The J.P. Morgan Billion Dollar Analysis Problem, What Went Wrong?

As the chief of J.P. Morgan Chase & Co. received an analysis of the billions of dollars lost in the bank’s second quarter, he couldn’t breathe. Some are calling it the the biggest lack of foresight in the executive’s 30-year career.

But what went wrong? How could J.P. Morgan and its CEO Jamie Dimon let more than $ 2 billion dwindle on bad trades without detecting anything had gone wrong?

J.P. Morgan lost more than $ 2 billion through a bad hedging strategy which had loose risk controls than the rest of the bank, according to Reuters. Essentially, the bank used a less stringent calculation that gave a lower risk assessment on risky trades. The high-risk trades became a common practice in the company’s Chief Investment Office.

“It created incentives to take extraordinary risk in one pocket of the bank that was different from the rest,” a source told Reuters, adding that at least one executive made more than $ 15 million in each of the past two years of risky trading leading up to the reported loss.

Now federal lawmakers have plenty of questions. U.S. Rep. Shelley Moore Capito, R-W. Va., chairman of the House Financial Services subcommittee, noted the loss during a session on how to best regulate banks big enough to bring down the broader financial system. U.S. Sen. Bernie Sanders, I-Vt., is calling for legislation to remove conflicts of interest between regulators and Wall Street banks, as two-thirds of the Federal Reserve’s regional-bank board members are appointed by the banking industry.

U.S. Rep. Brad Miller, D-N.C., said the massive loss was evidence of the need for more regulations tougher than what Dodd-Frank has imposed so far. The Dodd-Frank Act aims to promote financial stability of the United States by improving accountability and transparency in the financial system. President Barack Obama signed the act to end the notion that some banks are “too big to fail.”

Is more regulation the answer? Or was this a regulatory failure? Regulators failed to see one of the biggest banking blunders in recent history, how do we know that it couldn’t happen at other big banks?

Crain’s Business reported in a round-up on the JP Morgan loss that the public has no access to the information needed to assess the regulators’ performance — or even understand what their regulating. Their editors call for an “instant-replay” agency that reports on emerging risks to the public and what actions are being taken by regulators.

The coming weeks, federal lawmakers will meet to discuss public policy implications of the trading loss. JP Morgan will certainly be a hot topic on the House floor. This spring Dimon will testify at a congressional hearing to discuss the trading loss.

In a statement to shareholders this week, Dimon apologized for the massive loss.

“This should never have happened,” he wrote. “I can’t justify it. Unfortunately, these mistakes are self-inflicted. The buck always stops with me.”

The answer to the question of how to prevent such a thing from happening in the future isn’t necessarily more rules, it’s enforcing the rules we have in place. We need vigorous watchdogs to protect the public interest. Article provided by Cal Bank Trust’s Small Business Banking Division

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