JPMorgan's $2B US trading loss prompts downgrade

Fitch Ratings downgraded the credit rating of JP Morgan Chase by one level late Friday, a day after the biggest U.S. bank revealed a $2 billion U.S. trading loss.

Loss renews regulation debate

JPMorgan Chase says it lost $2 billion US in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money. (Mark Lennihan/Associated Press)

Fitch Ratings downgraded the long-term credit rating of JPMorgan Chase by one level late Friday, a day after the biggest U.S. bank revealed a $2 billion U.S. trading loss.

Fitch cut the rating from AA- to A+, saying the size of the loss and the fact that JPMorgan continues to hold positions in the complex securities that caused the loss "implies a lack of liquidity."

"It also raises questions regarding JPM's risk appetite, risk management framework, practices and oversight; all key credit factors."

Fitch put JPMorgan on negative credit watch, a warning that it might downgrade further.

The bank's announcement has also triggered a renewed debate over whether financial institutions should be more closely regulated.

JPMorgan shares lost 0.73 per cent in after-hours trading after closing down 9.3 per cent at $36.95 US Friday on a record high volume of 208 million shares.

On Thursday, it revealed the loss in a trading group that manages the risks the bank takes with its own money.

Democratic Senator Carl Levin, chairman of a congressional subcommittee that investigated what caused the 2008 financial crisis, described the loss as "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."

Mary Schapiro, head of the U.S. Securities and Exchange Commission, told reporters that the agency was focused on the JPMorgan loss but declined to comment further.

JPMorgan CEO Jamie Dimon says the strategy behind the portfolio was "flawed, complex, poorly reviewed, poorly executed and poorly monitored." (Mark Lennihan/Associated Press)

More than three years after the financial industry almost collapsed, the colossal misfire was cited as proof that big banks still do not understand the threats posed by their own speculation.

"It just shows they can't manage risk — and if JPMorgan can't, no one can," said Simon Johnson, the former chief economist for the International Monetary Fund.

"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," said Barney Frank, the retiring Democratic leader of the House Financial Services Committee.

In a statement, Frank said that the revelation runs counter to JPMorgan's narrative "blaming excessive regulation for the woes of financial institutions."

Criticism of the bank did not stop with its traditional chorus of detractors. It also came from Republican senator Bob Corker,  a prominent member of the Senate Banking Committee who has received $10,000 since January 2011 from JPMorgan's political action committee, the most any candidate has received.   

Corker, a leader of a failed effort last year to block a Federal Reserve rule that slashed bank profits from debit cards, called for a hearing "as expeditiously as possible" into the events surrounding JPMorgan's loss.   

On Thursday, CEO Jamie Dimon said in a conference call that the trading reflected a new strategy by the bank that was designed to protect against JPMorgan's own losses and did not involve any clients.

"In hindsight," he said, "the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored."

Tim Ryan, president of the Securities Industry and Financial Markets Association, a trade group, said it was imposible to legislate or regulate risk out of the financial system.   

"My hope is that this is viewed as bona fide hedging, but it went wrong," he said in an interview.

"A mistake was made. Money is going to be lost. It's not customer money. It's not government money. It's JPMorgan's money, the shareholders of JPMorgan."

But some analysts were skeptical, and suggested that the bank appeared to have been betting for its own benefit, a practice known as proprietary trading.

That so-called "prop trading" would be constrained by the Volcker rule — named after former Federal Reserve chairman and White House adviser Paul Volcker — which is still being written.

Dimon said the type of trading that led to the $2-billion loss would not be banned by the Volcker rule.

The Federal Reserve said last month that it would begin enforcing that rule in July 2014.

If the loss is a result of prop trading, it would appear to vindicate the stance taken by Bank of Canada governor Mark Carney, who was reportedly the subject of a tirade by Dimon for suggesting global banks be subject to greater regulation to minimize the effects of another financial crisis.

On Friday, Dimon told NBC News, for an interview airing Sunday on "Meet the Press," that he did not know whether JPMorgan had broken any laws or regulatory rules. He said the bank was "totally open" to regulators.

Bank executives, including Dimon, have argued for weaker rules and broader exemptions.

The trading loss is an embarrassment for a bank that has positioned itself as restrained in its use of complex financial derivatives compared with some of its peers, and which came through the 2008 financial crisis in much better health.

Cliff Rossi, a former top risk executive for Citigroup, Countrywide and other big financial companies, said he drew little hope from the steps Washington has taken.

He said JPMorgan's loss shows that the market for the complex financial instruments known as derivatives is too opaque. He also said the loss demonstrates that banks like JPMorgan are too big to manage effectively.

"This just tells you that we are a long, long way from getting our arms around this whole 'too big to fail' issue," said Rossi, now executive-in-residence at the University of Maryland's business school.

"This is actually worse than Citigroup landing in trouble" in 2008, he said, "because JPMorgan is recognized as one of the better-run institutions."

With files from The Associated Press