CFO: JP Morgan Hedge Exposed the Bank to More Risk
Thursday, May 17, 2012
In a feature story on May 17, 2012, CFO magazine said JPMorgan Chase's $2 billion mark-to-market trading loss stemmed from some fundamental mistakes by risk managers: particularly the notion that a hedge on credit exposures could reduce the bank's risk but at the same time earn billions of dollars.
That's what experts are saying, notes CFO, about a trading loss that has knocked billions off the bank's market share, sparked probes by the Justice Department and the Securities and Exchange Commission, forced credit-rating firms to issue negative outlooks for the bank, and turned the spotlight on a bank unit that was set up to invest excess deposits but also generate a sizable profit.
The CFO story is based primarily on interviews and commentary from experts, including the former finance chief at JPMorgan, who have extensive knowledge and understanding of the risk involved in investing in a benchmark for credit-default swaps designed to mitigate the bank's overall credit exposure, in particular the possibility of higher interest rates and inflation. But the hedge was risky itself and the positions in derivatives so large that they distorted the market.