Hedging for profit

It is hardly surprising that the news out of JP Morgan seems to have changed a bit every day, but the flip from the language of risk reduction (e.g., the losing position was a hedge put on by Morgan’s London-based risk management team) to the language of speculation has been quite stark. From this morning’s Bloomberg:

David Olson, a former head of credit trading in JPMorgan Chase & Co. (JPM)’s chief investment office, learned about risk as a U.S. Navy nuclear submarine pilot.

When he joined the bank in 2006, his new commander, Chief Executive Officer Jamie Dimon, was transforming the once- conservative unit from a risk manager to a profit center.

We want to ramp up the ability to generate profit for the firm,” Olson, 43, recalled being told by two executives. “This is Jamie’s new vision for the company.”

That drive has now shattered JPMorgan’s cultivated reputation for policing risk and undermined Dimon’s authority as a critic of regulatory efforts to curb speculation by too-big- to-fail banks. It also cost Chief Investment Officer Ina R. Drew, one of the most powerful women on Wall Street, her job. As U.S. and U.K. investigators descend on the firm following Dimon’s announcement last week of a $2 billion trading loss, lawmakers are pointing to the breakdown at the largest U.S. bank as evidence that tougher rules are needed.

Dimon pushed Drew’s unit, which invests deposits the bank hasn’t loaned, to seek profit by speculating on higher-yielding assets such as credit derivatives, according to five former executives. The CEO suggested positions, a current executive said. Profits surged over the next five years as assets quadrupled to $356 billion and employees were given proprietary- trading accounts, current and former executives said.

Speculative hedging – what could be more rational?

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