JPMorgan invented credit default swaps in the 1990s, but practice proved bank’s undoing in recent hedging loss.
Ina Drew, JP Morgan Chase’s chief investment officer, has announced her retirement in the wake of the US bank’s $2bn loss on derivatives trades, with two more senior execuitves expected to quit the company.
Drew had repeatedly tendered her resignation since the extent of the loss became apparent in late April, but Jamie Dimon, the bank’s chief executive, had refused to accept it until now, according to reports.
The departure came as Dimon admitted that the stunning loss had jeopardised the bank’s credibility and given regulators a fresh opportunity to target Wall Street.
Drew is “retiring” after more than 30 years at the bank, JPMorgan said, but her departure came days after the bank reported a huge “egregious” loss that came under her responsibility at the bank’s chief investment officer (CIO).
“Ina Drew has been a great partner over her many years with our firm,” Dimon said in a statement.
“Despite our recent losses in the CIO, Ina’s vast contributions to our company should not be overshadowed by these events.”
Al Jazeera’s Kristen Saloomey, reporting from New York, said that Drew’s departure was an effort by JPMorgan to limit the fallout ahead of a shareholders’ meeting on Tuesday.
“This is a woman who was considered one of the most powerful women in wall street. Someone who was a top earner for the company making 30m in the last two years,” she said.
“But these massive losses happened on her watch. So the company in an effort to limit the fallout from these huge losses is now taking steps to cleanhouse. The shares for the company plummeted on Friday by 9.3 per cent.
“Clearly this is an effort to stabilise things ahead of a shareholders meeting that is expected on Tuesday.”
‘Casino gambling industry’
The Wall Street Journal said two other high-ranking executives were set to leave during the week: Achilles Macris, who heads the London-based desk that placed the trades, and trader Javier Martin-Artajo, a managing director on Macris’ team.
London-based trader Bruno Michel Iksil, nicknamed “The London Whale” for the large positions he took in credit markets, is also likely to leave though it remains uncertain when he will do so, the Journal said.
Dimon told US network NBC’s “Meet the Press” programme that the big loss incurred by the New York-based bank, which triggered a slide in banking shares on Friday, was “stupid” and damaging, but not bad enough to stop the company from making a profit this quarter.
The Wall Street boss has led US banks in fighting the proposed Volcker Rule, which would ban so-called proprietary trading, when banks trade on their own accounts. Banks are also resisting curbs on their hedging activities.
Asked if JPMorgan’s losses had given regulators new ammunition to clamp down on Wall Street after the US government spent billions to bail out financial institutions during the 2008 crisis, Dimon replied: “Yes, absolutely. This is a very unfortunate and inopportune time to have had this kind of mistake.”
Martin Hennecke, associate director at Hong Kong-based financial advisory firm Tyche Group, told Al Jazeera that JPMorgan’s loss was another indictment of the US banking system.
“We are particularly not fond of the US banking industry, which is like a casino gambling industry, especially since the Glass-Steagall Act was repudiated,” he said, referring to the 1933 legislation established to regulate and limit speculation by banks which was repealed in 1999.
“The Glass-Steagall Act needs to be implemented again, otherwise it seems the banks pretty much do what they want.
“If they mess it up they get a bailout and if they do it right they don’t care about what limits were broken, and so they would all be heroes and get huge payouts and bonuses.”
Hennecke said: “So, we don’t think the US banking industry is safe or stable to invest in. The much chastised Chinese banks that everybody loves to hate are much safer to invest in than banks in the US and Europe as well for that matter.”
Dimon denied that the company’s hedging scheme – designed to lower investment risk, but which instead spectacularly backfired – had placed its future in doubt.
“It’s a question of size. This is not a risk that is life-threatening to JPMorgan,” said Dimon, who late on Thursday told analysts that the loss could increase to $3 billion through to the end of June due to market volatility.
“This is a stupid thing that we should never have done, but we’re still going to earn a lot of money this quarter. So, it isn’t like the company is jeopardised.”
The losses, however, could prompt unwanted ramifications.
“We hurt ourselves and our credibility yes, and we’ve got to fully expect and pay the price for that,” the JPMorgan chief added.
The losses were a humiliation for Dimon – one of the US financial industry’s biggest figures – and for the largest bank in the US, which was seen as having emerged from the 2008 crisis in better shape than many of its rivals.
Saloomey also said that JPMorgan’s crisis has reignited the debate in the US on regulating financial instutions.
“It [JPMorgan] is the largest bank in the US and it weathered the financial crisis in 2008 better than other financial institutions in the country,” she said.
“And since then Dimon has been one of the most outspoken critics of efforts to regulate the finance industry, precisely the kind of risky trades that led to this huge loss. He has been quoted as been quoted as describing efforts to regulate the market as infantile. He ridiculed the notion of banks being too big to fail.
“So this couldn’t have come at a worst time for JPMorgan Chase with the regulators in the US set to put the finishing touches on financial reforms in the coming months.
“Now we are hearing calls for new congressional hearings on what went wrong with JP and renewed calls for tougher regulation to prevent it from happening again and putting the US and world economy at risk.”