JPMorgan Chase & Co. (NYSE:JPM)'s stock is in decline Friday morning after the firm indicated that it had lost $2 billion on trading in synthetic credit securities. Jamie Dion, CEO of JPMorgan Chase & Co. (NYSE:JPM), indicated that the securities involved in the trading loss remain highly volatile and the position could result in additional losses of $1 billion to the firm over the next two quarters.
In a conference call only a month ago, Dimon had referred the Chief Investment Office, the group responsible for the losses, as a guardian of the bank’s financial position and any coverage of such proprietary trading a “tempest in a teapot.” He followed up these comments by leading Wall Street CEOs in a meeting with the Federal Reserve, demanding that proposed reforms be softened to allow increased proprietary trading in order to protect bank profits.
Implementation of the so-called “Volcker Rule,” named after former Fed Chairman Paul Volcker, has been a hot topic in political circles in the past months. The rule would prohibit banks from participating in proprietary trading, where the bank trades for its own account. Proponents argue that allowing banks to trade their own book creates potential conflicts of interest, and makes the financial sector more risky than necessary. This loss by JP Morgan certainly will not help Wall Street’s case that proprietary trading is an important source of both profit and risk management for financial institutions.
While Dimon declined to discuss what specific securities or transactions were involved in the loss, many on the Street are pointing to Credit Default Swaps (CDS) that are tied to credit performance as the source of the trouble. Dislocations between the value of CDS instruments and their underlying assets may be responsible for creating the large loss, and would make the position very difficult to unwind.
JPMorgan Chase & Co. (NYSE:JPM)'s stock is trading down 6.97% to $37.90 at 11:28AM EST.