Massive Trading Loss Tarnishes J.P. Morgan Chase
With the recent trading loss by J.P. Morgan Chase (JPM), more bank investors are losing their trust in banks. They have good reason to show concern.
J.P. Morgan Chase lost $2 billion from high-risk, derivative trades in only six weeks.
The C.E.O. of J.P. Morgan Chase, Jamie Dimon, said that the bank could suffer an additional $1 billion in losses. In a conference call with analysts on May 10, Dimon said that “egregious errors” were made. However, he refused to concede that the company needed a stronger regulatory framework.
The mark-to-market losses came from the bank’s chief investment offices. This trading unit of the bank was set up to hedge J.P. Morgan’s loan portfolio and to invest excess deposits. The office drew heated controversy in April based on reports that a J.P. Morgan Chase trader in London was making big bets in credit derivatives.
People within the firm have said that top traders for J.P. Morgan, such as Ina Drew, campaigned vigorously to keep this trade going. According to former executives for the company, Drew told traders at the bank’s chief investment office to execute trades that were meant to shield the bank from the turmoil in Europe. She believed that these bets could protect the bank from losses and that they could even earn a tidy profit.
When the credit market took a turbulent turn in April and early May, Drew tried to trim this gigantic bet. However, the instructions came too late and the losses from this trade exceeded the $2 billion mark. J.P. Morgan is now replacing Ina Drew and two other top trading officials.
Other J.P. Morgan Chase traders who are under scrutiny include Bruno Iksil who had made more than $100 million for J.P. Morgan Chase in recent years. Traders have nicknamed him the “London whale,” because the positions he had taken were so large that they distorted credit prices.
Iksil is not the only person to blame for the $2 billion loss, though. According to a writer for the Wall Street Journal, Gregory Zuckerman, Iksil was not a rogue trader. Zuckerman claims the bigger problem involves the bank’s risk management system.
The bank will probably have to hire some professionals to clean up the mess made from this massive bet. The C.E.O. of J.P. Morgan Chase also bears part of the blame, for allowing such a big bet to occur within his own company.
J.P. Morgan Chase (JPM) had earnings of $1.31 per share first quarter 2012, up from $0.90 in the fourth quarter of 2011.