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Smartest Man in the Room Looks Dumb

Written by: Doug Kass 05/11/12 - 8:30 AM EDT
Tickers in this article: JPM WFC AIG BRK.B BRK.A
NEW YORK (Real Money) --

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."

-- Warren Buffett

I took a small long position in JPMorgan Chase (JPM) at $38.20 after the close of trading yesterday and after JPMorgan made its surprising announcement.

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I weighed the impact of the hit to earnings and to perception and concluded that it is fairly unusual to be able to buy JPMorgan Chase's shares at only $4 over book value ($34 a share), especially in the face of an active $15 billion buyback.

I am not foolish enough to believe that I will be immediately rewarded in this trade, however, and I am putting the shares away as an investment.

Also, my position has been sized modestly for, as described below, the opportunities probably lie elsewhere in the financial sector. (And I did more aggressively buy Berkshire Hathaway (BRK.A) /(BRK.B) and American International Group (AIG) last night.)

While I have not yet read bank analysts' reactions to the news, here are my brief observations on JPMorgan Chase's blunder.

  • Jamie Dimon screwed up. His eye was clearly off the ball. JPMorgan Chase has been a champion against reform, seeing it as a detriment to banking profitability and credit availability. Dimon looks very stupid now. He is mortal, like us all.

  • I still don't have a clear vision of how the money was lost. I understand that selling credit default swaps on corporate debt was essentially going long debt. Was this a naked proprietary trade, or was there a short on the other side to be hedged (which doesn't make too much sense to me)? Or is JPMorgan Chase's management simply being deceptive or even lying? I don't know, and others might not (which speaks volumes!).

  • I view this as a one-off to JPMorgan Chase, so some opportunities might develop in peripheral financial stocks today (Berkshire AIG, Wells Fargo (WFC) , etc.).

  • The optics of JPMorgan Chase's hedging loss underscores that the forces of financial reform initiatives will be unrelenting (maybe even from both sides of the political pew).

  • Limited broad-market impact, perversely, could mark a bottom as money goes elsewhere and away from banks.