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Congress will weigh in on the news that JPMorgan Chase lost $2 billion on complex trades intended to hedge against economic risk, and that the losses could mount.
The Senate Banking Committee on Monday announced future oversight hearings, including one that will look into the trading losses at JPMorgan Chase from a regulatory angle. Lawmakers plan to question regulators, not JPMorgan Chase (, Fortune 500) officials.
Sen. Bob Corker, a Tennessee Republican, was the first to call for a hearing on Friday.
"Clearly the losses posted by JPMorgan are significant, and as policy makers we should understand in detail what has transpired," Corker said in a letter to Banking Committee chairman Tim Johnson, a South Dakota Democrat.
House Financial Services Committee and House Oversight Committee staff members said they had no plans yet to hold hearings yet.
The JPMorgan controversy comes a little less than two years after a big push for Wall Street reform led to the passage of the Dodd-Frank Act.
On Friday, two senators who helped craft the Volcker Rule — a new, not-in-effectpart of Dodd-Frank that bars banks from making trades for their own profit-chasing purposes — denounced JPMorgan’s trades.
JPMorgan CEO Jamie Dimon said last week that the faulty trades would have been allowed under the Volcker Rule, named for former Fed chief Paul Volcker, since the rule appears as though it will allow for economic hedging free instant credit score.
However, Democratic senators Jeff Merkley of Oregon and Carl Levin of Michigan, said they intended the law to ban the kind of trades that JPMorgan Chase traders made. They plan to push regulators to write and enforce a strict ban on so-called proprietary trading and hedging against economic forces.
"The law very clearly already excludes this activity," Levin said in a call with the media on Friday. "It specifically says that every single position that you take as a hedge has got to be tied to a specific risk arising from another specific position. Now, that’s about as clear as you can write. So the regulators are now hopefully going to implement the law as written."
The news has even drawn angry accusations from the political field. Elizabeth Warren, a Democratic candidate for U.S. Senate in Massachusetts, has called Dimon to step down from his position as a board member of the New York Federal Reserve.
"This is about accountability," Warren told CNN’s "Starting Point" on Monday. "Jamie Dimon not only is CEO of JPMorgan Chase, he holds this position of public trust, advising the New York Fed on how to regulate risk for these large financial institutions like his own financial institution,"
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How can a bank lose $2 billion in six weeks?
That’s just one of the mysteries surrounding the news that JPMorgan Chase, widely thought one of the safest U.S. banks, is gushing red ink from bad trading bets. As details slowly emerged Friday, the shares of the nation’s largest bank fell hard, as did those of several rivals.
The story behind the loss is complex, and rich in irony. How it’s viewed could influence regulators implement a major financial overhaul law called Dodd-Frank. How hard regulators crack down on bank could have a big impact on the stability of the financial system.
Here are answers to some questions about the loss:
Q: How exactly did the bank lose so much so fast?
A: First, start with the irony. JPMorgan says the losses came from a trading portfolio designed to offset losses in the bank’s lending business. Instead of offsetting losses, these so-called “hedges” added to them.
JPMorgan extends money to companies through loans and by buying bonds. The bank was worried that it might not get all its money back, so it bought protection. Though it didn’t detail how it did this, banks typically buy credit default swaps, essentially insurance contracts that pay out when companies stiff their lenders.
It gets more complex. In the often dizzying, Alice-in-Wonderland world of banking, these hedges are themselves sometimes hedged, and that’s exactly what JPMorgan did. The bank apparently thought it had bought too much protection, so it hedged its hedge.
It’s that second hedge, basically a bet that companies would pay back their loans, that led to the losses.
Q: How does the “London Whale” figure into the story?
A: News reports before the bank announced its loss said that a trader at the bank dubbed the “London Whale” had invested heavily in an index of credit-default swaps, and that the bets were producing losses. But in a conference call Thursday, Jamie Dimon, the CEO of JPMorgan, said the news reports about London trades were only “somewhat related” to the losses. He provided no other details.
Q: Why are other bank stocks falling on the news?
A: It’s not just the size of the bet that’s scaring investors, but its complexity. The fact is, not even experts know how precisely big banks make money, and occasionally lose it. Their wagers are largely hidden. The opaqueness, which investors normally shrug off, is spooking them now.
Investors are uneasy also because JPMorgan has a reputation of managing risks better than almost anyone in the business. Investors seem to be asking: If this bank can lose $2 billion in six weeks, maybe others can, too?
Finally, there’s the regulatory threat. The loss comes amid heated debate in Washington over just how tightly to regulate banks. “The timing of the JPMorgan announcement couldn’t be worse,” said Whitney Tilson, head of hedge fund T2 Partners, speaking at an industry gathering in Las Vegas.
Investors fear that bank profits could be pinched by the so-called Volcker Rule restricting trading that banks do with their own money, as opposed to clients’ funds. Dimon has been an outspoken critic of the rule, and an impactful one given his skill at navigating his bank in recent years. JPMorgan was the only bank to remain profitable during the 2008 financial crisis.
Now that Dimon has been pushed off his pedestal, investors are worried that regulators will be tougher in enforcing the new rule.
