JPMorgan's Loss Will Be Investors' Gain

NEW YORK (TheStreet) -- On Wall Street, sometimes being known as the "cleanest shirt in the dirty hamper" is often justification enough, allowing investors to take a position in a company they otherwise be too fearful to consider.

In fact, there are plenty of examples where companies have ridden this not-so-favorable distinction to soaring valuations. So as it stands with banking giant JPMorgan Chase (JPM), long considered the "lesser of the evils" in a sector that consists of many perceived villains.

Thus, the news Thursday that the company had loss $2 billion dollars in its synthetic credit portfolio since the end of the first quarter has been a hard pill to swallow. Investors now are re-evaluating where our financial system really is -- or more appropriately, whether anything been learned from the complicated financial engineering that almost brought the country to its knees.

To fully appreciate what is involved, investors need to first understand the ethical concerns surrounding what is known as mark-to-market accounting.

One of the most sensitive areas in all of finance has been the acceptance of mark-to-market accounting -- a practice widely recognized since the start of the 1980s. It became popular as a way for certain company assets to be recorded at their "fair market values" -- as opposed to "cost," which had been the standard practice.

The obvious problems that this would pose cannot be overstated. For JPMorgan investors, a cause for concern has always been its complex derivatives book. This is even though a large portion of the derivatives has been centrally cleared to offset the risk. From that standpoint, the company was required to report on market value as it shifts each quarter.

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