JPMorgan’s coal lump wobbles trading gravy train

June 8, 2010

Wall Street trading may be returning to reality. JPMorgan’s risk-takers have lost $250 million betting on the coal markets, according to the New York Post. JPMorgan calls the article “incorrect.” Whatever the size of the hit, it looks like a cautionary sign, or at least a timely reminder.

Bumper profit across the industry started to leave the impression that masters of the universe had found a magical way around risk. They have been raking in cash on the back of government intervention that helped kick-start capital markets last year. The winning streak continued into 2010. Banks have been avoiding losses as business dropped back in the run-up to Christmas and sovereign debt fears spiked volatility afterward.

Traders at four banks, including JPMorgan, even managed the rare feat of a perfect first quarter, making money every single day of the first three months of the year.

But such blissful thinking is, of course, misplaced. History is littered with examples of trading troubles — Goldman Sachs’ near-death losses in 1994; JPMorgan’s almost across-the-board hits in summer 2002 despite all trading desks being within risk limits; and Morgan Stanley’s <MS.N> $10 billion hit betting on subprime securities in 2007. Each disappointment comes with a requisite pledge to have learned from the mistakes.

The magnitude of the calamities from this latest crisis will have made banks more mindful of the risks they take. But the crunch also revealed markets to be too capricious and full of surprises that cannot be fully captured in risk management models. And there’s always plenty of room for human error.

Such losses don’t always stem from banks trading with their own money. Supporting clients can cost dearly too, and not just on the trading desks — witness the millions Goldman and Deutsche Bank  lost selling a large block of Vivendi Universal stock in 2002. Wall Street’s traders may have had a fun ride of late, but JPMorgan’s coal lump may be the first sign that this gravy train is starting to run out of steam.

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