JPMorgan Chase Admits Big Losses On 'Egregious' Credit Trades

JPMorgan Chase CEO Jamie Dimon. Turns out there's a problem with the bank's London Whale.

JPMorgan Chase has suffered big, unexpected losses at a closely watched trading desk, providing fodder to supporters of a new financial regulation the bank's CEO has loudly opposed.

The biggest U.S. bank by assets said on Thursday that it had lost $2 billion on bad bets on credit derivatives, made by a London trading desk, run by a man other traders have alternately dubbed "The London Whale" and "Voldemort." The office is intended to hedge the giant bank's credit risk, not increase it.

In a regulatory filing on Thursday, the bank said that, since the end of March, its chief investment office "has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed."

In a quickly scheduled conference call Thursday evening, CEO Jamie Dimon, who has been persistently critical of government efforts to regulate banks, said JPMorgan's trading losses were due to "egregious and self-inflicted mistakes," from trades that were "poorly executed and poorly monitored."

In recent months, news reports had alleged the office's trading desk was engaged in speculative trading, not hedging. Supporters of financial regulation used the reports as evidence of the need for the "Volcker Rule," a feature of the Dodd-Frank financial-reform act that would prohibit government-insured banks from taking big market bets with their own money. Critics of the Volcker Rule countered that banks sometimes need to be able to make big market bets as a way of hedging their risks. JPMorgan's losses suggest, at the very least, that even such a hedging operation can be subject to large, unexpected losses.

In the surprise conference call on Thursday, Dimon acknowledged the trading desk's losses, but said they did not change his opposition to Volcker Rule -- though he admitted they did not help his argument.

"It plays right into the hands of a bunch of pundits out there," said Dimon, who only days ago called criticism of banks a form of discrimination and suggested it was anti-American to criticize business at all. "But that's life."

“It puts egg on our face, and we deserve any criticism we get," he added.

And the bank is already getting plenty of criticism. In an email to the Huffington Post, Dennis Kelleher, president of the financial-reform advocacy group Better Markets, said the bank's admission "shows the need for financial reform, especially a strong Volcker Rule, to limit such risky betting."

"Jamie Dimon and JP Morgan Chase just proved what anyone not getting a paycheck from a Wall Street bank already knows: gigantic too-big-to-fail banks are too-big-to-manage," he added. "They must not be allowed to continue to threaten our financial system and our economy."

"The enormous loss JP Morgan announced today is 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," Senator Carl Levin (D-Mich.) said in a press release.

Dimon said the bank had lost $2 billion on the bad bets since the end of March, offset by about $1 billion in separate gains, resulting in a net loss of about $1 billion. Such numbers are manageable, relative to the size of the bank's quarterly profit, but far larger than the bank, or most of Wall Street, expected.

JPMorgan Chase's share price tumbled more than 5 percent in extended New York trading, and other stock market futures were dragged down with it.

The London trading desk responsible for the loss was made infamous recently by stories by Bloomberg and the Wall Street Journal that said "The London Whale" had taken such large positions in credit derivatives that it was distorting the market for them.

JPMorgan Chase insisted at the time that the desk was doing nothing more than hedging credit risk for the rest of the firm. It also said it was "very comfortable" with the desk's positions. Dimon, in another conference call less than a month ago, called stories about the desk "a tempest in a teapot."

In the conference call today, Dimon, who has complained frequently about financial regulation, admitted the firm "acted a little too defensively" in response to those stories.

The Securities and Exchange Commission declined to comment on the news.

-- D.M. Levine contributed reporting to this story.

See below for Jamie Dimon hates on regulation: A history

Loading Slideshow

• Trading Loss 'Puts Egg On Our Face'

  Dimon said JPMorgan Chase's unexpected $2 billion loss on credit trades in May "<a href="http://www.huffingtonpost.com/2012/05/10/jpmorgan-chase-london-whale_n_1507662.html?ref=business" target="_hplink">puts egg on our face, and we deserve any criticism we get</a>."

