Heads Roll at JP Morgan Over $2 Billion Loss

by John M. Curtis
(310) 204-8700

Copyright May 13, 2012
All Rights Reserved.                                         

              Sending shockwaves through financial markets, J.P. Morgan Chase & Co. CEO Jamie Dimon announced May 9 that one of its trading groups lost over $2 billion managing risks over bond investments.  As losses piled up to around $3 billion, the company announced the resignation of its 54-year-old New-York-based Chief Investment Officer Ina R. Drew.  Drew got her masters from Columbia University in international economics, joining Bank of Tokyo as a trader in 1979, learning in the trenches, eventually jumping to Chemical bank in 1993 where she managed a $19 billion investment portfolio, including $50 billion of total assets in fixed income securities and derivatives.  “The capital markets were just taking off, and the bank just threw us in there with no trading,” said Drew in 1993 while at Chemical Bank.  “I’d come home crying saying I’ can’t do this.”  Drew joined JP Morgan aound 2000, eventually promoted to Chief Investment Officer in 2005.

            During the financial crisis of 2007-08, JP Morgan prided itself on avoiding the same risky derivative-trading strategies that mushroomed into what former Federal Reserved Board Chairman Alan Greenspan called the worst financial collapse since the Great Depression.  JP Morgan capitalized on the crisis, eventually acquiring Washington Mutual, the nation’s biggest Savings and Loan, for around $2 billion.  While other banks ran out of cash and were forced under the government’s Toxic Asset Relief Program [TARP] to borrow billions, JP Morgan under Dimon’s leadership sailed through the crisis.  Dimon burnished his reputation in the meltdown as a brilliant CEO, avoiding the same mistakes of his more mortal colleagues.  When banking stocks went into freefall, including Bank of America and Wells Fargo, JP Morgan held steady.  Last week’s loss, while a drop in the bucket for JP Morgan’s $2 trillion total assets, hurt Dimon’s reputation.

            Dimon called Drew’s investment strategy “sloppy” and “stupid,” suggesting it ran afoul with the bank’s overall investment strategies.  With Drew paid about $15 million in total compensation a year as CIO, it’s difficult to completely disown her accountability and methods to JP Morgan’s CEO and board.  Dimon, who sits on the board of the New York Fed, was a key advisor on upcoming financial reform, resisting the Fed’s instinct, under recommendations from former Fed Chairman Paul Volcker, for tighter bank trading regulations.  While banks engaged in risky derivative trading before Gramm Leach Bliley overturned Depression-era Glass Steagall in 1999 under former President Bill Clinton, it ended the firewall between banks and investment houses preventing another Great Depression.  When the 1929-like crash occurred in 2007, it raised serious questions about how the well-intentioned Gramm Leach Bliley Act caused another financial panic less than 10 years after Clinton’s signature.  JP Morgan’s derivatives trading loss opens the door to more federal regulation.

            Forcing out Drew or her London-based lieutenants, Achilles Macris and Javier Martin-Artajo, doesn’t help JP Morgan other than a thinly veiled damage control strategy.  What’s really at stake is the very nature of the bank’s lucrative profit centers that, for years, capitalized on the “synthetic” or derivatives trading environment.  Drew simply got burned by the same overly-complex trading instrument known as credit default swaps, the same ones that brought down American International Group [AIG], Bear Stearns and others caught in the 2007-08 derivatives meltdown causing a worldwide financial panic.  When you consider the size of Drew’s loss relative to JP Morgan’s total assets, it shouldn’t cause Friday’s $15 billion loss in market capitalization, dropping JPM’s stock 10% or $36 a share.  It won’t take long for traders to bid back up the stock of the nation’s most solvent bank.  Last week’s shocker could have happened at any time since 2007.

             Today’s banking industry must stop blaming lowly borrowers that they blamed for the 2007-08 collapse of the mortgage-backed derivatives’ market.  While there’s no stampede today like there was in five years ago, the same industry practices could cause the next major financial collapse.  What disturbs so many now is that the fast-and-lose trading happened at the nation’s most prestigious bank, thought as doing things differently.  Whatever JP Morgan does to restore its reputation, including forcing out Drew or others, Dimon must look squarely in the mirror, before criticizing Fed officials as “infantile” and “nonfactual,” in their daunting task of reining in the financial industry.  Dimon must now get on board to put some teeth into needed financial reform to prevent another repeat of the 2007-08 collapse that plunged the nation into the worst recession since the Great Depression.  Today’s banking industry must accept their role in the yesterday’s meltdown.

            Dimon’s true leadership in Wall Street’s attempt at financial reform requires an honest inventory of today’s trading practices that place the U.S. and world financial system at risk.  Instead of blaming struggling homeowners, the banking industry must take inventory of how 1999 Gramm Leach Bliley ended the needed protections from Glass Steagall to prevent another Wall Street collapse and Great Depression.  However much easy money and false profits come from derivatives trading, Dimon should work hard with Volcker and other members of the Fed and Treasury Department to put teeth into President Barack Obama’s 2010 financial reform. Whether Dimon and JP Morgan violated the spirit of the Volcker rule by trading for profit and not risk management is irrelevant.  Any trading strategy that places depositors' or shareholders’ capital at risk must be carefully evaluated.  Whatever the expected profits, there’s just too much risk to entire system.

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