JPMorgan Chase said Thursday night that the bank lost $2 billion in securities trading -- an announcement that sent the bank's stock tumbling Friday. CEO Jamie Dimon called the operation "flawed, complex, poorly reviewed, poorly executed and poorly monitored." How did this happen, and what will it mean for JPMorgan Chase, which weathered the 2007-2008 credit crisis better than most big banks? USA TODAY reporter John Waggoner provides some answers.
Q. What happened at JPMorgan Chase?
A. A series of trades in their Chief Investment Office went terribly bad, costing the bank about $2 billion.
Q. Will the loss require a government bailout?
A. No. JPMorgan should still earn about twice that -- $4 billion -- this quarter, CEO Jamie Dimon says.
Q. How do you lose $2 billion?
A. By making big bets with derivatives -- complex agreements whose value is based on movements of an index or interest rate. Derivatives have worried regulators ever since Long-Term Capital Management, a hedge fund, went spectacularly bust in 1998 and required federal assistance to unwind its position.Warren Buffett has called them "weapons of mass financial destruction."
Q. Why would a JPMorgan make such big bets?
A. Ironically, they may have been trying to manage risk by hedging their bets on corporate bonds. Unfortunately, poorly-constructed hedges can sometimes go terribly wrong.
Q. How will this affect Dimon?
It's tough to absolve Dimon for the losses, especially since he had downplayed the size of the loss, calling it "a tempest in a teapot" during the company's first-quarter earnings report in April. "The price to pay historically has been the loss of the CEO's job," says Chicago securities attorney Andrew Stoltmann. "The board of directors will face a lot of pressure to throw Dimon overboard."
Q. Aside from the whole losing $2 billion thing, how else is this bad for Dimon?
A. Dimon has been outspoken in his opposition to increased bank regulation, and regulators are still hashing out some of the terms of the Volcker Rule, which would limit banks' ability to speculate with their own money. "The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today," Rep. Barney Frank, D-Mass., ranking member of the House Financial Services Committee, said Friday.
Q. Anything else?
A. Banks have been trying to carve out an exemption from the Volcker rule for hedging operations. "They won't be buying him any drinks at the next securities industry meeting," Stoltmann says.
Q. Has JPMorgan Chase paid back its bailout money from the 2008 crisis?
A. Yes. The bank received $94.7 billion in the bailout, which it repaid by December 2009.
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