Since the announcement last week that a large bet on Euro markets orchestrated by JP Morgan’s London trading desk, led by a gentleman referred to by awestruck compatriots as “the whale,” had failed spectacularly and caused at least a $2 billion loss, there has been much talk in Washington, on Wall Street and in the media on what the real costs will be. Politicians and pundits fired new salvos about the evils of banks, lessons of 2008 not learned and the need for more and stricter regulation, including speeding up the tortoise pace of Dodd-Frank regulatory enactments.
On Wall Street, there was concern about whether there were any similar issues at other investment banks (and scrambling within to find any potential problems), pontificating about the merits of risk taking and even some whispers about credit rating concerns. JP Morgan went into full crisis mode, sending out CEO Jamie Dimon to provide multiple mea culpas to investors, employees and Sunday morning shows and providing talking points to try to explain away the situation to customers and shareholders. Mr. Dimon will no doubt do much of the same at tomorrow’s Company annual meeting.
Yesterday, there were news reports of the imminent resignations of JP Morgan’s Chief Investment Officer and two other executives, including “the whale.” In the case of the CIO, it appears that she had offered to leave last month when the issue first came to but Mr. Dimon held off accepting until it became all too apparent that some heads needed to roll to satiate the masses and start repairing the Company’s reputation.
In the scheme of things, for a mammoth global banking power like JP Morgan, $2 billion (or even $4 – $5 billion as some commentators see the final tally of winding down the position) is just pocket change. The Company made roughly $39 billion in profit last year and nearly $10 billion in the first quarter of 2012.
The $2 billion loss sliced $14 billion off JP Morgan’s market cap on Friday and overage is an indication of the reputational loss the Company suffered. There will no doubt be Congressional and regulatory hearings in short order that will further heighten the significance of this very bad trade, rehashing 2008 and shining a spotlight anew on the Volcker Rule, Dodd-Frank and how banks should approach risk and playing with house money. Further, Mr. Dimon is now facing questions about his leadership abilities, hence his forceful public response with words and actions that would make you think this was a much bigger financial hit to the Company.
This story is still in its early days, but in the metrics of reputation, the $2 billion loss will cost the Company much, much more in terms of its valuation, standing with customers and public perception as well as any new legislative or regulatory rules that come from this. Mr. Dimon understands the serious and potentially far reaching impact this can have on the JP Morgan brand and is doing the right thing in trying to get out in front, taking responsibility and treating this as a far greater issue that just a rounding error on its massive balance sheet. The leadership of the other megabanks (and in fact any Company) should take note as they look closely to examine their books for any issues as “the whale” was not a rogue trader, just someone doing his job poorly with lax oversight.