This isn’t really an article crucifying JPMorgan for losing $2 Billion (and probably more) on a bad investment model, but more on how the company needs to learn from their mistakes.
For starters, JPMorgan lost the money by getting involved with credit-default swaps similar to those that led to the financial nightmare back in 2008, except for this time without betting on mortgages but rather on bonds. The plan they implemented – betting on the worsening credit conditions in the world – was profitable in 2011, but as things became erratic in Europe. To protect themselves from short-term losses, they took out insurance as an off-set. Unfortunately, they layers of their investments grew too big and too complicated that they weren’t able to react quickly enough to chaotic global economies. As such, they were caught with their hand in the cookie jar and ended up with a paper loss of $2 Billion. (This is an overly-simplified explanation to a very complex situation.)
The first thing JPMorgan needs to do is to launch an internal investigation. As Kimmons Investigative Services suggests when it comes to corporate investigations, they should explore the e-mail and computer records to capture all activity and communication associated with the investments. From there, the company and legal authorities can determine if there were any negligence or illegal activities involved with they way the investment process was executed.
Secondly, the company needs to update their policies to provide better oversight on high-risk investments. There was no reason to have such a small force handing such a large and complex investment portfolio. More eyes could have caught and foreseen the eventual downward spiral these investments were leading towards.
Lastly, a better series of checkpoints need to be created. Stop-gap positions and test points need to be more conservative to trigger re-evaluations of the market conditions and investment holdings to see if the investment strategy should continue or if they should scale back their involvement. Taking a smaller loss earlier in the process is easier for the company to absorb than a $2 Billion loss and global media scrutiny.
Hopefully this event can be used as a teaching tool for JPMorgan and other investment groups involved with credit-deficit swaps.