Just A Bad Trade

Just a few days ago, JP Morgan Chase & Co reported a trading loss of US$2 billion and the heads are already rolling. The losses came as a surprise to most people as JP Morgan was one of the few banks in America who came through the financial crisis with credit intact.

However they are now suffering heavy losses at a time when most companies listed in the U.S are beating expectations. So what gives?

The answer is simple; they made a bad trade with a trading strategy that was too complex. The bank took on complex derivative positions in a hedging strategy that prove unwise. When they tried to unwind their positions, they discovered the positions they took were too big and too complex to unwind easily. In a low volume market, unwinding their positions caused further losses to their positions which is why even JP Morgan believe the losses would increase to US$3 billion.

Personally, I think people are over reacting. The losses got nothing to do with bad bankers or poor oversight. The losses were just due to the fact that the bank made bad decisions; something that could happen to anyone. Remember, this is the same JP Morgan that came out of the financial crisis smelling like roses.

A bad trading strategy is the cause of the losses, and it is something JP Morgan CEO Jamie Dimon had already said the bank would investigate and take disciplinary action on. It’s not the end of the world or the start of a stock market crash, just a matter of people making bad trades.