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).
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