Friday, May 11, 2012

Morning Brief: JPMorgan trading losses drive bank stocks down; Greece's day of decision as political parties haggle; Rebekah Brooks in the dock at Leveson inquiry

Another bank trading debacle has the markets on edge and many calling once again for greater regulation on the banking community – though no one seriously thinks either party will act.

JP Morgan Chase & Co's CEO Jamie Dimon yesterday admitted that the bank lost $2 billion in trading losses due to a "a hedging strategy that backfired," as the NYT's DealBook put it last night.

The $2 billion loss came from a complicated trading strategy that involved derivatives, financial instruments that derive their value from the prices of securities and other assets. JPMorgan said the derivatives trades were part of a hedge, meaning they were set up to offset potential losses on the bank’s large holdings of bonds and loans. But, in the sort of nightmare situation that bankers dread, the ostensible hedge backfired, producing losses of its own.
European markets are down today, though blaming this on the JPMorgan misstep would be go a bit too far as there is plenty of other news today that could accomplish the same thing. For instance, the Spanish government, led by Prime Minister Mariano Rajoy, has bailout the country's fourth-largest bank, Bankia. That bank is the largest holder of Spanish real estate paper, and was put at risk when the real estate bubble burst.

Update: The Athens Stock Exchange General Index is down hard today - 3.92 percent. It is now down 54 percent in one year.

Leaders of New Democracy and Pasok,
Greece's two major parties that have seen
their support crumble. Photo: Athens News

Today is probably the day we'll learn whether Greece will have a new coalition government, or whether the country will be heading back to the polls. Yesterday it appeared as if there were moves to form a government that would include New Democracy, Pasok and the Democratic Left. This coalition would, in theory, be pro-Euro, but would want to renegotiate the "memorandum," the bailout package.

But the Democratic Left wants Syriza to be part of the deal. The reason for this may simply be politics: any coalition government would allow those outside of it to claim protection from any bad developments upcoming. Syriza has most likely seen the latest polls that show that in any second election it could come out on top. The Democratic Left, for its part, would probably not like to be seen as tied to New Democracy and Pasok, which saw its support crumble in the last election.

Rebekah Brooks, former News International chief executive, is testifying before the Leveson inquiry today. Brooks is at the center of the phone hacking scandal that centers on the actions of a private investigator, Glenn Mulcaire, who hacked the voicemail of Milly Dowler. The 13-year old girl who was later found out to be murdered, had her voicemail accessed, and messages deleted, giving her family the false hope that she might still be alive.

The Guardian is running a live blog of the proceedings, which are in recess as I write this, but will resume at 2 pm GMT (9 am EDT).