• Regulation 'The Nail In Our Coffin'

  In March 2011, Dimon expressed his fear over new regulations, warning that higher capital requirements would be "pretty much the nail in our coffin for big American banks," according to the <a href="http://www.ft.com/intl/cms/s/0/3157bcbe-5b05-11e0-a290-00144feab49a.html?ftcamp=rss#axzz1IB5kVGLG" target="_hplink">Financial Times</a>.

• Losing Liquidity

  Warning that limiting proprietary trading would also affect market making, <a href="http://www.cnbc.com/id/45986077/Jamie_Dimon_Regulators_Undermining_Economic_Objectives" target="_hplink">Dimon was quoted by CNBC</a>, "The United States has...the most liquid [capital markets in the world]. If you lose liquidity because you lose market making, you cost investors money."

• 'Little To Do With Financial Crisis'

  "Proprietary trading had very little to do with the financial crisis," <a href="http://www.gurufocus.com/news/159099/interview--jpmorgan-ceo-jamie-dimon-on-regulation-volcker-rule-some-of-the-global-regulations-are-unamerican)" target="_hplink">Dimon told FOX Business Network Senior Correspondent Charlie Gasparino</a> in January, adding that "you can't even make markets for your clients" with the Volcker Rule.

• Volcker 'Doesn't Understand'

  "Paul Volcker by his own admission has said he doesn't understand capital markets," <a href="http://dealbook.nytimes.com/2012/04/06/what-volcker-rule-could-mean-for-jpmorgans-big-trades" target="_hplink">Dimon told FOX Business.</a> "He has proven that to me."

• Volcker Rule Too Narrow

  in February, Dimon asserted the Volcker Rule had been written too narrowly. "If you want to be trading, you have to have a lawyer and a psychiatrist sitting next to you determining what was your intent every time you did something," he was quoted as saying in <a href="http://news.businessweek.com/article.asp?documentKey=1377-aIjS6U8zr2Z8-1PEFKF7I5P2SI88Q43D587IV8L" target="_hplink">Businessweek</a>.

Comments

[zfire]

12:39 PM on 05/25/2012

This is an excellent point to bring up to those that insist that Obama's administration is socialist/communist. A socialist nation, Germany for example, would have laws in place that would make this kind of Casino Royale risk taking with fdic insured money illegal and rightly so.

[DavidNYC1]

12:02 PM on 05/16/2012

The evidence does not support the nasty comments and broadbrushing of financial executives as evil people principally concerned about their end-year bonuses. I know too many flawlessly ethical risk managers who are ignored by commodities traders to let these opinions become the reason for ill-conceived regulations. Reverse the repeal of the Glass-Stegall Act. 90% of the problems will vanish.

[Likeitorleaveit]

07:46 PM on 05/14/2012

JP Morgan made more than 27 billion during the second quarter this year. Their assets are in the trillions, 2 billion really is chump change.
This is a crap news story. This is just a way for government to take over banks.
You want to see banks fail? Just let the government get their hands on them.
The government can't make the mail service profitable - that that's a MONOPOLY for god's sake! Only government can take a loss with a monopoly!
The government has lost a lot more than JP Morgan ever will:
Solyndra, received $800 billion from the tax payers. Now bankrupt.
Evergreen Solar Inc. received $5.3 million. Now bankrupt.
SpectraWatt, another “green jobs” received a $500,000. Bankrupt.
Mountain Plaza Inc. Despite declaring bankruptcy in 2003, Mountain Plaza Inc received $424,000. The company filed for bankruptcy protection again in June 2010.
Olsen's Crop Service and Olsen's Mills Acquisition Co. also failed despite Olsen's Mills receiving $10 million from the tax payers.
JP Morgan doesn't seem so bad compared to the Obama administration.

[amanda mariee]

10:17 AM on 05/14/2012

If you're a compulsive gambler, sitting at a table in Las Vegas, eventually a floor manager intervenes when your losses have gotten out of hand. Gambler's rarely see how hopeless the situation has become, why do we expect these "degenerate" bankers/gamblers to see the light? They will never voluntarily regulate their own behavior... what's wrong with Capitol Requirements they worked really well for 50 years.

