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Home | Blog | JP Morgan Loses $2 Billion trading, FDIC says no more TBTF

JP Morgan Loses $2 Billion trading, FDIC says no more TBTF


Victoria McGrane reports for the Wall Street Journal that the FDIC says it has it all figured out as to how it will unwind those huge, complicated, multinational financial institutions should the need arise. McGrane writes,

The FDIC, known more for its bank deposit insurance, is working to persuade major investors, analysts, economists and bankers that it is building an apparatus that could cleanly guide a massive financial firm to failure without a taxpayer bailout.

Regulators at the Fed generally look down their noses at their FDIC peers, who primary regulate small banks. Last month, Former Federal Reserve governor Kevin Warsh said that the new FDIC authority “is unlikely … to be up to the task” of mitigating harm in the next financial crisis.

“Critics argue that the FDIC doesn’t have the expertise to wind down a Lehman-like financial firm,” McGrane writes, “or they say that the international complexities would render the agency’s powers meaningless.”

Later in the day, after FDIC Chairman Martin Gruenberg gave a speech about all of this, J.P. Morgan’s wunderkind banker Jaime Dimon called an emergency press conference to announce that his bank’s CIO department booted $2 billion. These weren’t a bunch of credit card loans gone bad. The WSJ explains,

A massive trading bet boomeranged on J.P. Morgan Chase & Co., leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the “King of Wall Street.”

The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets.

As the gang at Zero Hedge says, JPM’s CIO department is the world’s largest prop trading desk. JPM wasn’t hedging but speculating,

because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.

Mr. Gruenberg, are you sure your troops are up to this?

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