NEW YORK - J.P. Morgan violated the "Dimon Principle" since the end of the first quarter, as JP Morgan said it suffered more than $2 billion of trading losses. Unlike, UBS's derivative losses these seems to come from Dimon himself and were sanctioned trades. Though the bank did not elaborate specifically, it does appear to be a synthetic derivative. The derivative seems to be based on houses defaulting in the U.S. Since, Dimon said the bank acted too defensively this means the bank must have been long on predicting home prices would decline in value. I.E they were buying a swap that would protect them if houses declined in value but go down in value if houses increased. Given the losses the derivative would likely have been at least a $4 billion bet. The bank must have been beefing up his position on this but later realized this was not a good course of action. Since, then it has began unwinding its positions but with few buyers it is suffering losses.
These sort of losses should make investors crave a bank like PNC over banks such as J.P. Morgan, Royal Bank of Canada, TD Bank. All of these banks have huge trading operations and results show over time that trading operations tend to be the most volatile for a bank. PNC, has a small trading operation which makes the bank's earnings more predictable and less subject to egregious swings.
JP Morgan declined over 7% in after hours. Even with the current losses today, J.P. Morgan is still outperforming PNC this year. A move which some investors say is wrong.
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