JPMorgan Chase moved swiftly on Monday to contain the growing fallout from a trading loss that could reach $3 billion or more, replacing the bank’s chief investment officer Ina Drew and moving to tamp down a growing furor over whether safeguards exist to prevent a similar debacle in the future. Drew, who had worked her way up the ranks at JPMorgan over three decades to become one of Wall Street’s most powerful women, was replaced by Matt Zames, currently co-head of the bank’s global fixed income group and head of capital markets in its mortgage division.
Last Thursday, JPMorgan’s CEO Jamie Dimon disclosed the $2 billion loss during a hastily convened conference call that stunned Wall Street. Dimon said the firm’s chief investment office, which Drew led, had engineered a “synthetic credit portfolio” as a “hedge” to balance out potential losses elsewhere on its books. As the markets turned against JPMorgan, the portfolio began to experience huge losses, spinning beyond the control of the bank’s risk managers. Dimon said the bank still faces $1 billion of further losses from the position. The Securites and Exchange Commission is investigating the loss, which caused JPMorgan shares to plunge 10% last Friday. The bank’s stock price had tumbled an additional 2.15% in early trading Monday.
In a statement, Dimon called Drew “a great partner over her many years with our firm,” and said that “despite our recent losses in the C.I.O., Ina’s vast contributions to our company should not be overshadowed by these events.” He added: “It’s important to remember that our company is very strong and well capitalized, with leading franchises across our businesses. We maintain our fortress balance sheet and capital strength to withstand setbacks like this, and we will learn from our mistakes and remain diligently focused on our clients, who count on us every day.”
JP Morgan’s surprise loss has prompted calls for stronger financial regulation, in particular an enhanced Volcker Rule, which is supposed to prevent banks from making risky so-called proprietary bets. Dimon has insisted that the positions in question were designed to mitigate risk elsewhere on the company’s books, but it appears they went beyond that in an attempt to make money. “It’s becoming increasingly obvious that Drew got paid her eight-figure salary in return for being able to pull off a very neat trick: turning hedging operations into a profit center,” Reuters blogger Felix Salmon observed Monday.
As the fallout over the loss continued, there was increased scrutiny on a JP Morgan trader named Bruno Iksil, who earned the nickname “the London Whale” (and “Voldemort”), for making large, market-moving credit-default-swap trades. Iksil, a French-born, London-based JPMorgan trader, had built derivative positions with a face value of $100 billion or more, but stopped trading in April as reports emerged that hedge funds had taken large positions opposing Iksil’s trades — reports Dimon dismissed as “a complete tempest in a teapot.”
JPMorgan’s loss was a blow to the reputation that Dimon has cultivated as an astute risk manager. In part bolstered by that reputation, Dimon had become, “Big Finance’s manicured right hand in Washington, slapping away the regulatory feelers of the federal government,” as TIME’s Adam Sorenson wrote Monday. JP Morgan’s “balance sheet was iron-clad because Jamie Dimon understood risk, and so too could other top bankers, he argued, without the most intrusive regulations to come out of Dodd-Frank.”
In an apparent offering of fealty to regulators, Dimon told NBC‘s Meet the Press on Sunday that the bank favors ending the implicit too-big-to-fail government backstop that protects banks from all-out collapse due to the presumed “systemic” impact on the financial system.
“We support getting rid of too big too fail,” Dimon said on the program. “We want the government to able to take down a big bank like JP Morgan. We think Dodd Frank, which we supported parts of, gave the FDIC the authority to take down a big bank. And when it happens, I believe compensation should be clawed back, the board should be fired, equity should be wiped out and the bank’s name should be buried in disgrace, that’s what I believe. We need to put that back in the system and we will work with regulators to make that happen.”
Consumer protection advocate Elizabeth Warren, a Democratic candidate for U.S. Senate from Massachusetts, called on Dimon to resign from the board of the New York Federal Reserve, saying his position there posed a conflict of interest. “We need to stop the cycle of bankers taking on risky activities, getting bailed out by the public, then using their army of lobbyists to water down regulations,” Warren said in a statement. “We need a tough cop on the beat so that no one steals your purse on Main Street or your pension on Wall Street.”