Q: Isn’t the trading that led to the loss banned already?
A: No. The rule doesn’t take effect until July, and even then regulators are suggesting banks will have another two years to comply.
In any case, it’s not clear that the trade in question were subject to the rule. In the conference call Thursday, Dimon said the trades that backfired were hedges, not bets for profit, so they wouldn’t have fallen under the rule.
But some experts have doubts.
Nancy Bush, a banking analyst at NAB Research, says it’s not always clear what is hedging and what is gambling. The size of JPMorgan’s loss makes her suspicious.
“So they made money on hedges and then they hedged some more,” she said. “At some point it goes from being a hedge to being a money maker. They crossed the line here somewhere and it’s going to cost them.”
Sen. Carl Levin from Michigan, the chair of a subcommittee that investigated the crisis, put it more bluntly. “This is not a hedge,” he said. He called the loss a “stark warning” about the danger of “risky bets” at banks.
Q: How much will the trading loss hurt JPMorgan?
A: Likely not much at all, putting aside the impact of tougher regulation. JPMorgan is a big money maker. The $2 billion loss, which is before accounting for taxes, compares with $19 billion in net income last year and $16 billion the year before that.
What’s more, Dimon said that $2 billion loss will be offset by $1 billion trading bets that have already paid off. Dimon said there are $7 billion more paper gains from trades that he can tap in case losses grow.
Q: Are more losses possible?
A: Dimon said he is trying to unwind the bad bets in a “responsible” manner to minimize losses, but prices can move against him. That would mean more losses. Dimon has said the $2 billion could become $3 billion depending on how markets react.
Indian industrial production unexpectedly contracted in March as weaker domestic demand and sliding exports hurt the economy, undermining the central bank
Macy’s is reporting a 38 percent increase in its first-quarter profit as the department store chain continues to reap benefits from its move to tailor its fashions to local markets.
The results beat analysts’ expectations but the company failed to boost its guidance for the year.
Macy’s Inc. shares fell 4 percent in early premarket trading.
The retailer said Wednesday that its net income rose to $181 million, or 43 cents per share, for the three-month period ended April 28. That’s up from $131 million, or 30 cents per share, a year ago.
Revenue rose 4.3 percent to $6.14 billion.
Analysts surveyed by FactSet had expected 40 cents per share on revenue of $6.14 billion.
Revenue at stores opened at least a year climbed up 4.4 percent for the quarter.
South Korean producer-price inflation cooled to the slowest pace in 26 months on a decline in meat and fish costs, according to a report released two days before a monetary-policy meeting.
Prices climbed 2.4 percent in April from a year earlier, the smallest gain since February 2010, after a 2.8 percent increase in March, the Bank of Korea said in a statement in Seoul today. Prices fell 0.1 percent from March.
If you’re in your mid-40s, you should expect an unpleasant retirement surprise from Uncle Sam.
The Social Security trust fund is scheduled to run out of money in 2033, about when today’s 40-something workers hit retirement age. When that day arrives, all Social Security checks would have to be reduced by about 25 percent.
For most retirees, that’s a doomsday scenario. A 25 percent cut would leave them unable to pay their everyday bills.
Unfortunately, doomsday keeps drawing closer. As recently as 2005, the Social Security trustees thought insolvency was 47 years in the future. Their latest report, issued last week, moved it up 3 years, and it’s now just 22 years away.
The recession, which caused a drop in payroll tax revenue and forced some people to retire earlier than they had planned, played a major role in eroding the system’s finances. In the past year, the trustees said, workers’ hours – and thus the taxes they paid – didn’t grow as fast as had been projected.
If the job market remains weak for a couple more years – which wouldn’t surprise a lot of economists – we’ll keep moving closer to Social Security’s moment of crisis.
Congress, however, doesn’t seem to feel the urgency. As has been said often, some relatively small tweaks now could make it solvent for 75 years or more. Plenty of reasonable fixes have been proposed, but all of them can be labeled as a combination of tax increases and benefit cuts.
Republicans balk at tax increases, and Democrats refuse to accept benefit cuts, so nothing gets done.
It also would have made Social Security more progressive, making steeper cuts for wealthier retirees while protecting the poor. Simpson-Bowles was a sensible package, but it was pronounced dead on arrival. Congress would rather risk long-term calamity than make some politically unpopular choices.
The trustees’ report contains some good arguments for acting soon. For one thing, the disability portion of the trust fund is headed for exhaustion in 2016. Congress can address that insolvency by moving money from the old-age fund, but it may as well look for a comprehensive solution instead of a Band-Aid.
The report also makes clear that the necessary combination of benefit cuts and tax increases will be about 50 percent larger if we wait 20 years to address the problem.
How do we convince Congress to make those relatively small tweaks now? Josh Gordon, policy director at the bipartisan Concord Coalition, thinks the debate should focus on Social Security’s negative cash flow instead of on a faraway insolvency date.
Social Security added $45 billion to the deficit last year, and that amount will rise sharply by the end of this decade as Baby Boomers retire. “It really is a federal budget urgency,” Gordon said. “If we wait 20 or 30 years to make changes, there will be too much debt growth.”
