Tags: Meredith | Whitney | JPMorgan | Fallout

Meredith Whitney: JPMorgan Fallout Could Get Worse

Wednesday, 16 May 2012 05:25 PM

JPMorgan's $2 billion trading loss couldn't have come at a worse time, as it will give regulation champions fodder to hogtie the banking sector and possibly speed up the implementation of the Volcker Rule, which would ban banks from trading with their own money for their own benefit, says star Wall Street analyst Meredith Whitney.

The Volcker Rule, part of the recently approved Dodd-Frank financial reform law, has drawn criticism from the banking community but has yet to be implemented.

Furthermore, JPMorgan enjoyed a reputation for running one of the tightest ships on Wall Street, and it will take a while to unwind the botched hedging strategy.

"If it were anybody else this would be even uglier," Whitney tells CNBC's "Closing Bell."

"This could get a lot worse. The position is reported to be so large; it's very hard when you take that size of a position to get out of it easily."

Calls for inquiries are likely to come from Congress, which will only confuse the country more.

"I don't think the company was even successful at explaining the trade to the analyst community," Whitney says.

"Try to explain to an average American represented by Congress and it's going to get hairy. It couldn't have come at a worse time because the Volcker rule is being decided at this time. This lowers the bar in terms of arguing for the Volcker rule."

Big banks like JPMorgan run both investment and commercial banking units, the product of the repeal of the Glass-Steagall Act under the Clinton administration.

Whether both types of financial services will continue to be allowed to operate under one roof remains to be seen, but banks today should focus on doing well with one or the other.

"For the last 50 years, when American financial institutions were almost monolines — specialist institutions — they made a lot of money and we still led the world in terms of financial innovation and financial competitiveness, and I think we've got to go back to that," Whitney says.

"This happens to a JPMorgan, such a revered institution, (and) it really throws the rest of the industry into question," Whitney says.

"It's hard to point to even one bank that's had a successful supermarket business."

Since the incident earlier this month, financial advisers across the country have been bombarded by calls from anxious clients who want to know if the fallout will affect their investments.

"(Clients) are asking about systemic-risk issues. They want to know if this means that there is more to come," says financial adviser Nicholas Olesen, whose King of Prussia, Pennsylvania-based firm has $82 million in assets under management, according to Reuters. "Many are asking if this is 2008 all over again."

Financial advisers spent the last few years coaxing investors back into the market, many still burned from the collapse of Lehman Brothers in late 2008.

"Average investors already feel that the game is rigged against them, and this seems to reinforce that," says Nancy Caton, a Larkspur, California-based independent adviser, Reuters adds.

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2012-25-16
Wednesday, 16 May 2012 05:25 PM
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