The losses stemmed from derivatives bets gone wrong in the bank's chief investment office, which manages risk for the New York company. The Wall Street Journal reported last month that large bets - by a London-based trader named Bruno Michel Iksil - being made in that office had roiled a sector of the debt markets.
The loss is a black eye for the bank, which sailed through the financial crisis in better shape than many of its peers, and for Dimon, who was deemed King of Wall Street during the financial crisis. It comes at a time when large banks are fighting efforts by regulators to rein in risky trading with measures such as the so-called Volcker rule.
J.P. Morgan shares fell 6.7%, to $38 in after hours trading yesterday.
JP Morgan, the US's largest bank by assets, said in its quarterly regulatory filing that a plan it has been using to hedge risks "has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed."
Dimon said the so-called synthetic hedge, using insurance like contracts known as credit default swaps, was "poorly executed" and "poorly monitored." He said that the bank has an extensive review under way of what went wrong, and that there were "many errors," "sloppiness" and "bad judgment" on the bank's part.
No one has been fired as a result of the losses, but Dimon could take such action once the firm completes its review of what happened.
"We will admit it, we will fix it and move on," Dimon said. "This trading violates the Dimon principle."
The bank raised its estimate of losses at the unit to $800m from the previous $200m. Dimon said yesterday that the trading losses had been offset by $1b or so in gains on securities sales.
The Journal reported in April that hedge funds and other investors were making bets in the credit default swap markets to take advantage of volatility that stemmed from the trades done by Iksil, who worked out of the chief investment office.
Dimon said on the company's earnings call soon after the April article that questions about the office's trading were "a complete tempest in a teapot."
"Every bank has a major portfolio," he said on the call April 13. "In those portfolios you make investments that you think are wise to offset your exposures."
Iksil, who has worked at JP Morgan since 2007, became bullish on the value of some corporate debt earlier this year. He sold protection on an index of these companies in the form of credit- efault swaps called the CDX IG 9.
Credit default swaps are a type of derivative that act as insurance against a debt issuer defaulting. The instrument rises in value and ultimately pays out to the buyer if a debt issuer defaults.
His trading moved the index during the first quarter, traders said. A sign of how hot the trade is: the net "notional" volume in the index ballooned to $144.6bn on March 30 from $92.6bn at the start of the year, according to Depository Trust & Clearing Corp data.
Iksil's group had roughly $350bn of investment securities as of Deember 31, according to company filings, or about 15% of the bank's total assets.
JP Morgan's loss comes in a period in which many other large US banks posted placid trading results. Goldman Sachs' trading operations had one losing day in the first quarter, in which it lost no more than $25m, it said in a filing yesterday. Bank of America had a perfect trading quarter, with no losing days. Morgan Stanley had four days during which it suffered losses.
"This is yet another example of the need for the more than $700 trillion derivatives market to be brought into the light of financial regulation," said Dennis Kelleher, president of Better Markets, a liberal non-profit focused on financial reform.
The Volcker rule is a part of the Dodd-Frank financial overhaul legislation passed in the US in July of 2010. The rule, conceived of by former Federal Reserve Chairman Paul Volcker, prohibits financial institutions from using their own proprietary cash to take big bets in the markets.
The rule isn't yet in place, but many financial firms have cut back on businesses and activities, such as specific trading desk that use bank cash and investments in hedge funds and private equity funds, that seem to violate the rule.
Banks have been arguing broadly that the rule would cut liquidity and raise prices in markets, while many critics of the large banks have said the trading needs to be reined in more aggressively.
The trading loss "plays right into the hands of a whole bunch of pundits out there," Dimon said. "We will have to deal with that - that's life."
The losses could potentially expose bank employees to so-called clawback policies that permit the recovery of compensation in the event of a financial re-statement. Banks like JP Morgan have adopted such policies, which also are required under the Dodd-Frank financial overhaul law.
For the latest updates on the stock market, PRESS CTR + D or visit Stock Market Today For the latest updates PRESS CTR + D or visit Stock Market news Today
No comments:
Post a Comment