I said this before (see here and here) and I will say it again, the only way to prevent this from occurring in the future is to require banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
As currently proposed the Volcker Rule would not have stopped this trade from occurring. Management claims it was a hedge and not a proprietary trade.
What would have stopped this trade from occurring was disclosure.
First, the trader would have had to be concerned with the market trading against him as he tried to put the position on. As we are now about to see, the market is going to trade against him to maximize JP Morgan's losses as he tries to exit the trade.
Second, market participants would have seen the trade and could have adjusted their exposure to JP Morgan to reflect the risk of the trade (this applies equally well to the risk of the 'unhedged position'). Market discipline in the form of higher costs of funds and lower stock prices tends to get management's attention. Something that the regulators who watch the trade go on did not do.
JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said the firm lost about $2 billion on synthetic credit securities after an “egregious’” failure in its chief investment office, which the bank says focuses on hedging.
“This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the New York-based company said today in a quarterly securities filing. ...
The chief investment office has been transformed in recent years under Dimon into a unit that makes bigger and riskier speculative bets with the bank’s money, according to five former employees, Bloomberg News reported April 13. Some bets were so big that JPMorgan probably couldn’t unwind them without losing money or roiling financial markets, the former executives said.
Bloomberg News first reported April 5 that London-based trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market.
After the Bloomberg report, Dimon on a conference call said the news coverage was “a complete tempest in a teapot.”
The losses disclosed today were “a little bit to do with the article in the press,” Dimon said, without specifying who in the bank oversaw the trades. “I also think we acted a little bit too defensively” to the reports.
Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt. The losses occurred as the company sought to unwind a portfolio of the instruments used to hedge JPMorgan’s credit exposure.
“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Dimon said.Requiring ultra transparency would greatly improve the monitoring as now the market could help JP Morgan.
JPMorgan said the losses were partly offset by gains from the sales from its available-for-sale credit portfolio, resulting in a net loss for the firm’s corporate division, which includes the CIO, of about $800 million after taxes. The losses could widen or narrow during the rest of the quarter, Dimon said.
The bank is “repositioning” the synthetic credit portfolio, and the CIO “may hold certain of its current synthetic credit positions for the longer term,” the firm said.