J.P. Morgan (JPM) CEO Jamie Dimon was called twice in the past week to testify before a Congressional committee about the loss of $2 billion in bad trades made by the big bank.
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For perspective, $2 billion is a pile of $100 bills stacked about 315 miles high. It is a lot of money to lose in a few trades.
But, there is also a lot of money to win in banking trades like this. In the entire hubbub, did anyone ever ask the question, “Who were the winners in these trades?”
It is more than an interesting question; it is a question that should have been asked with equal official interest.
Trades of the sort that J.P. Morgan engaged in are zero-sum games -- the winners and the losers offset each other, perhaps with some minimal (relatively) earned commissions in between. So if Dimon’s bank was engaged in risky behavior, there was at least one other party engaged in equally risky behavior.
So what distinguishes winners from the losers? Winners may have more ability. Winners may be luckier. Or, winners may know the game is “rigged” and how to exploit that fact. There really are only three explanations.
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Investors in J.P. Morgan would like to think that their management is a little smarter than the competition, no less lucky and not knowingly engaged in illegal behavior. Those are fair expectations. So Congress got itself involved, presumably to challenge these reasonable assumptions and perhaps showboat a little in the process.
But who is checking into the winners? They were engaged in equally risky behavior. And since they “won,” they may not ever question their trades, their management or the policies in place which should be guidance for prudent behavior. In all likelihood, they will confidently repeat their actions -- but the results could be stunningly different. After all, the risk is exactly the same on both sides of these kinds of financial bets.
Winning and losing may be no more predictable than a coin flip.
So, investors should have the names of the “winners” if the investigative process is to be legitimate. That would only be logical.
Mark Hubbard is an independent consultant providing services to senior management, primarily in media, manufacturing and start-up ventures. His areas of expertise include: market and industry analysis, business valuation, negotiating transactions, financing and restructuring, enterprise modeling, sales development and training, and executive coaching.