J.P. Morgan Chase, a large U.S. based financial holding company and financial services firm is facing asset losses of up to $9 billion dollars per the New York Times. These losses, and the events leading to them were caused by risky management decisions made by the company’s investment division; they have also led to much negative and costly publicity for the bank. The losses have caused the financial institution to reassess the quality and strength of its investment practices both at the managerial level and before Congress.
Securities
On, May 10, 2012 J.P. Morgan Chase announced investment losses up to $2 billion via numerous transactions involving synthetic credit securities. The value of these assets are derived from the worth and credit risk of other assets. According to an interview on American Public Media, these transactions were supposed to serve as a hedge against other investments if economic conditions changed. However, as it turned out, these derivatives were risky enough to shed light on how faulty banking management decisions can still put the financial system in jeopardy.
Shares
During the trading days after the initial announcement and through June 4, J.P. Morgan Chase share prices for common stock dropped 24.1 percent from $40.74 to $31.00 per share. Although some of those losses were recovered thereafter, news of the increased size of J.P. Morgan Chase’s loss caused another drop in share prices. On the day the $9 billion dollar loss was announced JPM shares were down to near $35.00 per share. J.P. Morgan’s total market capitalization lost since May 10 is over $20 billion as evident in the the value of the company’s share float.
Testimony
On June 13, 2012, Jamie Dimon, the CEO of JP Morgan Chase gave a testimony to the U.S. Senate Committee on Banking, Housing and Urban Affairs. On June 16, Dimon testified again before the House Financial Services Committee. Both these testimonies revealed flaws in existing banking practices. Of particular note is that the bank’s Chief Investment Office was told to wind down synthetic credit positions, but instead hedged against them. As a result, the investment decisions both complicated and added to the size of the risky derivative investment portfolio.
Regulation
The losses and risky financial positions taken and currently being sold by J.P. Morgan have served as a catalyst for further support of regulatory reform of the banking industry. Even though many bank regulators work with companies such as J.P. Morgan Chase, they too failed to stop the investment hedge position from putting so much money at risk. Forbes has reported Dimon himself proposed a “claw back” policy and stricter preventative regulations be implemented in order for financial institutions to develop accountability and safer financial practices.