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.
J.P. Morgan’s Loss as a Red Herring By R Tamara de Silva May 14, 2012Much ado is being made about J. P. Morgan’s disclosure of over $2 billion in trading losses and one hopes the media and regulators do not use this as yet another opportunity to completely miss the point. Wall street must not rely exclusively on its present risk models that are based exclusively on VaR and variations of VaR-it must learn to think outside its own box and anticipate worse case scenarios. We cannot afford to have many more systemic crises that threaten to bring down the financial system simply because yet again, the unexpected and un-modeled occurs.