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The Biggest Loser

After JP Morgan announced a $2 billion trading loss last Thursday (due in part to a risky strategy focusing on credit derivatives) several parties are feeling the pain. But to determine who is the biggest loser we have to look at each of them individually.

The first is JP Morgan –they’ve lost $4 billion of net income over the past three years and approximately $25 billion in shareholder value according to the Wall Street Journal.

But the shareholders also took a hit after losing approximately 14% of the share price this past week.

So did some JP Morgan employees like The “Whale” Bruno Iksil and his boss Ina R. Drew who were fired as a result. Though still employed, Chairman and CEO Jamie Dimon is definitely feeling the pain. Arguably, he was asleep on the job and failed to monitor the outcome of a strategy he’d approved and put into motion.

Or maybe the biggest losers are you and I.

Some perspective

Let’s put things into perspective: JP Morgan has (according to The Motley Fool):

  • Approximately $2.3 trillion in total assets
  • Shareholder equity of $190 billion
  • Revenues in 2011 of $97 billion
  • A net income (during 2011) of $19 billion

Their gamble on credit-derivatives lost them $2 billion or approximately 12% of their income in 2011 or 1% of the firm’s total net worth. To a small company, $2 billion would be catastrophic, but to a behemoth like JP Morgan, I think the costs will be easily absorbed.

Is it the firm’s management?

Chairman and CEO Jamie Dimon has a reputation for being a very skilled risk manager, which I believe is unlikely to change. Everything I’ve observed since the loss disclosure indicates Mr. Dimon is addressing the issue head-on through a pragmatic assessment of the issues, full honesty and transparency: all qualities of a good CEO doing his job.

Is it the banking system?

Maybe. The reality is our world has become more complex. We aren’t going back to a time of horses and wagons; therefore we must adapt and grow. Losses like the one experienced by JP Morgan will happen again and are an opportunity to learn from our mistakes. Those in the finance industry learn by testing and trying. But with a company as large as JP Morgan, the costs of a failed test can sometimes be huge.

Is it the government?

I don’t think government officials can solve this issue, nor will more regulation improve the situation. I doubt big government has a hidden answer or a better understanding of the situation than Jamie Dimon or others in the banking industry.

So who are the biggest losers?

The big losers in the JP Morgan trading scandal are you and I.  Of course no one knows for sure, but I think the stock price will likely recover, the employees will likely move on to higher paying jobs, the company will likely make up the losses, Jamie Dimon will likely remain Chairman and CEO, and the US taxpayer will likely continue to receive tax revenue from a prosperous JP Morgan.

But you and I will be worse off from this event.  Officials in Washington will likely layer on more regulations in an effort to reduce some of the high risk strategies these banks seem fond of. While that additional regulation can’t typically be directly seen or felt, I think it will show up as muted economic growth for the country, less jobs, more frustration for the consumer, higher taxes and lower productivity.

Craig Arfsten

Craig Arfsten

As a Prosperion Advisor, Craig has the independence, support and resources to help clients with what he does best – listening to their stories, discovering their desires, and identifying their greatest financial risks, before developing a comprehensive approach to meeting those needs. Learn more about Craig here.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Stock investing involves risk including loss of principle.

Securities offered through LPL Financial. Member FINRA/SIPC


Sources:
Huffington Post; Jamie Dimon, JPMorgan CEO, Under Increasing Pressure Following $2 Billion Trading Loss, May 14, 2012.

The Wall Street Journal; Inside JP Morgan’s Blunder, May 18, 2012.

The Motley Fool; What Does JP Morgan’s Trading Loss Mean for Investors? May 16, 2012.