Putting JPMorgan Chase's losses in perspective
Financial news has been ablaze since the announcement Thursday evening. While $2 billion is a lot of money, it's not the end of the world, and far from the end of JPMorgan Chase. So, some perspective:
It could exceed $3 brillion as JPM unwinds the positions (and until we know the specifics of what the investments were, who's to say the losses wouldn't recover some, given time?), but it was in a $100 billion portfolio. Stocks, especially indices, can see that kind of percentage swing daily. Meanwhile, JPM manages $1.4 trillion in assets.
The loss in JPM's market capitalization are purely paper. The only people affected are the shareholders who cash out for less than what they bought for, so in anticipation of this as a one-time loss, the prudent thing is to hold onto JPM stock. Personally I see this as a great value opportunity. (Disclosure: this is not a recommendation to buy. You do this at your own risk, and as always, I'm speaking for myself and am distancing my personal opinion from my employer.)
Many are calling for heads to roll, especially Jamie Dimon's. The only people with that right are the investors affected and shareholders. Cash in bank accounts is safe, so pure banking customers . Since JPM repaid its TARP loans in 2009, taxpayers aren't on the hook here. And to stop concerns immediately about taxpayers having to cover losses, it's very simple: don't bail them out! Then JPM can take care of its own losses, which will be booked as a one-time event (affecting profit only in the current quarter, so following quarters will be unaffected).
Meanwhile, among the same people who want Dimon to resign, are they so actively criticizing that taxpayers have poured billions into Fannie Mae (which finally showed its first profit since 2008) and Freddie Mac's continued losses? For 2010 and 2011, taxpayers gave over $20 billion just to Freddie Mac, which means taxpayers have been covering every few months what JPM lost as a one-time thing. These are losses every taxpayer is participating in, while JPM's losses affect only its clients.
Then consider that with Obama's budget deficits, taxpayers are losing over $3 billion each day. Where are the calls for the Borrower-in-Chief's resignation?
But Obama always heeds Rahm Emanuel's advice: "You never want a serious crisis to go to waste." Already this is touted as justification for even more federal regulation. The only thing the regulations do, at current levels or more severe ones, is to cause all financial institutions to spend money chasing ghosts, and hinder profits with forced "decreased risk." These regulations can do nothing to prevent losses. Less risk doesn't mean less lost money, but less risk can easily mean less profit.
There are calls for reinstating Glass-Steagall, which would also have done nothing. If JPM had been separate investment banking and consumer banking entities, the investment banking side would have still suffered these losses. Glass-Steagall is a favorite talking point of the financially ignorant, that it enabled "too big to fail," and that we didn't have such a big crisis while it was in effect. Actually, had the Act not been repealed, the crisis would have still happened. Note that the crisis didn't happen for ten years after repeal, because it wasn't the Act: it was a "perfect storm" of events that built up even while the Act was in force. Not repealing Glass-Steagall would have simply meant more institutions for the contagion to spread among, but the same amounts of assets and losses. There would have still been failed commercial banks that approved bad mortgages, and failed portfolios as investment banks put clients into bad Mortgage-Backed Securities.
It could exceed $3 brillion as JPM unwinds the positions (and until we know the specifics of what the investments were, who's to say the losses wouldn't recover some, given time?), but it was in a $100 billion portfolio. Stocks, especially indices, can see that kind of percentage swing daily. Meanwhile, JPM manages $1.4 trillion in assets.
The loss in JPM's market capitalization are purely paper. The only people affected are the shareholders who cash out for less than what they bought for, so in anticipation of this as a one-time loss, the prudent thing is to hold onto JPM stock. Personally I see this as a great value opportunity. (Disclosure: this is not a recommendation to buy. You do this at your own risk, and as always, I'm speaking for myself and am distancing my personal opinion from my employer.)
Many are calling for heads to roll, especially Jamie Dimon's. The only people with that right are the investors affected and shareholders. Cash in bank accounts is safe, so pure banking customers . Since JPM repaid its TARP loans in 2009, taxpayers aren't on the hook here. And to stop concerns immediately about taxpayers having to cover losses, it's very simple: don't bail them out! Then JPM can take care of its own losses, which will be booked as a one-time event (affecting profit only in the current quarter, so following quarters will be unaffected).
Meanwhile, among the same people who want Dimon to resign, are they so actively criticizing that taxpayers have poured billions into Fannie Mae (which finally showed its first profit since 2008) and Freddie Mac's continued losses? For 2010 and 2011, taxpayers gave over $20 billion just to Freddie Mac, which means taxpayers have been covering every few months what JPM lost as a one-time thing. These are losses every taxpayer is participating in, while JPM's losses affect only its clients.
Then consider that with Obama's budget deficits, taxpayers are losing over $3 billion each day. Where are the calls for the Borrower-in-Chief's resignation?
But Obama always heeds Rahm Emanuel's advice: "You never want a serious crisis to go to waste." Already this is touted as justification for even more federal regulation. The only thing the regulations do, at current levels or more severe ones, is to cause all financial institutions to spend money chasing ghosts, and hinder profits with forced "decreased risk." These regulations can do nothing to prevent losses. Less risk doesn't mean less lost money, but less risk can easily mean less profit.
There are calls for reinstating Glass-Steagall, which would also have done nothing. If JPM had been separate investment banking and consumer banking entities, the investment banking side would have still suffered these losses. Glass-Steagall is a favorite talking point of the financially ignorant, that it enabled "too big to fail," and that we didn't have such a big crisis while it was in effect. Actually, had the Act not been repealed, the crisis would have still happened. Note that the crisis didn't happen for ten years after repeal, because it wasn't the Act: it was a "perfect storm" of events that built up even while the Act was in force. Not repealing Glass-Steagall would have simply meant more institutions for the contagion to spread among, but the same amounts of assets and losses. There would have still been failed commercial banks that approved bad mortgages, and failed portfolios as investment banks put clients into bad Mortgage-Backed Securities.
posted by Perry Eidelbus at
11:05 PM
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