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WHEN JPMORGAN CHASE & CO. CEO JAMIE
DIMON admitted to at least $2 billion in losses on a
complex derivatives trade in the second quarter of this year,
he may well have signaled the end of an era for big global
banks. Until then it was clear why investors paid up for such
institutions: Banks with a big capital markets franchise made
oodles of money, especially for fixed income, commodities and
currencies the so-called FICC business, as the industry
categorizes its trading operations. The capital markets
business represented nearly two thirds of the revenues at the
top 13 global banks as recently as 2010, according to research
by consulting firm McKinsey & Co.
But this rosy picture is about to change dramatically as a
result of slumping demand and a slew of new rules and
regulations for leading global banks. Demands for higher
capital; new definitions of what constitutes risk-weighted
assets, against which they must reserve capital; and now,
thanks to JPMorgans losses, heightened demands for
restrictions on virtually any proprietary trading or risky
hedging, will impact the FICC business at most banks, hurting
their profits and forcing them to rethink their strategies.
Some business lines are likely to be closed or sold off.
be major changes at the big banks, says Roy Smith, a
longtime partner at Goldman, Sachs & Co. who now teaches
finance at New York Universitys Leonard N. Stern School
of Business. I suspect all of these businesses will have
to be regeared. You may have three or four of the top ten
investment banks veering off into significantly different
business or so de-emphasizing fixed income that they will leave
a lot of ground to be picked up by others.
These changes are already forcing sweeping reductions in
staff and substantial cuts in the traditional year-end bonuses
that fixed-income traders have long taken as a birthright.
Could the age of the fixed-income master of the universe, as
characterized by Michael Lewis in Liars Poker and Tom
Wolfe in The Bonfire of the Vanities, be coming to a close?
JPMorgan is already paying a heavy price for its derivatives
loss, which Dimon confessed violates our own
principles on acceptable risk-taking. The CEO canceled a
planned $15 billion share buyback in the wake of the
trading loss, causing the banks share price to plummet
and leading analysts to wonder whether JPMorgan is still worth
a premium. But because the losses occurred in the chief
investment office, which attempts to mitigate risk by investing
excess deposits, rather than in the investment bank, some
analysts believe that when the smoke clears, JPMorgan will
remain among a select group of bulge-bracket investment banks
that controls even more of the pie in FICC trading.