Where were you when you heard the news of JPMorgan’s multi-billion dollar trading loss? Ironically, I was in a room full of financial regulators and compliance officers at the FIA Law & Compliance Division conference. While not on par with the flash crash or Lehman bankruptcy, the JPMorgan announcement and subsequent apology speech by CEO Jamie Dimon certainly had that “shot-heard-’round-the-world” feel to it. For in one swift motion, the announcement served to ring the death knell to three things – risk-based modeling, the mounting opposition to Dodd-Frank and other financial regulatory confinements and, of course, to Mr. Dimon’s status as the unscathed ambassador to the banking sector.
They say no one rings a bell at market tops. I say, “ding-ding-ding.”
On Monday, the FT published an excellent article by Frank Partnoy, calling for a return to the regulatory structure of the 1930s. In the article Partnoy lists the total losses sustained by some of the recent financial implosions, along with the then-current 95 percent confidence level value at risk(VaR) for each:
- Barings Bank, 1995 – $1.4 billion loss; VaR: $0
- Long-Term Capital Management, 1998 – $4.7 billion loss; VaR: $45 million
- Merrill Lynch, 2007 – $9.8 billion; VaR $76 million
After the last financial crisis, it was widely assumed that the tools used to model risk and return – portfolio theory, financial engineering and securitization – would be relegated to the scrap heap. Yet here we are, post-bailout, witnessing the erosion of JPMorgan’s market capitalization due to imprudent risk management and trust in the model.
The trouble at JPMorgan also marked a personal high for Jamie Dimon. We can all remember the man’s swagger as he lectured the Financial Crisis Inquiry Commission (FCIC) in 2010 on how the banks were not to blame, and that Morgan did not even need the money received from TARP. We recall his most recent railings on how the Volcker Rule and Basel III will destroy the whole of commerce. In fact, since Mr. Dimon parted ways with Sandy Weill and Citigroup in 1998, he has had the spark of, well, a diamond. (collective moan.) He now appears wounded and contrite. Heads are beginning to roll. Will he be one of the casualties?
Doubtful, but it appears we are witnessing the end of knee-jerk opposition to new regulation. Regardless of whether JPMorgan’s losses were due to a rogue trader, imprudent risk management or something else, the incident will likely put to rest calls for the repeal of the Volcker Rule and/or other parts of Dodd-Frank. The standard industry narrative – inadequate cost-benefit analysis, the stranglehold being put on solid business practitioners, onerous capital buffer requirements – will fall on deaf ears. In fact, it is being said that the Volcker Rule may not have even prevented the type of trading that led to the steep losses, as they supposedly stemmed from legitimate hedging of the firm’s credit portfolio. Not only have the cries for watering down the Volcker Rule ceased, we are seeing a push for even stronger limits on bank trading activities.
As I wrote this column, I considered adding a fourth point – the end of Mitt Romney’s chances to become President in 2012. Since he and GOP strategists have paid a significant lip service to the notion of regulatory overreach, he will need some serious spin to get out of this one. In the end, however, it is much too soon to call the election. Many things could happen between now and November. Case in point: if the next non-farm payroll number is again weak, we may see QE3 by mid-summer. Such a short term jolt would probably help people forget the JPMorgan mess for a few months, until reality reappears. But the question now is, will JPMorgan’s misstep be an event we all remember like Lehman, or one that’s soon forgotten?