$2b Loss Hits JP Morgan – Reports

May 10, 2012 /

JP Morgan Chase has announced a whooping $2 billion loss from its credit portfolio while the financial giant’s stock fell 7% Thursday evening.

“Barely four years after Wall Street’s wrong-way bets plunged the world into a financial crisis, JPMorgan Chase & Co. admitted it lost $2 billion from a trading portfolio that was supposed to have helped the bank manage credit risk,” the Los Angeles Times reported.

JP Morgan Chief Executive Jamie Dimon said the loss came out of “egregious mistakes.”

“We have egg on our face, and we deserve any criticism we get,” he said.

According to the LA Times report: “The losses stemmed from derivative bets that backfired in the company’s Chief Investment Office. This part of the bank was in charge of trading to balance the company’s assets and liabilities, although it had been criticized by some analysts for operating more like a hedge fund.”

JP Morgan’s after-hours trading of $38.05 almost topped Nasdaq’s list of late-session volume leaders.

“The selloff was spurred by the bank’s regulatory filing in which it said it had “significant” mark-to-market losses in its synthetic credit portfolio,” MarketWatch reported.

“Given the lessons of the financial crisis, many will wonder how this could happen. The answer is simple: JPMorgan Chase blew it. As a former derivatives trader, this looks like a simple case of bad risk management, followed by an inability to cut losses quickly,” commented Jill Schlesinger of CBS News.

He continued: “The firm put on a complicated strategy that bet on the improving credit of selected companies. At the time, the trades were widely thought to be placed by a large firm backed with ample capital. The trader behind the strategy became known as ‘the London whale,’ though we now know that it was a French-born JPMorgan employee named Bruno Michel Iksil.

“As the bet moved against the London Whale, Jamie Dimon brushed it off and even went so far as to say it was a “complete tempest in a teapot,” during last quarter’s earnings call. In off the record quotes, some JPM employees said the bank had run tests that showed that the strategy worked in any market conditions.

“This reminds me when a trader told me that Morgan Stanley’s sub-prime bets were 100 percent hedged, except they weren’t. Perhaps that’s why Dimon called the mistake ‘egregious’ and ‘self inflicted’ and vowed to ‘learn from it … fix it and move on.’”

Meanwhile, Senator Carl Levin, the co-author of the so-called Volcker rule, said the New York-based bank’s disclosure yesterday served as a “stark reminder” to regulators drafting the proprietary-trading ban required by the 2010 Dodd-Frank Act, said Bloomberg’s report.

“The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too-big-to-fail’ banks have no business making,” Levin, a Michigan Democrat, said as quoted by Bloomberg.

“Other finance stocks fell in late trading. Citigroup Inc. fell 3.3% to $29.65 and Bank of America Corp. fell 2.7% to $7.59 and Morgan Stanley declined 3% to $15.13,” the report added.

“S&P 500 futures fell 11.6 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Nasdaq 100 futures fell 16.75 points,” Reuters reported.


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