Through the deep financial crisis and its slow aftermath, JPMorgan Chase & Co. chief Jamie Dimon was the Last Man Standing. But Thursday night, he was just another limping bank boss with some explaining to do.
As chairman and CEO of the largest U.S. lender, a company he had banged together from a string of big-name but troubled loan and investment firms since the late 1990s, Dimon had kept his job through the financial meltdown and come out of it with the reputation for acuity and depth and the profitable record to challenge President Obama and Federal Reserve boss Ben Bernanke over whether companies like his had grown too big for the public's safety.
And then, Thursday night, Dimon acknowledged that a French trader in his London office had blown $2 billion ($1 billion net) of the company's own money in a failed strategy that was supposed to hedge the bank's exposure to credit losses. "Poorly monitored, poorly structured, poorly reviewed" by his own treasury, Dimon admitted. "Egregious." JPMorgan shares tumbled, wiping out more than $10 billion in value.
"Terrible timing," bank analyst Jeffrey J. Harte told his clients at Sandler O'Neill + Partners L.P., a bank-investment firm in New York. The loss, Harte wrote, is not an existential threat to JPMorgan — $1 billion is about what the bank collects in profits every three weeks. Still, he told clients, he'll no longer project a premium price for JPMorgan shares; after such an embarrassing stumble, Dimon's bank no longer deserves special treatment.
"It's a major step backward," veteran bank-watcher Dick Bove, of Rochdale Securities in Connecticut, told me. Typically a critic of government regulation, Bove said JPMorgan's error "ruins" bankers' credibility at a time when they seemed to be winning the fight to ease heavy-handed oversight.
Dimon "should survive. But he'll have to rebuild," Bove said. "His mantra has always been, 'Reward success, punish failure.' So some people are going to be fired. And his aura of invincibility is gone. And breaking up the banks will now be an issue in the presidential race."
It could still blow over — investors will forgive — if the losses turn out to be less than Dimon's warning, said David Kotok, boss at Vineland-based Cumberland Advisors. On the other hand, Dimon himself warned, things could get worse in the quarters ahead.
The loss strengthens the case for bank critics who agree with ex-Fed chief Paul Volcker that commercial banks like JPMorgan — whose customer deposits are insured by solvent banks and those who rely on them, and backed in times of crisis by taxpayers — shouldn't be making such big financial bets with company money. It also helps those who believe we should go back to the Depresssion-era separation between companies that take deposits and lend and have an easy-to-trace role in the real economy (call them banks) and those that make ingenious, calculated, high-stakes bets on more abstract investments (call them, for example, hedge funds).
Dimon has long spoken for those who say a strong America needs a few big universal banks that can do it all, financing American companies in China and Arabia, serving the biggest governments and corporations, inventing new financial "products" to speed the flow of capital and make those bright young traders and their canny old backers rich. It sure beats factory work.
Banking isn't typically complex like high-level physics, but it does require relentless attention to detail. Giant banks like JPMorgan combine dozens of business units — thousands of local branches, the credit-card headquarters in Wilmington, the mortgage and commercial-loan operations in the Midwest, the fat financing hoses that keep big borrowers like Comcast growing, the deal salesmen sweet-talking company owners and public-finance officials in every business center of the world — with the securities traders in New York, London and other high-powered market towns, who make big money when they calculate the odds properly betting on interest rates, commodity prices, shipping demand, and consumer defaults.
It's tough to manage scale and complexity. Nineteen business units might be humming profitably away; the 20th can blow up and wreck the works, as the former First Union Corp. found out when it bought a California bank full of land-mine mortgages that resulted, among other things, in the Sixers' South Philly arena ultimately being renamed for an old stagecoach company.
JPMorgan will probably keep growing. Maybe the Republicans will win in November, roll back regulations, and actually let failing companies fail from time to time as a costly warning to the rest. Or maybe the Democrats and bank critics will succeed in breaking off some of the big banks' riskier business units, leaving potentially dangerous trading for the specialist firms, here and abroad. Which will likely mean lower profits for traditional banking businesses. Which will likely lead to higher rates and fees.
Either way, the public will likely pay more.