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JPMorgan Fallout 'Could Get a Lot Worse': Whitney

The JPMorgan Chase trading controversy comes at an inopportune time both for the bank and the industry as a whole, which needs to rethink the way it does business, analyst Meredith Whitney told CNBC.

Meredith Whitney
cnbc.com
Meredith Whitney

As the fallout continuesover the banking titan's $2 billion hedging loss, Whitney, head of Meredith Whitney Advisory Group, said the imbroglio fuels calls in Congress for more banking regulation and exposes the general weakness of large financial institutions.

"If it were anybody else this would be even uglier," Whitney said in a "Closing Bell" interview. "This could get a lot worse. The position is reported to be so large, it's very hard when you take that size of a position to get out of it easily."

JPMorgan revealed last week that it had lost at least $2 billion on a trading strategy actually meant to mitigate risk but ended up being a bad bet on corporate debt. Bank critics have used the controversy to recall how taxpayers got stuck bailing out banks that had made billions in bad bets on the subprime mortgage industry.

Regulators and Washington lawmakers are likely to conduct an inquiry into the trade's propriety, and Whitney predicted harsh scrutiny for the company and CEO Jamie Dimon.

"I don't think the company was even successful at explaining the trade to the analyst community," she said. "Try to explain to an average American represented by Congress and it's going to get hairy. It couldn't have come at a worse time because the Volcker rule is being decided at this time. This lowers the bar in terms of arguing for the Volcker rule."

The rule, named for former Federal Reserve Chairman Paul Volcker and part of an ongoing Washington effort aimed at banking reform, restricts banks from trading for their own benefit.

Whitney believes the end result should be that large banks like JPMorgan that maintain both commercial and investment operations should focus on one or the other.

"For the last 50 years, when American financial institutions were almost monolines — specialist institutions — they made a lot of money and we still led the world in terms of financial innovation and financial competitiveness, and I think we've got to go back to that," she said.

"This happens to a JPMorgan, such a revered institution, (and) it really throws the rest of the industry into question," Whitney added. "It's hard to point to even one bank that's had a successful supermarket business."

While some at the Fed, particularly Dallas Fed Chairman Richard Fisher, are strong proponents of breaking up big banks, the idea isn't universally shared.

Analyst Dick Boveat Rochdale Securities has repeatedly railed against the efforts, saying large institutions are necessary for American competitiveness and as buyers of the hundreds of billions in debt the government issues each year.

But Whitney said the group's best days are behind it, particularly this year, when she thinks they will not be able to repeat their first-quarter performance in which about 80 percent beat earnings expectations.

She has been an advocate of JPMorgan stock, calling it cheaply priced, but does not see any moves higher coming soon. Whitney advised investors to "stick with some boring names and you'll be fine."

"Things are not going to be easy for this company and more importantly things are not going to be easy for this industry," she said. "If you had a long-term horizon you could buy at these values and see upside. But you're going to have to be very patient."

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