JP Morgan Chase & Co. is rocking the financial markets with the disclosure that its in-house trading operating lost $2 billion in the past six weeks, raising new questions about whether the big banks that caused the financial meltdown have sufficiently changed their ways.
Chief Executive Officer Jamie Dimon said the trading loss was an "egregious" failure in a unit managing risks, but he added in a call with analysts after the markets closed Thursday that just because the bank did something "stupid" that doesn't mean other firms are having such trouble.
"There were many errors, sloppiness and bad judgment," Dimon said. "These were grievous mistakes, they were self-inflicted."
Congress and the FDIC have been grappling with how to prevent "too big to fail" institutions from taking big risks knowing that the U.S. Treasury is there to back them up.
JP Morgan, the largest U.S. bank, traced its big loss to the firm's chief investment office, run by Ina Drew. His unit made losing bets on "synthetic credit securities" -- the same kind of instruments that nearly led to a collapse of the financial system in 2008, prompting a nearly $1 trillion govenrment bailout.
Global markets fell on Friday after the big surprise trading loss at JP Morgan Chase shook investor confidence, while political chaos in Greece continued to cast uncertainty over its future in the euro currency bloc.
JP Morgan stock plunged almost 7 percent in after-hours trading, and the unexpected loss at one of the world's most venerated banks undermined investor confidence. British banks were hit hard ' Barclays, which has a large investment banking arm, was the biggest loser in London trading, down 2.9 percent by midmorning.
Some investors said JP Morgan would be able to withstand the fall-out from this bombshell.
Anthony Polini, analyst with Raymond James, wrote in a note to investors Thursday night that although JP Morgan's stock offers "exceptional value," he expects "some near-term pressure on the stock price due to uncertainty related to repositioning [its] hedging strategy."
Polini said that there is a "high probability that management will defuse this issue on or before" the company's conference call in mid-July discussing its second quarter results.
"This has permeated to the wider market as investors assess the possible systemic risk, adding another layer of caution to the fragile trading environment," Jordan Lambert, a trader at Spreadex, told the Associated Press. "When such shocks occur, it is wise to err on the side of caution and consider whether it is a possible 'tip of the iceberg' scenario, especially when one contemplates the interconnectedness of the banking system."
In Europe, the FTSE 100 index of leading British shares dropped 0.3 percent at 5,525 while Germany's DAX fell 0.3 percent too to 6,498. The CAC-40 in France was 0.7 percent lower at 3,107.
The euro was up 0.2 percent at $1.2952, though still near four-month lows against the dollar.
Wall Street headed for a lower opening, with both Dow futures and S&P 500 futures down 0.5 percent.
Dimon said yesterday that the timing of the trading blunders "plays right into the hands of a bunch of pundits out there" who want a strict proprietary trading ban, the Volker Rule, named for former Federal Reserve Chairman Paul Volcker.
The Associated Press contributed to this report.
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