[Aska Feld]

07:32 AM on 05/14/2012

Does this mean they need a bailout now to cover their obscene bonuses for being stupid with other peoples money ?

[nypapajoe]

07:24 AM on 05/14/2012

The issue is lack of federal regulations which the republicans out right refuse to legislate! Derivatives brought down the market the last time and it's the reason behind this catastrophe because nothing has changed! Greed is what's motivating this false economy! It was stated during the recent congressional hearings by experts that unregulated Wall St and Banking shenanigans will bring about another melt down which will be far worse! Don't think for one minute that the other financial houses are not suffering some financial compromise! the CEOs don't care their contracts dictate a parachute which consists of salary, bonuses and stock options worth Hundreds of Millions!

[tlcpro]

01:25 PM on 05/14/2012

That Golden Parachute will deflate fast once the business is bankrupt. Who wants stock that is worth nothing?

[QuantumBob]

05:09 PM on 05/13/2012

Here is an example of continued self regulatory policies by banks and wall street where billions are blown, yes blown, that money was not the banks to be so careless with.

[Steve Albin]

09:29 AM on 05/13/2012

Here is what all you Math Geniuses are forgetting, The money did not go away, It just changed hands, In the market if you loose $2 Billion someone made $2 billion ......... DUH......

[jannas2cents]

11:24 PM on 05/12/2012

So what's $2,000,000,000 anyway? Shucks, if they lose $200,000,000,000, so what? They can always ask the taxpayers to bail em out again. They're just way too big for us to let em fail. So how far would $2,000,000,000 go if it were used to bail out distressed homeowners? They could have bailed out 10,000 distressed homeowners by forgiving their $200,000 mortgages (where do I stand in line for that bailout?) Jamie Dimon reminds me of an over-indulged little rich kid who loses his college fund playing craps so just goes home to mom and dad to bail him out. But if he wins at playing craps, he just keeps those winning for himself. So the biggest bank in the US gets to privatize their profits and if they lose too much at their crap game, well they like to socialize those losses so the taxpayers get to bail em out. Is there anyone in American who still questions the need to regulate the banking industry? They can't even handle their own money, so who can trust em to handle OUR money?

[dfwenigma]

01:58 PM on 05/13/2012

Keep in mind that many of the GOP's biggest supporters were in favor of Gramm-Leach-Bliley which allowed banks to become so large and to combine the divisions that were previously separated and walled off. It's precisely the most conservative among them who wanted this and the banks pushed for it. So when we talk about too big to fail - we're the problem - not the banks. The public has allowed lobbyists from K Street to grow so large and omnipotent that the public has lost control of its own regulatory bodies. We need to pass laws limiting not only the amount of money that can be contributed political campaigns but also the power the lobbyists have over our elected officials.

[tlcpro]

01:27 PM on 05/14/2012

F&F

[ftkl1234]

04:04 PM on 05/12/2012

Is anything happening with the idea to have 2 separate divisions at banks--one for banking clients and the other division that may make speculative deals? Would this keep investor clients from suffering for losses incurred with risky deals conducted by bank managers?

When specualtive deals fail, is there any restitution made by those involved with making the deal or not? Do the dealers suffer any consequences?

[tlcpro]

01:28 PM on 05/14/2012

Nope, they just lose a commission.

[DavidNYC1]

12:06 PM on 05/16/2012

The "idea" is 75 years old. The Glass-Stegall Act required that separation. It was repealed by a Republican dominated Congress and, I am unhappy to say, Bill Clinton signed the bill.

[wufdog]

03:39 PM on 05/12/2012

RE: “It puts egg on our face, and we deserve any criticism we get," [Dimon] added.

Dimon finally said something I agree with.

