London Wale

JPM's $920million Fine Not A Worry For A Bank Worth $200billion

JPMorgan Chase finally got fined by US and UK authorities - $920million in total in relation to the infamous “London Whale” trades which resulted in the US banking giant booking a $6.2billion loss. JPM admitted violating US federal securities laws with two former JPM traders facing criminal charges in relation to the huge losses in derivatives trades at the start of 2012.

 

Our view: JPM stock knocked down on the day the Fed’s reluctance to taper props up risk assets across the board, especially global banks. JPM shares, although languishing on the fines this afternoon, could be in for a little respite in the days ahead as the bank can now put this episode behind. And of course, because Bernanke has left the doors open for QE for a little while longer. Putting that aside though, looking closely at the fine, it’s $920m for a bank sitting on a market cap of $200billion and the London Whale losses are worth $6.2billion  = not something Jamie Dimon, CEO of JPM, will be too phased about paying out. The bigger damage is of course is the reputational damage to JPM and another blow to London, a city embroiled with banking scandal after scandal.

 

Trust in the banking system remains low and fragile given these scandals and the large bonuses paid out to management. Although a caveat worth pointing out is that London is a global financial hub, pioneering innovative structured products which is a reflection of the attractive and compelling business environment the city presents across the world. That said, it is these complex innovative products that got JPM into this mess in the first place – clearly, management at JPM had no idea about risk controls to mitigate untoward losses racked up by this particular unit at JPM.

 

Regulators themselves have been behind the curve to address the issue as they seem to not understand these structured products either – both are too blame, not just bank management. So although this fine itself won’t affect JPM’s earnings, it does send a bigger message that despite public and political outcry, banks still engage in high levels of risk, management at banks fail to grasp the risk profile of innovative structured products and regulators are slow off the mark to chase down banks with fines. JPM corporate governance may have strengthened on the back of this, but it would be unwise to say that’s the case for all banks – expect these scandal breakouts to repeat, again and again.