JPMorgan's $2B trading loss puts spotlight on risky practices, Volcker rule

JPMorgan Chase, America's largest bank, has admitted to massive losses in risky trades in exotic investments costing it $2 billion - or more. Anthony Mason reports.

(CBS News) The lessons of the Great Recession didn't last long. As of Friday night, the nation's largest bank and one of its biggest energy companies are both reeling. Reckless investments in one case, questionable management in the other.

JPMorgan Chase said Thursday it lost at least $2 billion in investments that it called "egregious." On Friday, JPMorgan lost $14 billion in stock value. CBS News correspondent Anthony Mason looks into the bank's situation.

The losses for JPMorgan Chase continued Friday. This time to its stock price, which tumbled more than 9 percent as the bank reeled from its $2 billion trading blunder. And bank analysts took aim at CEO Jamie Dimon.

"He should have done his homework better," said Mike Mayo, who closely watches the company for the investment firm CLSA, said.

Mayo, who is also the author of the book "Exile on Wall Street: One Analyst's Fight to Save the Big Banks from Themselves," said that in April Dimon dismissed concerns the bank was making big bets on credit derivatives that even then were rattling the markets.

"One month ago, Jamie Dimon gave a reassurance that this was 'tempest in a teapot' when it came to the company's investments," said Mayo. "Here we are one month later and there's a $2 billion loss on their books."

The risky bets were placed out of the bank's London office by a trader named Bruno Iksil, nicknamed the "London Whale." But Iksil was not a "rogue," and critics say that raises serious questions about risk management at America's biggest bank.

"The 'too big to fail' culture is really still there," said Michael Hewson, an analyst with London investment firm CMC Markets. "And it is a concern. And I think what it will do is make the proponents of the Volcker Rule even more emboldened."

The Volcker Rule, set to go into effect in July, would prevent banks from making speculative bets that could put both themselves and taxpayers at risk. It's named for the man who proposed it -- the 84-year-old former Federal Reserve chairman, Paul Volcker

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"Do you believe the culture on Wall Street has to change?" Mason asked Volcker.

"Yes," he said.

In an interview for "CBS Sunday Morning" in March, Volcker said he thought the traditional culture of banking had been distorted by speculation.

"My concern has been the health of the banking system," he said.

But banking executives, including Dimon, have attacked both the reforms and Volcker himself.

"Some CEOs have been particularly critical of you," Mason pointed out to Volcker

"I wasn't aware of that," Volcker joked. "That amazes me. You telling me that? No."

"Jamie Dimon, the head of JPMorgan Chase, said, 'Paul Volcker by his own admission, has said he doesn't understand capital markets. He has proven that to me," said Mason.

"Well, unfortunately, I think that they proved some of that to me, too," said Volcker. "Their own misunderstanding. How did they get in so much trouble?"

JPMorgan Chase could face up to another billion dollars in losses from its bad bets. But the biggest loss may to its reputation and to trust in the banking system.

"CBS Evening News" anchor Scott Pelley asked Mason if JPMorgan is in jeopardy.

"It's not. As big a loss as that was, and that's a big number, the bank is well capitalized, it can absorb it. The company was downgraded by one ratings agency Friday -- Fitch said it is worried by the company's risk management.

  • Anthony Mason

    CBS News senior business and economics correspondent; Co-host, "CBS This Morning: Saturday"