Financial stock futures tumbled early Friday after the massive bank said it had lost $2 billion making bad bets.
The Wall Street Journal said the trouble starts in the bank's Chief Investment Office, its risk-assessment branch.
"Large positions taken in that office by a trader nicknamed 'the London whale' had roiled a sector of the debt markets," the Journal said.
Essentially, the bank expected the economic recovery to continue and made bets accordingly, using its own money to do so. This was a bold but flawed conclusion, it turns out.
And this is precisely what the so-called Volcker Rule is meant to address -- limit or even ban proprietary lending. Named after former U.S. Federal Reserve Chairman Paul Volcker, proprietary gambling defines using an organization's own money to bet on the market. It prohibits a bank owning a hedge fund, which is, essentially, a storefront for the same thing.
The $2 billion blunder also falls directly under the category of "too big to fail." Banks around the block watched share prices tumble Friday, and if that wasn't punishment enough a $2 billion loss puts a bank seriously out of balance. This kind of thing leads to margin calls and panic.
And this is precisely what the select new multi-agency committee in Washington designed to oversee systemic risk is all about. This is right in its wheelhouse, so to speak.
So who feels safer now?
The Volcker Rule is expected to take effect July 21 but only if the details can be ironed out, and after that it is still expected to be difficult to regulate. The supercommittee of experts in Washington cannot, it turns out, anticipate a $2 billion blunder or do much about it, until after the fact, as it happens. The committee is set up to be immediately useful if a company "too big to fail" does the unthinkable and fails. Committee members are the triage team, not a group of prophets.
So, here's what's unusual here: The bank's chief executive officer, James Dimon, after hemming and hawing a bit in April, said this week, "This is not how we want to run a business. This doesn't violate the Volcker rule but it violates the Dimon principle." He was offering a strategy in which the bank, admitted the mistake, fixed the mistake, then moved on.
The bank's bet was "flawed, complex, poorly reviewed, poorly executed and poorly monitored," he said. The error, he said, was "egregious, self inflicted."
Dimon seems to understand he cannot defeat group e-mails, whipped up in a frenzy among shareholders when a blunder goes public. He is going to have to take some lumps.
Hopefully, other bank executives are watching the fur fly at JPMorgan & Chase.
So far, this includes the bank keeping the staff member, Bruno Michel Iksil, who built up a derivatives position of $100 billion for the bank.
Why is all this commendable? Because panic is exactly the wrong thing to do. Regulators who forced banks to build up larger capital cushions to maintain their balance if a blunder or a downturn occurs got it right. The Volcker Rule, coming around, is exactly right. The super-committee of triage experts in Washington is exactly right. All risk-taking has not been snubbed out and that is how it should be, as well. Frankly, a lot safer is how this feels compared to 2008 and 2009.
Dimon has said repeatedly that the processes at the bank, not the people at the bank, got it wrong. That is also a good thing. You can fix flawed processes but people will always be people. You can't fix stupid, says comedian Ron White. Turns out, he's right about that.
In international markets Friday, the Nikkei 225 index in Japan lost 0.63 percent and the Shanghai composite index in China shed the same 0.63 percent. The Hang Seng index in Hong Kong dropped 1.3 percent and the Sensex in India fell 0.77 percent.
The S&P/ASX 200 in Australia lost 0.24 percent.
In midday trading in Europe, the FTSE 100 index in Britain slide 0.53 percent while the DAX 30 in Germany gave up 0.7 percent. The CAC 40 in France slid 1.4 percent and the Stoxx Europe 600 lost 0.87 percent.
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