More pain at JPMorgan
According to analysts' estimates, losses may be as high as $4.2 billion.
What was initially thought to be a $2 billion trading loss for JPMorgan Chase (JPM) may actually be as high as $4.2 billion, according to one estimate.
Credit conditions around the world have further deteriorated after the bank reported a massive trading loss on May 10. According to research by International Strategy and Investment Group, the trading loss may be more than twice the initial estimate. Ed Najarian, an analyst at ISI Group, said that the loss would cut second-quarter earnings 30% to 65 cents per share from a prior estimate of 93 cents.
JPMorgan's CEO, Jamie Dimon, has said that the losses were tied to credit derivatives the bank used to hedge its many businesses.
Najarian does highlight that some of JPMorgan's core businesses are continuing to deliver. He expects that strong mortgage banking revenue in the quarter, combined with realized security gains and a debt valuation gain, will amount to about $2 billion. Najarian cut his price target to $47 from $52, but kept a "buy" rating on the stock.
JP Morgan was hedging exposure to corporations by taking positions in credit derivatives tied to corporate debt. The loss has raised questions around the Volcker Rule, which says banks cannot trade for proprietary purposes and only for hedges. Questions have also been raised around the true nature of a hedge: What is a hedge and what isn't in the scope of the rule?
Another big concern is the health of other institutions who may have been making bets in other parts of the credit markets. Bill Gross of Pimco has openly stated that he is consistently increasing his firm's exposure to mortgage backed securities in hopes of further Federal Reserve easing focused on these securities. If investment grade credit markets have been hurt, who knows the extent of losses at Pimco, or any other firm for that matter.
Credit conditions improved after the European Central Bank offered two long-term refinancing operations to financial institutions, allowing three-year, 1% loans in exchange for collateral. However, the effect of these credit injections has weaned over the last few months, and now credit investors are seeing previously successful trades turn against them -- with JP Morgan being no exception.
Disclosure: The author has a long position in JPMorgan Chase.
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