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Jpmorgan ceo admits "egg on face" after us$2b trading loss by ferujkll sdff
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Jpmorgan ceo admits "egg on face" after us$2b trading loss |
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Business,Business News,Business Opportunities
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JPMorgan Chase & Co, the biggest US bank by assets, said itsuffered a trading loss of at least US$2 billion (S$2.5 billion)from a failed hedging strategy, a shock disclosure that hitfinancial stocks and the reputation of the bank and its CEO, JamieDimon. For a bank viewed as a strong risk manager that went through thefinancial crisis without reporting a loss, the errors areembarrassing, especially given Dimon's public criticism of theso-called Volcker rule to ban proprietary trading by big banks. "This puts egg on our face," Dimon said, apologizing on a hastilycalled conference call with stock analysts. He conceded the losseswere linked to a Wall Street Journal report last month about atrader, nicknamed the 'London Whale', who, the report said, amassedan outsized position which hedge funds bet against. JPMorgan said in a filing with the Securities and ExchangeCommission that since end-March, its Chief Investment Office hashad significant mark-to-market losses in its synthetic creditportfolio - these typically include derivatives in a way intendedto mimic the performance of securities.
While other gains partially offset the trading loss, the bankestimates the business unit with the portfolio will post a loss ofUS$800 million in the current quarter, excluding private equityresults and litigation expenses. The bank previously forecast theunit would make a profit of about US$200 million. "It could cost us as much as US$1 billion or more," in addition tothe loss estimated so far, Dimon said. "It is risky and it will befor a couple quarters." BAD STRATEGY The dollar loss, though, could be less significant than the hit toDimon and the reputation of a bank which was strong enough to takeover investment bank Bear Stearns and consumer bank WashingtonMutual when they collapsed in 2008.
JPMorgan had US$2.32 trillion of assets supported by US$190 billionof shareholder equity at the end of March - an equity ratio ofalmost 13 per cent, four times the industry mean and ahead of 10-11per cent at Citigroup and Bank of America Corp - and has beenearning more than $4 billion each quarter, on average, for the pasttwo years. "Jamie has always styled himself as one of the kings of WallStreet," said Nancy Bush, a longtime bank analyst and contributingeditor at SNL Financial. "I don't know how this went so bad soquickly with his knowledge and aversion to risk." JPMorgan shares fell almost 7 per cent after the closing bell anddragged other financial shares lower, with Citigroup down 3.6 percent and Bank of America down 2.6 per cent. FBR Capital Marketsanalyst Paul Miller cut his target for the stock to US$37 fromUS$50 in response to the disclosures. The shares were at US$40.74before the news.
Dimon said he still believes in his arguments against the Volckerrule. The problem at JPMorgan, he said, was with the execution ofthe hedging strategy, which "morphed over time" and was"ineffective, poorly monitored, poorly constructed and all ofthat." On the call, Dimon said he wouldn't take questions about specificpeople or their specific trading strategies. But he indicated thatsome people may lose their jobs as executives sort out what whenwrong. "All appropriate corrective action will be taken asnecessary in the future," he said. WHALE OF A LOSS The April Wall Street Journal report said Bruno Iksil, aLondon-based trader in JPMorgan's Chief Investment Office,nicknamed the 'London Whale', had amassed an outsized position thatprompted hedge funds to bet against it.
On an earnings conferencecall last month, Dimon called the concern "a complete tempest in ateapot." On Thursday, however, he said the bank's loss had "a bitto do with the article in the press." He added: "I also think weacted a little too defensively to that." The Chief Investment Office is an arm of the bank that JPMorgan hassaid is used to make broad bets to hedge its portfolios ofindividual holdings, such as loans to speculative-grade companies. The failed hedge likely involved a bet on the flattening of acredit derivative curve, part of the CDX family of investment gradecredit indices, said two sources with knowledge of the industry,but not directly involved in the matter. JPMorgan was then caughtby sharp moves at the long end of the bet, they said. The CDX indexgives traders exposure to credit risk across a range of assets, andgets its value from a basket of individual credit derivatives. Two financial industry sources in Asia said they heard the JPMorgantrader took a position that a credit derivative curve, part of theCDX family of investment grade credit indices, would flatten, butwas caught out by sharp moves at the long end.
The CDX index givestraders exposure to credit risk across a range of assets, and getsits value from a basket of individual credit derivatives. "It's a pretty stunning admission for a company that prides itselfon its risk management systems and the strength of its balancesheet," said Sterne Agee analyst Todd Hagerman. "The timingcouldn't be worse for the industry. It will have ramificationsacross the broker-dealer community." Just last week Dimon and leaders of other large banks met FederalReserve Governor Daniel Tarullo in New York to question the way theregulators conduct stress tests to see if banks have enough capitalto withstand possible losses.
They also made arguments over tradingrestrictions. Allegations that traders at the banks take outsized risks with bankcapital to earn big bonuses have been among the drivers ofgovernment regulations adopted, and pending, since the financialcrisis. JPMorgan spokesman Joseph Evangelisti said the company uses payformulas to reduce the chance of that happening in the ChiefInvestment Office and throughout the bank. Except for peoplehandling the bank's private equity investments, "no one at JPMorganis paid on their profits and losses," he said. PUSHING FOR DETAIL Regulators and lawmakers are now likely to push Dimon for moredetails about the trades.
Those details will guide how regulatorsnow view the issue and its impact on the Volcker rule, said KarenPetrou, managing partner of Washington-based Federal FinancialAnalytics. If the trades were meant to hedge against specific risks as opposedto clearly being done as a proprietary bet on the markets, it maynot play as clearly into the Volcker rule debate as supporters ofthe crackdown want it to, she said. "The question is whether this in fact was a hedge and I thinkthat's to be determined," she said. "That's really the heart of thematter." But some in Washington quickly expressed views on the lessons fromthe episode. Senator Carl Levin, in a statement issued two hoursafter the news broke, said, "The enormous loss JPMorgan announcedtoday is just the latest evidence that what banks call 'hedges' areoften risky bets that so-called 'too big to fail' banks have nobusiness making.". I am Fashion Accessories Agents writer, reports some information about diamond promise ring , wall quartz clock.
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