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JPMorgan, Dimon’s blunder invites bank breakup

NEW YORK NY - MAY 07:  Chairman CEO JPMorgan Chase   Co James 'Jamie' Dimspeaks during An Evening

NEW YORK, NY - MAY 07: Chairman and CEO, JPMorgan Chase & Co, James "Jamie" Dimon speaks during An Evening With the Fortune 500 at the New York Stock Exchange on May 7, 2012 in New York City. (Photo by Jemal Countess/Getty Images for Time)

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roeder report

David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday

Updated: May 13, 2012 11:08AM

A month ago, when JPMorgan Chase (JPM) Chairman Jamie Dimon was asked about problems in his company’s London trading office, he called it a “complete tempest in a teapot.”

Big tempest, big teapot, as it turned out.

JPMorgan’s disclosure that an off-the-rails trading strategy in London cost it $2 billion, and could incur a liability of another $1 billion, reopened market wounds now nearly four years old. It revived the question of whether big boys can run the big banks, and delicious irony abounds.

It starts with Dimon, formerly a model citizen of Wall Street and a leading voice against new regulation. He is against the Volcker Rule, something mandated by Congress but now stymied in the regulatory stage, that would separate banks from riskier businesses in proprietary trading. Dimon said the London losses came not from “prop trading,” but from mistakes in the bank’s own hedging. It’s a meaningless distinction. If JPM can’t handle complex hedges, how it can handle complex risk?

The power of Wall Street is one issue energizing the Occupy protesters expected in Chicago for the NATO summit. Last week, I attended an event about security procedures for NATO that was held in the auditorium of the old First National Bank Building, now part of the JPMorgan Chase empire. Who could have imagined that the building landlord would hand a new issue to the protesters?

But JPMorgan Chase and the other banks in its league have worse to contend with than more people waving signs. Dimon’s company was regarded as the best of the breed. Its bombshell reminds investors that when they buy any megabank, they are buying a black box of risk. How can an investor understand what’s in there, when the CEO and CIO don’t?

The pressure to break up the banks will move from Washington to the boardrooms. The relevant stocks, including Citigroup (C) and Bank of America (BAC), will feel the pressure for a long time. Sheraz Mian, analyst at Zacks Investment Research, said, “If Jamie Dimon, who came out of the banking crisis with his and his firm’s stature enhanced, could not prevent such derivatives linked loss, then these banks are not only too-big-too-fail, but also likely too-big-too-manage.”

Local trader John Fitzgerald emailed me another perspective. “JPM loses $2 billion but will not let me refinance because MY debt to income ratio is not acceptable,” he said. “The system has to go.”

Dimon’s debacle has given the investor class something in common with others who hate the big banks. That’s a large crowd. Look out, Wall Street.

FACEBOOK MOTEL: Here’s the title of an authoritative outlook on the Facebook IPO as issued by Morningstar: “The Facebook Motel: Where the Data Checks In, But Can It Check Out?” It sums up Morningstar’s view that Facebook still has to prove how to extract returns from its massive and growing database of online behavior.

Morningstar analysts led by Rick Summer have estimated Facebook’s fair value at $32 a share. The IPO due this week has a proposed offer range of $28 to $35 per share. Morningstar said that leaves limited upside potential. “The enthusiasm for Facebook is not misplaced, but the market may be underestimating several near-term challenges for the company,” the report said.

CME BLOTTER: In a disciplinary posting last week, Chicago exchange owner CME Group (CME) slammed the hammer down on Nicole Graziano, who records show is a former trader.

A CME disciplinary committee fined Graziano $250,000, ordered restitution of almost the same amount and barred her from ever working in the futures business again. Her offense, the panel said, was to wrongly record orders so as to “allocate favorable prices to her personal account on one or more occasions” in 2009 and 2010. CME spokesman Michael Shore said the trading was in lean hog futures.

Graziano never answered the charges against her, the committee reported. She could not be reached for comment. Records show her registration as a floor trader was withdrawn in January 2011.

In some disciplinary cases, CME can collect fines from those who don’t pay by putting a lien on memberships, but the company doesn’t have that recourse for a former member. Shore said CME has a rule providing that restitution must be paid by the clearing member firm that handled Graziano’s account. That firm was not identified.

OOPS! In the print version of last week’s column, I overstated J.B. Pritzker’s investment in Facebook. He was part of a group that invested $100 million in Facebook in 2010.

CLOSING QUOTE: “The question isn’t why oil is falling. The question should be why has it held up so good so long?” — Phil Flynn, senior energy analyst, PFGBest

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