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JPMorgan faces new scrutiny after US$2b loss
May 12, 2012, Saturday
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ONE of the pillars of Wall Street -- bank JPMorgan Chase -- faced new scrutiny today after it reported a shocking US$2 billion derivatives loss that even its pugnacious chief executive called "egregious."
"It ought to be a concern to the SEC. They are the ones who ought to have a concern about that," said Senator Carl Levin, referring to the Securities and Exchange Commission, the government's top financial regulator.
"The SEC should surely take a look at it." added the Democratic lawmaker, who heads the Senate's Permanent Subcommittee on Investigations.
According to The New York Times, the SEC was already on the case.
The inquiry, which is being run out of New York, will probably examine the bank's past regulatory filings about the internal unit that placed the trades, as well as recent statements from the firm's top executives, the paper said, citing unnamed people "briefed on the matter."
The huge New York-based bank sent shivers through the markets with the loss, after having convinced many that a well-managed bank could manage the risks of complex derivatives that lay behind the 2008 financial crisis.
Politicians called for tightening bank regulation and tough controls on hedging activities, and a Republican senator requested a hearing into the case.
"Are we confident that taxpayers are fully protected from losses at major financial institutions?" asked Senator Bob Corker in a letter to the Senate Banking Committee head.
JPMorgan CEO Jamie Dimon revealed the losses late Thursday in an unscheduled call to analysts, saying they were incurred in the last six weeks by the New York bank's risk management unit, the Chief Investment Office.
They involved trading in credit default swaps usually meant to offset other risks in the bank's investments, but Dimon said the strategy "morphed" into trading that was overly complex, poorly executed and badly overseen.
"These were egregious mistakes," Dimon said. "They were self-inflicted and... this is not how we want to run a business."
Although he said the bank was still very profitable, Dimon also acknowledged the positions could possibly lead to another US$1 billion in trading losses by the end of this quarter.
"Hopefully by the end of the year... this won't be a significant item for us," he said.
Investors made their displeasure brazenly apparent, savaging the bank's shares from the start of yesterday's trading.
The firm's stock closed down 9.3 percent at US$36.96, wiping around US$14 billion off the market value of the country's largest bank.
There was little new information about what happened at the bank. Attention focused on the role of a London-based JPMorgan trader, French-born Bruno Michel Iksil, nicknamed "The London Whale" and "Voldemort," after the villain in the Harry Potter books.
A source close to the matter told AFP that the loss was "related, but not exclusively" attributable to Iksil's activities, which had been reported out of London in April by The Wall Street Journal.
"Everyone is talking about this, because once again it shows the power that a handful of people can have on the market," a London trader said.
But others said such a large loss could not have occurred without the knowledge of Iksil's superiors.
The Wall Street Journal, citing people familiar with the situation, reported today that JPMorgan told traders several months ago to make bets aimed at shielding the bank from the market fallout of Europe's deepening crisis.
But instead of shrinking the risk, their complicated bets backfired into losses of as much as US$200 million a day in late April and early May, the paper pointed out.
Erik Oja, a banking analyst at Standard & Poor's, condemned the "major embarrassment for the bank" after it survived the 2008 financial crisis relatively unscathed.
JPMorgan was also hit with a downgrade by the rating agency Fitch, and S&P cut its outlook to "negative."
Dimon has led US banks in fighting the application of the new Volcker Rule, which would ban such proprietary trade. Banks also do not want to see curbs on their hedging activities.
Rick Gorka, spokesman for likely Republican presidential candidate Mitt Romney, said the loss "demonstrates the importance of oversight and transparency in the derivatives market.
If elected, he said, Romney "will push for common-sense regulation that gives regulators tools to do their jobs, and that gives investors more clarity."
-AFP
"It ought to be a concern to the SEC. They are the ones who ought to have a concern about that," said Senator Carl Levin, referring to the Securities and Exchange Commission, the government's top financial regulator.
"The SEC should surely take a look at it." added the Democratic lawmaker, who heads the Senate's Permanent Subcommittee on Investigations.
According to The New York Times, the SEC was already on the case.
The inquiry, which is being run out of New York, will probably examine the bank's past regulatory filings about the internal unit that placed the trades, as well as recent statements from the firm's top executives, the paper said, citing unnamed people "briefed on the matter."
The huge New York-based bank sent shivers through the markets with the loss, after having convinced many that a well-managed bank could manage the risks of complex derivatives that lay behind the 2008 financial crisis.
Politicians called for tightening bank regulation and tough controls on hedging activities, and a Republican senator requested a hearing into the case.
"Are we confident that taxpayers are fully protected from losses at major financial institutions?" asked Senator Bob Corker in a letter to the Senate Banking Committee head.
JPMorgan CEO Jamie Dimon revealed the losses late Thursday in an unscheduled call to analysts, saying they were incurred in the last six weeks by the New York bank's risk management unit, the Chief Investment Office.
They involved trading in credit default swaps usually meant to offset other risks in the bank's investments, but Dimon said the strategy "morphed" into trading that was overly complex, poorly executed and badly overseen.
"These were egregious mistakes," Dimon said. "They were self-inflicted and... this is not how we want to run a business."
Although he said the bank was still very profitable, Dimon also acknowledged the positions could possibly lead to another US$1 billion in trading losses by the end of this quarter.
"Hopefully by the end of the year... this won't be a significant item for us," he said.
Investors made their displeasure brazenly apparent, savaging the bank's shares from the start of yesterday's trading.
The firm's stock closed down 9.3 percent at US$36.96, wiping around US$14 billion off the market value of the country's largest bank.
There was little new information about what happened at the bank. Attention focused on the role of a London-based JPMorgan trader, French-born Bruno Michel Iksil, nicknamed "The London Whale" and "Voldemort," after the villain in the Harry Potter books.
A source close to the matter told AFP that the loss was "related, but not exclusively" attributable to Iksil's activities, which had been reported out of London in April by The Wall Street Journal.
"Everyone is talking about this, because once again it shows the power that a handful of people can have on the market," a London trader said.
But others said such a large loss could not have occurred without the knowledge of Iksil's superiors.
The Wall Street Journal, citing people familiar with the situation, reported today that JPMorgan told traders several months ago to make bets aimed at shielding the bank from the market fallout of Europe's deepening crisis.
But instead of shrinking the risk, their complicated bets backfired into losses of as much as US$200 million a day in late April and early May, the paper pointed out.
Erik Oja, a banking analyst at Standard & Poor's, condemned the "major embarrassment for the bank" after it survived the 2008 financial crisis relatively unscathed.
JPMorgan was also hit with a downgrade by the rating agency Fitch, and S&P cut its outlook to "negative."
Dimon has led US banks in fighting the application of the new Volcker Rule, which would ban such proprietary trade. Banks also do not want to see curbs on their hedging activities.
Rick Gorka, spokesman for likely Republican presidential candidate Mitt Romney, said the loss "demonstrates the importance of oversight and transparency in the derivatives market.
If elected, he said, Romney "will push for common-sense regulation that gives regulators tools to do their jobs, and that gives investors more clarity."
-AFP
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