Bad Banking Apparently Didn't Stop in 2008.

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banking, investments, market, economyYOU'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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Comments (8)

Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

I might add that the CEO and staff made a fortune while the bank took all the risks....too

May 11, 2012 12:11 AM
Edward & Celia Maddox
The Celtic Connection Realty - Queen Creek, AZ

As the movie said, they are back.  When will it end.

May 11, 2012 12:17 AM
Angela Lyons
REAZO - Missoula, MT for home buyers and sellers.

Richie, thanks for the comment. Yup, I'm sure they made much more for a bad decision than we will make from a year's worth of good ones.

May 11, 2012 12:21 AM
Angela Lyons
REAZO - Missoula, MT for home buyers and sellers.

Edward, Celia, Thanks for the comment. Yes, they are back. I'm glad i keep my money in a can buried in the backyard.

May 11, 2012 12:22 AM
Ralph Janisch ABR CRS Broker
Janisch & Co. - Conroe, TX
Selling Northwest Houston to good people like you!

Any time there is a lot of money to be made these kind of guys will proliferate.  They don't care who gets hurt in the process.  It's all about them.

May 11, 2012 12:23 AM
Angela Lyons
REAZO - Missoula, MT for home buyers and sellers.

Jeanne, Ralph. Yup. So true. Unfortunately, these days it doesn't seem to be about money made. It's like some sort of weird contest about money lost. I'm going to start checking these folks' dumpsters for their spare change. 

May 11, 2012 12:27 AM
Leslie G. Rojohn
MoonDancer Realty - Sylva, NC
GRI, ABR ~ MoonDancer Realty

Imagine that!  Banks screwing up!  But by all means, let's not have financial industry regulations.  Let's just keep letting them screw up, have their Ceo's and managers make a fortune and then make the tax payers bail them out.

May 11, 2012 12:42 AM
Angela Lyons
REAZO - Missoula, MT for home buyers and sellers.

Leslie, Thanks for the comment. Heavens no. We can't have big government sticking its nose in the business of big business. I'm just glad I don't have any money with JPMorgan nor do I own any of their stock. At this point, those who invest in bank stocks to make a buck deserve what they end up getting. I'm thinking the only one making money off these yahoos these days are the bankers themselves.

May 11, 2012 12:46 AM

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