JPMorgan's $2 Billion Loss Stuns Market; Bank Stocks Sink

Getty ImagesBy DANIEL WAGNER, AP Business Writer


JPMorgan Chase stock lost more than 8% of its value Friday after the bank, the largest in the United States, revealed a monster $2 billion loss in a trading group that manages the risks the bank takes with its own money.

More than three years after the financial crisis, the surprise disclosure quickly revived debate about whether banks can be trusted to handle risk on their own.

Sen. Carl Levin (D-Mich.), chair of a subcommittee that investigated the crisis, said the loss was "just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making."

The head of the Securities and Exchange Commission, Mary Schapiro, told reporters that the agency was focused on the JPMorgan loss but declined to comment further.

Some analysts were skeptical that the trading was designed to protect against JPMorgan's own losses, as CEO Jamie Dimon contended Thursday in a conference call with stock analysts and reporters.

The analysts said the bank appeared to have been betting for its own benefit, a practice known as "proprietary trading."

Dimon said the type of trading that led to the $2 billion loss would not be banned by the so-called Volcker rule, which is still being written and is expected to ban certain types of trading by banks with their own money.

The Federal Reserve said last month that it would begin enforcing that rule in July 2014. Bank executives, including Dimon, have argued for weaker rules and broader exemptions.

JPMorgan has been a strong critic of provisions that would have made this loss less likely, said Michael Greenberger, former enforcement director of the Commodity Futures Trading Commission, which regulates some derivatives.

"These instruments are not regularly and efficiently priced, and a company can wake up one day, as AIG did in 2008, and find out they're in a terrific hole. It can just blow up overnight," said Greenberger, a professor at the University of Maryland.



On Friday, bank stocks were hammered in Britain and the United States, partly because of fear that the JPMorgan loss would lead to tougher regulation of financial institutions.

JPMorgan stock was down 8.2% in early trading on Wall Street. It was down more than $3, and by itself shaved 25 points off the Dow Jones industrial average, which was up about 30 points on the day.

In Britain, shares of Barclays and Royal Bank of Scotland were down more than 2%.

JPMorgan stock was the hardest hit, but its American counterparts suffered, too: Morgan Stanley was down 4%, and Goldman Sachs and Citigroup each lost more than 3%.

Stock analysts said that bank stocks were hurt mostly because of regulatory fear, not because there was reason to believe other banks would discover similar losses.

"The regulatory and political environment is already a headwind, and clearly this doesn't help," Deutsche Bank said in a note to clients.

The trading loss was an embarrassment for JPMorgan, which came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.

The loss came over the past six weeks in a portfolio of the complex financial instruments known as derivatives, and in a division JPMorgan says was supposed to control its exposure to risk in the financial markets.

"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," Dimon told reporters on Thursday. "There were many errors, sloppiness and bad judgment."

Bloomberg News reported in April that a single JPMorgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in the $10 trillion market.


Dimon said the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader. Dimon also said the company had "acted too defensively," and should have looked into the division more closely.

The Wall Street Journal reported last month that JPMorgan had invested heavily in an index of credit-default swaps, insurance-like products that protect against default by bond issuers.

Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss. The losses came in part because financial markets have been far more volatile since the end of March.

Partly because of the $2 billion trading loss, JPMorgan said it expects a loss of $800 million this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200 million.

The loss is expected to hurt JPMorgan's overall earnings for the second quarter, which ends June 30.

"We will admit it, we will learn from it, we will fix it, and we will move on," he said. Dimon spoke in a hastily scheduled conference call with stock analysts. Reporters were allowed to listen.

JPMorgan is trying to unload the portfolio in question in a "responsible" manner, Dimon said, to minimize the cost to its shareholders. Analysts said more losses were possible depending on market conditions.

___

AP Business Writer Pallavi Gogoi contributed to this report. Daniel Wagner can be reached at www.twitter.com/wagnerreports.

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James M. Hartje

Tune into www.StocksonWallStreet.com for my full thoughts on the JP Morgan crisis & much, much more!

May 13 2012 at 6:55 PM Report abuse rate up rate down Reply
James M. Hartje

‎Jamie Dimon gets an A+ for brilliant crisis management. In his interview with Meet the Press he does a great job defending both JP Morgan & himself!

May 13 2012 at 6:54 PM Report abuse rate up rate down Reply
James M. Hartje

Another great part of the interview & what I love & completely agree with are Jamie Dimon's thoughts "In 2008 I was a Democrat now I'm barely a Democrat because I don't agree with the direction the party has gone & their new mentality attacking those with money & attacking people who are successful. Don't get me wrong I'm all for paying huge taxes, I'm all for jobs creation & government programs but the parties new decisions are just out of line & out of touch with many Americans. I'll always be a Democrat per say but I do not agree with the new direction of the party!"

May 13 2012 at 6:54 PM Report abuse rate up rate down Reply
James M. Hartje

Got to love Jamie Dimon's quote ""This is not a life-threatening thing for JP Morgan yes hurts us & yes it was a dumb move but were still going to make a ton of money this year and it's not going to hurt us as a business long-term besides our image and whatever fallout from the SEC probe."

May 13 2012 at 6:54 PM Report abuse rate up rate down Reply
James M. Hartje

Big hit for the bank we will see how they rebound from this?

May 13 2012 at 6:54 PM Report abuse rate up rate down Reply
nklswrth

With this failure banking has just joined politics as the most untrustworthy institutions in our society Investor money is nothing but a toy for these groups, and once they have it, it is very likely gone, as they have no obligation to pay it back, It's obvious the only way we will stop seeing stories about banks ripping us off is if they cease to exist. It is high time to abandon banks altogether and go with local credit unions.

May 13 2012 at 10:24 AM Report abuse rate up rate down Reply
nyvtmc

Diamond must go.

May 13 2012 at 9:53 AM Report abuse rate up rate down Reply
1 reply to nyvtmc's comment
hightest2011

Dimon must got to the white House.... Obama needs another Czar !!!!!!

OMG !!!!!! OBAMA MUST GO !!!!!!!!!!!!!!!!

May 14 2012 at 7:50 AM Report abuse +1 rate up rate down Reply
gatorhans

Doesnt anyone get it??? They are getting "free" money from the federal reserve and they ARE NOT loaning it the old fashioned way, they are investing it and denying anyone in this country to start a business or buy a house therefore ruining any form of capitalism thats left in the United States. Once they fail the government bails them out and the taxpayers take care of their greed. My company asked for a loan to build a new building and were told we could get $15,000 at 13.5%,but not the $200,000 we asked for at a lower than 7% loan. LOL, we built it cash and the bankers came by after we built it ourself and said "oh , wow, if you need anything let us know "

May 13 2012 at 9:11 AM Report abuse +1 rate up rate down Reply
thedtecter

Nothing that another bailout can't fix!

May 12 2012 at 7:09 PM Report abuse rate up rate down Reply
ATM

What they need are handcuffs, deportation papers, and FDIC closure notices... why should their employees suffer because of the ineptness of the people who can't control and manage risk?

How embarassing this would be...

How small of a person does it take to lose $2 billion and want to keep a job?

Wow- how sad.

May 12 2012 at 5:43 PM Report abuse rate up rate down Reply
1 reply to ATM's comment
hightest2011

ATM..... How do you piss away 5 trillion and not create a job??/ That what will get this excuse for a president fired!!!!!!

May 14 2012 at 7:53 AM Report abuse +1 rate up rate down Reply