JP Morgan Trader Bruno Iksil’s Causes 2B Loss For Bank

May 11, 2012 - PRLog -- First comes the symbolic ostracism as critics quickly separate themselves from the loser, as if proving themselves competent and lucky by their alacrity to discover the absence of these qualities in others.

"JPMorgan Chase & Co. (JPM) trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.

Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money As Reported: 4/8/2012 on SupplyBoysNews"

Mike Mayo, a bank analyst known for skepticism, was put in the position by a reporter of having to say J.P. Morgan Chase's Jamie Dimon, with this week's surprise trading snafu, had lost his "halo." Mr. Mayo's discomfort at being made to voice this chestnut at least came across too. That won't be so of the pilers-on who will be heard from in the weeks ahead.

What happened hasn't been well explained, but a London office of J.P. Morgan whose job is hedging apparently ended up making a big directional bet on improving credit quality among European corporations. It appears, too, an error in how these positions were calculated, when corrected, showed they were badly underwater. Oops.

Hardly mentioned is that a $2 billion paper loss this quarter might still become a profit in future quarters, or that $2 billion is 0.1% of JP Morgan's assets and 1% of shareholder equity. A systemic crisis this is not.

But human nature is human nature, and miscalculation must be denounced especially by politicians lest anyone think them capable of miscalculation too. The canting of Sen. Carl Levin, co-author of the Volcker rule, on Thursday was typical. "The enormous loss J.P. Morgan 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," he said in a rushed-out statement.

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J.P. Morgan Chase Chairman and CEO Jamie Dimon

Uh huh. Banks that refrain from risk aren't banks. And expecting regulators to distinguish good hedges from "risky bets," as Volcker requires, is to expect regulators to be better bankers (for a lot less pay) than one of the best bankers, Mr. Dimon, has shown himself to be.

The episode is useful, then, mainly for puncturing the myth of Dodd-Frank, one of the willowy pillars of the Obama administration's claim that the last four years have been great if you just ignore all the unemployment.

Let's see, the biggest banks today are even bigger. Their incentive, on balance, is to get bigger still. And thanks to mark-to-market accounting, another Dodd-Frank-like fetish, they must accumulate even more assets, in the form of hedges, to eliminate any impact on their books of small fluctuations in their existing assets, though whether these hedges really make them safer is debatable.

All this flows from Dodd-Frank's failure to get taxpayers off the hook of insuring the biggest banks.

In reality, J.P. Morgan's books are full of passing gains and losses that would turn heads if recorded and reported to the public. For all the hullabaloo and Mr. Dimon's own dramatic approach to revealing the London miscue, the harrumphing seems overdone in all respects but one: Even a highly capable executive, one whose mantra is "risk management," will be surprised from time to time to discover what's been going on in a bank as big and complex as J.P. Morgan.

Let's just guess that the bet made by his "London Whale" was a rumor in the markets for weeks before it became a front-page Journal story a month ago. It took another week for Mr. Dimon to dismiss the report as a "tempest in a teapot," and even more weeks to decide, after applying the appropriate rules and accounting standards, that on his hands was something that had to be reported as a loss.

If this leaves you uncertain whether J.P. Morgan is badly managed or just confusingly regulated, you're onto something.

Dodd-Frank never took on the right problem. Prohibitions on "risky bets," and even higher capital standards, have done nothing to inspire the biggest banks to get smaller. The problem is incentives—Democrats find it impolitic for a lot of reasons to talk about incentives. Yet it's really quite simple: When unsecured creditors know they won't be bailed out, the biggest banks will get smaller and easier to manage without anyone in Washington having to take on the impossible politics of trying to force them to do so. And expect the capable Mr. Dimon to lead the way.