Chasing Your Money
A controversial upheaval occurred with JPMorgan bank not too long ago over the trading loss that resulted in $2 billion being washed down the drain for the company. The flurry of activity in response to the bank’s error was certainly expected, but some of the events that took place were surprising to say the least.
It all started with a risky trading endeavor by JPMorgan that was built up over the past few years and considered sloppy and poorly thought through. In the latter part of March, the returns began to stumble, then went downhill from there. The initial loss was calculated at roughly $2 billion (forbes.com) but experts suggest that number could increase even more.
As if this wasn’t bad enough, MF Global was dragged into the mess as well. JPMorgan acted as a clearing bank for MF Global and was the go-between for nearly $6 billion in securities lending transactions. The embarrassing problem is that JPMorgan was involved in money shuffling that resulted in the mysterious disappearance of close to $1.6 billion in client money from MF Global’s account.
A little more than $600 million of that was found in a custodial account at JPMorgan as reported by Bloomberg late in 2011. Since then, JPMorgan has returned nearly $90 million in customer property and more than $518 million in non-segregated MF Global assets that were unallocated.
Following the woes of this incident, MF Global continued to decline in stability resulting in the resignation of CEO Jon Corzine and the bankruptcy of the company shortly afterwards. This brings us to the situation as it stands today. Unfortunately, JPMorgan is now legally tied to the mess thanks to a 285-page report released by MF Global recently explaining the firm’s bankruptcy.
Lawsuits Filed & FBI Investigation
In addition to the legal mess JPMorgan is now in, it is attempting to deal with the several lawsuits filed against the bank and an FBI investigation.
The lawsuits came after the realization dawned on Chase employees that their 401(k) and retirement plans were suddenly worth a lot less after the $2 billion loss was announced. Reuters made note that the defendants included Chief Executive Jamie Dimon and Ina Drew who both resigned from their positions as the head of JPMorgan’s investment office.
CNN reported on May 16, 2012 that the Federal Bureau of Investigation had begun preliminary investigations of JPMorgan after the $2 billion loss surfaced. The FBI is joined by the Federal Reserve, the Securities and Exchange Commission (SEC), and a few others in the investigation.
Despite the difficulties and complications facing JPMorgan Chase, the forecast still looks positive. Given its overall net-worth, the loss of $2 billion was not enough to put it entirely in the red. However, in order to fully recover from such a blow to finances and consumer trust, it will require additional protections and regulations to prevent investors at JPMorgan from making uncalculated, risky bets.
In response to the recent pressure to respond to JPMorgan’s loss, regulators are finishing up the “Volcker Rule” designed to mitigate risk of the depositors’ money being unwisely spent. There is much controversy over whether or not to allow aggregate or portfolio hedging at all and the controversy on all sides — Wall Street, JPMorgan, and the regulators involved — is heated and intense according to Bloomberg’s Businessweek post.
So long as JPMorgan learns from its lessons and pays more attention to the risks associated with its billion dollar investments, it should be able to recover from the financial and reputation blow they have suffered this year.