J.P. Morgan Losing More Than Money in Trading Fallout

The bank's balance sheet will be fine, but its reputation is now mangled.

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Two billion dollars was the figure that J.P. Morgan Chase CEO Jamie Dimon cited last week when he described the fallout from risky and complicated derivatives trades. That's not a massive sum of money—just one month of earnings for a company that earned $25 billion last year and is worth around $189 billion. But it's also not entirely accurate.

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While the losses will certainly not ruin J.P. Morgan Chase, the U.S.'s largest bank stands to lose much more than $2 billion. The company still has to unwind the position that led to the loss, meaning that the $2 billion could swell to $3 billion, as Dimon has said. The monetary loss could have easily been even more.

"They were lucky that they got away from a $4 billion loss," says John Alan James, executive director of the Center for Global Governance, Reporting and Regulation at Pace University's Lubin School of Business, noting that the position in question was worth much more—as much as $100 billion.

J.P. Morgan has also lost substantial ground in the stock market. Its stock price on the NASDAQ has fallen by roughly 11 percent since the close of Thursday's trading, just before Dimon announced the company's losses, with no signs of a rebound any time soon.

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The company will suffer in the human capital arena as well: Chief Investment Officer Ina Drew is retiring in the wake of the massive losses. "Ina is an amazing investor," one money manager told Reuters. "She's done a really good job over a lot of years. But they only remember your last trade."

It's hard to put a price on what might be the company could consider its biggest loss: a solid reputation. It is embarrassing enough that the trade occurred in a portfolio meant to mitigate risk, but Dimon has been a tireless advocate against proposed financial regulation, like the Volcker Rule, one of the provisions in the 2010 Dodd-Frank financial regulation act. And as the man who steered the bank to the top of the industry in the U.S. after the financial crisis, his voice has carried substantial weight in the discussion surrounding regulation.

"The landscape [of the regulatory discussion] has now changed. The most reputable spokesperson was Jamie Dimon. He is now wounded goods. He cannot say things in testimony and in a public forum with the same credibility he could two weeks ago, so in order for him to regain standing, he now faces six months or a year of very hard work," says David Kotok, chairman and chief investment officer at Cumberland Advisors. "Reputational risk in the midst of the turmoil of political change in the U.S. and elsewhere in the world is of greater risk and damage here than the $2 billion."

Excessive regulation would hamper U.S. banks, says Anthony Polini, banking analyst with Raymond James, but the J.P. Morgan losses give easy ammunition to proponents of greater regulation.

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"It's really easy to hate banks. It's politically correct. Everyone loves to hate banks," Polini says.

The calls for tightened regulation are many. Democratic senators Jeff Merkley of Oregon and Carl Levin of Michigan stepped up calls Friday to tighten the Volcker Rule, a section of Dodd-Frank that aims to limit banks' risky bets. Tennessee Republican Sen. Bob Corker has also called for a hearing on the matter.

Of course, it is still unclear exactly how J.P. Morgan's losses happened, much less how similar losses can be avoided in the future. Whatever the exact misstep may have been, the fear is now that other banks could make the same mistake and suffer these same sizable losses.

"The classic cliche is that you never see just one cockroach. So now you have to ask yourself: Is there another cockroach in J.P. Morgan we don't know about? And are there cockroaches in other banks which we suspect might be there, but don't know about?" says Kotok.
