The Truth About JP Morgan’s $2 Billion Loss

George Washington's picture

Must-Read Background

Before we can understand what’s really going on with JP Morgan’s loss (which will probably end up being a lot more than $2 billion), we need a little background.

JP Morgan:

  • Essentially wrote the faux “reform” legislation for derivatives, which did nothing to decrease risk, and killed any chance of real reform
  • Has had large potential exposures to credit default swap losses for years
  • Has replaced the chief investment officer who made the risky bets with a trader who worked at Long Term Capital Management … which committed suicide by making risky bets
  • … and again in 2007  ( and was saved both times by the government at taxpayer expense)

In addition, JPM’s CEO Jamie Dimon:

  • Is a Class A Director of the Federal Reserve Bank of New York, which is the chief bank regulator for Wall Street (including JPM).  Indeed, Dimon served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.  At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank
  • Has a reputation of being the “golden boy” and smartest guy on Wall Street
  • Jokes about a new financial crisis happening “every five to seven years”

What Does It Mean?

Pundits and consumers alike are reacting to JP Morgan’s loss like a startled herd of sheep.

They somehow believed that the “best of the breed” bank and CEO – the biggest boy on the block – was immune from losses.  Especially since JPM has been so favored by the Feds, and Dimon was so favored that he was being groomed for Secretary of Treasury.

And the fact that the head cheerleader for letting banks police themselves has egg on his face is making a lot of people nervous.

And that the biggest of the too big to fails could conceivably fail.

Many commentators have noted that other banks may be downgraded as well.

Elizabeth Warren is calling for Dimon to resign from the New York Fed:


Even CNBC is now calling for Glass-Steagall to be put back in place.

Banking expert Chris Whalen writes:

Someone at the Fed should have at least secondary accountability for the JPM losses if the VaR model/process was faulty. Is there any accountability for incompetent, badly managed federal bank regulators? As our colleague Janet Tavakoli wrote in the Huffington Post: “The U.S. can count on JPMorgan to continue both long and short market manipulation and take its winnings and losses from blind gambles. Shareholders, taxpayers, and consumers will foot the bill for any unpleasant global consequences.”


We think that the loss by JPM is ultimately yet another legacy of the era of “laissez-faire” regulation and even overt Fed advocacy for the use of OTC derivatives by US banks. Fed officials such as Pat Parkinson, who retired as head of the Fed’s division of supervision and regulation in January, were effectively lobbyists for the large banks and their derivatives activities. It seems a little ridiculous for the same Fed officials who caused the problem over the years to now be tasked with investigating JPM, much less regulation of large bank dealings in OTC instruments.

And Reuters correctly notes:

JP Morgan Chase’s loss is the perhaps inevitable result of the interaction of two policies: too big to fail and zero interest rates.




Too big to fail, the de facto insurance provided by the U.S. to financial institutions so big their failure would be disastrous, provides JP Morgan and its peers with a material advantage in funding and as counterparties. Depositors see it as an advantage, as do bondholders and other lenders. That leaves TBTF banks flush with cash.


At the same time, ultra-low interest rates make the traditional business of banks less attractive, naturally leading to a push to make money elsewhere. [See this.] With interest rates virtually nothing at the short end but not terribly higher three, five or even 10 years out, net interest margins, once the lifeblood of large money center banks, are disappointingly thin. Given that investors are rightly dubious about the quality of bank earnings, and thus unwilling to attach large equity market multiples to them, this puts even more pressure on managers to look elsewhere for profits.


Investors believe, rightly, that the largest banks won’t be allowed to fail; what they also appear to believe is that they very well may not be able to prosper and that to the extent they do shareholders won’t fairly participate.


What would you do if you had a built-in funding advantage but little demand for your services as a traditional lender, i.e., one which borrows short and lends long? If you are anything like JP Morgan Chase appears to be you will put some of that lovely liquidity to work in financial markets, hoping to turn a built-in advantage into revenue.


JP Morgan stoutly maintains that the purpose of the trades was to hedge exposure elsewhere, as opposed to being proprietary trading intended to generate profits. That’s contradicted by a report from Bloomberg citing current and former employees of the chief executive office, including its former head of credit trading.

