Kai Ryssdal: A funny thing happened not long after the closing bell this afternoon: JPMorgan Chase said it would hold what you can only call a highly unusual conference call, during which CEO Jamie Dimon announced the bank’s going to lose $2 billion on, in essence, a bad bet.
Marketplace’s Bob Moon is live in the studio with me to explain. Hi Bob.
Bob Moon: Hey Kai.
Ryssdal: All right, so $2 billion, a lot of money. What happened?
Moon: It is. We’ve talked for several years now about what some critics say is the equivalent of gambling by the big banks on Wall Street — something called ‘synthetic credit securities,’ where essentially the bank bets on whether there will be a credit default by a particular entity, even if there’s no direct link to that particular debt with the bank itself. This is something like AIG, for example.
Ryssdal: Right, exactly, credit default swaps, all that stuff.
Moon: We hope it doesn’t rise to that level, though. But as you say, in this dramatic and contrite conference call tonight, the flamboyant CEO of JPMorgan Chase Jamie Dimon revealed that the bank lost around $2 billion in positions — read that: bets — made by its chief investment office. It could face an additional $1 billion in losses in the second quarter of the year because it says the financial markets have been so volatile. Now Dimon said the bets have been used as an economic hedge by the bank; in other words, if the economy turned one way, these bets should have paid off. He says this portfolio proved riskier than expected.
Ryssdal: Yeah, that’s what I was saying to Mr. Sharpe — you pay your money, you take your chances. Is JPMorgan Chase now — I mean, you said positions, right, and bets? This is real money. They’re down $2 billion.
Moon: Well it is, but keep in mind that there are other bets going on elsewhere. So the losses were on these particular bets, but Dimon said they can offset some of these losses by maybe $1 billion or so by gains in other areas. Still, he blames these losses on what he called “poorly executed, poorly monitored trading.” He said it involves sloppiness and bad judgment on the banks’ part. But in characteristic Dimon fashion, he’s playing this down. He declared: “We will fix it and move on.”
Ryssdal: Yeah, well let me stop you there: Isn’t this what people have been worried about about banks since the financial crisis, and isn’t there the reform law and the Volcker Rule and all the stuff to stop banks from playing in the markets with their own money?
Moon: Yeah, I guess you can see that as collateral damage from Mr. Dimon’s standpoint. He said it’s unfortunate but he does fear this is going to give new life to that debate.
Ryssdal: Yeah, we’ll see what happens. Marketplace’s Bob Moon. Thanks a lot, Bob.
Moon: Thanks Kai.
We’re here to help you navigate this changed world and economy.
Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.
In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.
Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.