April 15, 2024

DealBook: JPMorgan Fears Traders Hid Loss, Now at $5.8 Billion

Jamie Dimon, chief of JPMorgan Chase, entered his bank's Manhattan headquarters on Friday.Jin Lee/Associated PressJamie Dimon, chief of JPMorgan Chase, entered his bank’s Manhattan headquarters on Friday.

12:36 p.m. | Updated

JPMorgan Chase, which reported its second-quarter results on Friday, disclosed that the losses on a soured credit bet could mount to more than $7 billion, as the nation’s largest bank indicated that traders may have intentionally tried to conceal the extent of the red ink on the disastrous position.

Amid a swirl of questions about how the traders marked their bets, JPMorgan also said Friday that it would be forced to restate its first-quarter results.

If the trades, made out of the powerful chief investment office unit in London, had been properly valued, the bank said it would have lost $1.4 billion on the position in the first quarter.

Jamie Dimon, the bank’s chief executive who has consistently reassured investors that the losses would be contained, announced that the bank lost $4.4 billion on the botched trade in the second quarter. So far this year, the bank says it has lost $5.8 billion on the trades in credit derivatives.

In a statement, JPMorgan said that “the firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter.”

The Securities and Exchange Commission, which is already investigating the trading loss is “interested” in the valuation of the trades, according to a person briefed on the investigation who insisted on anonymity because of the investigation was continuing.

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On a conference call with analysts on Friday, Mr. Dimon said that the trade could result in another $1.7 billion in losses in the future, but added that the estimate was considering a worst-case situation.

Doug Braunstein, the bank’s chief financial officer, told analysts that the decision to re-file its earnings was made on Thursday, just one day before the bank reported its second-quarter results.

As a result of the restatement, revenue for the first quarter fell by $660 million, and net income dropped by $459 million, the bank told analysts.

In its earnings report, JPMorgan Chase said it had a profit of $1.21 a share in the second quarter of 2012, down from $1.27 a share a year earlier but beating estimates. In a Thomson Reuters poll, analysts expected JPMorgan to show a per-share profit of 70 cents.

Revenue fell to $22.9 billion, down 16 percent from $27.4 billion in the same quarter a year ago. Net income also fell, to $4.96 billion, from $5.4 billion a year ago. The trading loss reduced the company’s second-quarter profit by 69 cents on an after-tax basis.

The problems surrounding the value of the trades is another black eye for the bank, which has suffered a bruising public fallout after first announcing a $2 billion loss in May. Since announcing the multibillion-dollar mistake, JPMorgan has lost $25 billion in market value.

On the much-anticipated earnings call, Michael Cavanagh who has been leading an internal investigation of the losses, tried to assure investors that any issues with valuation or risk controls were contained within the chief investment office, not endemic to the larger bank. As part of its broad investigation, JPMorgan said it would claw back two years of compensation from three executives at the unit.

Throughout the call, Mr. Dimon told analysts that the company had strengthened its risks controls to stave off further losses.

He added that the unit will refocus on its “core mandate of conservatively investing excess deposits to earn a fair return.”

JPMorgan still has provided no clarity about how much of the bungled trade remains. Mr. Dimon said in the statement that the chief investment office “will no longer trade a synthetic credit portfolio.”

In midday trading, shares of JPMorgan rose 6 percent to about $36.10 a share, but the company has seen its market value plummet since it first announced trading losses on May 10.

Mr. Dimon has repeatedly told investors and Congress that the bank would remain solidly profitable despite the trading blunder.

“Importantly, all of our client-driven businesses had solid performance,” Mr. Dimon said in a statement.

In its earnings release, the company said that revenue for the investment bank was $6.8 billion in the second quarter, down from $7.3 billion a year earlier. JPMorgan was buoyed by its retail financial services. The unit reported net income of $2.3 billion, compared with $383 million last year.

JPMorgan also slashed compensation within its investment bank by 22 percent, to $2.01 billion. In the same period last year, the investment bank had set aside $2.6 billion to reward its traders and other personnel.

Mike Cavanagh, who led the investigation into the trading losses, outlined a series of flaws that contributed to the debacle.

He reiterated much of what Mr. Dimon has said in the past about the trade being “poorly implemented.” But Mr. Cavanagh noted that the chief investment office’s trades grew in complexity and outpaced the skills and ability of the managers within the unit.

As widely anticipated, JPMorgan announced it would immediately take back compensation from three executives in London.

Mr. Dimon said that Ina Drew, who oversaw the chief investment office and resigned in the wake of the trading losses, has agreed to give up “a significant portion of her compensation.” Mr. Dimon did not reveal just how much compensation would be turned over.

After the call, Jason Goldberg, a banking analyst with Barclays, circulated a research note, emphasizing the company was still attractive.

Article source: http://dealbook.nytimes.com/2012/07/13/jpmorgan-says-traders-obscured-losses-in-first-quarter/?partner=rss&emc=rss