JPMorgan and its CEO lose credibility
Gambling on Jamie Dimon's statements going forward looks like a very bad bet for investors.
JPMorgan Chase (JPM) stockholders, beware. JPM's ongoing multibillion dollar bleed from the London Whale's gamble-gone-wrong highlights two big, related risks facing the company: a hot-money bank run, and the disintegration of CEO Jamie Dimon's likely unearned reputation as a brilliant risk manager.
Hot money is cash that global investors seeking both safety and yield deploy, yanking back and redeploying whenever a better opportunity shows. JPM is flush right now with hot money; will it stay?
Meanwhile, Dimon continues to undermine his credibility with more happy talk of the "tempest in a teapot" variety.
JPM's vulnerability to a bank run
As Amar Bhide explained to Bloomberg TV on May 15, the "surplus deposits" that JPM's chief investment office gambled are deliberately solicited international hot money. JPM's solicitations have been very successful; according to Bloomberg, on a one-year basis JPM’s "surplus deposits" grew by 13% while Wells Fargo's (WFC) increased 11%, Citigroup's (C) 5%, and Bank of America (BAC) 2%.
Unfortunately for JPM, hot money is fundamentally unstable, and its rapid withdrawal damages banks and countries. As JPM's safety image crumbles, it faces an increasing risk of hot money flight.
JPM's pitch as safe has two components: As a too-big-to-fail institution, Chase can tell hot money that the taxpayer will cover their losses if they become big enough. Second, Chase can push the Jamie Dimon risk manager mythology. But that part of the pitch should no longer be believed.
Dimon can't manage JPM’s risk
Bhide highlights the impossibility of managing a large hedge fund and a big international bank
simultaneously, which Dimon purports to do. But Dimon's reality-versus-perception reputation problem is worse than that. First, Dimon's rep is based on the questionable claim that he saved Chase from the last financial crisis. Second, Chase is gambling with leverage of 100 to 1 or even 200 to 1, according to Bhide. That's very risky stuff.
Does Dimon really deserve the credit for Chase's escape from the last crisis? Here’s an alternative explanation: Ina Drew, who focused mostly on hedging back then and had not been laid low by Lyme disease, deserves the credit. She guided the bank through the LTCM debacle, after all.
Look, Dimon's been about increasing risk, not managing it: Dimon's the one who pushed the CIO into heavy gambling. And see who Dimon replaces Drew with -- Matt Zames, of the big hedge fund failure LTCM, who made his mark at Chase trading derivatives for big profits in a tough market. How is that possible without real risk taking?
Ignore Dimon's happy talk
Back in April, after Bloomberg and the Wall Street Journal reported about Chase's risky trades, Dimon told investors not to worry and called it a "tempest in a teapot." That was so misleading both the SEC and the Justice Department are investigating.
But Dimon's not chastened, telling Bloomberg recently that "I am not sitting here worried about the ultimate loss" on the London Whale bets and "there's no outcome that will be a disaster for this company."
Or consider that when announcing a halt to share buybacks, Dimon said the move would help the bank meet regulatory capital requirements. As CBS News noted, however, Dimon's explanation "is an about-face from earlier statements. At a meeting with investors in February, Dimon had said buying back stock helps the company meet regulatory requirements quicker." Gambling on Dimon's statements going forward looks like a very bad bet for investors.
Abigail C. Field is a freelance writer and attorney who blogs at Reality Check.
Why does the government need to spend another 2 or 5 million to find out why a company lost money. That is what they taught me in my Introduction to Business class in college. Some companies make money and others lose money. The ones that make money stay in business and the ones that lose money go out of business.
As far as the government caring about the money of the investors, Where the hell was the government when the DOW went from 14K to 6.6 K?
"Gambling on Jamie Dimon's statements going forward looks like a very bad bet for investors"
The emphasis here is on gambling, a Freudian slip, I think not! The whole market has become a crap shoot and it is now just gambling. You can't believe any of the info the CEO's put out! I even remember the EX CEO of Golman Sachs coming out and saying for weeks before the 08 crash, "the fundamentals of the economy are sound". Street level people don't have enough reliable info to trade on and the now it is even the top tier traders can't trust the information.
Always get the thumbs down when I refer to the market as one big Casino but it seems more and more people are becoming aware of this fact. It is gambling and the odds are stacked against you!
Crooks. The whole pot full of them.
"a too-big-to-fail institution"
Very good article. Here’s another dimension of JPM’s problem which is at the core of this fiasco. When your hedging position in a market becomes so relatively big that you are the market, it increases your risk rather than reduces it. You are faced with the dilemma of exposing yourself to try and hide yourself. You end up trading against yourself to get out of your position. You become inescapably caught in your own trap. Being too big to fail guarantees that you will fail. Therein lies the paradox.
That’s why every time Blythe Masters (Head of Global Commodities at JPM and creator of the Credit Default Swap) goes before the CFTC and argues how position limits are so wrong for the big banks and the world economy in general, she is not only lying to us, she is lying to herself as well.
They are telling hotmoney that they are too big to fail,and that the taxpayer will bail them out. Let them fail and the
we taxpayers have bailed out them out for the last time.They think they can make millions and then through hedgefunds play with the American taxpayers money and then when it fails they want the American taxpayer to fork out more money for them.
The life of Riley , huh?
Let the big banks fail, because there are a lot of smaller banks that can take the slack up and get rid of the outrageous paid CEO's.
I have a comment for all the whiners on this thread. Grow up and do something about it. Stop voting on the basis of tribal affiliation and vote your best interest. If the Republican party had their way, the US would become China West. The auto industry would not exist; the manufacturing sector would also not exist; the only people that would be around would be the "masters of capital" risking everyone;s money, burdening everyone with the loses but stiffing everyone when it comes to the profits.
Name any other industry that pays million dollar bonuses to first year out of college employees. They do so because they are making them sell their souls for money. Banks have merged their businesses with a casino operation. Creating "synthetic" financial instruments that even they do not understand and then selling them to pension funds, European retirees, whole cities and countries and unknowing people around the world and then laughing while they crumble under the weight of the fraud.
Why would you trust your money to some with the name 'Jamie'? It is what you wa\ould call a child. Not an adult!!!!!!!
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