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JPMorgan takes $2 billion loss as mistakes trounce hedges

JPMorgan Chase plunged nearly 10 percent on opening.

JPMorgan Chase & Co. chief executive officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.

The company’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts Thursday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure.

“There were many errors, sloppiness and bad judgment,” Dimon said as the company’s stock fell in extended trading. “These were egregious mistakes, they were self-inflicted.”

The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn’t unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money, five former employees said.

The U.K.’s Financial Services Authority, which regulates banks, is examining the role London employees played in the loss, according to two people familiar with the talks. The agency hasn’t opened a formal investigation and there was no evidence of criminal activity, these people said. The loss originated out of the firm’s London CIO unit, an executive at the bank said.

“I think it will weigh on the sector pretty bad,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia. Miller and Christopher Mutascio at Stifel Nicolaus & Co. downgraded their recommendations on the shares Friday. “Investors are going to say that these are general big black boxes that can’t be analyzed, not even the management companies understand what they’re doing themselves.”

Dimon had defended the chief investment office as a “sophisticated” guardian of the bank’s funds on an April 13 conference call, calling news coverage “a complete tempest in a teapot.” On May 2, he led fellow Wall Street CEOs in a closed-door meeting to lobby the Federal Reserve about softening proposed U.S. reforms that might crimp their profits.

Thursday, he said the timing of the trading blunders “plays right into the hands of a bunch of pundits out there” who are pushing for a strict version of the proprietary trading ban named for former Federal Reserve Chairman Paul Volcker.

Given Dimon’s resistance to the ban and new regulations, “he’s got a lot of egg on his face right now,” said Craig Pirrong, a finance professor at the University of Houston. “Any chance they had of getting a relative loosening of Volcker rule, anything of that nature, that’s out the window.”

The chief investment office’s push into risk-taking was led by Achilles Macris, 50, according to three former employees, Bloomberg News reported on April 13. He was hired in 2006 as its top executive in London and led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York-based bank, they said.

Dimon closely supervised the transition from its previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

“I wouldn’t call it ‘more aggressive,’ I would call it ‘better,’” Dimon told analysts Thursday. “We added different types of people, talented people and stuff like that.” Until recently, they were careful and successful, he said.

“It’s classic Wall Street hubris, which we’ve seen so many times before,” said Simon Johnson, a former chief economist at the International Monetary Fund who now teaches at the Massachusetts Institute of Technology. “What’s particularly ironic here is that Jamie presents himself, and is believed by others to be, the king of risk management.”

Bloomberg News reported on April 5 London-based JPMorgan trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market.

The $2 billion loss occurred in London under multiple traders, according to an executive at the bank, who spoke on condition of anonymity. Dimon wasn’t told about their shift in strategy and didn’t know the magnitude of the losses until after the company reported earnings April 13, the executive said.

As the position deteriorated rapidly, the bank gathered internal analysts and examiners to investigate, and Dimon grew more distressed by the day, the executive said.

While no one has been fired yet, Dimon told analysts he will take “corrective actions.” The bank is keeping employees involved on hand while it deals with the transactions, and some are likely to lose their jobs afterward, said an executive with knowledge of the situation. The bank is also re-evaluating its risk-monitoring team within the chief investment office, the person said.

JPMorgan risks losing more money now because other market participants will figure out what the bank has to do to unload its position, said Charles Peabody, an analyst with Portales Partners LLC in New York.

 
A version of this article appeared in the print edition of The Daily Star on May 12, 2012, on page 6.

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