The Volcker Rule, now being shaped, is intended to stop such speculative trades, though in practice debating what is a hedge and what isn’t is a sort of angels-dancing-on-the-heads-of-pins argument which makes effective regulation almost impossible.




The keys are motive, opportunity and ability. Profits – and the investment office is reported to have made considerable ones in the past – provide a more believable motive than simple hedging. Opportunity is afforded by the combination of a privileged funding cost combined with poor alternative places to put money to work elsewhere in the banking business. While there may be some active borrowers, and TBTF banks enjoy an unfair advantage in serving their needs, the trans-Atlantic balance-sheet recession means households and businesses are showing a preference for paying back loans rather than taking them out.


Bruce Lee, chief credit officer of Fifth Third Bancorp, which isn’t TBTF, was frank about this recently, saying that the value of deposit funding was now at its lowest in his career.


Finally there is ability, and like common sense all bankers believe they have the ability to trade successfully despite the wealth of historical evidence to the contrary.

While events show clearly that JP Morgan wasn’t able to adequately manage its own business, an attack on it engaging in speculation doesn’t actually hinge on that.


There is clearly a public policy outrage here because should JP Morgan find itself in difficulties due to speculation the taxpayer will end up paying the freight. That’s probably not even the worst of it. All of the profits that TBTF banks make through speculation have been subsidized and enabled by the taxpayer. It is obvious that managers and employees have an incentive to take risks because, after all, TBTF may not be forever but they will capture 35 or 40 percent of the inflated takings so long as it lasts. Even if JP Morgan never blew up speculative trades, we should still oppose them so long as they are made possible and profitable by government policy.


Raising interest rates in order to remove an incentive to speculation probably wouldn’t work; low rates are the result of too much debt as well as a palliative for that disease.


The Volcker Rule won’t be effective; it is impossible to distinguish hedges from speculation and either can blow up banks.


The better alternative is to end the policy of too big to fail, preferably while at the same time forcing all banks out of the business of market speculation through a revival of the kind of Glass-Steagall-like policy which encouraged a small and useful financial sector for decades, forcing those that want government insurance to act like utilities, taking deposits, processing payments and making simple loans.


Let the investment banks take their risks, take their chances and suffer their losses – as separate entities.

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SmoothCoolSmoke's picture

Fuck the Criminal Elite.  Tired of them pissing on the backs of the people and telling us it's raining.   Put Jamie Diamomd's head on a pike at the Wall and Broad and let the pidgeons peck his eyebalss out.  That'll straighten some asses out.

Eric L. Prentis's picture

Jamie Dimon, stop the insanity, resign already.

michael_engineer's picture

Did they consider cancer as genetic damage?

Do mice live long enough to accurately determine that?

Clowns on Acid's picture

Why is Paleface Warren even talking? Indians don't know anyting about banking....feckin' Fauxcahontas !

Augustus's picture

Info for Geo Wash:

We regularly are dished up the radiation scare nonsense, after having the oil blowout nonsense for months.


This study just in:

A new study from MIT scientists suggests that the guidelines governments use to determine when to evacuate people following a nuclear accident may be too conservative.

The study, led by Bevin Engelward and Jacquelyn Yanch and published in the journal Environmental Health Perspectives, found that when mice were exposed to radiation doses about 400 times greater than background levels for five weeks, no damage could be detected.

Current U.S. regulations require that residents of any area that reaches radiation levels eight times higher than background should be evacuated. However, the financial and emotional cost of such relocation may not be worthwhile, the researchers say.

“There are no data that say that’s a dangerous level,” says Yanch, a senior lecturer in MIT’s Department of Nuclear Science and Engineering. “This paper shows that you could go 400 times higher than average background levels and you’re still not detecting genetic damage. It could potentially have a big impact on tens if not hundreds of thousands of people in the vicinity of a nuclear powerplant accident or a nuclear bomb detonation, if we figure out just when we should evacuate and when it’s OK to stay where we are.”

LouisDega's picture

Deeep Thoughts.......The truth. The truth. A kingdom for the truth... What is the truth asked the spector. The old wise man answered, The truth my son gets you hits on a website.  Deeeep thoughts

windcatcher's picture

What a hoot! The left hand stole 2 billion from the right hand and no one knows what the bet was or where the “money” went!


