Last week’s headlines screamed about a sensation: J.P. Morgan Chase & Co, one of the largest US banks in terms of assets, lost $2 billion. However, Jamie Dimon, CEO of JPMorgan Chase, assured everyone that no client had suffered from that. Moreover, according to him, the bank will finish this quarter with a surplus even despite the major loss. President Obama also helped JP Morgan to extinguish the fire by saying that JP Morgan’s management staff is the best in the US banking sector, so the US authorities won’t interfere with the bank’s activities due to its high productivity. However, the Federal Reserve is determined to start special investigation.
What really happened? Why do the US Authorities stay calm? What does it mean for J.P. Morgan’s investors?
$2B Loss: Economic Fail Or Political Game?
According to Eugene Olkhovsky, ’s leading expert in financial markets form Canada, J.P. Morgan changed the Chief Investment Officer instantly after the incident.
Some experts say that Neither Obama’s administration nor the US banking system will benefit from the scandal. J.P. Morgan’s stock dropped by 6.5% shortly after the news. Other major US banks followed J.P. Morgan: Citigroup’s stock lost 3,6%, Bank of America –2,6%, Goldman Sachs –2,4% etc. Fitch Ratings downgraded J.P. Morgan’s rating from АА– down to А+. The forecast changed from stable to negative.
Moreover, the current political situation in the country (run-up to the forthcoming presidential elections) didn’t let the authorities to hush up the scandal: both the Democrats and the Republicans are trying to use it as a weapon in the battle for the electorate.
Tips For Investors: Is It Possible To Lose $2bn Accidentally?
Bruno Michel Iksil, a trader form London (aka “London Whale”), opened multiple trades in the derivatives market to the amount of $100bn, anticipating an improvement in the credit market. However, because of Spain and other negative factors, the risks escalated and in 6 weeks J.P. Morgan lost $2bn.
But is it possible to lose $2bn accidentally? According to experts, the current situation around J.P. Morgan seems to have much in common with Lehman Brothers’ bankruptcy, which initiated the global economic crisis in 2008. The situation in the derivatives market can change in the blink of an eye. So it is impossible to sell them out fast so as to avoid major losses. How come that J.P. Morgan’s traders didn’t take this factor into account when investing in derivatives?
It is interesting to know that J.P. Morgan’s top managers were informed about the problems in the bank’s investment department a month ago. However, somehow they ignored that the risks doubled from $88mn up to $170mn (y/y). They were aware of the risks long before the incident. In late April traders tried to reduce the exposure but, as we can see, it was too late. By the way, Bruno Michel Iksil is still working for J.P. Morgan unlike Ina Drew, who used to be the banks’ Chief Investment Officer.
Gaining Control Over Wall Street
According to , the incident with J.P. Morgan seems to have revived the debates over Barack Obama’s financial reform, which is considered as his administration’s biggest achievement. President Obama signed the financial-market regulation bill in 2010 when the Democrats represented the majority in the US Congress and managed to pass the bill despite the Republicans’ opposition.
Obama’s financial reform implies the elimination of the following 3 key factors:
· the absence of control of Wall Street (i.e. over the US banking system)
· the absence of the mechanism of monitoring those US financial institutions, the financial activity of which threatens the US economic security.
· the absence of regulation for non-banking financial institutions
Moreover, it was planned to found a standalone institution under the Federal Reserve to provide security to US consumers of financial services.
However, for some reason the financial reform has failed to take full effect. Therefore, the scandal with J.P. Morgan allows Obama’s administration to accelerate the implementation of the reform.
They say this is the biggest financial reform since the Great Depression. According to Masterforex-V academy, if it had been implemented before 2008, the world would have avoided the global crisis.
Political Regulation Of US Financial Flows
According to the analytic team of Forex Trend (TOP 10 of ’s rating of Forex brokers ), political scientists are sure that the situation in the US financial sector will become the key factor in the run-up to the USA’s presidential elections.
Anyway, experts are sure that the incident with J.P. Morgan will have serious consequences both for the US financial system and the entire world. It will give the US authorities an opportunity to establish control over the US financial sector and to deprive it of excessive liquidity.
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
In your opinion, what will be the consequences of J.P. Morgan’s loss?
