Wall Street Week in Review 5/11/2012: JP Morgan Chase hit with $2billion loss, Goldman Unwinds Hedge Fund Bets ahead of Volcker Rule

by Kyle Colona on May 11, 2012

Jamie Dimon no longer a convincing critic of Volcker ruleJPMorgan Reports $2Billion Loss

JP Morgan reported after the trading day yesterday a $2 billion loss in its Chief Investment Office. CEO Jamie Dimon attributed this whopper to hedges of “synthetic credit securities.”

Perhaps the bank should have stuck with the real thing?

But the portfolio was said to be riskier, volatile and “less effective as an economic hedge,” according to a Bloomberg News. And the losses were larger than anticipated. The key here is that this office had been reformed by Dimon and he put a London-based trader, Bruno Iksil, in charge. Mr. Iksil has a reputation for taking risky business.

So called “synthetic credit products” are derivatives that are intended to generate gains and losses tied to credit performance. These are hedge transactions that are supposed to protect a firm against credit exposure.

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Dimon said.

Goldman Unwinds Hedge Fund Bets ahead of Volcker Rule

In a proactive step to comply with the inevitability of the Volcker Rule, Goldman Sachs sold $250 million in hedge fund investments. The measure was made public in a regulatory filing.

While banks have been given a two year grace period to align their businesses with the rule, many firms have been closing their proprietary units and unwinding positions in an orderly fashion – a move designed to avoid a market disruption and suffer unneeded losses.

The Volker Rule, while yet to be finalized, aims to” rein in risk-taking on Wall Street by barring banks from placing bets with their own money,” say the New York Times DealBook. Moreover, the rule requires banks to reduce the amount of capital they invest in hedge funds and other high risk plays. But the regulators and the market players are still hammering out a definition of what assets can be included n the definition of “capital.”

The Goldman filing stated that the firm plans to meet the Volcker mandate by redeeming “certain of its interest in hedge funds.”

Volcker Defends Volcker Rule

Paul Volcker, the onetime head honcho of the Federal Reserve, told Congress this week that the rule that bears his name is a “solid step” in clamping down on too big to fail banks.

The DealBook notes that Volcker has “championed” barring banks from proprietary trading because banks should not be taking high risks while relying on FDIC insurance and the taxpayers to bail them out if these plays head south. Mr. Volcker argued on that the rule would mitigate the “likelihood of future Wall Street bailouts.”

“Its influence goes far beyond the particular risks,” he said. Volcker also contends that the rule addresses “a cultural issue” on The Street because proprietary plays invariably leads to conflicts of interest and “dangerous behavior.”

“It is surely inappropriate that those activities be carried out by institutions benefiting from taxpayer support, current or potential,” he said. “Proprietary trading is not a necessary ingredient of bank profits.”

Spain Moves to Shore up Troubled Banks

The Spanish banking system continues to resemble a Dali painting and the government plans to “shore up confidence in the economy” despite fears that the Iberian nation will need to be bailed out in order to stay in the euro zone.

According to The Guardian, Prime Minister Mariano Rajoy is pressuring banks to “to own up to the scale of their toxic property loans.” The country has been struggling to recover from a collapse in the real estate sector much like in the United States. However, the housing woes there have had far more of an impact on the broader economy as the unemployment rate is about 24%.

So the newly installed Rajoy regime believes it was necessary to partly nationalize Bankia, which is the country’s fourth largest bank. Some economists contend this move was a necessity because foreign investors have been reducing their exposure to Spain “at an economically disruptive rate.”

But this may be a case of too little too late in light of the fact that the UK and the US were bailing out their banks that had tanked because of the subprime mortgage contagion back in 2008.

Societe Generale Installs New Brazil Chief

Societe Generale a/k/a SocGen plans to name Francis Repka chief executive officer for the country, says Bloomberg News.

The move comes in the wake of the “second biggest loss” by a Brazilian bank last year. The French firm said Monsieur Repka will leave his current slot in the lender’s German unit to head to the country that is rumored to have an awful lot of coffee.

The firm posted a loss of about $79.5 million in Brazil last year which was a distant second to the whopping $740+ million loss by Banco Votorantim, a Sao Paulo-based bank that got over roasted, so to speak.

DealBook notes that about half of SocGen’s losses were due to “reversing tax credits” from two consumer-loan units as well as realizing the expenses connected to integrating the two subsidiaries. SocGen is said to be the 23rd-largest bank by assets in Brazil, with 12.5 billion reais as of December 2011.

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Kyle Colona is a New York-based freelance writer and a Feature Writer for CompliancEx and the Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications as well as his blog, “Colonaville.” You can contact him on him on Linkedin.

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