JPMorgan sees $2 billion loss from trades gone bad

Shares tumble after hours as the company says a hedging strategy basically blew up. It may take until the end of the year to fix everything.

By Charley Blaine May 10, 2012 6:05PM
Updated: 7:25 a.m. ET Friday

Shares of JPMorgan Chase (JPM) were off 7% in premarket trading Friday after the company said its corporate and private equity business expected to take an $800 million after-tax loss for the second quarter.

This stemmed from a paper loss of about $2 billion resulting from a hedge of the company's entire credit position. The hedge was "flawed, complex, poorly reviewed, poorly executed and poorly monitored," CEO Jamie Dimon said on a hastily organized conference call. Dimon was often curt during the call, reflecting his embarrassment at having to disclose the problem.

The losses could rise by an additional $1 billion, Dimon said, but he hopes the problem will be resolved by the end of the year.

The announcement could depress stocks Friday. Futures trading suggests the Dow could open down 70 points.

At 7:25 a.m. ET, JPMorgan shares were down $3, or 7.3%, to $37.71 in premarket trading. They had risen 10 cents to $40.74 in regular trading Thursday.

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After hours, stocks of big banks and investment banks fell sharply as well. Bank of America (BAC) shares were down more than 2.6% to $7.50. Wells Fargo (WFC) fell by 2% to $32.53. Citigroup (C) was down 3.7% to $29.52, and Goldman Sachs (GS) shares fell by 2.4% to $103.75. Morgan Stanley (MS) was off 2.5% to $15.21.

With Thursday's close, JPMorgan's stock was up 22.5% for the year but had fallen 5.2% so far this month.

The issue threatens the reputation of Dimon as one of Wall Street's smartest executives and JPMorgan's reputation as one of the world's best-managed financial institutions. The company came through the financial crisis of 2008 and 2009 with few problems, unlike many competitors. It may result in shareholder lawsuits.

The loss came in the company's chief investment office, which makes bigger and riskier speculative bets with the bank’s money. The group makes trades to balance the bank's assets and liabilities, and its problems could weigh on the bank's broader earnings.

The company, however, would not offer a specific estimate on how earnings per share would work out. But Dimon predicts the company will still earn $4 billion in the second quarter.

While Dimon would not offer specifics on what happened, he did describe the issue as "significant mark-to-market losses in its synthetic credit portfolio." Dimon said the portfolio "has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed." (The wording is taken from the company's 10-Q report filed Thursday with the Securities and Exchange Commission.)

Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner's buying or selling actual debt, according to Bloomberg News.

The losses exist only on paper. They won't be realized until the trades are closed with profits and losses allocated. Another group of trades actually may produce a $1 billion profit, Dimon said.

The issue appears related to trading in the company's big London office. Apparently, Bruno Iksul, a London trader in credit default swaps, which are basically insurance policies on specific events, had sold so much protection, Bloomberg News said, that his trades have moved a number of market indexes. Iksul's activities became so well known that he was nicknamed the London Whale.

It's not clear whether Iksul is still with JPMorgan.

Dimon conceded that the problem caught the banking giant by surprise. The issue came into focus starting around March 31. But, he said, when the company makes a mistake, "We admit it. We learn from it. We fix it. And we move on."

The company has put a big team of experts on trying to figure out what happened and minimize the effects on the company's bottom line. JPMorgan has enough capital to weather the problem, Dimon told analyst. "We've got staying power."

Asked to describe how big a problem the trading error was, Dimon said, "Egregious."

JPMorgan has been considered to be one of the best-managed banking companies on Wall Street, one with good risk-management policies and strong risk controls. That makes this incident all the more embarrassing for Dimon, who acknowledged in the conference call that the bank has egg on its face. "This is not how we want to run a business," he said.

When reports of potential problems in the London office began to surface, Dimon called it "a tempest in a teapot."

But the incident is another instance of a very few employees who make a wrong move and cost their employers billions.

French banking giant Société Générale lost 4.9 billion euros ($6.4 billion U.S.) after Jerome Kerviel, a trader in the company, was found to have traded well beyond his authorized limits. Kerviel later created a series of transactions designed to cover up his activities.

Barings Bank, which had been Britain's oldest investment bank (and financier of the Louisiana Purchase), failed because of fraudulent transactions made by Nicholas Leeson, then a trader in the bank's Singapore office.

Kim Peterson contributed to this report.

