Dimon with egg on his face

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’.

5 thoughts on “Dimon with egg on his face

  1. Sorry about this being off topic:

    You speak of a long expansive period 1982-97. Do you consider this to be compatible with analyses by Kliman, which emphasize the failure to achieve higher profit and growth rates during the last 30 years? He seems to characterize the period 1982-2007 as one of continued stagnation.

    McNally also use this periodization but I haven’t seen him entering debates on the measurement of profit rates, historical vs. current costs…

    Anyway, I think this issue is not widely discussed and grasped in left circles.

    1. Magnus

      I agree that this is not widely discussed because it is my view of the trend in the US rate of profit, namely both a secular fall but with cycles of up and down phases. I developed this view in my book, The Great Recession (2009). I also outlined the view in more up to date detail in a paper to the Association of Heterodox Economists in July 2011 (see my post Karl Marx was right(partly) – Roubini 16 August 2011 where you can get a copy of the paper). Also, look at my post, The debate of the rate of profit (yet again) on 26 October 2011 which covers Dave McNally’s book and his critics.

      It is an important difference I have with AK (see my post reviewing his book, Andrew Kliman and the failure of capitalist production, 8 December 2011). In correspondence with AK, he did recognise that there are cyclical movements in the rate of profit and on some measures there was a rise from 1982. If I am right and the US rate of profit peaked in 1997, then it provides the best explanation of the ensuing Great Recession.

  2. Regarding Dimon and Chase’s losses: I wonder whether this loss represents the opening of a new stage in the banking crisis in general.

  3. Here is what one analyst said about the huge and risky derivatives market: “That $14 trillion in exposure exists because the financial world cannot earn sufficient returns on all of those little green pieces of paper printed by the Fed by investing solely in the real economy. That is why the real takeaway from the JPM disclosures is not that it was an aberration, but that this is the core business of Wall Street today. ” JPMorgan: What’s the Fuss? Chris Whalen, May 15, 2012

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