Financial markets were rocked last night when JP Morgan (JPM) announced an unexpected loss of $2 billion in what CEO Jamie Dimon called "synthetic credit positions." According to Dimon, one of the most highly regarded CEOs in the financial industry, the losses had been incurred over the last 6 weeks.
The trades were intended to be "hedges," a position the firm maintains, but the losses looked much more like the result of aggressive prop bets that proponents of the so-called Volcker Rule are seeking to outlaw.
Josh Brown, author of Backstage Wall Street and JP Morgan shareholder suggests the ill-fated trades likely came out of the firm's Chief Investment Office. "There was some talk in the press about a month ago that they were putting on trades that were so large that they actually skewed inter-market relationships (causing other parties to lose money)," he says.
The trades were allegedly implemented by a man named Bruno Iksil, often referred to on street as the "London Whale" and sometimes Voldemort.
Whether or not it was the Iksil at work, the trades being made were enormous and potentially dangerous. When asked about the stories weeks ago, Dimon dismissed them as a tempest in a teapot.
"Now it turns out that it's about a $2 billion loss and it's something that's going to take them a while to unwind," says Brown. "In the context it's not relevant but as a shareholder you're always concerned because this was supposed to the 'quality' U.S. bank."
Two billion dollars isn't a massive amount for a company the size of JP Morgan. On yesterday's call the CEO Dimon conceded "I think we acted a little too defensively" in response the Iksil reports.
Brown says the chastened bank will likely stick to their knitting, spending less time campaigning against the Volcker Rule and more time focusing on operations.
The lingering question for the industry is whether or not this massive loss will lead to ramped up financial regulations that will make passage of the Volcker rule inevitable. Brown says anyone that was on the fence politically on the Volcker Rule is now immediately in favor of its passage. "The other banks are sitting in the splash zone of this whale," he says.
The question for Brown is what he intends to do with his shares.
For the moment he's standing pat. He's long at $40/share and notes the dividend yield is still in place, as is the $15B share buyback plan. He says this "puts a little bit of cushion under the shares," and as the dust settles he'll consider whether or not other names in the financial industry are more compelling.
"What we don't do is make a panic sale based on a problem that we think can be one time in nature, and does not necessarily have to represent systemic or chronic issues within the company," Brown explains, adding he just doesn't think that's the case for JPM.
As a final thought Brown wants to make sure he and others obey the number one rule in trading "Don't cry!"
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- Jamie Dimon
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- Josh Brown