JP Morgan (JPM): The Big Bank with a Big Blunder

By now you probably know that JPMorgan Chase (NYSE: JPM) made a very serious boo-boo recently.

The big bank suffered at least $2 billion in losses after making a series of bad trades. Chief Investment Officer Jamie Dimon is calling them “egregious mistakes.” Investors are clearly viewing the losses as a major reason to sell the stock.

Shares of JPMorgan have been getting hammered since the big bank announced the losses after the market closed on Thursday. JPMorgan’s stock had fallen 8.9% in mid-day trading.

But the trading “mistakes” point to a much deeper problem with the biggest U.S. bank as measured by assets. That Dimon referred to the bank’s trading strategy as “unbelievably ineffective” is likely to weigh heavily on investors’ psyche for quite some time. It may take a while for people to have much confidence in a bank that recklessly poured its money into so many bad trades.

The scapegoat for JPMorgan’s bad trades has become known as the “London whale,” a French-born JPMorgan trader named Bruno Michel Iksil. As The Wall Street Journal reported last month, the “London whale” took a number of large positions in credit-default swaps, essentially betting that a number of companies wouldn’t default.

The trades apparently backfired, along with a number of other trades the bank made. As a result, the bank has taken a $2 billion haircut.

Even with today’s losses, JPMorgan’s stock is still up 12% for the year. But this is likely to be more than a one-day drop-off. When a bank makes $2 billion worth of bad trades it’s sure to erode investor confidence and drum up some bad publicity. The words “egregious mistakes” and “unbelievably ineffective” from a company’s CEO tend to have a lasting effect.

With an additional $1 billion in trading losses possible this quarter, according to Dimon, today’s losses could be just the beginning JPMorgan’s suddenly maligned stock.

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