Saturday, May 19, 2012

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.


A Non-American Chinese said...

At this stage of the investigation,we still do not know whether Jamie authorised the high level of risks taking.
I concurred with the Barney/ Dodd Wall street reform to seperate commercial banking from investment banking.Do not expect tax payers money to bail out failed financial institutions.Paul Volcker was also right to tighten the financial institutions regulations
Banking should revert to its plain vanilla operations,accepting of deposits and lending to finance of international trade,housing but no Credit Default Swaps

Ghost said...

Personally, I have doubts if the Volcker rule will go through in the end. It's a good rule but if the Americans still has doubts over the rule after what happened at Lehman, I highly doubt what happened at JP Morgan is going to change anyone's mind.