Let me get this straight: an inside trader bet 1 billion on a sure thing (something) and did not hedge his bet but instead doubled down on the 2 billion dollar bet—maybe the sure thing was stealing the money. Ha. Ha.

OC Money Man's picture

The recent J.P. Morgan derivatives fiasco demonstrates that the Federal Reserve’s zero interest rate policy has encouraged risky financial speculation that is highly dangerous and potentially destructive. It’s time for the Federal Reserve to let interest rates rise and banks to get back to the business of financing the growth of America’s real-economy.

Achilles Macris, J.P. Morgan’s CIO in their London office, began using the bank’s access to cheap capital from the Federal Reserve to amass a huge over-the-counter derivative gamble that high yield and sovereign debt interest rates would fall, after MF Global suffered a $1.2 billion loss on similar bets and was forced to file for bankruptcy last October 30th.  Morgan’s gamble became very profitable after December 21 when the European Central Bank (ECB) began making $640 billion of three year loans at 1% interest, referred to as “Long Term Refinancing Operations” (LTROs), available to the banks of Portugal, Ireland, Italy, Greece and Spain (PIIGS).  By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets, according to the U. S. Controller of the Currency.  Morgan is reported to have continued heavy derivative buying in January and February.  Its profits soared again when the ECB announced LTRO2 as another $714 billion in three year low-interest loans to PIIGS banks.  

The stock of J.P. Morgan vaulted from $29 per share in December 2011 to $45 a share in March 2012 as rumors swirled that Achilles Macris and his London team of 6 had already made $2-3 billion as high yield and sovereign debt interest rates continued to fall.  A jubilant Jamie Dimon announced that J.P. Morgan would increase its dividend and buy back $15 billion of its stock.

Everything seemed rainbows and unicorns for J.P. Morgan until two weeks ago, when France and Greece elected hardcore leftist candidates who want to abandon austerity spending cuts and increase social welfare spending.  Interest rates on the PIIGS sovereign debt shot back up and J.P. Morgan appears to have suffered a $4-5 billion loss.  It also appears the bank has been unable to limit its losses to $2 billion by selling out of their enormous derivative positions.   

mendolover's picture

I don't give two shits what Elizabeth Warren says, and JPMorgan = Federal Reserve Bank.

GeezerGeek's picture

So does this explain the FBI "non-criminal investigation" discussed earlier?

General Debility's picture

Thanks! Very helpful to this financial luddite GW...You really need to write a book called Zero Hedge for Dummies. Illustrated by WB7 of course.

 Launch it at the "Bailout" premiere;)

Gully Foyle's picture

And no one notices a link between Mf Global missing 2 billion and JPM missing 2 Billion.

Corzines final payoff is where the JPM money went. To the pockets that laid claim to it slightly over half a year ago.

According to Bloomberg, representatives with JP Morgan, who provided credit for MF Global's operations, were also concerned about the source of funds used to maintain or pay back credit lines. Bloomberg reported that "Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by [Edith] O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan."[47]

The final $680 million or so was transferred to other financial institutions with which MF Global did business, including a substantial portion that went to JPMorgan.

lotsoffun's picture

I don't see what the problem is, based on the way the system is set up.  the fed is owned by the banks.  jpm is the largest of the banks.  jamie dimon runs jpm.  he has an advisory seat on the fed.  the fed works for the banks. really, this is all fine.

and he should have a large say in what the fed does and the fed approves.

the fact that the taxpayers back stop the fed is a differerent issue and should be changed.

the fact that the fed exists should be changed.

but removing dimon from the fed is all smoke and mirrors.  it DOES NOT address the problem.


Augustus's picture

Is it the Taxpayers backstopping the Fed,

Or is it the Fed backstopping The Treasury's unrestrained bond issuance?

The original purpose of the Fed was simply to backstop the banks by providing a source of funds to discount loans.  All Fed banks had to maintain reserves with the Fed that were used for providing that liquidity.  Great idea until perverted to fund deficit spending.

lotsoffun's picture

taking mr. dimon off the fed A list - what does that really do?  you mean all his contacts and pals and cronys will stop listening to him?  it's just show for the muppets.

