When the Dimon turns out to be cubic zirconium

Of all the bankers who “starred” in the recent ongoing financial system crises, Jamie Dimon had the best reputation.

JP Morgan Chase, which he leads, was perceived as (and perhaps actually was) the banking system’s shining city on the hill.  Dimon was a perennial Institutional Investor All-Star Executive, and even was named the industry’s MVP (CEO of the Year) in 2011 – a year in which he was paid a cool $23M. (Source: Wikipedia.)

Jamie Dimon was the industry’s face-saver, its savior, its saving grace, proving that a bank could actually be run well and profitably, without the need for TARP infusion or – heaven and Wall Street forbid – any heavy-handed regulation.  He was living proof that someone, or some institution, actually had a handle on derivatives, was in control of risk, actually knew what they were doing.

And in the movie Too Big to Fail, Dimon even got to be played by the sweet and charming Bill Pullman (picture audience blowing kisses, clasping hands over their hearts), while one of his opposite numbers, Richard Fuld, was played by James Woods (if ever a villain: hiss boo).

Bill Pullman aside, it certainly wasn’t a total Jamie Dimon love-fest. He is, after all, a fat-cat banker, a 1 percent-er. Still, at times it appeared that JP Morgan Chase would be last bank standing.

His zeal for cost-cutting and perceived mastery of risk did more than keep JPMorgan strong enough to bail out two failing competitors, Bear Stearns and Washington Mutual. It gave him a kind of street cred during the post-crisis years, when he lashed out at regulators who sought to rein in banks, and Occupy Wall Street protesters who raged against them. (Source: Washington Post.)

But Dimons aren’t forever, and last week Jamie Dimon had to admit to analysts that JPM’s:

…“flawed, complex, poorly reviewed, poorly executed and poorly monitored” trading strategy … lost a surprise $2 billion.

Surprise, all-righty.

And there may be more where that came from, as there is a strong possibility – which Dimon has hinted at – that, once the bank starts following the bread – or is it let-them-eat-cake – crumbs and unwinding its position, they’ll find more losses. Oppenheimer is doubling down, and predicting a $4B loss by the end of second quarter.

Part of the problem of unwinding appears to be that JPM had $100B in credit default swaps in play, out of a total market of $150B, putting them in something of an “I’m my own grandpa” position when they go to unwind.

"The mystery," TABB Group said, is "how J.P. Morgan planned on finding counterparties and the liquidity to unwind its alleged position."

Research firm CreditSights seconded that, saying: "This position could be difficult to exit in an orderly fashion given its potentially large size in relation to the overall specific market and the potential need to reverse it for some reason in quick fashion." (Source: Wall Street Journal.)

So if they want out, they could tumble down this entire part of the market. Dimon has countered that:

…the bank would not engage in a fire sale that would flood the market and drive down the value of its holdings. "We're not going to do something stupid," he said. "We're willing to hold as long as necessary inventory, and we're willing to bear volatility."

And we need to keep in mind that, throughout all this, JP Morgan remains profitable. (What’s a $2B loss among friends?)

Still, given the potential for events of this sort to wreak systemic havoc, it’s hard not to believe that we could use a teensy-weensy bit more regulation than Wall Street would like.

I don’t pretend to understand any of this. After all, I took finance with Robert Merton who, I seem to recall, was a principal in Long Term Capital Management, a canary-in-the-coal-mine hedge fund that lost a kabillion dollars before it went bust a decade or so ago. But I have a hunch that even those, like Dimon, who are supposed to understand it; who are, in fact, paid a ton of money to understand it, don’t have a 100% grasp on all the intricacies, either. Which is how you get into $2B losses, I guess.

While offering little detail, Dimon said the trade was intended to hedge but that "it morphed over time and the new strategy which was meant to reduce the hedge overall made it more complex, more risky and it was unbelievably ineffective."

“Morphed over time.” Don’t we all. Including Jamie Dimon’s reputation.

Now who’s going to break the news to that nice Bill Pullman?