Tavakoli: JPMorgan May Be a Trading Accident Waiting To Happen

In an August 2010 commentary about JPMorgan's losses in coal trades I wrote: "The
commodities division isn't the only area in which JPMorgan is
vulnerable. Credit derivatives, interest rate derivatives, and currency
trading are vulnerable to leveraged hidden bets. Ambitious managers
strive to pump speculative earnings from zero to hero."

At issue is corporate governance at JPMorgan and the ability of its CEO,
Jamie Dimon, to manage its risk. It's reasonable to ask whether any CEO
can manage the risks of a bank this size, but the questions surrounding
Jamie Dimon's management are more targeted than that. The problem
Jamie Dimon has is that JPMorgan lost control in multiple areas. Each
time a new problem becomes public, it is revealed that management
controls weren't adequate in the first place.

JPMorgan's Derivatives Blow Up Again

Jamie Dimon's problem as Chairman and CEO--his dual role raises further
questions about JPMorgan's corporate governance---is that just two
years ago derivatives trades were out of control in his commodities
division. JPMorgan's short coal position was over sized relative to the
global coal market. JPMorgan put this position on while the U.S. is at
war. It was not a customer trade; the purpose was to make money for
JPMorgan. Although coal isn't a strategic commodity, one should question
why the bank was so reckless.

After trading hours on Thursday of this week, Jamie Dimon held a
conference call about $2 billion in mark-to-market losses in credit
derivatives (so far) generated by the Chief Investment Office, the
bank's "investment" book. He admitted:

"In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored."

But lets get back to commodities. For several years, legendary investor Jim
Rogers has expressed his concern to me about JPMorgan's balance sheet,
credit card division, and his belief that Blythe Masters, the head of
JPMorgan's commodities area, knows so little about commodities. Jim
Rogers is an expert in commodities and is the creator or the Rogers
International Commodities Index. He also sells out-of-the-money calls on
JPMorgan stock. So far, that strategy has worked out well for him.
(Rogers gave me permission to publicly reflect his views and his
trades.) Moreover, JPMorgan is still grappling with potential legal
liabilities related to the mortgage crisis.

Is Jim Rogers justified in his harsh view of JPMorgan's commodities
division? After he expressed his concerns, JPMorgan's coal trade made
the news, and it appeared to me that Jim Rogers is on to something. For
those of you who missed it the first time, my August 9, 2010 commentary
is reproduced below in its entirety. Dawn Kopecki at
Bloomberg/BusinessWeek broke the story wherein Blythe Masters' quotes
first appeared...