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Financial Stocks Roundup: JPMorgan Leads the Whole Sector Down on Trading Loss


The strongest bank is now a poster child for the very regulation that it eschews.

MINYANVILLE ORIGINAL Financial stocks got a bloody nose today after JPMorgan Chase (JPM) revealed to the Securities and Exchange Commission that a trader in its London-based Chief Investment Office managed to lose $2 billion in bets on synthetic credit. The trading losses will likely swing the bank to a $800 million loss this quarter.

Those investments were supposed to be hedges against excessive deposits, but the ironies of this story don't stop there. JPMorgan Chase is the biggest bank in America by assets, and was regarded as the most stable and trustworthy. Also, CEO Jamie Dimon was an outspoken critic of the Volcker Rule, which bans the very practice that got JPMorgan into this mess: proprietary trading. Today, the bank just became a poster child for more stringent government regulation of prop trading. As Dimon said, this fiasco "plays right into the hands of a bunch of pundits out there but that's life."

As Credit Agricole (CRARY.PK) analyst and author of Exile on Wall Street Mike Mayo said in an interview with CNN Money, "I think JPMorgan and their CEO Jamie Dimon is better than average, but it's a reminder that the largest banks might be too big to manage."

Mayo, who has the unique capability of putting negative ratings on banks, says that this incident does sully the credibility of the banks in the eyes of investors.

"You always have to understand, here's always information risk, there's always a black-box nature to the big banks," he said. "So ultimately you have to trust the systems, the processes, the managers running the bank. And do you trust them? And what you receive as a result of the JPMorgan trading loss, it's a little bit less trust for JPMorgan and a little bit less trust for the industry."

Today the biggest US banks are taking a beating in the markets. Here is where the big five stand:

JPMorgan Chase: down 8.69%
Citigroup (C) and Morgan Stanley (MS): both down 3.85%
Goldman Sachs (GS): down 3.25%.
Bank of America (BAC): down 0.46%.

The broader financial sector underperformed today. The Financial Select Sector SPDR ETF (XLF) declined 0.87% and the KBW Bank Index (^BKX) fell 0.94%.

Twitter: @vincent_trivett
No positions in stocks mentioned.
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