The biggest
bank in the US has squandered $2 billion (1.54 billion euros) in an investment
aimed at profiting from the eurozone debt crisis. The mistaken gamble has
thrust the regulation question back into the spotlight.
The huge
loss had emerged over the past six weeks in an investment portfolio originally
designed to help the bank control financial market risks, JPMorgan Chase
announced late on Thursday.
Admitting
that there were "many errors, sloppiness and bad judgment" involved
in managing the portfolio, JPMorgan's Chief Executive Jamie Dimon told a
hastily scheduled news conference that the investment "proved to be
riskier, more volatile and less effective as an economic hedge than we
thought."
"We
will admit it, we will learn from it, we will fix it, and we will move
on," Dimon said, adding that the bank would seek to unload the portfolio
in a "responsible manner" to limit damage to its shareholders.
However,
analysts told the AP news agency they were skeptical that the investment had
been designed to protect against financial market risks, and that the bank
appeared to have been betting for its own profit.
A case of
casino capitalism
According
to an article in the Wall Street Journal last month, JP Morgan was heavily
invested in an index of so-called credit default swaps (CDS), which are
products to ensure against default by debt issuers.
In
addition, Bloomberg News reported in April, that a single JPMorgan trader in
London, known in the bond market as 'the London whale' was moving prices
through exceptionally large trades. Chief Executive Jamie Dimon admitted that
the loss was "somewhat related" to that story.
Presumably
in connection with the Greek debt swap completed in April, the CDS index had
lost value, forcing JPMorgan to sell its investments at a loss.
"These
instruments are not regularly and efficiently priced, and a company can wake up
one day, and find out they're in a terrific hole," Michael Greenberger, a
professor at University of Maryland, told AP news agency.
The
announcement of the loss has led to mounting calls for tougher regulation to
monitor banks' trading activities.
"The
enormous loss is just the latest evidence that what banks call 'hedges' are
often risky bets that so-called 'too big to fail' banks have no business
making," US Democratic Senator Carl Levin said Thursday.
JPMorgan
Chase CEO Jamie Dimon is one of the staunchest critics of tighter US trading
rules which come into force in July 2014, and which would have made this loss
"less likely," as Michael Greenberger told AP.
The bank's
shares fell 6.7 percent in after-hours trade, pulling fellow banks down with
it.
uhe/ar (Reuters, AP)
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