the economy, Jamie Dimon decided to simply play with it in financial markets, just as a hedge fund would.

Kevin Drum calls for more regulation:

Dumb, blunt rules are the only kind that can work in the playpen of modern finance. We simply don't understand the world well enough to pretend that we can regulate things in minute detail, and we sure as hell don't have regulators who are either smart enough or can move fast enough to stay ahead of the rocket scientists trying to outwit them. That's not just impossible in practice, it's pretty much impossible even in theory. It's just plain impossible.

Peter Suderman disagrees:

Markets don’t evolve by preventing mistakes entirely. They learn by making mistakes, by experimenting with new business models, some of which prove unsuccessful, and then further refining the process, and usually making more mistakes along the way. But it’s incredibly difficult for anyone — regulator or market player — to know what will fail in advance, and regulations that prevent some failures also typically end up blocking a lot of potential successes. What JPMorgan’s blown deal mostly proves is that complex systems sometimes fail, and that it’s very hard to know exactly when and how those systems will fail until they do.

Jared Bernstein sees no alternative to regulation:

[F]inancial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. That’s not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We don’t know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JP’s loss should be taken as a warning that our tendency is to set them too low.

Bainbridge defends the bank:

Let's put that $2 billion loss in context. JP Morgan had first-quarter 2012 net income of $5.4 billion on revenues of $27.4 billion. Morgan thus is still in the black so far this year, despite this hit. The $2 billion figure is a headline-grabber, but it posed no threat to JP Morgan's viability, let alone a systemic threat. Using it to justify more restrictive regulation is thus mere agitprop.

 And Adam Sorensen isn't sure more regulation would have prevented the loss:

The bet in question would not have been banned under the Volcker rule if, as Dimon says, the position was classified as a hedge—insurance against another position—rather than a pure money-making scheme for the bank. The Volcker Rule is still being written, and its scope could be expanded, but even then, there’s no guarantee that bets of this kind would be prohibited.