JPMorgan Trading Loss May Reach $9 Billion

The losses on JPMorgan Chase's bungled trade could total as much as $9 billion. Originally, Jamie Dimon, the bank's chief executive, believed that the losses would be somewhere around $4 billion. High losses such as this feeds the debate over how strictly large financial institutions should be regulated.

By JESSICA SILVER-GREENBERG and SUSANNE CRAIG
June 28, 2012, 2:30 am
NY Times

Losses on JPMorgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation.

When Jamie Dimon, the bank’s chief executive, announced in May that the bank had lost $2 billion in a bet on credit derivatives, he estimated that losses could double within the next few quarters. But the red ink has been mounting in recent weeks, as the bank has been unwinding its positions, according to interviews with current and former traders and executives at the bank who asked not to be named because of investigations into the bank.

The bank’s exit from its money-losing trade is happening faster than many expected. JPMorgan previously said it hoped to clear its position by early next year; now it is already out of more than half of the trade and may be completely free this year.

As JPMorgan has moved rapidly to unwind the position — its most volatile assets in particular — internal models at the bank have recently projected losses of as much as $9 billion. In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.

With much of the most volatile slice of the position sold, however, regulators are unsure how deep the reported losses will eventually be. Some expect that the red ink will not exceed $6 billion to $7 billion.

Nonetheless, the sharply higher loss totals will feed a debate over how strictly large financial institutions should be regulated and whether some of the behemoth banks are capitalizing on their status as too big to fail to make risky trades.

JPMorgan plans to disclose part of the total losses on the soured bet on July 13, when it reports second-quarter earnings. Despite the loss, the bank has said it will be solidly profitable for the quarter — no small achievement given that nervous markets and weak economies have sapped Wall Street’s main businesses. To put the size of the loss in perspective, JPMorgan logged a first-quarter profit of $5.4 billion.

More than profits are at stake. The growing fallout from the bank’s bad bet threatens to undercut the credibility of Mr. Dimon, who has been fighting major regulatory changes that could curtail the kind of risk-taking that led to the trading losses. The bank chief was considered a deft manager of risk after steering JPMorgan through the financial crisis in far better shape than its rivals.

“Essentially, JPMorgan has been operating a hedge fund with federal insured deposits within a bank,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve bank examiner.

A spokesman for the bank declined to comment.

In its most basic form, the losing trade, made by the bank’s chief investment office in London, was an intricate position that included a bullish bet on an index of investment-grade corporate debt. That was later combined with a bearish wager on high-yield securities.

The chief investment office — which invests excess deposits for the bank and was created to hedge interest rate risk — brought in more than $4 billion in profits in the last three years, accounting for roughly 10 percent of the bank’s profit during that period.

In testimony before the House Financial Services Committee last week, Mr. Dimon said that the London unit had “embarked on a complex strategy” that exposed the bank to greater risks even though it had been intended to minimize them.

JPMorgan executives are briefed each morning on the size of the trading loss. The tally could shrink if the market moves in JPMorgan’s favor, the people briefed on the situation cautioned.

But hedge funds and other investors have seized on the bank’s distress, creating a rapid deterioration in the underlying positions held by the bank. Although Mr. Dimon has tried to conceal the intricacies of the bank’s soured bet, credit traders say the losses have still mounted.

While some hedge funds have compounded the bank’s woes, others have been finding it profitable to help JPMorgan get clear of the losing credit positions.

One such fund, Blue Mountain Capital Management, has been accumulating trades over the last couple of weeks that might help reduce the risk of the bets made by JPMorgan in a credit index, according to interviews with more than a dozen credit traders. The hedge fund is then selling those positions back to the bank. A Blue Mountain spokesman declined to comment.

As traders in JPMorgan’s London desk work to get out of the huge bet, which started generating erratic losses in late March, the traders based in New York are largely sitting idle, according to current traders in the unit.

“We are in a holding pattern,” said one current New York trader who asked not to be named.

Long before the losses started mounting, senior executives at the chief investment office in New York worried about the trades of Bruno Iksil, according to the current traders.

Now known as the London Whale for his outsize wagers in the credit markets, Mr. Iksil accumulated a number of trades in 2010 that were illiquid, which means it would take the bank more time to get out of them.

In 2010, a senior executive at the chief investment office compiled a detailed report that estimated how much money the bank stood to lose if it had to get out of all Mr. Iksil’s trades within 30 days. The senior executive recommended that JPMorgan consider putting aside reserves to deal with any losses that might stem from Mr. Iksil’s trades. It is not known how much was recommended as a reserve or whether Mr. Dimon saw the report, but the warning went unheeded.

The losses are the most embarrassing fumble for Mr. Dimon since he became chief executive in 2005.

In appearances before Congress, Mr. Dimon has taken pains to assure investors and lawmakers that the overall health of JPMorgan remained strong and that it had more than sufficient amounts of capital to weather any economic dislocation.

Even as he apologized for the trade, calling it “stupid,” Mr. Dimon emphasized to lawmakers that the loss was an “isolated incident.”

The Federal Reserve is currently poring over the bank’s trades to examine the scope of the growing losses and the original bet.

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