Banks stocks took a big hit Friday after JP Morgan Chase and Company reported a $2 billion loss on a complex trading strategy that went bad. The bank's disclosure is renewing debate over the need for tougher financial regulations.
It's one of the world's biggest investment banks, and its CEO is among the harshest critics of government efforts to rein in risky financial bets. But in a late night conference call to shareholders, JP Morgan CEO Jamie Dimon told investors the bank may have taken too big a risk.
“We are reducing that hedge, but in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored," said Dimon.
Dimon blamed the $2 billion loss on a complex trading scheme that was designed, ironically, to help manage the bank's credit risks. Instead, the trading blunder bolstered the argument that big banks cannot be trusted to handle risks on their own.
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"Well, as he [Dimon] said himself, there's egg on his face [he's embarrassed] and it does play very well, as he says, into the pundits who have been advocating the Volcker rule and also the scenario of being too big to fail," said CMC Markets analyst Brenda Kelly.
The Volcker rule is named after former Federal Reserve Chairman Paul Volcker. It would restrict the biggest U.S. banks from making risky investments that do not benefit bank customers. Volcker said such trades involving credit default swaps and other derivatives played a key role in the financial crisis of 2008.
"It was elements of a casino, a very complex casino with all sorts of inter-dependencies. And when it came under pressure, not just from credit default swaps but otherwise, when the system came under pressure - it collapsed," said Volcker.
JP Morgan has warned investors to expect additional losses - sending a shiver through Wall Street. JP Morgan stock lost more than 8 per cent of its value. Other financial stocks also suffered big declines.
Analysts fear the scandal will impact regulations not just in the U.S., but around the world.
"Just as it will in the U.S. and in the eurozone, Asia will not be spared this push down the path of greater, tighter regulations," said Tim Condon, who is head of Asia research at ING Financial Markets.
In a statement Friday, U.S. Senator Carl Levin of Michigan, who has been pushing for new banking rules, said the bank's losses were "a stark reminder of the need for regulators to establish tough, effective standards."