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Adding Fuel to the Fire

Sigma Investment Counselors

May 17, 2012

Last week, JPM Chase reported a $2 billion loss on a bad bet it made from its proprietary trading desk. Moreover, the bank conceded that the company was still unwinding the trade and that this loss could double over the next several quarters. In addition, the company may be fined and incur other legal expenses related to these charges. Fortunately, the company has sufficient capital to absorb these expenses without the risk of default.

As expected, the company is now being investigated by the Securities and Exchange Commission, the Federal Reserve, the FBI, and other government agencies. The concern, of course, is whether any laws have been broken and whether this loss is an isolated incident or the tip of the iceberg. At the same time, the company has begun to dismiss those responsible for the loss, with additional casualties expected shortly.

More glaring than the loss is the fact that the company’s chairman and chief executive, Jamie Dimon, has been a vocal critic of newly passed legislation aimed at curbing the excessive risks inherent in many financial institutions. Considered by many to be one of the most respected and prominent CEOs on Wall Street, it seems out of character that Dimon allowed such activity to take place under his watch and/or that JPM Chase lacked the internal controls to monitor these risks. Ironically, this only adds fuel to the fire that banks have become “too big to fail” and that legislation is very much needed to curb the abuses inherent in the industry. Personally, I believe that reform is long overdue. However, I also believe that many of the rules recently put into place may prove to be quite ineffective and lead to unintended and negative consequences, resulting in less protection for the consumer than once thought.

As for JPM Chase, I am willing to give Jamie Dimon the benefit of the doubt, for now. Yet, I am looking for him to clean house quickly and change the company’s culture as it pertains to risk management. If we come to find out that this is not an isolated incident, then all bets are off.

All questions and thoughts are welcome.

Christopher J. Kress, CFA

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