JP Morgan’s sudden confession of a $2 billion loss on a “synthetic credit portfolio” last night was the talk of the morning for many reasons, not the least of which was the ammunition such a mistake gives the regulatory push in Congress. We are not a big holder of the stocks of international money-center banks for precisely this type of risk: if the CEO has no idea about his/her company, how can we?
However, we are often perfectly happy to own the bonds issued by these same banks. Why? Perhaps the chart below can show this better than we can describe things in writing. The graph shows a bond we own for many of our clients (JPM 5.125% 9/15/14, in white) and JPM common stock (orange line). At the end of the day, as galling as JP Morgan’s confession was, it was the stock that took it on the chin, while the ability of JPMorgan to pay its debts as they come due was deemed unaffected by the markets.
Remember, bad news for a stock may not be bad news for the bonds – and that’s why bonds probably have a place in your portfolio.