Like the horror movie where the little monster created in a test tube in the lab grows and grows only to wind up threatening the whole village, the JPMorgan (JPM) “London Whale” trader’s exotic credit derivative bet is now a potential $100 billion liability, according to the Wall Street Journal of last Friday. And the loss has ballooned from $2 billion to possibly $5 billion in one week! While Jamie Dimon may have beached his Whale, the credit derivatives, which Warren Buffett aptly called “weapons of mass destruction” continue to grow. Indeed, Dimon and JPMorgan continue to argue that this was a proper “hedge” which was “poorly monitored” and have fired the underlings supposedly responsible for the mess.
The rest of us, however, know better. We know how this horror movie will end, because we saw it over and over again in 2008 and beyond. It was called “Too Big To Fail,” and it always ended the same way. The murderous banks, splattered with gore, scurried away, bailed out by the Fed and ready to spawn more bad trades for a sequel.
The reality is that JPMorgan is “too big to manage” and Dimon, the leading critic of the “Volcker Rule,” needs to admit that fact and change course to save his bank and avoid the harm which, could affect the rest of us should this monster not be contained.
Since May 10, on the evening of which, Mr. Dimon finally fessed up to his Whale’s monstrous trades, JPMorgan’s stock through last Friday dropped 17.6%. And the broader stock indexes have also suffered, with the S&P 500 (SPY) losing 4.4% and the Dow Jones Industrial Average (DIA) down 3.6% over the same period of time.
With fear and uncertainty rampant in the markets before the revelation of JPMorgan’s horror show, the bank can’t take all the blame for the broad market’s downward swing. Still, the JPMorgan debacle has turned into a bloody disaster for all mom and pop investors due to losses in retirement and college savings plans.
Stay tuned for the climactic ending when Dimon testifies before the Senate Banking Committee next month. No doubt, Dimon will explain what he hath wrought and why he believes regulation of “too big” banks is not the antidote for his monster of a bank.
Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions, including JPMorgan.