JPMorgan Reveals $2 Billion Trading Loss
Published: May 11, 2012
JPMorgan Reveals $2 Billion Trading Loss, JPMorgan Chase & Co, the biggest U.S. bank by assets, said it suffered a trading loss of at least $2 billion from a failed hedging strategy, a shock disclosure that hit financial stocks and the reputation of the bank and its CEO, Jamie Dimon.
For a bank viewed as a strong risk manager that went through the financial crisis without reporting a loss, the errors are embarrassing, especially given Dimon’s public criticism of the so-called Volcker rule to ban proprietary trading by big banks.
“This puts egg on our face,” Dimon said, apologizing on a hastily called conference call with stock*n*lysts. He conceded the losses were linked to a Wall Street Journal report last month about a trader, nicknamed the ‘London Whale’, who, the report said, amassed an outsized position which hedge funds bet against.
JPMorgan said in a filing with the Securities and Exchange Commission that since end-March, its Chief Investment Office has had significant mark-to-market losses in its synthetic credit portfolio – these typically include derivatives in a way intended to mimic the performance of securities.
While other gains partially offset the trading loss, the bank estimates the business unit with the portfolio will post a loss of $800 million in the current quarter, excluding private equity results and litigation expenses. The bank previously forecast the unit would make a profit of about $200 million.
“It could cost us as much as $1 billion or more,” in addition to the loss estimated so far, Dimon said. “It is risky and it will be for a couple quarters.”
The dollar loss, though, could be less significant than the hit to Dimon and the reputation of a bank which was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.
JPMorgan had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March – an equity ratio of almost 13 percent, four times the industry mean and ahead of 10-11 percent at Citigroup and Bank of America Corp – and has been earning more than $4 billion each quarter, on average, for the past two years. (Reuters)
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