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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: Protect Yourself From Market Loss

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  6. Stock Analysis

    The Top 5 Financial Penny Stocks for 2016 (CPSS, ASRV)

    Learn about some of the most promising penny stocks in the financial services sector that investors can consider adding to their portfolio for 2016.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
Trading Center