On Thursday, May 10, 2012, the Chairman and Chief Executive Officer, Jamie Dimon, of the JP Morgan Chase announced that the banking behemoth’s unit in London, U.K. lost $2 billion in a risky derivative investment deal over last several weeks. Later several published reports admitted that the actual paper loss may even be higher than previously announced. Later reports also indicated that several high ranking officers of the bank either offered to resign or left the company. The U.S. Securities and Exchange Commission (SEC) is also investigating the incident. The company stock continued to lose value since the incident disclosed.

Derivatives are a contract between two or more parties. The value is determined by the fluctuations of the underlying asset. Common underlying assets include stocks, bonds, currencies, commodities, interest rates and market indexes. Derivatives are complex agreements and highly leveraged. They are designed to control exposure to risk and therefore, adequate insurance should be available to cover any losses.

They are so complex that Warren Buffet once called them “weapons of mass financial destructions”. The irony for JP Morgan Chase is that they argued against Dodd-Frank financial control legislation which is intended, among other things, to limit or curb bank involvement in similar derivatives.