Big loss, small deal

Just like that, it’s gone! Two billion dollars… and yes, that’s billion with a B.

For those of you who don’t follow the world of finance, I’m referring to the $2 billion loss suffered by JP Morgan after a failed hedging strategy conducted by its Chief Investment Office. This failed strategy caused their shares to take a serious beating, losing 9 percent of their value immediately after reporting the loss, and almost a quarter of their value over the month of May. A serious loss to be sure, but it is still a lower percentage than Facebook lost after, well, showing up to NASDAQ for three weeks (about one-third). Dotcom bubble, anyone? But I digress.

Jamie Dimon, CEO of JP Morgan, admitted openly that he did not know the extent of the problems and took blame openly. That said, Dimon contends that his bank is still strong and highly profitable with first quarter earnings of $5.4 billion. Well, sounds like an open and shut case folks. The misguided investment strategy ran its course in a bad way, and shareholders punished the company through selling stock. JP Morgan remains strong, so no drastic bailout legislature will be necessary. What’s more, some new investors might be interested in buying stock in what is arguably still a strong company at a lower price. Glad that’s behind us. The loss sounded scary at face value but JP Morgan handled it pretty well, and there was no need for government intervention. … Or we can do this crap again.

Shortly after the $2 billion trading loss, the FBI’s financial crimes squad opened a preliminary investigation and regulators at the Securities and Exchange Commission set their focus on JP Morgan. The former is a little unnerving. Correct me if I’m wrong, but isn’t the FBI only supposed to get involved if there’s reason to believe a crime (not just investment idiocy) has taken place? All that is evident is that JP Morgan made a terrible investment and lost money. If I had blown my own capital on, say, a certain IPO whose only tangible value is Internet ad space, I shouldn’t be expecting a local private investigator to launch an investigation. The SEC business sounds typical enough. After all, it was a lot of money and looking into risky trading is kind of the SEC’s thing. It will play its usual role of Captain Hindsight and let everyone know what we already knew shortly after the mistakes had been made. This lesson can usually be summed up as: “See that thing you did? Yeah, don’t do that again.” It’s a thankless job, but only because the SEC doesn’t actually deserve any thanks.

Of course, leaving this to known executive branch channels is not enough for this president, notorious for throwing his two cents into everything from the Trayvon Martin case to “The View.” No sir, Obama couldn’t let this golden opportunity to pretend he knows how investment works slip by. The entirety of his case could best be summed up in the following quote: “You could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in. That’s exactly why Wall Street reform’s so important.” Okay, I’ll give him… the first two-thirds of the first sentence. Yes, it turns out that in a private economy, companies of all strengths, sizes and profit margins will in fact risk as much as one one-thousandth of their total assets (JP Morgan has $2.27 trillion in total assets) on risky ideas sometimes, maybe even a higher fraction. We might as well be in a casino with such high-stakes gambling going on!

As for the “had to step in” part, I can only ask: Why? A bank lost money on a bad investment. Large quantities of people lose their own money all the time. It’s as though this president has no idea how America became an economic powerhouse in the first place. We did it through free markets, and the concept of “risk and reward” is an essential part of this. People like Obama see a recession as an excuse to buckle down, to curtail risk. People like Dimon see a recession as a new playing field, as a chance to learn from the mistakes of his company and get right back to starting bold new business ventures. If JP Morgan’s strategy is truly that dangerous, people will stop investing and the bank will continue to decline. As long as investors are informed enough to understand what exactly they are investing in, we don’t have to worry about things like mortgage-backed securities stuffed with sub-prime loans or the fact that a social networking site whose primary product is distributed over the Internet free of charge could ever be valued at $116 billion.


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