Finance crisis worries UK centre

JPMorgan Chase is facing intense criticism for claiming that a surprise two billion-dollar (£1.2bn) loss by one of its trading groups was the result of a sloppy, but well-intentioned strategy to manage financial risk.

More than three years after the financial industry almost collapsed, the colossal misfire was cited as proof that big banks still do not understand the threats posed by their own speculation.

"It just shows they can't manage risk - and if JPMorgan can't, no one can," said Simon Johnson, former chief economist for the International Monetary Fund.

JPMorgan is the largest bank in the United States and the only major one to remain profitable during the 2008 financial crisis. That lent credibility to its tough-talking chief executive Jamie Dimon, as he opposed stricter regulation in the aftermath.

But Mr Dimon's contention that the two-billion loss came from a hedging strategy that backfired, not an opportunistic bet with the bank's own money, faced doubt, if not outright ridicule.

"This is not a hedge," said Senator Carl Levin, the Democratic chairman of a sub-committee that investigated the crisis. He said the trades were instead a "major bet" on the direction of the economy, as published reports suggested.

Yesterday Mr Dimon told NBC News in an interview being shown tomorrow on Meet The Press, that he did not know whether JPMorgan had broken any laws or regulatory rules. He said the bank was "totally open" to regulators.

The head of the Securities and Exchange Commission, Mary Schapiro, told reporters that the agency was focused on the JPMorgan loss but declined to comment further.

JPMorgan's disclosure on Thursday recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system when they falter.

The JPMorgan loss did not cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers investment bank. But it shook the confidence of the financial industry.

Within minutes after trading began on Wall Street, JPMorgan stock had lost almost 10%, wiping out about 15 billion dollars in market value. It closed down 9.3%.

Fitch Ratings downgraded the bank's credit rating by one notch, while Standard & Poor's cut its outlook on JPMorgan to "negative", indicating a credit-rating downgrade could follow.

Morgan Stanley and Citigroup closed down more than 4%, and Goldman Sachs closed down almost 4%. The broader stock market was down only slightly for the day.

Mr Dimon gave few details about the trades on Thursday beyond saying they involved "synthetic credit positions", a type of the complex financial instruments known as derivatives.

Enhanced oversight of derivatives was a pillar of the 2010 financial overhaul law, known as Dodd-Frank, but the implementation has been delayed repeatedly and will not take effect until the end of this year at the earliest.

JPMorgan's trades show that the derivatives market remained too opaque for regulators to oversee effectively, said Massachusetts Democrat, Rep Barney Frank, one of the law's namesakes.

"When a supposedly responsible, well-run organisation could make such an enormous mistake with derivatives, that really blows up the argument, 'Oh, leave us alone, we don't need you to regulate us'," he said.

Criticism of the bank did not stop with its traditional chorus of detractors. It also came from Republican senator Bob Corker, a prominent member of the Senate Banking Committee who has received 10,000 dollars since January 2011 from JPMorgan's political action committee, the most any candidate has received.

Mr Corker, a leader of a failed effort last year to block a Federal Reserve rule that slashed bank profits from debit cards, called for a hearing "as expeditiously as possible" into the events surrounding JPMorgan's loss.

Tim Ryan, president of the Securities Industry and Financial Markets Association, a trade group, said it was impossible to legislate or regulate risk out of the financial system.

"My hope is that this is viewed as bona fide hedging, but it went wrong," he said in an interview.

"A mistake was made. Money is going to be lost. It's not customer money. It's not government money. It's JPMorgan's money, the shareholders of JPMorgan."

No-one seemed to suggest that JPMorgan had broken a law. But the mistake added a wrinkle to the still-unsettled discussion about how the financial industry should be regulated in the aftermath of 2008.

JPMorgan was seen as a saviour of weaker banks during the financial crisis and the only big bank to escape relatively unscathed. His reputation enhanced, Mr Dimon, 56, has been emboldened to challenge efforts to toughen regulation.

Mr Dimon, who grew up in the Queens borough of New York and was groomed by the former Citigroup chief executive Sanford Weill, has also chafed against Occupy Wall Street protesters.

"Acting like everyone who's been successful is bad and that everyone who is rich is bad - I just don't get it," he said at a conference earlier this year.

On Thursday, at about the same time he was breaking news of the two billion-dollar loss to Wall Street, he sent an email to JPMorgan's 270,000 worldwide employees, assuring them that the company was "very strong".

AP