JPMorgan Chase & Co’s shock trading loss of at least $2 billion from a failed hedging strategy knocked financial stocks across the globe on Friday, as well as the reputation of the biggest US bank by assets and its CEO Jamie Dimon.
For a bank viewed as a strong risk manager that navigated the fallout from the 2008 financial crisis without reporting a loss, the errors are embarrassing, especially given Dimon’s public criticism of the so-called Volcker rule to ban proprietary trading by big banks. “This puts egg on our face,” Dimon said. He conceded the losses were linked to a Wall Street Journal report last month about a London-based trader Bruno Iksil, nicknamed the ‘London Whale’, who, the paper said, amassed an outsized position which hedge funds bet against.
JPMorgan had informed the UK’s Financial Services Authority (FSA) of the situation, but this was a regulatory requirement and there was no indication at this stage that the regulator would take any action, a source familiar with the situation said.
In a Securities and Exchange Commission filing, JPMorgan reported that since the end of March, its chief investment office has had significant mark-to-market losses in its synthetic credit portfolio.
While other gains partially offset the trading loss, the bank estimates the business unit will post a loss of $800 million in the current quarter, excluding private equity results and litigation expenses. The bank previously forecast the unit would make a profit of about $200 million.
“It could cost us as much as $1 billion or more,” in addition to the loss estimated so far, Dimon said.
The dollar loss, though, could be less significant than the hit to Dimon and the reputation of a bank which was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.
JPMorgan had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March — an equity ratio of almost 13%. That is four times the industry mean and ahead of 10-11% at Citigroup and Bank of America Corp. JPMorgan has been earning more than $4 billion each quarter, on average, for the past two years.
“Jamie has always styled himself as one of the kings of Wall Street,” said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. “I don’t know how this went so bad so quickly with his knowledge and aversion to risk.”