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Could Jamie Dimon really be as clueless as he sounded on the phone yesterday?
Last month, after Bloomberg News broke the story that JPMorgan Chase & Co. (JPM)’s chief investment office had, in essence, become a ticking time bomb, Dimon, the bank’s chief executive officer, called the press coverage “a complete tempest in a teapot.” That explanation no longer works.
Yesterday, Dimon changed tacks. Losses on the investment office’s “synthetic credit portfolio” had reached $2 billion so far this quarter, though he refused to give any meaningful details on how that had happened. Presumably, these are derivatives of some sort, but even that basic fact was too much for the bank to specify.
What Dimon lacked in information, he more than made up for in assigning blame -- to himself and JPMorgan employees. “There are many errors, sloppiness and bad judgment,” he said, as JPMorgan’s stock sank in after-hours trading. “These were egregious mistakes. They were self-inflicted.” He called himself and his colleagues “stupid.”
But there is more to it than that. Either Dimon misled the public about the gravity of the festering trades during his company’s first-quarter earnings call last month. Or he didn’t know what was happening inside the bowels of his own company. History tells us the latter is the norm for Wall Street bosses, though it’s hard to say which is worse.
Don’t bother asking JPMorgan how it accumulated all these losses. That information is proprietary, as if the taxpayers who bailed out the bank in 2008 don’t have any business knowing. Here’s an idea for a new rule: If a too-big-to-fail bank can’t disclose what its trading desk is doing for fear of blowing itself up, then the bank shouldn’t be allowed to do it.
It’s not often that a huge company calls an emergency teleconference on short notice to discuss an intra-quarter trading loss that’s equivalent to only 1 percent of shareholder equity. So when a Deutsche Bank AG stock analyst named Matt O’Connor asked Dimon why the company had disclosed it at all, the answer was bound to be revealing.
“It could get worse, and it’s going to go on for a little bit unfortunately,” Dimon replied. The meaning was clear. Worse could mean disastrous.
Here’s what little Dimon said of the trades in question: “The synthetic credit portfolio was a strategy to hedge the firm’s overall credit exposure, which is our largest risk overall in this stressed credit environment. We’re reducing that hedge. But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective as an economic hedge than we thought.”
There is a tantalizing clue in this language. Read the statement carefully and you can see this wasn’t a bona fide hedge. That means it probably was no different, in substance, than a speculative wager. The definition of an “economic hedge,” literally, is an investment that doesn’t qualify for hedge accounting, meaning its effectiveness at offsetting a given risk isn’t sufficiently reliable. Otherwise the wiggle word “economic” wouldn’t be needed. It’s also conceivable that Dimon didn’t understand the details of the trades, and simply declined to discuss them rather than admit this.