Today the news wires and financial channels are ablaze with J.P. Morgan Chase announcing they are going to experience a $2 BILLION dollar loss from one of their departments responsible for hedging risk for the bank. The drumbeat I hear from the so-called “Smart crowd” of talking heads and analysts is both very interesting, and at the same time troubling.
I just want to illustrate a few key points that from my point of view are not only critical questions that need to be asked, but jump out at me in bewildering amazement on how they are spinning or making assumptions that are superfluous.
Here’s what I’m hearing followed by what I think:
1. “Give Jamie Dimon credit for coming out with this story getting ahead of hit. He’s embarrassed and mad and blah, blah, blah.”
Me: Currently he is being compared to getting ahead of a story with a subtle nod of comparison with “The Tylenol® Recall” from years ago. Although the tactic was brilliant and now a case study in how and what to do in a corporate crisis. The comparison or similarity doesn’t work because Tylenol was an act of malicious and criminal intent to mame or harm from an outside force. This is a failure of management and leadership from the top down. The assumption that JPM is so large that the CEO can’t know everything doesn’t fly. Currently we are talking $2 BILLION dollars and that is the current figure being reported. That figure can go up and no one knows exactly by how much. It’s all a guess even by the banks own words. But that is not being discussed. I contend there is NO company operating today where BILLIONS are at risk, and are currently being lost, and they are the very same instruments the bank is using to mitigate risk which is now causing the entity itself to be at risk without the CEO fully aware of what is going on. If he didn’t know or fully comprehend the risks he’s either a fool, or has had plausible denial scenarios at the ready on par with any Head of State.
2. The instruments used by the bank were for their “Hedging Strategy”
Me: This is the one that jumps out at me the most. Everywhere, and I mean everywhere you hear this one say this, or that one say that. What’s glaringly obvious to me is how these so-called “financial analysts” are missing the largest point of their own analysis. They are going on to explain how this or that might have happened and are so caught up in sounding smart they look foolish. My question is, “How can this be called a problem from their Hedging? Hedging by its definition means protecting your position or in plain language if you lose on this you’ll win on that because you hedged. If you can lose on this while at the same time you can lose on that what you did was not a hedge. You speculated, you gambled, you did something, but it clearly was not a hedge.” This is where language is important and anyone in charge of money knows this let alone a CEO of one of the worlds largest financial institutions.
This story is far more troubling and I believe could be just as dangerous to the financial markets than any of the so-called “smart crowd” either know or understand.
It’s no longer any wonder to me why economists and analysts have a track record of being correct on par with fortune tellers on Coney Island.
My apologies to fortune tellers everywhere.
© 2012 Mark St.Cyr