Peter Lynch, the legendary manager of Fidelity’s Magellan Fund, is famous for advising investors to “invest in what you know.” The Prophet of Omaha, Warren Buffett, also advocates investing within your “circle of competence.” Maybe JPMorgan Chase traders should have followed this sage advice.
I was struck when JPMorgan Chase’s CEO Jamie Dimon recently boldly told the Senate Banking Committee that the trades that led to billions in losses were placed by traders who didn’t understand the risks they were taking.
More alarming than that, Dimon suggested the bad trades could not have been prevented by regulations. In fact, when the senators asked Dimon about the Dodd-Frank Act’s Volcker Rule, which would restrict banks’ right to speculate with their own money, he called the yet-to-be-finalized rule “vague” and “unnecessary.”
Instead of federal regulations, Dimon said financial firms need proper capital, liquidity, risk measures and risk controls to succeed. I’d add one thing – an understanding of the securities they trade.
The Wall Street Journal estimates JPMorgan Chase could have lost as much as $5 billion from trading a synthetic credit portfolio that Dimon insists was meant to hedge risks, not to speculate. With the FBI poised to begin an inquiry into this staggering loss, it remains problematic that the company’s internal risk management committee did not appreciate just how risky the strategy was, whatever its design.
In short, based on their track record, leaving the JPMorgan Chases of the world to regulate themselves doesn’t seem prudent.