The Truth About JPMorgan Chase's $2 Billion Loss: It's No Big Whoop

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JPMorgan ChaseHey, Wall Street? Chicken Little called. She says you need to stop overreacting to JPMorgan Chase's $2 billion trading loss. I mean, it's not as if the sky were falling...

For the past few days, investors have been mulling the implications of JPMorgan Chase's $2 billion derivatives trading loss, reported Friday. Ask some folks what it means, and they'll tell you it's proof positive we need to implement the Volcker rule. Others say that because JPMorgan (JPM) lost the money trying to "hedge" against market risk in Europe, the Volcker rule wouldn't have made a difference anyway.

Still others will tell you that whether JPMorgan Chase's actions were kosher or not, they're evidence of systematic risk in the banking industry, and maybe, just the tip of the iceberg.

The truth, though, is even more shocking than any of the above -- $2 billion in losses? It's hardly a disaster. It's more like a rounding error.

Too Big to Fail. Literally.

Let's put this in perspective, folks. Yes, JPMorgan Chase lost $2 billion in late April-early May trading. But last year, this bank earned $17.45 billion. While a "$2 billion loss" certainly sounds big, and grabs headlines, it's actually less than 11% of what this bank earns in a single year.

Analysts expect that even with the loss, the bank will earn more than $17 billion this year... then go on to earn nearly 18% more than that in 2013.

Simply put, JPMorgan is a fabulously profitable enterprise. It's so profitable that even a $2 billion loss can't trip it up.



What It Means for You

So far, Wall Street's Chicken Little-like prattling has cost Chase shareholders nearly $4 per share on Friday, followed by another buck and change lost in Monday trading, after which it held fairly steady and even gained a few cents here and there. But that's more than $19 billion in market capitalization vaporized, all over a couple of billion bucks' worth of lost profit.

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This is clearly an overreaction to the news, and entirely disproportionate to the magnitude of Chase's loss.

Warren Buffett famously said that the time for investors to "be greedy" is "when others are fearful." Right now, the fear surrounding JPMorgan Chase is practically palpable. Draw your own conclusions.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of JPMorgan Chase.

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