[ by Howard Haykin] While regulators pour over JPMorgan's trade blotters - by now, at least 5 or 6 separate investigations - some analysts and journalists are filling the air time by devising their own theories behind the oversized trading losses.  The Federal Reserve Bank is presented in this scenario as the "hidden culprit" by The Motley Fool's Alex Dumortier, who's a CFA.  Let's follow Mr. Dumortier's logic. In the 2 weeks since JPMorgan Chase CEO Jamie Dimon let the world know that his bank had incurred a multi-billion trading loss on derivatives, one question has repeatedly been asked: How could this happen, less than 5 years after the worst banking crisis since the Great Depression? However, a better, more appropriate question to ask is this: In the current environment, how didn't it happen sooner? And, it all comes down to 'over-reaching for yield'. Ben Bernanke has been quite explicit that one of the goals of the Fed's extraordinarily accomodative monetary policy is to entice investors to take more risk.  Mr. Bernanke has succeeded - 'mission accomplished'.  The stock markets have rallied after each successive round of quantitative easing by the Fed over the past couple of years.  The trouble is that reaching for yield - i.e., seeking out and investing in higher-yielding assets - can quickly turn into over-reaching.  In fact, I'd argue that this is almost certain to happen in an environment of negative real interest rates. "Negative" doesn't suit me. That's right; investors who own U.S. Treasuries will lose money on an inflation-adjusted basis. For evidence of this, just have a look at what has happened to the real yield on TIPS (Treasury Inflation-Protected Securities), which now sits at nearly negative half a percentage point: In that context, investors may be heavily tempted to do stupid things to reach for yield, whether they are individual investors or traders tasked with managing a bank's excess deposits. Perhaps I misunderstand the potential consequences of higher short-term rates; however, since it is a lack of demand for, rather than supply of credit that is constraining growth, it's difficult for me to imagine that a Fed policy rate at 2% instead of 0%-0.25% would be all that harmful to the economy.  (If you have a differing, considered opinion on this, please let me know in the comments section below.) It's not all on Ben. Perhaps you think I'm being too kind to the bankers at JPMorgan, absolving them of all responsibility in this fiasco.  Not so. First, let me be clear: I'm not putting this entirely at the Fed's doorstep, but I certainly do think a zero-interest-rate policy raises the risk of this type of incident. Furthermore, whether or not this was a hedge (which seems to me unlikely), JPMorgan's CIO made a grievous error in misjudging the risks associated with a position of the magnitude that it had built up.  When your position is so big that you are the market, liquidity risk trumps all others -- that's risk management 101. I've also been critical in the past of JPMorgan, specifically.  Last June, for instance, I asked if the bank wanted another financial crisis, arguing that it was acting irresponsibly by lobbying against capital surcharges for systemically important (i.e., "too-big-to-fail") institutions. Never mind too-big-to-fail, these banks are plainly too-big-to-manage.  Mr. Dimon, whom I still regard as the best global bank CEO, has just provided us with the strongest possible evidence of that fact.  My preferred solution would be to break these organizations up, but I have long since given up hope that regulators will ever impose that.  Barring that, we must make these banks robust to losses or a deteriorating operating environment.  In that regard, lower leverage is capital, so to speak.  Banks that receive an implicit subsidy from taxpayers should be penalized through higher capital requirements. Jamie comes around... under duress. Last August, in a blog post on The Economist's website, I wrote that "the Fed was right to suspend normal dividend payouts by top banks in the aftermath of the crisis, and it was wrong to allow JPMorgan Chase to raise its dividend in the first quarter of this year.  The Fed should consider a quiet halt to share repurchases at all of the large banks." On Monday, Mr. Dimon told investors at a Deutsche Bank conference that the bank is suspending the $15 billion share repurchase program that the Fed just approved in March. In justifying the decision, Mr. Dimon said: "We made a commitment to our regulators and ourselves:  We are supposed to be on a glidepath to Basel III [capital requirements]; we want to be on that glidepath." Not all financial institutions are created equal -- find out which stocks only the smartest investors are buying. 'Obviously, We're Not Going to Make as Much Money'. Per Mr. Dimon himself, the trading losses are the reason why JPMorgan is halting the share buyback program. "Obviously, we're not going to make as much money," he said in a statement.  After the bank passed its most recent "stress test" (a test of a bank's balance sheet in a simulated economic nightmare scenario administered by the Federal Reserve), it was one of 15 banks allowed to increase its dividend and buy back shares.  Buying back shares is very popular among shareholders.  Like any other commodity, the fewer shares that are out there the more each individual share is worth.  But while buybacks are nice, their suspension will have no immediate effect on shareholders. More importantly in all this are these two points:

• JPMorgan's shareholder dividend is safe; Dimon said so himself as part of the share-buyback announcement.
• JPMorgan Chase itself is in no imminent danger of collapse.

With total assets of $3.4 trillion, JPMorgan Chase is currently the biggest bank in the U.S.  Over the past 12 months alone, it's made $90 billion in revenue and over $17 billion in profit.  So even a $5 billion write-off would not affect the bank's overall solvency;  the losses on this trade would have to multiply dramatically for that to be the case. This too shall pass. By halting the share buyback program, Mr. Dimon is being prudent and tactful.  Even with JPMorgan Chase's seemingly limitless assets, it's wise to preserve capital until all the trades are unwound and there's a full accounting of the damage done. [Motley Fool, via Daily Finance, 5/23/12]