With the bank down over 8% on the announcement of at least $2 billion in expected losses, JP Morgan’s Jamie Diamond has some explaining to do. And simply saying that the incident “puts egg on their face” isn’t cutting it. The massive trading loss stemmed in part from a failed hedging strategy and derivatives bets placed by a large trader better known as the “London Whale.” Known for a high level of risk management, JPM’s lack of diligence does not inspire confidence in an already shaky sector with a looming European crisis on its hands.
According to Sterne Agee analysit Todd Hagerman, “It’s a pretty stunning admission for a company that prides itself on its risk management systems and the strength of its balance sheet. The timing couldn’t be worse for the industry. It will have ramifications across the broker-dealer community.” And this is precisely what is rippling across the markets and dragging down the banks. With the added uncertainty that JPM’s derivatives fiasco adds to the banks, this sector could be a time bomb with Europe as the fuse.