Mr Lennon Hendrix's picture

GW, with respect to the loss - after the credit downgrade due to capital requirements it was near $4B (per Tyler Durden) and remember they had $16B wiped out of their equity.  So their loss was $20B in 48 hours.

Anyone want to guess as to what caused the loss?  Short DXY hedge?  Long EUR?  What could have tripped them up so poorly?  Does it have to do with the BAC mortgage settlement?

Buck Johnson's picture

I still say that there is alot more to come from this, I think he threw out the 2 Billion to 4 Billion in order to obfuscate the fact that they may have lost 20 billion or more.

Withdrawn Sanction's picture

So who MADE the $2 to $4 billion on other side of the deal?   Inquiring minds want to know...

Mr Lennon Hendrix's picture

And neither you or I have mentioned that all the Major Banking Houses are tied at the hip concerning the rehypothecation of assets/credit, and that they all lien on each other extensively before using the Fed's discount window.

Greenhead's picture

This is about as good a summary of what capitalism ISN'T as I can remember.  Inside connections, special treatment, protection from stupid business decisions, bad internal risk management, and on and on.  To call this "capitalism" is comparable to calling a goat a lamb.

BeetleBailey's picture

Correct. And just today, the shareholders (board of douchebags) "OK'ed" Dimon's 23 million dollar salary......assholes.

tony bonn's picture

 with all due contempt for charlie munger, civilized people do not bank with jpm - or america for that matter.

Withdrawn Sanction's picture

Exactly...If you still have deposits w/Morgan or Chase after this fiasco, you're asking for it....dont say you weren't warned, Chum....p.

world_debt_slave's picture

but, but, Obammy said it is the best ran bank in the world

max2205's picture

If Jamie had a vagina I'd fuck him

BeetleBailey's picture

Dimon be the bitch on Cellblock D at a state prison and repeatedly raped to the point of his douche eyeballs bulging out.

What the pompous prick really needs is to get the ever loving shit beat out of him.Then again, once he recovers - just for good measure.

Just reading the summary at the top brings my blood boiling to Fukishima levels.

Money 4 Nothing's picture

I guess what comes around goes around?

Unique Snowflake's picture

Nah. Karma was revoked by Nixon in 1971. Now what comes around stays around. Until the revolution...bring it.

dexter_morgan's picture

What's that free man Jon Corzine's take on all this I wonder............probably hasn't had much time to think about it, I mean with raising funds for the man and all........

lotsoffun's picture

JC is having a big party right now with ina drew.  and laughing at all of us. dimon will be next at the party.  i would bet if he resigns he checks out with his stock options at todays price, before it can potentially drop to ....  remember stanley 160MM o'neal?  or mr. 200mm mozila?  or, or, or, or.



Careless Whisper's picture

This post went DOWNHILL real fast GW. I'm watching your video in the post that starts out with a 15 second GoldmanSachs commercial, (not your fault), followed by an intro from Bilderberger Charlie Rose, then some comments from that fake half-breed Indian Squaw/Harvard elitist professor, Lizzy Warren. I don't believe a word from any of them. Not. A. Word.

We know Hollywood when we see it (enjoy the song):

LouisDega's picture

There was a time when i loved Charlie Rose ( Pre-Dark circles). What happened? Hes not the Charlie rose i once knew. 

dexter_morgan's picture

For once I gree with the ultra douche bag heap big liar Elizabeth Warren. He should resign, should have been forced to resign years ago. She's a little late to the usual.

lotsoffun's picture

as i said above, removing dimon is just a power play by her for the muppets.  sure, jamie boy feels a bit disappointed (sociopaths don't feel shame) because it means he will have to work a tiny bit harder to get what he wants. (more power and money).  but this is just an ego game between sociopaths.  in terms of correcting what is wrong in usa - it means nothing.


AldousHuxley's picture

Elizabeth Warren warned years ago about collapsing middle class at International House of (Pancakes?) meeting:



elites gave middle class cheap stuff (clothes, food, toys etc.) while inflating what really makes someone a middle class outpace inflation (education, healthcare, housing) and taking away job security.




higher risks, lower rewards, shrinking safety net



You better take your $150,000 law school debt  + $100,000 college debt and startup a company selling shit online from your parent's basement all on your own while eating ramen just so that you can hit startup jackpot and pay off student loan and a modest fixer upper house which will eat up all of your million dollar options cashed in.

