J.P. Morgan’s $2 Billion Blunder

By DAN FITZPATRICK
Wall Street Journal

A massive trading bet boomeranged on J.P. Morgan Chase leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the “King of Wall Street.”

The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets.

The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade.

The bank’s strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Mr. Dimon said Thursday in a hastily arranged conference call with analysts and investors after the stock-market close. He called the mistake “egregious, self-inflicted,” and said: “We will admit it, we will fix it and move on,” he said.

The CEO emphasized that the bank remains profitable despite the trading loss. “While we don’t give overall earnings guidance and we are not confirming current analyst estimates, if you did adjust current analyst estimates for the loss, we still earned approximately $4 billion after-tax this quarter give or take,” he said on the call. The bank earned $5.38 billion in the first quarter.

The trading loss tarnishes the reputation of the bank, which came through the financial crisis better than most peers. It comes at a time when large banks are fighting efforts by regulators to rein in risky trading.

Banks have been arguing that measures to do that, such as the so-called Volcker rule, would hurt liquidity and raise prices in markets. The rule, set to take effect July 21 if regulators can finalize details, restricts banks’ ability to trade with their own money but would give them at least two years to fully comply.

The trading loss “plays right into the hands of a whole bunch of pundits out there,” Mr. Dimon said. “We will have to deal with that—that’s life.” Asked about the Volcker rule, he said, “This doesn’t violate the Volcker rule, but it violates the Dimon principle.”

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