JP Morgan Chase losses mount

With the New York Times reporting that JP Morgan Chase’s losses may reach $9 billion, we asked out Zintro experts what issues may be behind this debacle.

Rex Danford, a consultant in strategic, capital, and marketing functions, says that this incident illustrates how investment and trading practices have grow increasingly complex without comparable growth in management tools and techniques. “Bank management requires more sophisticated and automated monitor and control systems to enforce investment policies and regulatory compliance, he says.

“Probable scenarios as to what caused the losses include inadequate responses to the warning signals due to management’s failure or inability to understand alternative outcomes and repercussions. Banking culture is predominantly one of assurance and risk understatement, which is not rational in the 21st century,” Danford says. “General lack of humility in the trading culture influences people to contain the bad news within their purview rather than seeking assistance from management superiors. JPMorgan-London is a case of humans not being prepared for the technology which makes as much sense as giving a child an Aston-Martn in lieu of a bicycle.”

Allan Foster, a consultant on hedge fund accounting, operations and compliance  believes that the rise from $2 billion to $9 billion was expected: “These were huge notional bets that cannot be easily closed out. The CDS instruments are what you could say very leveraged as you only have to put up a small percentage when positions are open and only the P/L is settled up when the contracts are closed,” he says.

Steven Zwillick, a consultant in banking operations and system management, says that Chase had $2 billion plus of assets (customer loans). “It took an equal amount of its operating capital and used it as a hedge against the loan risk. Chase lost this bet when it attempted to renegotiate the hedge deal,” he says.

Jim Higgins, an expert in the card and payment industries, thinks that Jamie Dimon’s recent debacle had nothing to do with Chase’s card programs. “Chase announced a new prepaid card program called Chase Liquid two days before the $2 billion trading loss on derivatives was revealed. In my opinion, commercial banks should not be allowed to trade any synthetic securities on their house account,” he says.

By Maureen Aylward

 

Zintro, Inc

 

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