Five Lessons from the JPMorgan Chase Crisis

by | US Economic News

The banking community was having plenty of image trouble as it was, so JPMorgan Chase did the industry no favors when it was discovered that the firm’s trading department lost at least $2 billion in a series of derivative trades earlier this year.

As if $2 billion is not already a staggering sum – even by Wall Street standards – some recent estimates say the losses could ultimately reach $4 billion.

In any major business story there are lessons you can take away regarding what to do and what to not do when faced with similar circumstances. Of course, the dust hasn’t all cleared and you’ll likely never be faced with a multi-billion dollar disaster, but here are a few observations or lessons relevant to almost any type of business.

1. Define the Problem and Confine its Impact

It would be easy for consumers and bank customers without a working knowledge of bank holding companies to worry that the bad trades might impact their deposits. To help control the public reaction, JPMorgan executives immediately explained what had happened and made it clear that deposits and other customer assets held by the bank were never at risk. The trades were made from a discretionary account that held only the bank’s funds, so depositors had no stake in the losses.

Unfortunately, the bank’s stockholders may not fare as well. Analysts are concerned that the losses may jeopardize future earnings growth. At the bank’s annual meeting in Tampa, Jamie Dimon, JPMorgan’s chief executive, would not rule out a cut in the bank’s current dividend, which is currently 30 cents per share.

In any case, various stakeholders were alerted to what their potential exposure, if any, might be. This prevented panic and stopped trust in the bank from sliding further.

2. Emphasize the Positive

There’s almost always something good to report, even in particularly tough times. Really. In this case, JPMorgan noted that the trading department responsible for the missteps had actually turned a $5 billion profit over the previous three years.

The bank is also happy that analysts have publicly stated they expect it to earn $4 billion in the coming quarter, even with the original $2 billion loss factored-in. Most analysts and investors remained publicly optimistic about JPMorgan’s prospects, and shortly after the trading story came out, an analyst with Nomura Securities repeated his “buy” rating on JPMorgan shares.

Certainly bank executives wish this had not happened, but emphasizing the “big picture” and illustrating that the crisis was not going to doom the company helped minimize the fall out.

3. Accept That Some Damage is Inevitable

Negative publicity may be the least of JPMorgan’s problems. Federal regulators are ramping-up an inquiry into the firm’s trading practices relating to the losses. Investigators are reportedly issuing subpoenas, requesting emails, and asking for other internal documents.

The probe is believed to focus on statements made by JPMorgan traders to their supervisors and risk-management staffers regarding the trading positions. If the traders are found to have made deceptive or misleading statements to their superiors, that might constitute fraud, based on provisions of the Dodd-Frank financial legislation.

So even as JPMorgan absorbs the financial losses, the possibility remains that fines, sanctions or other disciplinary actions may be doled out by the Feds. How severe those penalties could be, and what long term implications might follow, is uncertain.

4. Clean House…But not too Quickly

Another interesting issue in the aftermath of the trading losses is that the trader who executed the complex strategy is no longer on the trading desk, and is expected to leave the bank prior to the end of the year.

While the trader’s expected exit shows that JPMorgan is taking responsibility for the activity and is committed to it not happening again, the fact remains that the individual possesses knowledge of the market that will be difficult replace; knowledge that could help the bank recover from the losses.

Presumably the trader, Bruno Iksil, will spend his remaining months at the bank cooperating with investigators (see above) and also helping construct strategies that will untangle the trades with the least damage possible to the portfolio.

So if a crisis warrants personnel changes, product alterations, or other large-scale modifications to your operations, then move ahead. But keep the big picture in mind and salvage what you can from the situation.

5. A Little Luck is a Great Thing

Luck is beyond your control. That’s why it’s called luck. But it’s worth noticing that some completely unrelated news stories helped dilute the attention originally focused on the JPMorgan matter.

As the story heated up, the business and popular media were also concerned with the Facebook IPO and the share sell-off in the days that followed, the continuing economic crisis in Spain and other parts of Europe, and various reports indicating that the U.S. economic recovery could be slowing.

You can’t stage competing controversies or crises to deflect attention from yours, but you can be grateful when they happen. Here’s a tip in a similar spirit: If you must release bad news, consider timing it with a Friday afternoon or a holiday weekend. The non-business days that follow your announcement can provide a built-in cooling-off period, and also buy some time to determine your next move.

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