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JPMorgan Chase & Co. Message Board

  • flashcrashcoming flashcrashcoming Oct 31, 2012 8:57 AM Flag

    Did J.P. Morgan Fiddle While Risk Burned?


    So far, J.P. Morgan has given little detail around the trading losses and has said it won't furnish more until after the end of the second quarter. Mr. Dimon also agreed last week to testify this summer before a Senate Banking committee hearing on the losses.

    For Congress, questions about the bank's risk measures are particularly important. That is because issues around them also touch on the way banks manage capital and report risk to investors.

    In some cases, value-at-risk models help to determine how much capital banks hold against trading assets. That gives them leeway since these are internally generated models. The danger: Banks have an "incentive to game their model to lower their regulatory capital requirement," says former Federal Deposit Insurance Corp. Chairman Sheila Bair. The risk grows if banks can tinker, as J.P. Morgan's episode shows may be possible.

    J.P. Morgan's experience is also a reminder that the risk measure varies among banks. Indeed, the Office of the Comptroller of the Currency, in a quarterly report on derivatives activity, "cautioned" that the risk gauge can mislead.

    The OCC said that J.P. Morgan, Goldman Sachs GS -0.23% and Morgan Stanley MS -0.35% calculate the measure with confidence there is a 95% chance that losses will be within the reading. If the firms used a 99% confidence level like "Bank of America BAC -1.32% and Citigroup, C -2.21% their Var estimates would be meaningfully higher," the OCC said.

    In light of that, J.P. Morgan is a reminder for both banks and investors that attempts to measure risk, let alone tame it, are fraught with hazard.

    Sentiment: Strong Sell

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