JPMorgan Chase & Co.’s (JPM) huge mark-to-market loss of about $2 billion in the first six weeks of the second quarter has entangled it in numerous troubles. The company’s losses have been under intense scrutiny by the Department of Justice, the Commodity Futures Trading Commission (CFTC), the Federal Reserve and the FBI.
Now, the Senate Banking Committee is examining the regulators of JPMorgan’s banking activities to find out where they went wrong in monitoring the hedging strategy, which led to such huge losses.
In May, in its quarterly regulatory filing, JPMorgan stated that its chief investment office (CIO) incurred nearly $2 billion mark-to-market losses during the first six weeks of the current quarter in its synthetic credit portfolio.
This portfolio was to protect the company against the potential losses on its large holdings of loans, deposits and bonds. However, the company’s strategy backfired as the repositioning of the credit portfolio was poorly monitored and executed.
Therefore, since that time, daily meetings are being conducted by the Office of the Comptroller of the Currency (OCC) with JPMorgan’s managers to reassess the bank’s risk management practices and issue remedial measures to ease the risk of such trading positions.
Legislative Actions
On June 6, the first public hearing will be conducted before the Senate Banking Committee. This will be based on the evaluation of responsibilities carried out by the OCC, the Federal Deposit Insurance Corp., the Federal Reserve and the Treasury Department, prior to JPMorgan’s announcement of the massive trading losses.
Senator Tim Johnson, the South Dakota Democrat leading the committee, will give an opportunity to regulators to investigate the losses at JPMorgan. Moreover, the committee will have a hearing with CEO Jamie Dimon on June 13.
Further, Dimon also has a meeting with the House Financial Services Committee on June 19. The CEO is under duress from legislators and regulators provide reasons for the losses incurred. Dimon is answerable to them for the strategy behind these losses, which he stated as “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”
The U.S. regulators are preparing their statements to be presented before the Senate Banking Committee related to their review process in connection with JPMorgan’s losses.
According to OCC’s statement, the agency isconducting a review process to assess whether JPMorgan should clawback compensation from the executives, who are responsible for these trading losses. Moreover, the agency is also evaluating whether regulators monitoring the company’s banking activities were equipped with sufficient information related to the trading positions, which resulted in $2 billion losses.
No conclusion has yet been drawn by the OCC to ensure whether the losses incurred have violated the Volcker Rule or not. The Volcker Rule, a specific section of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires banks to restrict their investments in hedge funds and private equity funds. Moreover, proprietary trading is also prohibited under this rule.
Further, Fed Governor Daniel Tarullo also prepared his verdict stating that the central bank is working to determine the weaknesses in JPMorgan’s risk management strategies in other parts of the company, though the review is not completed yet.
Woes Related to Losses
Since the announcement of the trading loss, JPMorgan has been facing the wrath of the investors, employees and regulators alike. Moreover, Fitch Ratings and Standard & Poor’s (S&P) revised their assessments on the company.
Additionally, JPMorgan has temporarily suspended its $15 billion share repurchase program. Moreover, JPMorgan has decided to remove the private equity-like operations – the special investments group – from its CIO. Though not implicated in the trading loss, the special investments group is banned from looking for fresh investment opportunities like the private equity investments and risky credit derivatives positions.
These restructuring efforts are part of the overall audit of JPMorgan’s risk management abilities.
Conclusion
Major banks in the country, such as Bank of America Corporation (BAC), Wells Fargo & Company (WFC), The Goldman Sachs Group Inc. (GS), Citigroup Inc. (C) and Morgan Stanley (MS), follow the trend set by JPMorgan. Over the last several quarters, we have seen that even the announcements of quarterly financial results by almost all the major banks followed the company’s footsteps. However, we hope that other banks are not going to turn up with similar trading loss announcements.
JPMorgan runs the risk of further hedge-related losses over the quarter. Numerous lawsuits alleging the bank of such wrongdoings would surely dent its reputation and financials. Moreover, the review and evaluation process completed by regulators would give the investors a clear picture of the company for future commitments.
Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral rating on the stock.
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