EthicsBite™

Last week the U.S Senate conducted hearings on JPMorgan’s $6.2 billion 2012 trading loss in its London office. This was the amount of a trading loss attributed to the “London Whale,” an individual trader in the bank’s Chief Investment Office (CIO), an office whose responsibility is risk management. That individual and the executive in charge of the CIO were let go and the damage now seems to be contained. So why should the Senate be investigating? Why should we care?

Critics might argue that this is the business loss of a defined corporate entity, JPMorgan Chase, and therefore a matter for the company and its shareholders, not the general public and the Congress. In most cases I would agree.

However, this is not just any company and the causes of the loss have significance beyond its corporate and national bounds. An important point to make here is that while the bank was successful in holding the loss at $ 6 billion, it could have been more extensive and had greater consequences.  More importantly, the nature of the loss is indicative of a systemic problem that continues to threaten the nation’s economy, which is the reason it is definitely the public’s business.

When the Banks Fall It Hurts Us All

JPMorgan Chase is a global financial entity, the largest global bank according to an editorial in Bloomberg. As the editorial points out, the bank’s equity is only between 3 and 4 percent of its total value. A sufficient drop in stock price could potentially wipe out that underlying equity and set events in motion that would cause the American taxpayer to bail them out.

How much would that bail out be? JPMorgan has a total value of around $4 trillion.   As someone argued soon after the first bail out, “too big to fail will one day be too big to save.”

The area that should be our greatest concern is this: if Mr. Dimon is the best risk manager in the industry, then can the industry as a whole really be counted on to be a partner with the people (via regulation) in ensuring we do not have another global calamity? The Bloomberg editorial re-opens the discussion on capping the size of the largest banks.

It’s Not Their Money

There are people who believe the $6 billion loss is an issue for JPMorgan management and its shareholders and should be left there. But it is not just the bank’s direct shareholders that may be hurt in these situations. This bank’s stock prices impact many other investors and non-investors. Indirect investors in JPMorgan include those who buy ETFs including ETFs that track the S&P, the Dow and other metrics. People who do not directly invest but have pension and other retirement plans can be affected. A major bank failure, as we saw in 2008 and 2009 can impact the economy as a whole costing the jobs of people who have no investments of any kind.

We need to address bank size to protect us all. We need to understand that complex investments aimed at managing risk can introduce new risks. And we need to realize that the importance of fiduciary responsibility must be re-established in the industry.