By DAVID MOON, Moon Capital Management, LLC
May 20, 2012
It’s hard to believe, but JP Morgan’s $2 billion loss on a trading hedge isn’t a massive amount of money – at least to JP Morgan. In absolute terms the number has shock value, but in perspective, the relative size of the loss is less meaningful. The company has $866 billion of cash and $183 billion of shareholder’s equity.
Even with a $2 billion trading loss, the company will still earn a multi-billion profit this quarter and more than $14 billion this year.
Yet analysts, investors, politicians and social commentators were all quick to offer comments on the situation – many of them acting as if this is some sign that the banking world is about to collapse. Like me, none of them know the details of the trade, yet they feel qualified to draw conclusions about its detailed operational implications.
Almost everyone has a bias, especially people who are quick to judge or comment on public matters about which they know few of the intimate details.
I am a JP Morgan shareholder. No matter how hard I try, that will influence anything I write about this situation.
President Obama has up to $1 million in JP Morgan. In the immediate media controversy following the announcement of the loss, he described CEO Jamie Dimon as “one of the smartest bankers we got.”
In the next breath he revealed his second bias, questioning whether a weaker bank might not be able to withstand such a loss. “That’s why Wall Street reform is so important.”
Senator Bob Corker (R-Tenn.) quickly called for a Senate hearing on JP Morgan’s trading activities insisting that even the most stringent portions of the new Volcker rule would have permitted this particular trade. According to the Wall Street Journal, Corker quoted a staffer from the Office of the Comptroller of the Currency (OCC) who said that hedging against broad market moves – like JP Morgan was doing – is “something useful for financial institutions to be doing.”
Corker has a bias. Obama has a bias. All God’s children have a bias.
Banks do a lot more risky things, however, than engage in hedging transactions equal to one percent of their capital.
When Regions Financial sold Morgan Keegan, it took a charge equal to about four percent of its equity, or four times the relative size of this JP Morgan loss.
Where are the congressional hearings into the reckless banking behavior at Regions?
Banks take risks. Unless we are ready to fully nationalize the lending industry, we need to recognize and accept it. The problem arises when the government chooses to provide ex post facto insurance to some bankers for truly reckless behavior. See Goldman Sachs.
The JP Morgan shareholders rightly bore the cost of this loss. They and the board are the proper arbiters of Dimon’s transgressions, if any. Everyone else is no better than a financial Al Sharpton rushing to the scene of a tragedy, exploiting it for his own purpose.
When a company makes an unfortunate or even stupid business decision, it should be investigated by the board of directors – not the FBI. Of course, that's my bias as a JP Morgan shareholder and supporter of informed, open markets.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).