474Comments
May 10, 2012 9:33PM
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If you would like to see Jamie Dimon go to jail and get futtbucked...give me a thumbs up (Stone Cold Steve Austin voice)
May 11, 2012 1:03AM
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JP Morgan Chase can suck my fat one! In 1972 my parents bought 5.5 acres of land and built a house on it. In 1991 my dad retired after 30 years. In 2005 my parents were one year from being free and clear of their mortgage, but on advice from their financial advisor they took their equity in a refinance (JP Morgan Chase) and had the home and property improved, against advice of myself and 3 siblings. In 2006 my dad was diagnosed with Parkinson's disease. In 2008 the financial advisor lost all but $30K of my parents retirement. From 2007 to 2010 my dad's health deteriorated to the point that he was a virtual vegetable by December 2010. He was incapable of communication, he could not even force his brain to open his eyes, he could squeeze our hands, so we knew he was still in the shell that was his body, but that was it. In 2008 my Mom tried to work with Chase on a "Program" to reduce her interest rate so she could continue to pay her mortgage. Chase "worked" with her for 2 years on this program and 3 months prior to my dad's death Chase issued a letter to her that her home of over 30 years would be foreclosed within 30 days if her past due balance was not paid in full, to include attorney's fees. My mom spent well over a year sending fax after fax to Chase of Docs they asked for to get her into this program to reduce her interest rate. She was told on numerous occasions that she was in this program and her rate would be reduced through this program instituted by the Obama administration. All the while she was paying what Chase told her to pay each month. All this time my dad is in an assisted care facility due to his illness. My brother and Sister were able to get my Mom's mortgage brought current about two months before my dad passed. We spent the last year trying to sell the property so it was not foreclosed upon. So in the span of a year my mom has lost her husband of 40 years and home of 36 years. Chase lied to her so many times about so many different things. I hope this is just the tip of the iceberg and Chase goes down hard! They can all burn for eternity for the grief they visited on my family in the last years of my Dad' life. Good riddance you filthy scum!  

May 10, 2012 8:59PM
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Couldn't happen to a nicer bunch oif money-grubbing bastards!
May 10, 2012 7:18PM
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The CEO Jamie does not really care because his big payceck and bonus will still be there for him. He will cut employees pay and benifits to cover the losses and keep his payout for himself. 

May 10, 2012 6:41PM
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Here are more banking financial idiots who control our investment!!! Someone has to step in and protect or investments from our lenders, advisors, and financial idiots!!!

May 10, 2012 7:21PM
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We need to break up these "to big to fail" institutions ASAP!!!
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I closed my account with them after I lost my job, because I could not afford to start paying stupid fees just for not having a monthly deposit to keep it at a certain level blah blah blah, so now that I'm back on my feet with a higher paying job, I opened with a credit union and love it! No stupid fees, no BS! Bye JP, screw your customers and you get yours in the end. Also, Capital one who decided to sue me for a card with a $750 limit... well I'm one less customer you'll never earn back, in the long run more of a loss for you! Ha! Wink
May 10, 2012 7:17PM
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bet they still pat themselves on the back on job well done with million $$$$ bonus.
May 10, 2012 8:59PM
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I am so sorry to hear, I hope this company along with Goldman Sacs goes down faster than North Korea's missile
May 10, 2012 7:20PM
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caught them by suprise? These are supposed to be the best of the best. How BIG were their year end BONUS'S ? I'll wager the loses will at least match them. Don't worry though they will still make $2+ Billion THIS QTR. Only their customers and stockholders will loss. The BONUS'S will still flow at christmas as alwayy. You can BET on it.   SAD SAD SAD Wakeup AMERICIA!!!!!!!!
May 10, 2012 7:20PM
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And yet, the political assault continues on regulations that are intended to protect the public. The rich get richer....  
May 10, 2012 7:08PM
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The Financial services industry has simply created more types of investments than are necessary,  that are often misunderstood.  Clinton and everyone in govt after completely blew it by eliminating Glass-Steagal. That enabled decisions that made the crash a reality, and it will create more hiccups and major corrections moving forward.
May 10, 2012 7:10PM
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cry me a river.  I don't feel sorry for anyone at JP Morgan.  They got millions in bailouts and Tarp money.  I hope the executives who got the big bonuses and took everyone's money will finally get what they deserve.   I hope them and Wells Fargo and the other big banks take the hits they so deserve.

 

May 10, 2012 7:22PM
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Biggest crooks in the country.  They deserve every bad thing that comes their way.
May 10, 2012 7:24PM
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This is the same JP Morgan, run by the same Jamie Dimond, that we taxpayers ponied up 50 Billion to save from going under???  Here's a thought:  F*** him and his bunch of bandits!!
May 10, 2012 7:16PM
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"This is not how we want to run a business," [Dimon] said.

How is losing over 2-Billion dollars on bad investments in synthetic derivatives in 2012 any different than losing billions and billions of dollars in bad synthetic derivatives in 2009?

 

This is just the same BS over and over and over and over again.

 

Either JP Morgan can't learn from its mistakes, or won't learn from their mistakes. Either way, this just proves capitalism and a free market economy is dead.

 

2-billion here and 2-billion there and eventually you have no more billions to lose. One would think.

May 10, 2012 11:08PM
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The goverment better not bail out this over-rated trading company!
May 10, 2012 9:32PM
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These people haven't learned a f*ckin thing.
May 10, 2012 11:19PM
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At what point do we revert to banking regulations that served us well for over 50 years to prevent these types of happenings? This all began when special interests had their politicians hack away at regulations. Those with the money write the rules to make more money while the rest of us get hosed! If you buy the myth that the "job creators" just need a little more money and everything will be just fine, you must have been living in a cave during the period from 2000 to 2008 when this was the policy...how'd that work out? Republican solution...let's do more of the same. Never any new ideas. Just trust them.
May 10, 2012 6:54PM
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That is part of his wages and Big Bonuses!!!!!!!!!!!!!!!!!
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