Bouncing Back from London Whale Debacle
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JP Morgan & Chase’s stock (NYSE: JPM) has taken a bruising over the past few months, much to the delight of naysayers who say it is the epitome of being too big to fail.
Its problems stemmed from a variety of issues, but its biggest blunder was one it created on its own – the London Whale debacle. While the market sold off shares of the country’s largest bank like it had the plague because of this derivatives snafu, the bank quickly moved to shore up its finances, and win favor among investors and other market players.
It’s been almost two months since the bank’s chief executive officer Jamie Dimon shocked the market by announcing that the bank had played its hand in the risky derivatives market again, creating a loss of $2 billion.
Despite the devastating hit its stock took immediately after the announcement, the bank has shown its resiliency, and the conservative management practices it is known for seem to have kicked in to help save the day.
Most recently, this was acknowledged by Goldman Sachs (NYSE: GS), which on Tuesday placed the bank on its conviction buy list. One of the reasons sighted by Goldman Sachs for this action relates to JP Morgan having a sufficient capital position and earnings power to offset the hedging losses.
At the same time, Goldman Sachs changed Morgan Stanley (NYSE: MS) to a hold from a buy. The stocks of both Morgan Stanley and JP Morgan have been among the worst underperformers over the past few months, and JP Morgan’s situation was only aggravated by the infamous London Whale debacle.
When comparing JP Morgan and Morgan Stanley, Goldman Sachs noted the balance of risk and potential return being better for JP Morgan shareholders because of the bank’s near-term earnings and return visibility, according to Bloomberg.
News of Goldman Sach’s action comes on the heels of a ratings downgrade for JP Morgan by Moody’s Investors Service last week. One of the things Moody’s took issue with was JP Morgan’s willingness to take on the risky credit default swaps.
JP Morgan’s standalone credit assessment was lowered to C/a3 from B/aa3. However, as an indication that Moody’s is comfortable that the worst is behind JP Morgan, it assigned the bank a stable outlook.
JP Morgan, along with 14 other global banks, was downgraded because of its “significant global capital market activities,” according to Moody’s. The rating agency also took issue with JP Morgan’s willingness to take on the risky credit default swaps. Bank of America, Citigroup, Goldman Sachs and Morgan Stanley were the other American banks downgraded.
When the credit default swap was announced, it was thought that the losses would easily exceed the $2 billion figure that had been bandied about. The transaction had not been fully unwound, and it was anybody’s guess how much would be lost. Dimon refused to say anymore after the May announcement, so investors reacted the way they knew best – by sharply selling off shares of the bank, leading to its stock shedding more than 13% of its value.
While investors were left to wonder what the bank was doing to curtail the losses, officials were working diligently to limit the bank’s losses. In fact, at the time of writing, the bank had reportedly unloaded between 65% and 70% of its position.
In other positive news for JP Morgan, it announced that it would no longer charge customers its $34 overdraft fee for transactions that were less than $5. The practice had grown to be a thorn in the side of consumers who complained that it was excessive and unfair. The bank’s hand was forced to change its policy as part of a $110 million settlement with its customers. However, it still shows that the bank is well positioned to absorb losses, and remain competitive in this industry.
TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
