JPMorgan has hit the headlines recently for losing a shocking US$2 billion over derivatives. The derivatives involved were mainly credit default swaps, which were supposed to be used to offset other risks in the bank's investments.
Isn't it ironic that the bank's risk management unit became responsible for the bank losing US$2 billion? Isn't the risk management unit there to... manage risk instead of adding to it? Additionally, the CEO has admitted that another US$1 billion of losses was possible by the end of this quarter. Exacerbating this is the fact that other market participants, knowing that JPMorgan may have to cut their positions urgently for risk management purposes and to cut losses, may wait for the bank to unwind positions at even more attractive prices before stepping in.
The world economy is still on a very fragile note, and the least the world needs is another spanner throw into the recovery process. And such acts - losing US$2 billion simply due to "errors, sloppiness and bad judgment" coupled with the risk management unit being empowered by the CEO to make bigger and riskier speculative trades - are simply intolerable and downright irresponsible. When banks deemed "too big to fail" fail, what happens? Governments may have to come in and bail them out using taxpayers' money.
And yet when their speculative bets succeed, they earn tons of money and pay themselves unbelievable bonuses.
http://www.bloomberg.com/news/2012-05-11/jpmorgan-loses-2-billion-as-mistakes-trounce-hedges.html
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