More indications today that the Fail Whale trades were far more consequential for JPMorgan Chase than anyone is making it out to be. Reuters looks at the furious sell-offs JPMorgan Chase has engaged in over the last month:
JPMorgan Chase & Co has sold an estimated $25 billion of profitable securities in an effort to prop up earnings after suffering trading losses tied to the bank’s now-infamous “London Whale,” compounding the cost of those trades.
CEO Jamie Dimon earlier this month said the bank sold corporate bonds and other securities, pocketing $1 billion in gains that will help offset more than $2 billion in losses. As a result, the bank will not have to report as big an earnings hit for the second quarter.
The sales of profitable securities from elsewhere in the bank’s investment portfolio will increase its costs by triggering taxes on the gains and by eliminating future earnings from the securities.
This basically is an accounting gimmick, a shift from one end of the books to the other to mask the trading loss.
But it also concedes some longer-term gains. And at $25 billion, the size of the sales suggests that the Fail Whale trades could come out much larger than currently reported. Remember, this is on top of the suspension of a $15 billion share buyback program JPMorgan Chase announced last week. If they’re forgoing profitable securities to hide the losses, that gives more evidence that the losses are massive. This will generate a long-term hit to the bank’s profitability. And in the event of a Euro crisis or another big trading loss or anything triggering a sharp downturn, suddenly JPM’s bullet-proof balance sheet has a few holes in it. And that’s when taxpayer dollars typically get involved.
So while everyone is out there claiming that the Fail Whale trades don’t represent a systemic risk, you can see through the weeds examples of precisely the opposite. And this gives more credence to the view that we need to end risky prop trading inside commercial banks.