JP Morgan Pain Is Investor Gain

By Sham Gad | May 10, 2012 AAA

Shares of investment bank JP Morgan (NYSE:JPM) fell about 7% on news that the company incurred a $2 billion trading loss. In a conference call with analysts, CEO Jaime Dimon was candid and apologetic to shareholders. Dimon admitted that the bank's hedge trading strategy was "egregious" and poorly tended to. That sentiment fell on deaf ears; by noon trading volume was over 100 million shares versus a daily average of nearly 30 million.

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More Regulation
As a result of the financial crisis of 2008, many have been calling on Washington to push for more regulation in the financial industry. Dimon, over the past couple of years, has been very vocal about the consequences to the economy as a result of placing more regulation on the banks. Needless to say, this trading loss has reinvigorated the call for more regulation. According to the retiring Democratic leader of the House Financial Services Committee, Rep. Barney Frank, the call for less regulation became "$2 billion harder to make" today. While this trading loss may indeed argue in favor of that "too big to fail" is still prevalent, investors may have an opportunity to gain from this incident.

Part of Business
It's unfortunate that JPM incurred a trading loss; no one ever wants to lose money on a trade. If I were a betting man, I would bet that there will be more trading losses in the future from the largest financial institutions. Obviously, the buck falls with the CEO who is ultimately the de-facto Chief Risk Officer. There are trading losses and then there are the kind of trading losses that hit Lehman Brothers, AIG and Bear Sterns in 2008. JPM has over $2 trillion in assets; a $2 billion loss is not going to remotely impair the bank. The threat of course is that this $2 billion is the beginning of something bigger. That's where management comes in, and I believe JPM has an excellent management team.

Shares in JPM now trade for about 77% of book value and yields 3%. Anyone with a multi-year holding period is picking up a nice dividend which will likely increase as the company plans to continue increasing its payout. The company earned nearly $20 billion in 2011 and those profits will climb higher over the years. The current market cap is roughly $143 billion. JPM has often being grouped with Wells Fargo (NYSE:WFC) as the two strongest, most ably run banks. While this trading loss stains that image, it's likely to be quickly forgotten, especially as the bank continues to churn out its earnings.

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The Bottom Line
JP Morgan's news may soon create other financial buying opportunities in shares of names like Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C), both of which declined over fears that they too may report "surprise" losses. It's evident from the financial statements that banks have boosted capital ratios and reduced riskier assets from the balance sheet. An opportunity to buy these banks when prices fall from current levels is likely to reward investors with a long-term holding period.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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