Satyajit Das on JP Morgan’s $2 Billion Loss

Having benefitted from risk management failures of others such as investment bank Bear Stearns and hedge fund Amaranth, JP Morgan (“JPM”) appears to have made an “egregious” and “self inflicted” hedging error. The bank would have done well to reflect on John Donne’s meditation: “send not to know for whom the bell tolls it tolls for thee”.

A US$2 billion Banana Skin …

The losses indicated are US$2 billion and may be higher. JPM’s share price fell around 9% (a loss of US$14 billion in market value) when the new was announced via a hastily arranged news conference. The bank also lost considerably more in reputation and franchise value.

The episode has all the usual trappings of a salacious trading disaster. Competitors had christened Bruno Iksil, one of the traders responsible – Lord Voldemort (after the Harry Potter villain). The position, which has been common knowledge in the market since early 2012 at least, was dubbed “the London whale”. After the losses were announced, the usual journalistic liberties have been taken – the whale has “beached” or “been harpooned”. A sub-editor gleefully coined the headline “Dimon is a Whale of a Hedge Fund Manager”.

But the losses raise serious issues. As they do not relate to the usual “rogue trading” incident which is typically dismissed as impossible to detect or control, the episode provides insights into the problems of modern high finance, bank strategies and regulation of markets.