JPMorgan's $2B loss: What it means to you

(MoneyWatch) The ripple effects from JP Morgan Chase's $2.3 billion trading loss range from job resignations to bad PR to reinvigorated debates over regulatory reform. Lost in the conversation is what the bank's bad bet means to you.

1. Has JP Morgan Chase's risky bet put the bank's customers or taxpayers at risk?

Bank and brokerage customers are safe -- there's nothing to worry about this time around. Taxpayers don't have exposure on this trade, because JPMorgan can absorb the trading loss -- the bank has plenty of money on hand to do so. The big losers so far are JPMorgan shareholders. On Friday, JPMorgan's stock price fell by 9.3 percent, wiping out $14.4 billion of the company's value and the stock was down another 2 percent in early trading on Monday.

2. Other than the bailout risk, could regulation cost us in other ways?

The banks claim that regulation could limit economic growth. They also say if their permitted activities are curtailed, then they will look to make money in other areas, and as a result, the cost of consumer products, like banking services; personal and small business loans; and mortgages will rise.

3. Why didn't regulatory reform prevent this kind of thing from happening?

There seems to be a lot of confusion around whether JPMorgan's trade would have been permitted under the Volcker Rule, which is set to go into effect this summer. The rule prevents banks from trading for their own accounts, unless it is for hedging purposes -- meaning unless the trade would reduce overall risk for the firm. But one man's hedge might be another man's proprietary trade, and critics say this rule has been watered down by bank lobbyists.

4. Isn't there more to regulatory reform than Volcker?

Volcker is a part of the Dodd-Frank reform, but there's a lot more. Regulators say that if we are going to allow big banks to take risk, then there have to be safeguards in the system, including: forcing them to hold more money (capital requirements); limiting the amount of borrowed money they can use (leverage); making complex trades more transparent; and allowing them to fail if they implode (resolution and recovery).

[zanmia]

Here's what's really going on with the banking system. Check it out and see what you think...

http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

[marychgo]

Here's a modest proposal: In addition to the Volcker Rule limitations on proprietary trading and increased capital requirements, no FDIC-insured institution should be permitted to trade "naked" or "synthetic" derivatives. Hedging is a legitimate risk management tool when the institution actually OWNS the underlying asset. Trading derivatives when the institution DOESN'T OWN the underlying asset or the underlying asset DOESN'T EXIST is NOT "hedging"; it's gambling!

[lami987]

I'm not JPMorgan's share holder but I still lose money on the stock I do own. Jill is completely wrong on that.

[chyenna-2009]

I HATE YOU, J.P. MORGAN!!!!!!!!!!!!!!

[tb91006]

Do you also hate Obama, Corzine and MF Holding who lost 1.2 billion of investors money causing the compny to go bankrupt? JP Morgan will rebound and investors will not go bankrupt like the investors did with Corzine and MF. He should be in prison with Madoff. Or Obama who invested billions of tax payer money with Solyndra and the other green energy companies? Or the trillion dollar of tax payer dollaqrs on those shovel ready jobs that were never ready? Or how about spending this country into bannkruptcy adding 5 trillion to the deficit? Obama makes JP Morgan look like saint.

[Henri_Rochard]

There are countries on this Earth where Jamie Dimon would have been taken out back and shot by now.
This happened on Obama's watch.
BOTH the Dems AND the Repubs are happily shipping U.S. jobs to Asia.

[CatsPaw4]

To cite the costs of doing business with small investments as a reason they must gamble sounds like an alcoholic blaming the psychiatrist for revealing his genetic makeup made him drink to begin with. While charging smaller customers a greater share than larger clients the aggregate sum of their investments fall in the range of home mortgages notwithstanding commercial investments> Marking to the market caused the downfall of AIG so to give a lame excuse that small investors are just not worth the time when u use them for collateral at the window is hypocritical and arrogant. Naturally Dimon knows his friends downtown will see him through his addiction until he gets treatment.

[sjc_1]

"..this rule has been watered down by bank lobbyists."

THAT is the point, they say it would be legal after they watered the original legislation down to nothing meaningful. You expect bank lobbyists to try this, you don't expect our reps to cave! Ever since 1995, the GOP has gotten the lobbyists on K Street to write the legislation for them. That is like letting the bank robbers make up the guard schedule.

[tb91006]

So is that Obama's excusre as well with his financial reform bill passed last year resulting in this and not to mention what his buddy Corzine did to MF Global?

[GeorgeKafantaris]

The derivative hedging game played by JPMorgan Chase is no different than that played by AIG in 2008.
Yet, Jamie Dimon tells us that Chase had merely "made a terrible, egregious mistake."
He might as well have said that Chase was wrong in raising in a game of poker, when it would have been more prudent and folded. But why was Chase busy gambling in the first place -- right after our economic meltdown, and while fighting government regulation?
One answer is because Chase could bear the gambling losses.
That's right. With $2 trillion at hand, Chase can yawn when $3 billion goes down the tube.
Nonetheless, Dimon tells us that he sees no problem with the government dismantling big failing banks. This is nice to know because the government should start dismantling big banks before they fail -- and before they have another chance to take us down with them.
The important lesson then from this Chase episode is not that stringent regulations are needed to reign in on derivatives, but that banks big enough to take huge hits standing up are ripe enough for us to chop down to size.

[Osprey4]

This is completely different than the AIG situation, which was precipitated by a credit rating downgrade. If you want to get all pompous about "taking big banks down", at least try to understand the facts.

[AmyInNH]

I disagree Osprey4. The facts are that the banks take risks beyond what they can cover. You're nit-picking over methods when the net effect is the same, the public gets the bill. And how shameless is JPMorgan, pleading ignorance. I don't know how my bank runs but give me a bonus for doing a good job?