JPMorgan's stock fell nearly 7 percent to $38.05 in after-hours trading and dragged down shares across the entire banking sector.
Its executives called an extraordinary conference call with analysts at 5 p.m. EDT where Chief Executive Jamie Dimon said "egregious" mistakes had been made.
The news from JPMorgan comes at a difficult juncture for the stock market as investors wrestle with heightened concerns about Europe's debt crisis and signs are emerging that the U.S. economic recovery may be starting to slow.
"When there's uncertainty, investors' first reaction is to sell," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
"This is not the kind of news you expect from a high-quality management team and a well-run bank."
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.
If there is nothing to reassure investors between now and the start of trade on Friday the weakness in likely to spill over into the cash market.
Shares of JPMorgan's peers fell sharply after hours on the news.
Bank of America stock fell 2.9 percent to $7.48 and Goldman Sachs dropped 2.5 percent to $103.65, while Citigroup lost 3.9 percent to $29.45.
The Chief Investment Office is the arm of the bank that JPMorgan has said it uses to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.
BIG SHOCK AFTER A TEPID DAY
The news came after a lackluster day for stocks. The Dow and the S&P 500 eked out a modest gain as investors had dipped back into the market after a weak stretch, but a disappointing outlook from Cisco Systems capped gains. Cisco Systems Inc lost 10.5 percent to $16.81, its biggest percentage drop since February 2011, making it the heaviest drag on the market. The network equipment maker forecast profits below Wall Street's estimates, sparking concerns about technology spending.
In a positive development, euro-zone officials said the bloc's countries are prepared to keep financing Greece until the country forms a new government.
The Dow's modest rise broke a six-day losing streak for the blue-chip average.
But the S&P 500 could not hold enough gains to close above its April low. Still, the S&P has rebounded after falling to a two-month low near 1,340 on Wednesday.
"You are seeing traders and investors come into some of these very oversold sectors and buying on the dips. Then suddenly, the people who are scared decide to start selling into it," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"That is what you are seeing today. You are seeing the see-saw between people who are coming in, and adding positions slowly, and people who are saying, 'The world is coming to an end. I want out.'"
On Thursday, the Dow Jones industrial average rose 19.98 points, or 0.16 percent, to close at 12,855.04.
The Standard & Poor's 500 Index added 3.41 points, or 0.25 percent, to end at 1,357.99.
But the Nasdaq Composite Index fell 1.07 points, or 0.04 percent, to close at 2,933.64.
The latest uncertainty surrounding Greece and the euro zone's sovereign debt crisis helped spark a drop in the S&P 500 in five of the past seven sessions, sending the benchmark index down 4 percent.
While the region's difficulties persisted with the political gridlock in Greece, investors used the market's declines as a buying opportunity.
The CBOE VIX Volatility Index, used as a measure of investor anxiety, fell 6.2 percent to 18.83. This week, the VIX closed above 20 for the first time in a month in a sign of growing caution.
The number of Americans applying for jobless benefits fell last week, but from an upwardly revised figure from the previous week.
The report follows last month's nonfarm payrolls report, which showed weak employment growth in April.
Signs of softness in the U.S. economy recently have led some investors to err on the side of caution and cut back on sectors exposed to the vicissitudes of the economic cycle.
The Standard & Poor's 500 could fall 5 percent to 7 percent from its April high, and see "several months" of choppy trading, said Citigroup's chief U.S. equity strategist Tobias Levkovich.
"I don't see that as unreasonable," he said. "The solutions to some of these things are not imminent. People forgot them and got a little bit too excited."
On the plus side, News Corp rose after its profit beat expectations late Wednesday and it announced a $5 billion stock buyback.
Its stock climbed 4.9 percent to $20.32.
With 449 of the S&P 500 companies reporting results through Thursday morning, 66.4 percent exceeded estimates, according to Thomson Reuters data, compared with more than 80 percent at the start of earnings season.
Volume was 6.75 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE Amex, just above the 50-day moving average of 6.65 billion.
On the NYSE, more than three shares rose for every two that fell, while for the Nasdaq, about seven stocks advanced for every five that fell. - Reuters
JPMorgan has $2 billion trading loss, reputation hit
NEW YORK: JPMorgan Chase & Co said on Thursday that it suffered a US$2 billion trading loss from a failed hedging strategy, a disclosure that hit financial stocks and the reputation of the bank and its prominent CEO, Jamie Dimon.
Since the end of March, the company's Chief Investment Office "has had significant mark-to-market losses in its synthetic credit portfolio," the company said in a quarterly filing with the Securities and Exchange Commission.
JPMorgan said that other gains partially offset the trading loss, and that it estimates that the business unit with the portfolio will post a loss of $800 million in the second quarter, excluding private equity results and litigation expenses. That compares with a profit of about $200 million that the bank had forecast previously.
"It could cost us as much as a $1 billion or more," Dimon said in a hastily scheduled conference call in which he apologized to stock analysts. "It is risky and it will be for a couple quarters," Dimon said.
The dollar loss, though, could be less significant than the hit to Dimon and the bank's reputation. JPMorgan had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March. The bank is the biggest in the United States by assets.
"This puts egg on our face," Dimon admitted.
JPMorgan has been viewed as a strong risk manager after never reporting a loss during the financial crisis and being the bank that was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.
This announcement could taint that reputation "as well as hurt management's credibility," Barclays analyst Jason Goldberg wrote in a note to clients.
Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial, said, "Jamie has always styled himself as one of the kings of Wall Street," she said. "I don't know how this went so bad so quickly with his knowledge and aversion to risk."
JPMorgan shares fell 5 percent after the closing bell, and other financial shares also fell sharply. Citigroup was down 2.4 percent and Bank of America was down 1.7 percent.
Dimon called the bank's mistake "egregious." He acknowledged that the errors are especially embarrassing in light of his public criticism of the so-called Volcker rule to ban proprietary trading by big banks.
"It plays right into the hands of a bunch of pundits out there, but that is life," Dimon said. He said he still believes in his arguments against the Volcker rule. The problem at JPMorgan, he said, was with the execution of the hedging strategy.
The strategy "morphed over time" and it was "ineffective, poorly monitored, poorly constructed and all of that," Dimon said.
"This violated our principles. This trading violates the Dimon principle."
The Chief Investment Office is an arm of the bank that JPMorgan has said is used to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.
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