Healthcare and job afterwards, you figure it out.


Also your "ultra douche bag" Warren  would reinstate Glass-Steagall Act in response to JP Morgan loss  unlike obama, bush, congress, Romney, etc.

dexter_morgan's picture

Talk is cheap. I can name dozens of people warning of the same things.  But, I suppose if this came from someone that didn't lie their way in to preferential treatment in admissions and financing to aggressively move themselves forward, it may carry a bit more weight. Perhaps if she were to reimburse Harvard and / or any other entities she received  preferential treatment from I'd be a bit more convinced she would  be trustworthy enough to actually do something along the lines of which she speaks if given the opportunity. Remember, Mr. Obama promised to clean up Wall Street and the mess Bush left it in. Still waiting on that.........


Holy fuck, repost due to relavency - AGAIN.

JPMorgan bought out the assets of MF Global in a friendly take over back in 2012, announced this morning by the White House Special Reporting Goon Squad. John Corzine had replaced Ben Bernanke at the Fed in the summer of 2012, and Ben became head of an investigationary team that hunted down that missing MF Global money for the poor bastards that got fucked over by some low end expendable cleaning staff, and interns back in the day. Curiously enough, not one red cent was ever recovered.

All liabilities pertaining to MFGlobal had been swept under the newly woven "carpet of lies "campaign conceived by Secretary of State Ina Drew, and will not be seen by the light of day - ever - again - period - they promise. Any assets of course, were purchased by JPMorgan for one dollar, and an expired McDonalds coupon for a McCoffee, due to the risk involved in strip mining free assets and spending them on severance packages for phoney London Whale fall guys 'n girls.

The above was the summary of a ten year investigation into banking practices, concluded in 2022, at the cost of 3 trillion dollars to the taxpayer. President for Life, Mittens Rommely, celebrated the landmark event by increasing the medication of the FEMA camp survivors of the 2012 global economic meltdown free of charge. This was done in a fiscally prudent manner by reducing their GMO food rations to 800 calories per day for a year or two, subject to change without notice, to reduce the incentive to protest the wonderful news.



dugorama's picture

No, the founding fathers would ask who gave that slave a suit.

Augustus's picture

The video of Princess Elizabeth "Spreading Bull" Warren adds gravitas to this piece of crap article.  This analysis is as flawed as what the Princess has passed off as research.


Derivatives do not inherently destabalize the economy.

JPM did not need any bailout funding but was forced to take it by Paulson.

That did not "cost the taxpayer" a nickle.  The taxpayer made a profit.

Geo Wash has eaten an excess of Sigsby Salt.

aerojet's picture

So you're saying a key conduit in the transfer of wealth up from the 99% to the 1% is not inherently destabilizing?

Augustus's picture

So, you admit you don't know what a derivative is or who actually owns or trades the instruments?  Let me know wheren your car wash wheel polisher has the account, OK?

Peter Pan's picture

Inherently derivatives don't destabilise the economy according to you. But apparently they do.

newworldorder's picture

Excellent work GW. The article prompts a question however.

Given all the articles from you, Tavakoli, Moyers, Volker, Black, Smith and scores of others - Where is the urgency to bring change and who will lead this change? It is as the power strucure is daring us all to do something about it, knowing that they hold all the cards and no change will take place.

web bot's picture

The only change will come when its forced. Despite all of the bravado, very few people want what's coming. Does anyone really want to live in a world of $600 oz silver, with bread at $20 a loaf, or higher?

My prediction is that the trigger will be some event that causes a run on the banking system... a global run where massive amounts of liquidity moves with lightening speed out of treasuries or collapsing sovereign currencies into anything that can be a store of value (ya - PMs and food stuffs for sure).

When this happens, get ready for governments to nationalize food distribution companies, energy companies along with mines (ya - the PM kind), and invoke martial law to quell civil unrest,

The political system is broke, the financial system is broke, basic morality is broke... Call it God, call it nature... but there is a natural order and law which self corrects humankind and unfortunately, many of us will live to experience it first hand.

dexter_morgan's picture

We'll get Bill Daley and Eric Holder on it pronto !

surf0766's picture

And Elizabeth Warren has what amount of credibility left?