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JPMorgan’s loss: More than a blip in the news cycle

Marketplace Contributor May 14, 2012

JPMorgan’s loss: More than a blip in the news cycle

Marketplace Contributor May 14, 2012

Kai Ryssdal: The JPMorgan news of the day goes something like this: We’re still at $2 billion as far as the total known losses go. The woman who ran the division responsible for those losses, Ina Drew is her name, has resigned. What we don’t know so much is what it all means in the bigger picture of Wall Street and its effect on the American economy and what happens now. That’s why we’ve called our New York bureau chief Heidi Moore. She’s on the line with us. Hey Heidi.

Heidi Moore: Hey Kai.

Ryssdal: So how worried ought we be about this thing? I think we’re still early days yet, right?

Moore: Early days, but we don’t know how big the losses are, so those days are going to kind of get ugly and stormy coming forward. Basically what this tells us is that a lot of banks still haven’t learned how to measure and control the financial risks they’re taking when they make these bets and what’s dangerous about that is that now they’re doing that with our deposits — the deposits in the actual bank. So we should be very careful about the kind of arrogance that’s implied in taking a bet this big. I asked Guy LeBas, he’s a bond fund manager at Janney Montgomery Scott, how to put it in context in Wall Street terms. Here’s how he put it:

Guy LeBas: Anyone who believes that they are always smarter than the markets is destined to fail at the market’s mercy. You can be smart for a while, but you can’t be smart forever.

Ryssdal: Here’s the thing though Heidi, you’d think we’d be smarter now because of that whole financial crisis thing.

Moore: No. We have the memory of goldfish. But the problems are also persistent, to be fair. I mean, the real question here is how do we make our banks profitable and are we really ready to accept less profitable banks? I can tell you that the people making $20 million a year are not ready to accept less profitable banks, so this is their kind of magical thinking. They take these big risks because they want the big revenues, they want Wall Street back the way that it was, but the way that it was is the wrong place to be. And there’s no acknowledgment of that yet. We need to get Wall Street to acknowledge the trouble that it’s creating for itself instead of seeing this as a government problem.

Ryssdal: Yeah, which you haven’t heard Jamie Dimon, the CEO of JPMorgan, talk about at all. Let me ask you this, though, Heidi. What are the odds that banks not as strong as JPMorgan — which is the strongest bank out there — that other banks are doing this?

Moore: The odds are very strong. In fact, Moody’s is worried about a number of those banks. Standard and Poor’s is taking a look at how it measures risk for those banks as well. There’s a Wall Street saying: There’s never just one cockroach in the kitchen. So if JPMorgan — the biggest and supposedly the smartest bank in the country — is taking these risks, why would anyone else not be taking the same risks? They are under the same pressures. Where are they going to get those profits? Where are they going to get those revenues? It’s the equivalent of not being able to pay the bills and taking your last $20 and going to Vegas.

Ryssdal: Right. Seeing as how the world hasn’t ended yet and it’s been three-and-a-half days on this story already, what are the odds that by, I don’t know, Wednesday afternoon, we’ll be turning to the Facebook IPO and this will have faded into nothingness?

Moore: Right. This is the memory of goldfish, right? The chances are fairly high, but we shouldn’t it let go by that quickly because this isn’t just another blip in the news cycle. This is not the way pundits entertain themselves. This is a warning. It tells us that the machinery of finance isn’t quite working right. It would be a mistake to ignore that. It’s exactly the same as driving your car. When you hear those weird sounds, it’s a sign you should stop driving and go to the mechanic.

Ryssdal: You know what I do when I hear those weird sounds? I turn the radio up, which is kind of what Wall Street is doing.

Moore: That’s exactly right. On that highway.

Ryssdal: That’s right. Heidi Moore in New York City for us. Thanks Heidi.

Moore: Thank you, Kai.

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