June 28, 2012

JPMorgan’s Loss $9 Billion and Counting

How did it happen and why do its size estimates continue to grow?

JPMorgan Chase CEO Jamie Dimon testifying on Capitol Hill in mid-June. (Photo: AP) JPMorgan Chase CEO Jamie Dimon testifying on Capitol Hill in mid-June. (Photo: AP)

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It’s a nebula—or maybe mushroom cloud is a more apt description; morphing, changing, growing before our eyes.

The loss suffered by JPMorgan Chase & Co. (and its investors) is either attributed to the “London Whale” or “complacency,” as CEO Jamie Dimon told Congress last week; one that began at $2 billion and was then estimated to grow to between $4 billion and $6 billion. The estimate of the estimate has now doubled, with Reuters reporting it could go as high as $9 billion, citing a person “familiar with the matter."

How did it happen, and why does the bill keep growing?

Derivatives, of course. In particular, the credit kind.

Initially, Dimon said he believed the trading losses could double in the next few quarters; instead, they tripled in the next few weeks. Part of this is good news (relatively speaking), according to The New York Times, and the larger amount reflects the bank’s aggressive steps to unwind the losing bet as quickly as possible.

“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,” the Times states.

The trouble all started with the bank’s Chief Investment Office, whose risky trades returned more than $4 billion in profits in the last three years, accounting for roughly 10% of the bank’s profit during that period. The office was designed to invest excess deposits for the bank and created to hedge interest rate risk.

“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,” the Times writes. “That was later combined with a bearish wager on high-yield securities.”

In testimony before the House Financial Services Committee last week, 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.

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 Dimon has tried to conceal the intricacies of the bank’s soured bet, credit traders say the losses have still mounted,” according to the paper.

But 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.

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