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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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  • JP Morgan – More Of The Same? 0 comments
    Aug 4, 2012 4:35 PM

    Jamie Dimon of JP Morgan is explaining the conduct at the bank this week regarding the $2 Billion loss that was reported about one month ago. There were conflicting messages by James Dimon in the past like "We know we were sloppy. We know we were stupid. We know there was bad judgement, …" (1) At the same time, this trade was considered to be non-life threatening to JP Morgan. "This is not a risk that is life threatening to JPMorgan. This is a stupid thing that … we should never have done. But we are still going to earn a lot of money this quarter. So it isn't like the company is jeopardized," James Dimon stated. The tune this week is one of remorse: "We have let a lot of people down, and we are sorry for it," Dimon says in testimony prepared for his appearance before the Senate Banking Committee on Wednesday. (2). The $2 Billion loss is now estimated "as high as $5 billion" and was "an isolated event." (3)(6).

    Apologies are a beginning, but how much is really going to change? Banks are out there to make money, and there are times when this is necessary. However, as long as this motive exists, some action may be attempted that may cross the line of reasonable risk. If the action can be done without scrutiny from the owners of the capital, it will be that much easier to complete. After the ravages of 2008, the lessons surrounding risk don't appear to have been learned. JP Morgan was lauded as having the best risk record on Wall Street, and Jamie Dimon was called the "Good King Jamie". (4) It appears now that the CIO's office was taking positions that were large, illiquid and were difficult to unwind. (4) Due to these restrictions, the company tried to hedge the positions and this ended up backfiring. (4)

    Risk is not selective. If you take big bets with one part of your capital, and the bets go wrong, the whole organization will be at risk. If you monitor only some of the risks and not the rest, you are still at risk. As an analogy, if you are wearing a suit of armor with a hole in the chest area - wouldn't a knife in the chest represent a risk? This is true even if the rest of the body is protected. This is analogous to what was happening at the JP Morgan CIO unit. (4) Can a company that is making money justify their action by saying that risk does not matter if the bets are right? Bets will not always go right, and when they go wrong, there is no warning. Containing risk is to not get into situations that you cannot get out of. Understanding what you are doing is another aspect of containing risk. (5) Why is the issue of risk coming back over and over again? The people taking the risks think that the money is worth it.








    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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