JPMorgan's Big Loss: Explain it to Me

JPMorgan announced last week that it lost 2 billion dollars over the past six weeks. The local newspapers and talking heads made a huge deal about it. After all, it is 2 BILLION dollars, and the implied worries that the bank will go under, the economy will collapse and there were will be general mayhem abound.
However, that loss will not crash the bank, or anything else. According to the real money media, JPMorgan has more assets than any other bank in the country. Its net loss for the quarter is estimated to be $800 million and the bank made $5.4 billion in the first three months of the year alone.

But 2 billion dollars is a lot of money, and one has to wonder how in the world any one, or any financial institution, could lose that much money in a month. According to CNN Money and the Wall Street Journal, it is all caused by huge hedging transactions in credit default swaps. You remember them, they played a large part in the collapse in 2008 and 2009. According to the press, the credit default positions were so large that they caused unusual market movements, prompting hedge funds to take the opposite position.

So far, no one is saying that anyone did anything wrong, but we will have to wait and see on that one. But the back story is interesting, and starts at CNN Money - JPMorgan's big loss: Explain it to me 

Did JP Morgan Get a Break in CDO Case?

The SEC has filed a complaint against JPMorgan Securities for failing to disclose a material fact in connection with the creation, sale and distribution of a product. We commented on it earlier this week - JP Morgan to Pay $153.6 Million to Settle SEC Charges. In essence, the Commission alleged that JP Morgan failed to inform investorsin a CDO that it created that a hedge fund helped to select the assets in in the CDO portfolio, and the hedge fund was short those same assets. As a result, according to the SEC, the hedge fund was poised to benefit if the CDO assets defaulted.

The allegation was familiar, since the Commission brought almost identical charges against Goldman Sachs last year. We discussed that case at SECLaw.com -The Impact of the SEC CDO Fraud Complaint against Goldman Sachs and here - Goldman's Defense to SEC Fraud Case

JP Morgan settled by paying $153.6 million (and no executives were harmed in the settlement). Goldman initially fought the case, and ultimately settled for $550 million.

Now commentators are questioning the disparity between the two penalties. Bloomberg's Jason Weil writes that JP Morgan caught a break. Aside from the money, the charges against JP Morgan were for negligence, the charges against Goldman Sachs were for fraud.

Without knowing the intimate details of the two cases, if there was a difference in the scienter, or intent, part of the violation, then that would explain the disparity in the fine. Also, as litigators are well aware, defendants often get a better deal settling early.

But that doesn't explain the signficant difference in the fines, nor does it explain why there was no individual at JP Morgan included in the sanctions, whereas individuals were included in the Goldman Sachs case.

Bloomberg says that the SEC won't explain the disparity, but also notes that the Commission will have to have the approval of United States District Judge Richard Berman before the settlement is effective. If Judge Berman asks, the SEC will be forced to explain.

JPMorgan Gets a Break Where Goldman Got Nailed: Jonathan Weil - Bloomberg