Risky Business

Article excerpt

Byline: Zachary Karabell

The $2 Billion Lesson Of Jpmorgan Chase.

Question: When does risk aversion become risky behavior? Answer: when you are a large financial institution in today's world, especially a behemoth bank like JPMorgan Chase, attempting to navigate both labyrinthine regulations and shareholder demand for endless profit. How not to solve that conundrum was evidenced last week when the until-now lauded CEO of JPMorgan Chase, Jamie Dimon, announced losses of $2 billion in an internal fund designed to, of all things, prevent losses. But this isn't just a story of Dimon losing his luster. Faced with new dictates on trading and capital, combined with the continued drag of bad loans and the slow U.S. housing market, banks have been hoarding cash and coming up with innovative attempts to not lose any more money. Yet in this effort to avoid loss and steer clear of risk, they have placed themselves in precisely the same risk-taking, loss-courting position. There is no such thing as a free lunch and no such thing as banking without bets.

Financial institutions have been tripped up by software-enabled derivatives with arcane names (Goldman's Abacus product that bundled credit default obligations, or CDOs--huh?), ill-fated gambles (like the bet on European debt that sank MF Global and its CEO, former New Jersey governor Jon Corzine) and risk-taking traders. When things go awry, they are invariably described as "rogues"--the Nick Leesons (Barings), Jerome Kerviels (Societe Generale), and Kweku Adobolis (UBS) of this world. In the case of JPMorgan Chase, the current meltdown seems linked, in some way, to a London trader known alternately as "the whale" or "Voldemort" for the ever-larger, ever-riskier trades he placed in an misguided pursuit of this central strategy to mitigate loss and decrease risk. …