JPMorgan Chase is trying to explain how the bank lost $2 billion and may lose another $1 billion as it settles a trade. In just six weeks, the bank's Chief Investment Office, a group that invests extra assets to hedge risks, lost this extraordinary amount of money.
In a conference call, Jamie Dimon, CEO of JPMorgan Chase, called the situation "self-inflicted":
"We're accountable, and what happened violates our own standards and principles about how we want to operate the company. This is not how we want to run a business."
Liz Rappaport, a Wall Street Journal reporter on PBS NewsHour questioned the terminology that Dimon used, specifically that the Chief Investment Office was intended as an "economic hedge." According to Rappaport, this was an "unclear thing to say": a hedge typically is used to protect against a specific investment, but "exactly...what this group actually hedges against is unclear, and the fact that this was such a large and outside position in one direction, and they got caught...flat footed with it, also doesn't sound like a hedge-it sounds like a bet." The distinction is important: did the investments hedge against risk or create more risk for the bank?
Rappaport also said that this wasn't really a "rouge trader" situation, as we saw at UBS in September 2011. Rather, at the center of the controversy is a London trader nicknamed the "London Whale" for his large investment positions. Unlike the UBS situation, the Chief Investment Office's trades were apparently "run up the flag pole," according to Rappaport.
- What do you see as the distinction between a "hedge" and a "bet"?
- How do you assess Jamie Dimon's response to the situation?