Derivative Trading Causes Meltdown at JP Morgan Chase

Jamie Dimon, the CEO of JP Morgan Chase, was hailed a brilliant risk taker. Not only that, he was a white knight on Wall Street. Under Dimon, Chase took over Bear Sterns, and then took over Washington Mutual. Quickly Chase became the nation's biggest bank, with a massive combination of commercial, retail, and investment banking. Except now this legacy is undone. As reported by the AP News on Saturday, May 12th, 2012:

"Dimon had to face stock analysts and reporters on Thursday and confess to a "flawed, complex, poorly reviewed, poorly executed and poorly monitored" trading strategy that lost a surprise $2 billion.

The revelation caused traders to shave almost 10 percent off JPMorgan's stock price the following day and brought a shower of complaints from industry observers and lawmakers who said banks needed tighter scrutiny."

Dimon, since the collapse, had fought hard against attempts to reregulate the banking industry. Now politicians and regulators certainly have a lot more ammunition. Bank bailouts were not popular among either the tea party or among occupiers, so bailing JP Morgan Chase out, if things got much worse, would not be politically acceptable. What could be done? In the 1930s, the government split JP Morgan into JP Morgan, the commercial bank, and Morgan Stanley, the investment bank. Chase and Citi were kicked out of investment banking. And the Glass Steagall act forbade a commercial bank from getting anymore than 10% of its revenue from investment banking.

This new meltdown at Chase is ironic. Dimon himself has said occupy wall street protesters have some legitimate complaints. More surprisingly, is the reaction of some analysts. As AP News Reports:

"His admission of the mistake this week left some analysts asking whether his grip is slipping, and the bank's more than $2 trillion in assets have become too big for him to manage.

More likely, some other analysts said, it is a statement about how, three and a half years after the crisis, banks still conduct impossibly complex trades that are difficult to track."

Just the fact that some Wall Street analysts are now saying JP Morgan Chase maybe too big for star CEO Jamie Dimon to manage is extremely significant. Also the admission that the impossibly complex derivative trades are problematic is also very interesting. This should certainly give ammunition to those who wish to re-regulate banking and restore Glass Steagall. This is an election year, so the outcome of this is potentially very interesting. The role that New York State and New York City plays in this remains to be scene, but banking is a big contributor to the economy and to the tax base of both city and state. At some point, New York officials will need to address what's going on with Chase, while the feds are deciding on what should be done.