JPMorgan's surprising $US2 billion trading loss begs a post-financial-crisis question: Are America's biggest banks simply too big to manage?
Washington policymakers have largely focused on whether banks are "too big to fail" or whether they are so huge and interconnected that their failure would threaten the greater financial system as when Lehman Brothers collapsed in 2008.
But JPMorgan Chief Executive Jamie Dimon's seeming failure to gauge the riskiness of the trades at the heart of the loss is shifting the debate to "too big to manage".
"In hindsight the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored," Dimon said during a conference call late on Thursday about the trades designed to hedge the company's overall credit exposure.
The loss, which Dimon said could grow by another $US1 billion, does not appear to pose a threat to JPMorgan's overall financial stability.
It is, however, fueling a debate about whether regulators or executives can really get a handle on the biggest financial companies when a complex trading strategy can lead to a multi-billion-dollar loss.
JPMorgan is the nation's largest bank with roughly $US2.3 trillion in assets.
Marty Mosby, a Guggenheim Securities analyst, said the failed hedge exposes flaws in JPMorgan's corporate controls because it came from the office responsible for managing JPMorgan's overall risk.
"It would be easier for (Jamie Dimon) if this was a rogue trader out in some faraway country" because of the managerial questions at play, he said.
Sheila Bair, former chairman of the Federal Deposit Insurance Corp, said on CNBC on Friday that JPMorgan's loss shows how difficult it is to manage big banks from the top.
"Trying to manage a $US2 trillion institution from the top of the house is a challenge for anyone," Bair said. "This is the kind of thing that even (at) the best-managed banks things fall through the cracks, and this is a pretty big crack."
The American Federation of State, County & Municipal Employees, a national union, on Friday urged shareholders to approve a stockholder resolution calling for an independent board chairman at JPMorgan. Dimon currently holds the chairman and CEO titles.
Some US lawmakers attempted to forcibly shrink the big banks when Congress was debating legislation in response to the 2007-2009 financial crisis.
The measure did not make it into the 2010 Dodd-Frank financial reform law, but some congressional Democrats have pursued such legislation and are pointing to JPMorgan's loss as a reason to renew calls for vigilance of big bank management.
"The combination of large, complex activities with large, complex institutions is fraught with risk, even at the best managed firms," Democratic Senator Sherrod Brown said in a statement on Friday. "We must make sure that they are not too big to manage or too big to fail."
In May , Brown introduced a bill that would impose a strict 10 percent cap on any bank's share of the total amount of all insured deposits in the United States.
Democratic Representative Brad Miller has sponsored a version of the bill in the House.
It is unlikely to get the votes needed to pass that Republican-controlled chamber, but Miller said in an interview that JPMorgan's trading loss underscores the need for the reform.
"When you have hundreds of subsidiaries doing all manner of business, there are no human beings that can manage a bank that size," Miller said.
Some funds skeptical about the ability to effectively manage big banks are pulling back from those investments.
Adam Strauss, a portfolio manager at the Appleseed Fund, a mutual fund with $US230 million under management, said the firm decided in 2010 not to invest in any companies with over $US10 trillion in derivatives exposure.
He said JPMorgan's losses show the need to break up large banks, which have increased in size since the financial crisis.
"If they were too big to manage in 2007, why would you think they would be manageable now?"