JPMorgan Shareholders Bear Entire Debacle Burden

NEW YORK (TheStreet) -- No borrowers, bondholders, regulators or taxpayers were hurt from the JPMorgan Chase ( JPM) trading debacle; only shareholders and bank employees got hurt, which is how it should be.

During the two trading sessions following JPMorgan CEO James Dimon's announcement late Thursday of a $2 billion second-quarter trading loss, the market lopped off 12% of the company's share price, and JPMorgan announced on Monday that Chief Investment Officer Ina Drew had resigned.

When acting Federal Deposit Insurance Corp. Chairman Martin Gruenberg last week discussed his agency's expanded powers to resolve large, failing financial holding companies -- under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 -- he said that one of the stated goals of the resolution authority was "accountability, ensuring that the investors in the failed firm bear the firm's losses."

While the profitable JPMorgan Chase is nowhere close to being a failure, there's no question that Congress and bank regulators are getting what they want, as "the market exacted pretty strong revenge," according to Michael Robinson, executive vice president of Levick Strategic Communications and chair of the firm's Corporate and Public Affairs Practice.

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"The market did punish a bad actor, and it is likely at the annual meeting," which begins today at 10:30 EST, "that Mr. Dimon himself will get a lot of criticism," according to Robinson, who adds that the CEO "may voluntarily suggest that his pay package be reduced to a dollar a year."

"The smart money is saying that he'll get in front of it and say that he bears blame and take a personal hit for it," which "sends the right message and provides an opportunity to change the direction of all this," Robinson said.

Right after JPMorgan's trading loss announcement on Thursday, Senator Carl Levin (D-Mich.) said in a statement that "the enormous loss JP Morgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."

Lawrence Harris -- the Fred V. Keenan Chair in Finance at the University of Southern California's Marshall School of Business -- says that "there were some very serious mistakes made, which suggest that JPMorgan was doing things that they didn't think they were doing, which of course is problematic," but "in the grand scheme of things, for a bank of this size there is little systemic risk here. "

According to Harris, "it would be impossible for regulators to determine with any degree of accuracy if a bank is hedging or speculating," and that "what is needed is adequate capital so that whenever they make a mistake, the shareholders end up paying for it, and not the government or the bondholders."

Along with the effect on bank employees, this is exactly what has happened, although we will see further government involvement, through various investigations and possible Congressional hearings.

Harris says "it is undesirable for the government to regulate everything. It is easiest to regulate capital, so that when banks make mistakes, the mistakes don't propagate to other people."

Even with the estimated $800 million after-tax hit to second-quarter earnings -- with the $2 billion hedging loss partially offset by $1 billion in gains on available-for-sale securities -- the effect on JPMorgan Chase's strong capital position is likely to be negligible. During his announcement on Thursday, Dimon said the firm's estimated March 31 Basel III Tier 1 common equity ratio would decline to 8.2% from a previous estimate of 8.4%.

While it is understandable that members of Congress who worked to draft the Dodd-Frank legislation in the wake of the credit crisis that began in 2008 and the industry bailout through the Troubled Assets Relief Program would express concerns over JPMorgan's trading loss, Harris says that "none of us are hurt because the bank has enough capital," and that "the issue is not the Volker Rule ," which bans 'proprietary trading' as part of Dodd-Frank. "The issues is that banks have enough capital, so that when banks make mistakes, as they inevitably will, the shareholders end up owning the mistakes, instead of the U.S. Treasury."

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.