JP Morgan's declared loss of at least $2 bn has sent ripples across the globe for financial stocks. JP Morgan's own shares were down 9 percent on Friday which dented the image of the bank along with its Chief Jamie Dimon.
Even Fitch ratings cut the bank's credit rating by a notch as it said though the losses were manageable, it "raises questions regarding JPM's risk appetite, risk management framework, practices and oversight; all key credit factors."
Dimon agreed that this loss was especially embarrassing in light of his public criticism of the so-called Volcker rule to ban proprietary trading by big banks. On the World Economic Forum panel this year in January, Dimon said, "If you asked me to increase profit by 50 percent next year, I could do it. Take a little more risk. But that wouldn't be in the longer term interest of customers, employees and communities as well as shareholders."
For a bank lauded for navigating the fallout from the 2008 financial crisis without reporting a loss, the errors are embarrassing, especially given Dimon's criticism of the so-called Volcker rule to ban proprietary trading by big banks.
Dimon will undoubtedly be pressed by investors for more details about what exactly went wrong when he hosts the bank's annual shareholder meeting on Tuesday in Tampa, Florida.
A national union on Friday urged shareholders to approve a stockholder resolution calling for an independent board chairman at JPMorgan. Dimon currently holds the chairman and CEO titles.
"The stakes are too high to leave Jamie Dimon unsupervised," said Gerald McEntee, president of the American Federation of State, County & Municipal Employees, which sponsored the proposal. "Dimon denied that the 'London Whale' was making risky bets, and now that this has turned out to be a fish story, shareholders need to step in." Wall Street may have lost its most potent spokesman against Washington reforms.
The fallout extended across much of the banking sector, with shares of some of Wall Street's top names declining on Friday. Among others, Citigroup dropped 4.2 percent, Goldman Sachs fell 3.9 percent and Bank of America slipped 1.9 percent.
The debacle prompted Dallas Federal Reserve Bank President Richard Fisher, who has called for the breakup of the top five U.S. banks, to say he is worried the biggest banks do not have adequate risk management.
"What concerns me is risk management, size, scope," he said in answer to a question about JPMorgan's trading loss. "At what point do you get to the point that you don't know what's going on underneath you? That's the point where you've got too big."
The situation has shifted the focus of the question from whether American banks are too big to fail to whether they are too big to manage.
"In hindsight the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored," Dimon said during a conference call late on Thursday about the trades designed to hedge the company's overall credit exposure.
The loss, which Dimon said could grow by another $1 billion, does not appear to pose a threat to JPMorgan's overall financial stability.
It is, however, fueling a debate about whether regulators or executives can really get a handle on the biggest financial companies when a complex trading strategy can lead to a multi-billion-dollar loss.
Sheila Bair, former chairman of the Federal Deposit Insurance Corp, said on CNBC on Friday that JPMorgan's loss shows how difficult it is to manage big banks from the top.
"Trying to manage a $2 trillion institution from the top of the house is a challenge for anyone," Bair said. "This is the kind of thing that even (at) the best-managed banks things fall through the cracks, and this is a pretty big crack."
Some U.S. lawmakers attempted to forcibly shrink the big banks when Congress was debating legislation in response to the 2007-2009 financial crisis.
The measure did not make it into the 2010 Dodd-Frank financial reform law, but some congressional Democrats have pursued such legislation and are pointing to JPMorgan's loss as a reason to renew calls for vigilance of big bank management.
"The combination of large, complex activities with large, complex institutions is fraught with risk, even at the best managed firms," Democratic Senator Sherrod Brown said in a statement on Friday. "We must make sure that they are not too big to manage or too big to fail."
In May , Brown introduced a bill that would impose a strict 10 percent cap on any bank's share of the total amount of all insured deposits in the United States.
Democratic Representative Brad Miller has sponsored a version of the bill in the House.
It is unlikely to get the votes needed to pass that Republican-controlled chamber, but Miller said in an interview that JPMorgan's trading loss underscores the need for the reform.
"When you have hundreds of subsidiaries doing all manner of business, there are no human beings that can manage a bank that size," Miller said.
Some funds skeptical about the ability to effectively manage big banks are pulling back from those investments.
Adam Strauss, a portfolio manager at the Appleseed Fund, a mutual fund with $230 million under management, said the firm decided in 2010 not to invest in any companies with over $10 trillion in derivatives exposure.
He said JPMorgan's losses show the need to break up large banks, which have increased in size since the financial crisis.
"If they were too big to manage in 2007, why would you think they would be manageable now?"
Inputs from Reuters