JPMorgan and its CEO lose credibility

Gambling on Jamie Dimon's statements going forward looks like a very bad bet for investors.

By MSN Money Partner May 23, 2012 6:07PM
By Abigail C. Field

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.

29Comments
May 24, 2012 9:01AM
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Just wondering

 

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? 

May 24, 2012 8:29AM
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"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!

May 24, 2012 5:38AM
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where's the 2 billion dollars that jpm lost who has it????????????????????????????????
May 24, 2012 7:41AM
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HOT NEWS FLASH here folks!!  Anyone that puts any stock in any of the fictitious stories that come out Fall Street (no, not a typo) I have a bridge for sale and some oceanfront property in Arizona if they're interested.  Everything has a usable lifespan and the manipulators can only manipulate so many times before they exhaust the usable lifespan of everything from money, to an explanation, to the gullibility of their investors. JPM has run out of lifespan usage and deserves whatever happens.
May 24, 2012 8:47AM
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It as $4.5B, then $2B, then $3B. Which is it?? How come when I get 'creative' with my money like that they charge me $35 a shot??
Crooks. The whole pot full of them.

May 24, 2012 7:15AM
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I think I losses are up to 5 billion now and might be going to 7 billion. I don't believe the London Whale casued this in derivatives by speculation...I believe they are not disclosing where the real losses came from.
May 24, 2012 8:18AM
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Jamie Dimon on the hot seat! Couldn't happen to a nicer guy.
May 24, 2012 8:13AM
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frugal one

more money has been stolen at the point of a pen ,than at the point of gun

some one needs to slap the horse
May 24, 2012 9:09AM
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"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.

May 24, 2012 9:27AM
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To big to fail? To big to exist!  Just another Ponzi scheme gone wrong, that will cost the tax payer
May 24, 2012 9:32AM
May 24, 2012 9:45AM
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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.

May 24, 2012 10:04AM
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here we go again. please i beg of you do not let jamie leave without a multimillion dollar bonus. after all look at the great job he did hiding 2 to 7 to god knows how many billions of dollars until the smoke clears then he can head off to his own private island we payed for. thanks jpm and the feds for taking all you can and getting away with it. ta ta for now coravette.
May 24, 2012 9:56AM
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So when are we gonna the resignation of JAMY DIMON on grounds of FRAUD and bad risk taking. LET THEM FAIL.
May 24, 2012 10:27AM
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The sad part is that as long as we bail them out the big banks,insurance companies, wall street,and all of the other multi million dollar paid ceos will gamble with the investors money and then use the taxpayers money to get the companies out of the trouble they get in.Then the ceos and  speculators will probably get big bonuses and then do it again as soon as they can. Why do the taxpayers not reap the benefits when they make millions and billions of dollars? 
May 24, 2012 10:27AM
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What the article doesn't say is that JPM losses could reach the 18-20 Billion dollar range on this "trading error". First of all, this was a bet not a hedge. Secondly, JPM silver position also exposes it to potentially billions more in losses. When these two bets go south you can bet Jamie will go crying to the Fed and then, QE-3 here we come, don't worry folks it will only cost the taxpayer a few trillion and debase the currency a bit more.
May 24, 2012 10:31AM
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GREED, GREED, STUPID ,STUPID !!!!!! Get the picture.
May 24, 2012 10:50AM
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Banks and CEO's like Dimon have more difficulty telling the truth than even politicians ... they ALL lie!!! How many examples do we need:  Enron, WorldCom, Adelphia, Lehman ... they all told the public, their employees, the investment community, etc. that everything was wonderful while selling their own stock and making billions.  They all suck; let them all go down the tubes.   
May 24, 2012 11:06AM
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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.

May 24, 2012 9:31AM
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Why would you trust your money to some with the name 'Jamie'? It is what you wa\ould call a child. Not an adult!!!!!!!

 

Just saying

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