In the early days of his administration, Obama praised JPMorgan as an example of a well-run bank. “You know, keep in mind, though there are a lot of banks that are actually pretty well managed, JPMorgan being a good example, Jamie Dimon, the CEO there, I don’t think should be punished for doing a pretty good job managing an enormous portfolio,” Obama told ABC News in February 2009.
Obama: "JPMorgan is well managed.."
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Let's do some math.
1. JPM has a $2 Billion trading loss.
2. Last year, JPM earned ~$26 Billion before taxes.
3. Assume JPM earns the same pretax income this year.
4. JPM's trading loss is ~7-8% of pretax profits for 1 year.
Seems like people are blowing this way out of proportion... maybe to push their political agendas? You never know.
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Let's do some math.
1. JPM has a $2 Billion trading loss.
2. Last year, JPM earned ~$26 Billion before taxes.
3. Assume JPM earns the same pretax income this year.
4. JPM's trading loss is ~7-8% of pretax profits for 1 year.
Seems like people are blowing this way out of proportion... maybe to push their political agendas? You never know.Yes and no. Actual loss was small. Details are sketchy, but they seem to have lost $2 billion on CDSs when spreads moved against them. To lose $2 billion, presumably they are selling LOTS of protection. So the observed loss was small but the exposure was huge.
That being said, was it Dimon's fault that a few traders in London didn't understand what they were doing? Probably not directly, and from his reputation he will make sure the proper changes are made to internal oversight to prevent reoccurrences.
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4eef, you're confounding stocks with flows (ie...profit=operating capital). Margins and operating capital on Wall Street are much, much smaller than raw measures of profit, and a $2B loss has the potential to eat a significant chuck of JPM's capital cushion at any point in time (to say nothing of the potential for a run on bank/system liquidity).
And like 9e6e outlined, this doesn't even take into account their potential exposure to CDS losses, which would further compromise their capital positions.
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4eef, you're confounding stocks with flows (ie...profit=operating capital). Margins and operating capital on Wall Street are much, much smaller than raw measures of profit, and a $2B loss has the potential to eat a significant chuck of JPM's capital cushion at any point in time (to say nothing of the potential for a run on bank/system liquidity).
And like 9e6e outlined, this doesn't even take into account their potential exposure to CDS losses, which would further compromise their capital positions.That's actually a great point. It's true they could have been in grave danger from the perspective of risk management.
But the truth is, we cannot see JPM's trading books. I have only heard stories about the positions of this one trader, and nothing which speaks to what the rest of JPM's risk exposure looked like. What was the *net* exposure across the firm? People are just guessing. Obviously we can all agree a concentrated risk was taken, but to what degree, I don't think anybody can say for sure.
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I know nothing about finance and am clueless while reading what you guys are saying. Any decent reading list that will help me understand what goes on in these firms- what stuff these guys actually trade, on what basis etc. Something that assumes no prior knowledge other than say econ phd core(if that is at all relevant). Thanks.
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@ f9be: if you've digested the core of an econ PhD program, you should be able to digest these (though they aren't necessarily for beginners). The list is in order of ascending difficulty.
-How Big Banks Fail and What to Do About It, by Darrell Duffie
-Slapped by the Invisible Hand, by Gary Gorton
-Credit Derivatives & Synthetic Structures, by Janet Tavakoli
-Structured Finance and Collateralized Debt Obligations, by Janet TavakoliThat's a good start.
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Thanks!
@ f9be: if you've digested the core of an econ PhD program, you should be able to digest these (though they aren't necessarily for beginners). The list is in order of ascending difficulty.
-How Big Banks Fail and What to Do About It, by Darrell Duffie
-Slapped by the Invisible Hand, by Gary Gorton
-Credit Derivatives & Synthetic Structures, by Janet Tavakoli
-Structured Finance and Collateralized Debt Obligations, by Janet Tavakoli
That's a good start. -
Let's do some math.
1. JPM has a $2 Billion trading loss.
2. Last year, JPM earned ~$26 Billion before taxes.
3. Assume JPM earns the same pretax income this year.
4. JPM's trading loss is ~7-8% of pretax profits for 1 year.
Seems like people are blowing this way out of proportion... maybe to push their political agendas? You never know.The controversy is that it's supposed to be their hedging division. I think they made around 2bn last year - which, quite obviously, isn't supposed to happen. And neither is a 2bn loss.
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The controversy is that it's supposed to be their hedging division. I think they made around 2bn last year - which, quite obviously, isn't supposed to happen. And neither is a 2bn loss.
What? I always thought that the hedging division should take loss when the asset is making money and the opposite when is losing. They might be trading around assets as well, but we don't know that.
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Hedging can be either long or short. JPM functions as a market maker for many different asset classes and securities.
They will often "go long" or "go short" in trades with a client to both provide liquidity and earn a marginal profit, however this leaves JPM exposed to a significant amount of financial risk.
To offset that risk, JPM uses financial engineering techniques to create an equal and opposite position. If a perfect hedge is not possible, meaning JPM is not 100% protected, which is often the case, whatever residual risk JPM is exposed to can be thought of as a speculation, or a gamble, meaning they will gain or lose money.
Often it is simply impossible to perfectly hedge all risks while also providing significant liquidity to markets. The process is too expensive and onerous, so banks have to naturally keep some risk on their books. Proprietary traders try to direct these risks in a way they think will benefit the bank.
However, if these size of these speculative positions grows large, and proprietary trading dominates the bank's risk profile, then the bank itself becomes something similar to a hedge fund. As such, volatility, poor judgment, unfavorable liquidity conditions, or simple misfortune can devastate the bank's capital and leave it crippled.
Thus, banks have to keep a vigilant eye on their proprietary traders. This is the job of risk managers. Natural conflicts emerge between risk managers and traders, because traders are often rewarded with massive bonuses by risking the bank's capital. Risk managers are supposed to protect the firm by measuring trader's positions and enforcing internal regulations. But this is a dynamic process, and simple controls cannot always prevent a trader from creating a large, concentrated position.