“A billion here, a billion there, and pretty soon you’re talking real money.” – Senator Everett M. Dirksen

JP Morgan Chase has enough egg on its face to make omelets for an entire country.  Mystery abounds.  Total trading losses may have reached $2.3 billion, and could well hit $4 billion, said the The Wall Street Journal.  What in the world happened here?!?

Chase, in an irony worthy of a Hollywood screenplay, is led by Jamie Dimon (Chairman and CEO), who is at the forefront of the charge to resist, or at least, to water down, the specter of more regulation of what banks should be able to do and what they shouldn’t be able to do.  Dimon has been quite visibly prominent on that frontier – for this to happen under his watch would be funny, if it weren’t so menacing.

What happened?  How do you lose over $2 Billion, and perhaps as much as $4 Billion dollars in the world of Big Banking?

Back when there was effectively no federal regulation of banks, we were accustomed to having bank ‘Panics,’ every half dozen years or so. ‘Panic’ is a quaint word that suggests a mental disorder for which drugs await you at your doctor’s office after you hear that soothing voice on your TV, amid butterflies and Springtime, to ‘ask your doctor if ____ is right for you.’  But some of these ‘Panics’ back in the Gilded Age wiped out businesses and wreaked untold hardship on bank depositors who were told there was no money left for the banks to make good on their deposits.

After the Great Depression, we learned that federal bank regulation would act to calm down financial markets when times got tough.  We did not have anything like the Great Depression of the 1930’s again until the Fall of 2008, when, for a few months or more, it seemed like our financial system was imploding into a supernova of trouble.

In the very late 90’s we did away with federal bank regulation that some say could have helped us avoid the 2008-2012 period, now charmingly called the Great Recession.  And, in the mid-2000’s, came “Liar’s Loans,’ and NINJA loans (no income; no job; no assets) – when some people’s gardeners were buying a couple of houses on ‘spec’ – and the securitization of box-fulls of home loans marketed in ‘tranches,’ yet another charming name, all over the world as exotic financial instruments “of mass financial destruction,”  as Warren Buffett put it.  Physics and math grad students left academia, going to work on Wall St. instead, and driving Ferrari’s and Porsches, putting their talents to better use dreaming up exotic financial instruments for banks to sell than continuing to argue over String Theory and just how many universes exist.

To clean up the mess, the Fed opened it’s money window and the banks lined up for nearly free money which they could then lend out, perhaps on credit cards, for interest rates up to and over 30%.  After all the Bailouts, this has continued to the present day.  Banks like Chase, were under the usual pressure from their competitors and stockholders, to earn huge profits, to pay some of their trading employees amounts yearly well in excess of $10 million dollars.

A week or so ago, Chase first reported a 2 Billion dollar trading loss.  Chase’s shareholder’s meeting was Tuesday.  Dimon said there in his address that “no clients suffered as a result of our mistakes.”  Maybe that is true, but the US taxpayers, whose money the Fed lends out nearly for free to behemoth banks like Chase, surely did suffer, didn’t they?!?  Interestingly, Dimon is also a NY Fed Board Member – is this a conflict?

But, shareholders of Chase had foreclosures on their minds; asked one of Dimon: “If Chase can afford to gamble with $ 2 billion then why can’t it reduce principal on mortgages?”  A shareholder asked why Chase almost always denied requests for principal reductions on mortgages.  “Particularly worrisome is that qualified borrowers are being unnecessarily foreclosed on, in urging more oversight in loan servicing.”

Dimon labeled the $2 Billion (or more) loss reported by Chase from trading gone south as “Sloppy,” and “Stupid.” Many now ask if anything has changed on Wall St. since 2008 if such a loss can happen to bankers who still think they are smarter than anybody else.  But, viewed together with the sharp drop in Chase’s stock prices since the trading loss was announced, the loss could actually be $20 Billion – a drop in excess of 11 percent as this is written; making about $17.5 Billion in Chase’s market value vanish into thin air.

Dimon had a good reputation for managing risk before this trading loss – he managed to avoid much of the risky betting that likely caused the Great Recession, starting in 2008.  Remember too that Chase’s revenue was some $90 Billion over the past year.  But, good reputations can vanish in thin air just like the market value of a behemoth bank, and it is far too soon and the wounds are yet all too raw from the crashing and burning of Lehman Bros., Bear Stearns, and so many others over the last few years, to make any definitive pronouncements.

Should banks be continuing to risk our taxpayer dollars, coming to them by way of the Fed, on extreme bets to try to keep earning outsized profits?  How does one go about losing $2 Billion?  What is the amount of Chase’s total loss from this trading debacle and how exactly did it happen?  Will federal regulation for banks now be re-examined with new urgency in the wake of this unexpected financial meltdown?  We will all have to wait and see as more information is learned and shared over the coming weeks and as investigations of Chase’s bad trading days proceed.