NEW YORK (Real Money) --
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." -- Warren BuffettI took a small long position in JPMorgan Chase ( JPM) at $38.20 after the close of trading yesterday and after JPMorgan made its surprising announcement. I weighed the impact of the hit to earnings and to perception and concluded that it is fairly unusual to be able to buy JPMorgan Chase's shares at only $4 over book value ($34 a share), especially in the face of an active $15 billion buyback. I am not foolish enough to believe that I will be immediately rewarded in this trade, however, and I am putting the shares away as an investment. Also, my position has been sized modestly for, as described below, the opportunities probably lie elsewhere in the financial sector. (And I did more aggressively buy Berkshire Hathaway ( BRK.A)/ ( BRK.B) and American International Group ( AIG) last night.) While I have not yet read bank analysts' reactions to the news, here are my brief observations on JPMorgan Chase's blunder.
- Jamie Dimon screwed up. His eye was clearly off the ball. JPMorgan Chase has been a champion against reform, seeing it as a detriment to banking profitability and credit availability. Dimon looks very stupid now. He is mortal, like us all.
- I still don't have a clear vision of how the money was lost. I understand that selling credit default swaps on corporate debt was essentially going long debt. Was this a naked proprietary trade, or was there a short on the other side to be hedged (which doesn't make too much sense to me)? Or is JPMorgan Chase's management simply being deceptive or even lying? I don't know, and others might not (which speaks volumes!).
- I view this as a one-off to JPMorgan Chase, so some opportunities might develop in peripheral financial stocks today (Berkshire AIG, Wells Fargo (WFC), etc.).
- The optics of JPMorgan Chase's hedging loss underscores that the forces of financial reform initiatives will be unrelenting (maybe even from both sides of the political pew).
- Limited broad-market impact, perversely, could mark a bottom as money goes elsewhere and away from banks.
- Bank stocks already are at low P/E multiples, in part stemming from generally opaque financials (and the risk of revelations like last night). I see limited impact to the bank stock sector.
- This cost to JPMorgan Chase will likely be less than $0.50 a share, not really impeding capital or reducing earnings power but hurting reputation. JPMorgan Chase's premium relative multiple will likely narrow.