Perhaps we need a law that would divert all congressional salaries and benefits into the Social Security trust fund when it becomes insolvent. It wouldn’t be enough to solve the problem, but might be enough to spur action.
The United Nations hopes to have 30 cease-fire monitors in Syria next week and plans are already being made for the deployment of up to 300, a spokesman for international envoy Kofi Annan said Friday, as France called on the international community to prepare for the possible failure of the increasingly fragile peace deal.
Seven observers are on the ground and another two will arrive on Monday, said Annan’s spokesman.
“During the course of next week we hope that those that we are seconding from missions in the area who can move quickly will be there and we will make the numbers up to 30,” Ahmad Fawzi told reporters in Geneva.
The preliminary agreement between Syria and the United Nations on the deployment of U.N. observers says they will have freedom to go anywhere in the country by foot or by car, take pictures, and use technical equipment to monitor compliance with the cease-fire engineered by Annan.
But the issue of using helicopters and aircraft will likely dominate discussions in the coming days, Fawzi told The Associated Press.
The larger contingent of up to 300 also still needs to be approved by the U.N. Security Council.
“As soon as the Security Council adopts a resolution authorizing up to 300 monitors on the ground, we will be ready to deploy very, very rapidly,” Fawzi said.
“We are preparing for the deployment because we feel that it is going to happen sooner or later because it must happen,” he added
In France, Foreign Minister Alain Juppe called on the international community to live up to its responsibilities and warned that if Annan’s peace plan “doesn’t function, we have to envisage other methods.”
U.N. Secretary-General Ban Ki-moon accused Syrian President Bashar Assad on Thursday of failing to honor the peace plan that went into effect a week ago payday loan.
Juppe said on France’s BFM television that his country would support a U.S.-backed proposal for a U.N. arms embargo and other tough measures against Syria.
The peace plan is “the last chance before civil war. … We don’t have the right to wait,” he said.
Juppe hosted U.S. Secretary of State Hillary Rodham Clinton and other diplomats in Paris on Thursday to try to work out options for Syria.
Annan’s diplomacy succeeded in getting Russia to back the monitoring mission, but Syria’s ally continues to resist more forceful measures.
“The Russian position is in the process of evolving,” Juppe said without elaborating.
U.N. chief Ban told the Security Council on Thursday that the situation remains “highly precarious,” citing an escalation of violence including “shelling of civilian areas, grave abuses by government forces and attacks by armed groups.”
That view was echoed by Annan’s spokesman.
“The situation on the ground is not good, as we all know,” Fawzi said. “There are casualties every day. There are incidents every day. And we have to do everything we can to stop what’s going on. The killing, the violence in all its forms.”
The observers, who report to Annan daily, will have freedom to install temporary observation posts in cities and towns, to monitor military convoys approaching population centers, to investigate any potential violation, and to access detention centers and medical centers in coordination with the International Committee of the Red Cross and Syrian authorities, the agreement says.
______
Angela Charlton in Paris contributed to this report.
Asian stock markets rebounded Wednesday after a slew of solid earnings boosted the outlook for U.S. companies and a successful Spanish bond auction eased worries over Europe’s debt crisis.
Japan’s Nikkei 225 index jumped 1.7 percent to 9,622.39. South Korea’s Kospi added 0.9 percent to 2,003.03 and Australia’s S&P/ASX 200 rose 1.2 percent to 4,339.40.
Hong Kong’s Hang Seng gained 0.9 percent to 20,750.55. Benchmarks in Singapore, Taiwan and Indonesia also rose.
On Tuesday, European stocks had their best day in four months after Spain attracted strong investor interest at an auction of two-year debt.
The government sold more than (EURO)3.2 billion ($4.2 billion) in short-term debt, more than had been expected, and the yield on Spain’s 10-year government bond fell, a sign of improving confidence in the country’s finances.
“This saw investors less pessimistic about Europe and lifted risk assets all round,” said Stan Shamu, analyst with IG Markets in Melbourne.
In the U.S., first-quarter results gave markets a lift. Coca-Cola’s profit was better than Wall Street analysts had forecast. Goldman Sachs and Johnson & Johnson also posted strong results.
The Dow Jones industrial average rose 1 bad credit payday advance.5 percent to 13,115.54, its best day in a month. The S&P 500 closed up 1.6 percent to 1,390.78. The Nasdaq composite index soared 1.8 percent to 3,042.82, its biggest point rise in three weeks.
Positive news also came from the International Monetary Fund, which raised its outlook for the global economy because of faster U.S. growth and a coordinated effort in Europe to address its debt crisis.
The global lending organization said Tuesday the U.S. economy should expand 2.1 percent this year. Europe will likely shrink 0.3 percent and the world economy should grow 3.5 percent. All three estimates are slightly better than the IMF’s January forecasts.
Benchmark oil for May delivery was up 3 cents to $104.23 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.27 to settle at $104.20 in New York on Tuesday.
In currency trading, the euro fell to $1.3111 from $1.3139 late Tuesday in New York. The dollar rose to 81.37 yen from 80.80 yen.
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