USA: Shareholders, banking analysts offer their assessment of JPMorgan Chase after a huge trade loss.

Record ID: 643102

  • Title: USA: Shareholders, banking analysts offer their assessment of JPMorgan Chase after a huge trade loss.
  • Date: 14th July 2012
  • Summary: NEW YORK CITY, NEW YORK, UNITED STATES (JULY 13, 2012) (REUTERS) EXTERIOR OF JPMORGAN CHASE HEADQUARTERS (SOUNDBITE) (English) NANCY BUSH, NAB RESEARCH BANKING ANALYST, SAYING: "I felt largely comforted by what I heard. There obviously had been a massive breakdown in the CIO office, in risk management, across the company. I think they made the classic mistake. They had
  • Embargoed: 29th July 2012 13:00
  • Keywords:
  • Location: Usa
  • Country: USA
  • Topics: Business,Economy
  • Reuters ID: LVAABZNDCLW1ORCH1BRAM2VSGPL8
  • Story Text: JPMorgan Chase & Co. lost $5.8 billion (USD) in 2012 from disastrous credit bets, and traders might have tried to conceal the extent of the losses earlier this year, the biggest U.S. bank said on Friday (July 13).
    The bank still managed to earn nearly $5 billion in overall profit in the second quarter and said it had fixed the problems in the Chief Investment Office (CIO), which was responsible for the trading losses. In the worst-case scenario, JPMorgan will lose another $1.7 billion on the trades, it said.
    But JPMorgan's disclosure that traders may have deliberately lied about their positions could bring even more intense regulatory scrutiny to the bank, analysts said. It is already under investigation by everyone from the FBI to the UK's Financial Services Authority.
    The Chief Investment Office became infamous in May when JPMorgan said bad derivatives bets on portfolios of corporate bonds had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.
    One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname "The London Whale." Iksil has left the bank, a source said on Friday.
    Ina Drew, who headed the CIO, has also left, and offered to give back her pay for two years, said Dimon, whose pay is subject to being taken back as well. A spokesman for the bank said JPMorgan had accepted her offer.
    During a shareholders meeting at the company's Manhattan headquarters, JPMorgan Chief Executive Officer Jamie Dimon addressed concerns about the company.
    Banking analyst Nancy Bush from NAB Research attended the meeting.
    "I felt largely comforted by what I heard. There obviously had been a massive breakdown in the CIO office, in risk management, across the company. I think they made the classic mistake. They had a management team in place that had been there for a long time, that had produced good results for them and I think they trusted them more than they should have when they got into a more complex situation than had been the norm," Bush said.
    The trading losses and possible deception from traders are a black eye for Dimon, who was respected for keeping his bank consistently profitable during the financial crisis.
    Bush admitted the bad trade is a blow to Dimon's reputation, but said he can recover.
    "It's taken a hit, but you got to remember this guy is like the last man standing when it comes to the large banks. So I think it's a hit from which he can recover. I think it's going to take a while longer. I think it's going to take the production of good, clean, strong quarters. I think it's going to take the resumption of the share buy back which he also mentioned as a possibility in early forth quarter. Now if they go to the Fed and ask to do that buy back and are turned down, I think that's going to be an issue. But if he can resume what looks to be a normal quarterly progression against this very abnormal economic background, I think they are going to do okay," said Bush.
    The bank said it had moved the bad trades from the CIO, which invests some of the company's excess funds, to its investment bank. JPMorgan was one of the inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street. The CIO will now focus on conservative investments, JPMorgan said.
    After the meeting, Kenneth Langone, an investment banker and a former director of the New York Stock Exchange chided reporters outside the company's headquarters.
    "I think that the waste of human energy on this thing is disgraceful. With all the things that need to be done in America, I've never heard so many petty, foolish, stupid questions in one place at one time or a more revealing management than was upstairs right now. I can't image anyone left here right with any questions at all about anything. It was forthright. It was complete. It was candid and it was direct," he said.
    The company's shares rose 4.9 percent to $35.72 in morning trading.
    JPMorgan said misevaluations for the first quarter had overstated the CIO's net income for the period by $459 million.
    The bank posted second-quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.
    The derivative loss after taxes reduced earnings per share by 69 cents, the company said.
    "I think the entire fiasco actually shows the importance of size. When they complain that a bank like JPMorgan Chase is too big to fail or too big to manage, but they are so big that they can afford to lose four billion dollars and it really barely dents their balance sheet. Because this is a company that in a normal year will have billions of dollars from charged off credit cards, or other loan losses, or currency losses or other things. So this is all just sort of part of doing business for a bank as large as JPMorgan Chase," said James Angel, an associate professor of finance at the McDonough School of Business at Georgetown University.
    But Angel added, "There's always the 'cockroach theory', that when you see a problem in one area you have to ask yourself, 'Where are the other cockroaches?' So the bank is saying all of the right things in terms of they have admitted the problem, they are making changes, they've made personnel changes, they're making system changes, so they say they are doing all of the right things, time will tell if they really are."
    Mortgage lending was strong during the quarter, which helped results. Because it is experiencing fewer defaults and delinquencies than it expected in areas like mortgages, the bank reduced the amount of money it had previously set aside to cover bad loans. That reduction boosted profit by $2.1 billion before taxes.
    JPMorgan said it expected to file new, restated first-quarter results in the coming weeks, reflecting a $459 million reduction of income because of bad valuations on some of its trading positions. The bank found material problems with its financial controls during the period.
    Friday's financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a "tempest in a teapot."
    That remark, which Dimon told Congress last month was "dead wrong," added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.
    A host of international regulators and agencies are probing the trading mishap. Besides the FBI and FSA, they include the U.S. Securities and Exchange Commission, the Federal Deposit Insurance Corp., the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, and the Federal Reserve Bank of New York.
  • Copyright Holder: REUTERS
  • Copyright Notice: (c) Copyright Thomson Reuters 2012. Open For Restrictions - http://about.reuters.com/fulllegal.asp
  • Usage Terms/Restrictions: None
Register