JPMorgan’s Whale of a Loss and Dimon’s Volcker Criticism Look Worse in Hindsight

The Jamie Dimon utterance from last night’s mea culpa that stuck with us today had to do with hindsight—not when he said that looking back, the hedging strategy that resulted in a $2 billion loss was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”—but rather this: “Hindsight is—even in hindsight, it’s not 20/20.”

Last month, the financial press gawked in fascination at a JPMorgan trader named Bruno Iksil whose enormous derivatives positions earned him the nicknames Voldemoort and the London whale. Then JPMorgan brass went on their April conference call and said that the story was much ado about ordinary business, and the story disappeared, and we—at The Observer at least—more or less forgot about it.

Which seems so silly now, because as Felix Salmon put it last night, “whenever a trader has a large and known position, the market is almost certain to move violently against that trader.” Gregory Zuckerman expanded on the idea in Deal Journal this morning, in a story about the dozen or so firms on the winning side of JPMorgan’s losses:

“Investors began to smell opportunity earlier this year as J.P. Morgan built noticeably large derivative positions that included bullish bets on the health of various companies. Some traders decided to take the other side of J.P. Morgan’s trade—including those of a London-based trader at the bank nicknamed “the London Whale”—in the belief that the bank’s positions had become so large they would have to be sold at some point, perhaps due to pressure from senior executives, said people familiar with the matter.

“Others entered into opposing trades simply because J.P. Morgan had made so many wagers on corporate credit, by selling so-called credit-default insurance, that it became inexpensive for these other traders to buy this insurance to protect against bad economic news.”

Which brings us to the folks like Massachusetts congressman Barney Frank and Sen. Carl Levin of Michigan, who also smell the blood in the water. (“The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today,” said. “The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too-big-to-fail’ banks have no business making,” said. Mr. Levin.)

Dimon said last night that the ill-fated trade complied with the Volcker rule, but not the Dimon rule—the language of which might read, “you have to not lose $2 billion.” Which is a right thing to say, and a point worth remembering, that no one wanted JPMorgan to lose $2 billion on the London whale trade than the folks at JPMorgan.

Whether or not you truck with Volcker, we can concede that the rule aims to protect banks from losses like these, which seems like a noble goal this afternoon, when in hindsight JPMorgan’s whale of a loss looks like those that came before it.

[DON EMMERT/AFP/Getty Images]



JPMorgan’s Whale of a Loss and Dimon’s Volcker Criticism Look Worse in Hindsight