Six Black Swan Events JPMorgan Says They Worry About. $JPM

JPMorgan (NYSE:JPM) is subject to multiple risks which at times may be beyond the ability of management or the board to comprehend or even for see. Here are some of the Black Swan events that they publicly declare in regulatory documents that they consider risks. Having included the risks in the boilerplate somewhere they go on with corporate communications which blithely ignores the issues. Sober long-term investors need to review these risks and come to their own determination where they stand.

  1. Credit Risk –

Credit risk is the risk of loss from obligor or counterparty default. The Company is

engaged in various lending and principal transactions with counterparties that include corporations,

financial institutions, governments and their agencies, pension funds, mutual funds, and hedge

funds. In addition, obligations arise from participation in payment and securities settlement

transactions on the Company’s behalf. For further discussion on credit risk related to customer

activities, please refer to Note 13 in these Notes to Consolidated Statement of Financial Condition.

2. Liquidity Risk –

Liquidity risk arises from the general funding needs of the Company’s activities and

in the management of its assets and liabilities. The ability to maintain a sufficient level of liquidity is

crucial to financial services companies, particularly their ability to maintain appropriate levels of

liquidity during periods of adverse conditions. The Company’s funding strategy is to ensure liquidity

and diversity of funding sources to meet actual and contingent liabilities through both normal and

stress periods. Through JPMorgan Chase and outside relationships, the Company seeks to

preserve stable, reliable and cost-effective sources of funding. Procedures are in place to identify,

measure, and monitor the Company’s liquidity sources and uses, which enable the Company to

manage these risks.

3. Market Risk –

Market risk is the exposure to an adverse change in the market value of portfolios

and financial instruments caused by a change in market prices or rates. Market risk is identified,

measured, monitored, and controlled by JPMorgan Chase’s Market Risk function, a corporate risk

governance function independent of the lines of business. Market risk is overseen by JPMorgan

Chase’s Chief Risk Officer. Market risk is controlled primarily through a series of limits set in the

context of the market environment and business strategy.


4. Operational Risk –

Operational risk is the risk of loss resulting from inadequate or failed processes

or systems, human factors, or external events. Operational risk is inherent in the Company’s

business activities and can manifest itself in various ways, including errors, fraudulent acts,

business interruptions, inappropriate behavior of employees, or vendors that do not perform in

accordance with their arrangements. These events could result in financial losses and other

damage to the Company, including reputational harm. To monitor and control operational risk, the

Company (through JPMorgan Chase) maintains a system of comprehensive policies and a control

framework designed to provide a sound and well-controlled operational environment. The goal is to

keep operational risk at appropriate levels, in light of the Company’s financial strength, the

characteristics of its businesses, the markets in which it operates, and the competitive and

regulatory environment to which it is subject.

5. Legal Risk –

Legal risk is the risk of loss arising from the uncertainty of the enforceability, through

legal and judicial processes, of the obligations of the Company’s clients and counterparties,

including contractual provisions intended to reduce credit exposure by providing for the offsetting

and netting of mutual obligations. Legal risk also encompasses the risk of loss attributable to

deficiencies in the documentation of transactions (e.g., trade confirmations) and of regulatory

compliance risk, which is the risk of loss due to the Company’s violations of, or non-conformance

with, laws, rules, regulations and prescribed practices in the normal course of conducting its

business and activities. Finally, legal risk encompasses litigation risk, which is the risk of loss

resulting from being sued, including legal costs, settlement expenses, adverse judgments and


6. Reputation Risk –

Attention to reputation is a key aspect of the Company’s practices. The

Company’s ability to attract and retain customers and transact with its counterparties could be

adversely affected to the extent its reputation is damaged. The failure of the Company to deal, or to

appear to fail to deal, with various issues that could give rise to reputation risk could cause harm to

the Company and its business prospects. These issues include, but are not limited to, appropriately

dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering,

privacy, record-keeping, sales and trading practices, and the proper identification of

legal, reputation, operational, credit, liquidity and market risks inherent in its products. The failure to

address appropriately these issues could make the Company’s clients unwilling to do business with

the Company, which could adversely affect the Company’s results.

George Gutowski writes from a caveat emptor perspective. Follow him on twitter @financialskepti and follow his evil twin brother who pens Wall Street Murder Thrillers @georgegutowski