JPMorgan Chase & Co, the biggest US bank by assets, announced yesterday that it had suffered a trading loss of at least $2 billion from a failed hedging strategy. Jamie Dimon, CEO of the banking giant, said that “this puts egg on our face” . Dimon said the bank had made a significant mark-to-market loss in its synthetic credit portfolio – these typically include derivatives in a way intended to mimic the performance of securities. Dimon then put more egg on his face, making a complete makeover, when he added, “it could cost us as much as $1 billion or more,” in addition to the loss estimated so far. Dimon said. “It is risky and it will be for a couple of quarters.”
The problem at JPMorgan, he said, was with the execution of the hedging strategy, which “morphed over time” and was “ineffective, poorly monitored, poorly constructed and all of that.” The department responsible for this disaster, based in London, the Chief Investment Office, makes broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies. So these losses were with that great phenomenon of the credit crisis: derivatives.
The banks are back to their old tricks of not doing any proper banking, but instead trying to make huge speculative bets on the movement in the prices of financial assets – the very actions that caused the biggest global banking collapse ever just three years ago. At the same time, the likes of Dimon and other bank chiefs are awarding themselves the old grotesque pay packets and bonuses that they did before the crises as though nothing had changed. And it seems that it has not – we are back to ‘business as usual’, even if the eggs keep hitting the faces of bank leaders.
It’s yet another example of the crying need to take the banks into public ownership and control so that banking becomes a public service to provide credit to businesses and loans to individuals, not be huge hedge funds that have to be bailed out by the taxpayer when they make the ‘wrong bets’.