Why JPMorgan Chase and Bank of America Are Plunging

Even though the Dow Jones Industrial Average (INDEX: ^DJI  ) soared 1.1% today, its two big banks continued their freefall, with JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) slipping another 2.9% and 2.7%, respectively.

In just the past seven trading days since JPMorgan announced a multibillion-dollar loss on a proprietary derivatives trading bet gone bad, each of the two behemoths has fallen 20% and 12%.

Today, JPMorgan announced that it's suspending its share-buyback program only two months after it passed the Federal Reserve's stress tests allowing it to begin the program. Two analysts downgraded the stock today. Although the company will probably shed significantly more in market cap that it stands to lose from the trade when all's said and done, it's unclear how much money it will ultimately lose. Hedge funds have been attacking for weeks, and with the spotlight firmly on JPMorgan's blunder, you can expect they'll continue to hack away, driving the bank's losses ever higher.

JPMorgan had been, rather optimistically, viewed as the role model in risk management by an industry desperate for role models in the wake of the 2008-2009 financial crisis. With the grudging acknowledgment that even JPMorgan is still human and the trading positions at large banks inhumanly complex, investors rightfully worry that maybe JPMorgan as well as Wall Street's runts -- Bank of America and Citigroup (NYSE: C  ) -- have a less-than-perfect handle on their risk.

In other disappointments today, shares of Facebook (Nasdaq: FB  ) fell 11% in their second day of trading. Some hedge funds have been pointing fingers at lead underwriter Morgan Stanley, but let's be honest: They were just planning on dumping shares onto individual investors anyway. Long-term investors who liked the stock at $38 should like it even more at $34. I'm not convinced yet in the company, or that its forward earnings multiple of 56 times is such a great deal.

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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter, where he goes by @TMFDada. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (5) | Recommend This Article (17)

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  • Report this Comment On May 21, 2012, at 9:32 PM, WileyCyote wrote:

    The Facebook thing has been in the making for months. Like a soap opera that drags on and on it had to land someplace. The hedge funds and other institutions (which are not noted for honesty) probably had planned well in advance to "make a quick buck" Sort of it didn't work. We rarely heard about the DOWN side of Facebook, such as possible employers looking at their Facebook entries and saying "NO THANKS,YOU AIN'T GONNA WOIK HERE". Then there is the case of someone in the school system who sent comments to what she THOUGHT were "friends only" Guess what!! The comments went out to the entire planet earth (Facebook had chenged the rules) and she had to resign. Why??? Because some of the parents didn't like it when she said that a lot of their kids (as well as parents) were rather useless. So much for comments that only go to your 100 closest friends!!

  • Report this Comment On May 21, 2012, at 9:51 PM, robertsgt40 wrote:

    Simple. They're plunging because their insolvency is around the corner and everyone has figured out

  • Report this Comment On May 21, 2012, at 10:14 PM, br549now wrote:

    So, I'm new to this game. My mortgage is held by Bank of America. Should I pay off my mortgage? Any advice appreciated!

  • Report this Comment On May 21, 2012, at 10:35 PM, OBXRon wrote:

    "JPMorgan is still human"........Really!

    Obviously a proponent of "Corporations" are people thinking. I have never seen any of the corporations in jail........so are they REALLY human or is this faulty thinking?

  • Report this Comment On May 21, 2012, at 11:06 PM, maninatl wrote:

    These hedge funds can be compared to hyenas that are aggressively biting and hacking away at the old lions, that are the banks. It is just a matter of time the hyenas will bleed the old lions to death.

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