Is J.P.Morgan Chase & Co. the next Lehman Brothers financial crisis?

Posted by AzBlueMeanie:

For all those Tea-Publican politicians who assert that we need to repeal even the most modest of regulations on financial services institutions like Dodd-Frank and the Volcker Rule, this is why they are insanely irresponsible and represent a risk that we cannot afford to this country's economy and financial system. JPMorgan Falls 9% After Reporting $2 Billion Trading Loss – Bloomberg:

JPMorgan Chase & Co. fell the most in nine months after Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss he attributed to “egregious” failures in a unit managing risks.

JPMorgan dropped 7.7 percent to $37.59 at 10:20 a.m. in New York, the biggest decline since Aug. 8.

The bank’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost the lender an additional $1 billion this quarter or next, Dimon, 56, said yesterday in a conference call with analysts. The loss originated out of the firm’s London CIO unit, an executive at the bank said.

“There were many errors, sloppiness and bad judgment,” Dimon said. “These were egregious mistakes, they were self-inflicted.”

The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn’t unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money, five former employees said.

The U.K.’s Financial Services Authority, which regulates banks, is examining the role London employees played in the loss, according to two people familiar with the talks. The agency hasn’t opened a formal investigation and there was no evidence of criminal activity, these people said.

Dimon had defended the Chief Investment Office as a “sophisticated” guardian of the bank’s funds on an April 13 conference call, calling news coverage “a complete tempest in a teapot.” On May 2, he led fellow Wall Street CEOs in a closed- door meeting to lobby the Federal Reserve about softening proposed U.S. reforms that might crimp their profits.

Yesterday, he said the timing of the trading blunders “plays right into the hands of a bunch of pundits out there” who are pushing for a strict version of the proprietary trading ban named for former Federal Reserve Chairman Paul Volcker.

Given Dimon’s resistance to the ban and new regulations, “he’s got a lot of egg on his face right now,” said Craig Pirrong, a finance professor at the University of Houston. “Any chance they had of getting a relative loosening of Volcker rule, anything of that nature, that’s out the window.”

The chief investment office’s push into risk-taking was led by Achilles Macris, 50, according to three former employees, Bloomberg News reported on April 13. He was hired in 2006 as its top executive in London and led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, they said. Dimon closely supervised the transition from its previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

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“It’s classic Wall Street hubris, which we’ve seen so many times before,” said Simon Johnson, a former chief economist at the International Monetary Fund who now teaches at the Massachusetts Institute of Technology. “What’s particularly ironic here is that Jamie presents himself, and is believed by others to be, the king of risk management.”

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While no one has been fired yet, Dimon told analysts he will take “corrective action.” The bank is keeping employees involved on hand while it deals with the transactions, and some are likely to lose their jobs afterward, said an executive with knowledge of the situation. The bank is also reevaluating its risk-monitoring team within the chief investment office, the person said.

JPMorgan risks losing more money now because other market participants will figure out what the bank has to do to unload its position, said Charles Peabody, an analyst with Portales Partners LLC in New York. Costs from the trades may affect earnings through the end of the year, he said.

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Dimon declined on the call to discuss the specific transactions or people involved. Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt. JPMorgan used the instruments to hedge exposure on loans and other credit risks tied to corporations, banks and sovereign governments. The losses emerged after the firm tried to reduce that position and unwind the portfolio, Dimon said.

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“It’s a major event that confirms a lot of investors’ worst fears about bank risk,” said Frank Partnoy, a former derivatives trader who’s now a law and finance professor at the University of San Diego. Concern is “that at a large, supposedly sophisticated institution, even something called a ‘hedge’ can contain all kinds of hidden risks that the senior people don’t understand.”

The New York Times adds Regulators Looking Into JPMorgan Trading Activities Before $2 Billion Loss:

Regulators’ efforts to get to the bottom of JPMorgan’s recent trading activity come as authorities worldwide are clamping down on the risks that financial institutions are able to take.

Along with the Volcker Rule, which will restrict banks from trading with their own money, officials are demanding that firms hold more reserve capital to offset any future financial shocks and are forcing so-called over-the-counter trading activity, which allows companies to trade between each other, onto exchanges to increase the transparency of financial markets.

“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making,” Senator Carl Levin, a Michigan Democrat, said in a statement on Thursday.

Until we unwind the "casino capitalism" on Wall Street unleashed by financial services deregulation at the end of Bill Clinton's term and reimpose the Glass-Steagall Act, we continue to remain at risk from the voracious greed of the banksters of Wall Street and their "masters of the universe" hubris.