Don't be surprised if the session gets ugly. JPMorgan Chase is a major market player and at last check its stock was down more than six percent in after-hours trading - the result of the bank's stunning announcement of a $2 billion trading loss. It's not that JP Morgan Chase can't cover the losses - it earned $5.4 billion in the first quarter. It's that the magnitude of the losses came completely out of the blue, surprising even CEO Jamie Dimon. Investors are bound to wonder whether the banking industry has truly gotten its financial act together. This latest dustup also features those dastardly credit default swaps that did so much damage during the mortgage meltdown. From the WSJ:
Even Chief Executive James Dimon acknowledged on a hastily arranged investor call that the trading strategy behind the losses had grown too complex. And he acknowledged the losses could grow or shrink as the year progresses. That banking king Mr. Dimon could stumble in this way also resurrects the question of whether banking behemoths are too big to manage. Meanwhile, J.P. Morgan may have just shot itself in the foot. If the losses were of a greater magnitude, any distress could quickly ripple out through a host of markets--J.P. Morgan, for instance, is a vital part of the market for tri-party repos. That should stiffen the resolve of regulators such as the Federal Reserve that have proposed measures such as limiting the exposures of big banks to each other. Banks have been fighting such initiatives.
Here's a WSJ story from last month that reported on the large positions being taken by a London-based trader named Bruno Michel Iksil.
The [hedge] funds' wagers against Mr. Iksil's positions have become increasingly profitable in recent weeks as prices in the credit-derivatives index that was at the center of one of Mr. Iksil's trades rose after his trades ceased. "I view the entire market as a chess match playing against this guy," said a person who is familiar with Mr. Iksil's positions and is trading against him. Mr. Iksil's group had roughly $350 billion of investment securities at Dec. 31, according to company filings, or about 15% of the bank's total assets.
One other reason to be nervous about Friday's market: Bloomberg reports that Facebook's initial public offering is generating lower-than-expected demand from institutional investors. They're worried about the company's growth prospects, especially in advertising. Even before this afternoon's news, Wall Street had shown increased volatility, and while the Dow finished up today by 19 points, it closed on the down side during the six previous sessions. Year to date the Dow is up 5.2 percent.