JP Morgan Chase, long considered the gold standard in prudent money management, lost $2 billion in six weeks while pursuing a hedging strategy the company’s CEO described as “stupid.” The losses couldn’t have come at a worse time for the bank, which is desperately fighting against new U.S. regulations that would limit its ability to trade with its own money.
From the NY Times:
The centerpiece of the new regulations, the so-called Volcker Rule, forbids banks from making bets with their own money, and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view, banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name, in this case for the purposes of hedging and market-making.
The missteps by JPMorgan could highlight that murky line between proprietary trading and hedging. The bank unit responsible for losses takes positions to hedge activities in other parts of the bank.
“This is a crucial moment in the debate,” said Frank Partnoy, a professor of law and finance at the University of San Diego, who has been a longtime supporter of tighter rules for the nation’s banks. “It couldn’t have come at a worse time for JPMorgan Chase. After everything we went through in the financial crisis, the fact that something of this magnitude could happen shows that the reform didn’t do the job.”