YOU'D THINK they would have known better.
JPMorgan, the nation's largest bank, announced this week it recently lost at least $2 billion by investing in hedge funds. The bank apparently was trying to hedge its investments with the same sort of shaky investment strategies that got us all in this financial mess several years ago.
In a case of deja vu all over again, officials with the bank said a complex hedging strategy backfired and led to the losses over a six-week period. Other losses may still be coming and other banks also might be preparing to release their own, similar, statements.
As hedge funds have a way of doing, it appears this one backfired.
"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," bank CEO Jamie Dimon said in a conference call to investors. That call was monitored by MSNBC and other news outlets. The MSNBC article is here. "There were many errors, sloppiness and bad judgment," Dimon said.
Dimon went on to say the flawed hedge strategy was "poorly constructed, poorly reviewed, poorly executed, and poorly monitored."
In response to the news, the company's stock price fell by 6 percent in after hours trading Thursday. The news even hurt other bank stocks with Citigroup and Bank of America also taking a hit.
The fund apparently was designed to offer protection from global credit risk. Instead, it potentially could lead to another $1 billion in losses for JPMorgan this fiscal quarter.
The losses come from betting on derivatives - a practice that led to much of the problems faced by the banks in 2008.
In a culture where some corporations are considered too big to fail, JPMorgan is the biggest of all. The company's losses come as Congress is currently debating new regulation that would limit some risk taking by banks - especially since taxpayers can be left holding the bill.
I have an idea. Perhaps Congress should require large banks to send their decision makers back to college to revisit some entry level business classes. What is not clear is how large of bonuses JPMorgan officials probably will instead receive for making such an expensive screw-up.
So far it remains unclear how large of an impact the losses will have on the broaded market and the economy in general. Stocks were set to open lower Friday as investors prepared to react to the news. Futures were down for the Dow Jones, Nasdaq and S&P 500.
Apparently, the investments were made in an attempt by the bank to protect itself from the on-going political uncertainty in Europe.
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