answer the questions on the discussion, please. there are 4 questions answer them clearly. see the attached file.please do not do it as Essay. I need you to answer each question by order you put the qestion and the answer under it. do not use contractions when you write like ” don’t, can’t, couldn’t etc..”thank you
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Derivative Losses at JPMorgan Chase
JPMorgan Chase ( sometimes referred to by its short name, JPMorgan) was one of the
larg-est banks in the United States and the only major bank to remain profitable
during the 2008 financial crisis. In May 2012, the bank surprised the financial
community and the American public when it announced that one of its derivative
trading groups had lost an astonishing $ 2 billion of the banks money. Derivatives
were financial instruments that derived their value from changes in the price of
commodities ( such as wheat), the level of interest rates, or an underlying asset such
as mortgages. They were bought and sold usually by big institutions such as pension
funds or sovereign wealth funds which were essentially making a bet on whether
the prices of the underlying assets would go up or down. The leading creators and
brokers of derivatives were five large Wall Street banks JPMorgan, Goldman Sachs,
Morgan Stanley, Bank of America, and Citigroup. These banks also traded derivatives
for their own investment portfolios, seeking to profit from their own insights into
market movements. The derivative business produced about $ 20 billion in revenues
for the five major banks in 2010.
Within minutes after JPMorgans announcement of their losses, the companys stock
lost almost 10 percent of its value, wiping out about $ 15 billion in market value.
Fitch Rat-ings downgraded the banks credit rating by one notch and Standard &
Poors cut its out-look of JPMorgan to negative, indicating that a credit- rating
downgrade would follow. Other banks were caught in the decline in confidence.
Morgan Stanley, Citigroup, and Goldman Sachs stock all closed down about 4 percent.
Critics of the banking community were quick to jump on the reported JPMorgan
losses. It just shows they cant manage risk and if JPMorgan cant, no one can,
said Simon Johnson, former chief economist for the International Monetary Fund.
When Congress had debated financial regulatory reform in 2010, it considered imposing government rules on the trading of derivatives. Trading in some kinds of
derivatives ( particularly those whose value was tied to mortgages), which were
largely unregulated at the time, had profoundly destabilized the U. S. and world
economies in 2008, and Congress sought to avoid a similar situation in the future. For
this reason, it sought to extend govern-ment oversight. Unlike stocks and bonds,
which were traded on public exchanges such as the New York Stock Exchange, most
derivative deals were private agreements between two parties. Congress proposed
instead that derivatives be traded in public clearinghouses run by intermediaries,
where regulators could scrutinize these transactions. The big banks, including
JPMorgan, had argued vigorously against this, saying that intermediaries could reveal
sensitive pricing information or the structure of the deal, potentially benefiting rivals
and reducing the banks profits. But in 2010, Congress decided to extend government
regu-lation over the derivatives market, despite the industrys opposition.
In addition to requiring regulated trading through clearinghouses, the Dodd- Frank
Act also included a provision called the Volker Rule. This rule, named after a former
head of the Federal Reserve, Paul Volker, who had suggested it, said that banks could
not trade derivatives for their own accounts something they had commonly done
before Dodd- Frank. The purpose of the rule was to prevent banks from taking on
excessive risk by mak-ing big bets and leaving taxpayers on the hook to bail them
out if something went seriously wrong, as it had in 2008. An exception was made for
derivatives trading done to hedge risk in a banks own portfolio. In 2012, the
Securities and Exchange Commission was still trying to figure out exactly how to
implement this part of the law and what ex-actly a hedging trade was, as opposed
to some other kind so banks were still largely free to do what they wanted. Bank
lobbyists were still busy arguing for a loose interpretation of the rule.
JPMorgans huge losses startled both Congress and regulators, and again posed the
question of what kinds of regulations were necessary. Many wondered if the banks (
and its shareholders) losses could have been avoided if a strict interpretation of the
Volker Rule had already been in effect. It is premature to conclude whether the
Volker Rule in the Dodd- Frank Act would have prohibited these trades, said Bryan
Hubbard, spokesperson for the U. S. Office of the Comptroller, referring to the fact
that the specific rules had not yet been written. Representative Barney Frank,
coauthor of the Dodd- Frank Act, com-mented, When a supposedly responsible,
well- run organization could make such an enor-mous mistake with derivatives, that
really blows up the argument, Oh, leave us alone, we dont need you to regulate us.
To Frank, the losses underscored the continuing need for strong government
Weeks later, after an internal investigation by the bank, JPMorgan chief executive officer Jamie Dimon announced that three high- ranking executives were leaving the
com-pany: Ina Drew, who ran the risk management unit that was responsible for the
companys derivative losses; Achilles Macris, who was in charge of the London- based
desk that placed the trades; and Javier Martin- Artajo, a trader and managing director
of Macriss team. Dimon also said that the trading positions taken had produced losses
that could go as high as $ 5 billion. Later, others estimated that the losses could be as
high as $ 9 billion. Unlike the banking crisis a few years earlier, these losses would be
absorbed by the bank or its shareholders and a bailout, which would have passed
the costs along to the taxpayers, would not be needed. At the companys annual
meeting a few days later, Dimon addressed the issue of increased regulation. While he
continued to criticize the cost and complexity of added regulation, he said he
supported most of the proposed regulatory rules, including some of the Volker Rule,
but did not elaborate further.
Sources : Banks Falter in Rules Fight, The Wall Street Journal , April 14, 2010,
online. wsj. com; Calls to Toughen Regulation Follow JPMorgan Loss, Yahoo!
Finance , May 11, 2012, finance. yahoo. com; JPMorgan Sought Loophole on Risky
Trading, The New York Times , May 12, 2012, www. nytimes. com; Three to Exit J.
P. Morgan after Losses, The Wall Street Journal , May 13, 2012, online. wsj. com; In
Washington, Mixed Messages over Tighter Rules for Wall St., The New York Times
Dealb% k , May 14, 2012, dealbook. nytimes. com; Inside J. P. Morgans Blunder,
The Wall Street Journal , May 18, 2012, online. wsj. com; Bank Regulators Under
Scrutiny in JPMorgan Loss, The New York Times , May 25, 2012, www. nytimes.
com; and JPMorgan Trading Loss May Reach $ 9 Billion, The New York Times
Dealb% k , June 28, 2012, dealbook. nytimes. com .
1. Does this case indicate that JPMorgan and the federal government were in a
collabora-tive partnership or working at arms length? Why do you think so?
2. Which stakeholders benefited, and which were hurt, by JPMorgans actions in this
case? For those that were hurt, wasnt this a risk they were willing to take?
3. Were the regulations of derivatives trading legislated by Congress in 2010 an
example of economic or social regulations? What were the arguments in favor of and
opposed to these regulations?
4. Do you believe the government should have regulated the trading of derivatives
further, and why or why not? If so, what kinds of regulations would you favor?
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