The rumor of this story was out there a month ago, but the most arrogant man on Wall Street dismissed it. Jamie Dimon has known about the $2 billion trading loss for weeks and finally went public with the news Thursday night after trading hours. The actual trading loss by the man known as Voldemort or “The Whale” in London was “only” $800 million (a fraction of the value of JPMorgan, which is a few trillion dollars) so the bad trade will not bring down the company.
The much larger concern is what else is out there. JPMorgan’s Jamie Dimon sold himself as the expert on risk. The old “trust me, I know better” routine. Just like the “trust me, I know better” crowd at Enron and later Wall Street circa 2008, they didn’t know better. Dimon’s strength had been his bluster. He bullied Washington and demanded that they leave him alone because he knew better. Dimon called attempts to regulate “anti-American” and he ripped into all attempts at reforming the greed culture of Wall Street.
As the week ended, more began to emerge on the JPMorgan scandal. The Chief Investment Officer, Ina Drew, previously had a reputation for being a genius with handling risk. Despite the reports that she had a reputation for being a “natural trader” she was in charge of addressing risk for the bank. This is not unlike asking a sales person to be in charge of accounting or a fox guarding a hen house. It’s an obvious conflict of interest for any industry other than Wall Street.
The risk team at JP Morgan had been growing its supposed hedges in recent years, growing from a relatively small division to an increasingly large division. Profits were rolling in (which means bonus money was flowing) so nobody was going to rock the boat. If it sounds like a familiar story, it is. It’s this kind of problem that triggered the Wall Street collapse back in 2008. Nobody was asking serious questions because the money faucet was flowing.
What is also curious not to mention scary about this latest loss is that the trader was not known to be a high risk person. He made lots of money for himself and for JPMorgan but he was considered to be a conservative family man, as opposed to the flashy car type of trader.
All of this now has many worried that there is more. Bloomberg reported on Friday (h/t to Sandra) that this may be the tip of the iceberg for JPMorgan. The theory is that if Jamie Dimon came out this early in the quarter with such bad news, there’s a high likelihood that there is a lot more bad news to come.
What we should be hearing on Sunday during the morning talk shows is a strong demand for reform of Wall Street. No more apologists, no more nice guy talk and no more excuses. What we also need to hear is no more bailouts of any kind for Wall Street, especially JPMorgan. We may not be there (yet) but Washington has to be crystal clear that if they want to gamble, they need to live with the full consequences. That’s how actual capitalism works. If you risk and lose, you risk and lose.
(Follow me on Twitter @ChrisInParis)