Chief Executive Jamie Dimon’s public self-flagellation aside, this loss compromises merely 20% percent of J. P. Morgan’s pretax profit for the first quarter of this year. Put another way, J. P. Morgan has a market capitalization of $137.4 billion of which $2 billion comprises a bit more than 1 percent–hardly fodder for anyone’s angst against quasi-public Wall Street juggernauts that seem to privatize profit and publicize loss being ‘too big to fail.” Mr. Dimon is wrong to assert that the trading losses were the result of hedges. It would be more wrong for lawmakers on either side of the aisle to call for hasty regulations on an industry they have never really understood and from whose pockets they are lobbied and receive the heftiest campaign contributions. A cursory look at what has happened to the Volcker Rule illustrates this point. The real lesson of J. P. Morgan’s $2.3 billion loss is that Wall Street must once and for all adjust the way it manages and understands risk.
Yesterday, Standard & Poor’s relieved the Eurozone’s bail-out fund, the European Financial Stability Facility (“EFSF”) of its AAA credit rating, possibly hampering the fund’s ability to contain the European debt crisis. This comes on the heel’s of the S&P stripping both France and Austria of their triple-A rating in favor of a rating of AA+. The effect of the S&P downgrade may be negative. Ratings agencies exist to level asymmetries in information and evaluate risk but one of their inherent oddities is that they seek to compare things whose differences in scale make them incomparable. Ratings agencies also have conflicts of interests, they often evaluate financial products (like collateralized debt obligations) that they do not understand, they seem to lack fixed ways to measure absolute risk, and they are at times, catastrophically wrong.