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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!