Sound and Fury

JPMorgan Chase announced it had a $2.3 billion trading loss last Friday, and politicians and the press are having a field day.  

To put this loss in perspective, the company made almost $5.4 billion last quarter, and $18.8 billion over the last 12 months.  That $2.3 billion loss occurred relative to an asset base of $2.3 trillion (the loss was 0.1% of assets), with $190 billion of equity (the loss was 1.2% of equity), $256 billion of long term debt, and $78 billion of short term debt.  In other words, JPMorgan would have had to lose $1.1 trillion before even one depositor with the bank would have been at risk.

Businesses will have losses as well as profits, and in this case JPMorgan’s loss doesn’t and couldn’t possibly impact the solvency of the bank much less impact depositors or tax-payers.  

Politicians and the press are generating a lot of sound and fury at present, but don’t seem to know or care what kind of business JPMorgan is, or whether it has put tax-payers in any way at risk.  

The reality is that a $2.3 billion trading loss is egg on the face of JPMorgan and Jamie Dimon, but has little impact on the viability of the bank, depositors or tax-payers.

To assume–as politicians and the press do–that regulators would have prevented this from happening is to forget the last 200+ years of banking regulation, which always has and always will manage to close the barn door long after the animals are gone.  

Regulators are human beings, too, and just like the hard-working people at JPMorgan, can and will make mistakes.

The assumption that more controls and regulations would prevent such events is pure fantasy, and is more likely to create than solve any problems.  Chasing down minor events like this loss that will have minimal impact on equity investors that have knowingly and voluntarily put capital at risk is worse than a waste of time–it’s counter-productive.

JPMorgan’s loss is bad for JPMorgan shareholders, not bond-holders or depositors.  The press and politicians are eager to use this event to call for increased regulations and control, but a short evaluation of JPMorgan’s capital position and the “success” of previous regulatory reforms should make people pause and think before listening to the press or politicians.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Sound and Fury