The Hidden Message in JP Morgan's $2-Billion Loss

Unless you were living under a rock, you are aware of JP Morgan's stunning $2-billion loss. According to The Wall Street Journal the loss was caused by a trader in London nicknamed "the London whale." Mr. Whale guessed wrong in making complicated trades tied to the values of corporate bonds, causing massive losses in the bank's derivative positions.

Jamie Dimon, the Chief Executive of JP Morgan, called the trades "flawed, complex, poorly reviewed, poorly executed and poorly monitored." Mr. Dimon was nonplussed by this event, adding, "We will admit it, we will fix it and move on."

If you are a shareholder in JP Morgan, you are not "moving on" so quickly. According to Reuters, the bank lost $15 billion in market value since this announcement. Standard & Poors revised its outlook on the bank from stable to negative, while affirming its A/A-1 issuer credit rating.

In an odd coincidence, the state of New York announced the appointment of JP Morgan as the new advisor for its $2-billion adviser-sold 529 plan, marking its entry into the college savings market. JP Morgan's "Global Multi-Asset Group" will handle the new business. It manages $74.6 billion in assets.

Mr. Dimon was right. JP Morgan is "moving on." The question is whether investors in this 529 Plan, and other clients whose assets are managed by this bank, are doing the same. The massive loss suffered by the bank is yet another indication of the inability of this huge institution (or anyone else) to predict the direction of the markets. Yet, the entire securities industry is premised on the false assumption that its members can add value by stock picking, market timing, and fund-manager picking.

The real skill of these "wealth managers" lies in their ability to convince you they have an expertise that doesn't exist. This latest debacle is one more example demonstrating the irrefutable fact that these investment gurus are emperors with no clothes, representing a significant, little-understood peril to your financial security.

Here's the hidden message: You would likely be better off without them. Read The Smartest Investment Book You'll Ever Read, The Little Book of Common Sense Investing and Index Funds: The 12-Step Recovery Program for Active Investors.

You can't fight this system, but you don't have to be part of it.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

 

 

 

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Comments

[metaluna]

05:41 PM on 05/16/2012

Must read: Griftopia by Matt Taibbi

[altosax]

01:45 PM on 05/16/2012

Why gamble? If you must invest in the stock market and/or the bond market, put half your money in a stock index fund, one that mirrors the movement of a large number of stocks (i.e., S&P 500). Do the same with the other half of your money into a comparable corporate bond index fund. Costs are lower and on average will do as well as actively managed funds. Why risk trying to make a killing when you could be the one that is killed?

[KarmaPatrol]

12:42 PM on 05/16/2012

A bet is a bet. Fine if we could be assured it was shareholder money (unless you are a shareholder - haha) , but last time, it was the TAXPAYER called upon to bail out all these losing bets. Next time I'll just defer the banks to the Tea Party if they ask for another bail-out.

[rjohn10215]

01:35 PM on 05/16/2012

JP Morgan repaid the TARP back within 9 months. It was President Obama who bailed out the banks and came up with "too big to fail". How come no one is complaning about Fannie and Freddies loss of 7.8 billion in taxpayer money, or the USPS with yet another loss of 3 billion plus?

[spinotter11]

09:50 AM on 05/16/2012

Our entire country is being ruined by the machinations of these banksters and without a single benefit to our society - in fact the worst sort of negative effects are resulting, including the worship of wealth and an increase in social inequity and a breakdown of any values but those of money and profit. A very negative lookout for the future thanks to these institutions of legalized cheating and stealing.

[fortressfountain]

09:44 AM on 05/16/2012

Or the loss was on purpose for a giveaway or political to promote wall street reform.

[johnnymainstreet]

08:04 AM on 05/16/2012

Dan, totally agree with your comments "The real skill of these "wealth managers" lies in their ability to convince you they have an expertise that doesn't exist. I might add that they are also really good at making up names for these exotic financial instruments that sure sound great, but in reality are nothing more than fancy labels for extremely risky bets. I guess all this is part of the :branding" to make it seem like we have to pay these people millions a year because the financial industry is so complex. It's only complex because they have made up this little code speak, that unless your in the "club" you don't know what their talking about. I mean really, lets call horse track bets something exotic like equestrian hedge,collateralized default swaps or something. Really hides what is going on to the casual observer like Congress.

[Vocalid]

06:52 AM on 05/16/2012

While I agree 100% with what was written, this is basically an advertisment for buying a book.... why is this on HP?

[Oracleman]

12:05 AM on 05/16/2012

Mr. Solin,

I agree 100% with this. Remember The Wizard of Oz and the scene where the wizard was nothing than a scared little man behind the curtain. "The real skill of these "wealth managers" lies in their ability to convince you they have an expertise that doesn't exist. This latest debacle is one more example demonstrating the irrefutable fact that these investment gurus are emperors with no clothes, representing a significant, little-understood peril to your financial security." We need someone to force transparency and accountability and get them to not hide behind the "Too Big to Fail" curtain. Oh my.....