[ictks]

02:36 PM on 05/12/2012

Here we go again....but but but we won't do it again, we've learned our lesson....just in case we need more bail out. Oh and by the way, we don't need no stinking regulations! The tax payers just need to get out of our sandbox and leave us alone. We would have been better served compensating depositors and investors and home owners than in bailing out these criminals in 2008. Then maybe we would have taken the corporate heads and the corporate boards to court for the fraud they commited and put them behind bars where they deserve to be.

[MarcDel]

01:26 PM on 05/12/2012

A good dose of medicine Jamie. You're considered a good guy. One of the brightest and best who handled the crisis the best among your peers. Now leave a legacy and learn from this and work with government to develop some balance of regulation and responsibility. You screwed up. Now go be a hero. Admit the system is flawed and government and banks have a role in fixing it and soon

[wufdog]

03:42 PM on 05/12/2012

RE: .. learn from this and work with government to develop some balance of regulation and responsibility. You screwed up. Now go be a hero. Admit the system is flawed and government and banks have a role in fixing it and soon

It's such a simple point. Why can't so many conservatives get that through their thick skulls? We need some balance; SOME regulation. We know this because history has shown what happens without such regulation.

[MarcDel]

04:08 PM on 05/12/2012

When the financial services "industry" has grown from about 10% of GDP to perhaps 40%, it is easy to confuse phantom financial assets with the real wealth for which they can be exchanged. The illusions of phantom wealth are so convincing that most Wall Street players believe they are creating real wealth. In this illusion they make big transaction profits. Profits used in part to lobby government to allow more illusion and secrecy. When the bubble bursts as it did the ones holding money and not real wealth benefit from the creation of phantom wealth may never realize their gain is unfairly diluting everyone else’s claim to the available stock of real wealth.

[tlcpro]

01:31 PM on 05/14/2012

Because Republicans care only about the 1% and they comprise the 1%. Regulations hurt profits... and all that rot. Suffer unto the consumer...

[DavidNYC1]

12:07 PM on 05/16/2012

Thank you. Finally, a rational voice.

[Geo Johnson]

12:08 PM on 05/12/2012

JP Morgan Chase Shareholders Equity (net worth) was at $190 billion at the end of March 2012, so a hit of $2 or $20 billion can be abosrbed at this point without capsizing the ship. JP Morgan has quite a ways to go to be adjudged "insolvent" according to their books. Now, how accurate those books are after the past few decades of independent auditors sleeping with management can be suspect.

[noncash 86]

01:31 PM on 05/12/2012

I do not understand the language of the Wall Street Mafia, but what little I can glean is that the so called 'hedge' was in the form of a 'credit derivative'. Someone can give me an explanation a credit derivative. My understanding is it is a way of putting up very little collateral, as compared to a potential loss, to cover a bet So in this case, although we are given no details, and probably most will be withheld from Congress, the loss sustained by the gamble may be far greater than reported by J. P. Morgan Chase.

[Geo Johnson]

02:13 PM on 05/12/2012

I do not fully understand derivatives other than they are more unstable than nitro-glycerin. On paper JP Morgan can absorb this loss without much harm but with much egg on their face. If you look at JP having $190 in cash in their hand, they have just suffered a loss of $2, not an absolute disaster. However, it is how that $190 in their hand was calculated that is scary. In essence, JP like any business has a net worth which is relative to assets verses liabilities. The difference of the two is your net worth (to the good or to the bad). What IS important is the value of JP's assets and their contingent liabilities and that is where independent auditors come in, they attest as to the value (and soundness) of the assets and that all liabilities (real or contingent) are shown on the current Balance Sheet. A classic example: ENRON. A sloppy job done by the independent auditors allowed ENRON to "cook the books." How sound are JP's assets? How sound were the real estate loans made by Washington Mutual? In the real world those loans belong to JP Morgan Chase. And what is their real value today? The banks talked Congress out of "Mark to Market." Or, valuing your loans at current market. All the real estate lonas that banks are contingently liable for are still on the books at "Loan Value," not "Market Value."

[ictks]

02:53 PM on 05/12/2012

derviatives are bets usually private and unregulated which can be made against literally anything including whether the sun will shine tomorrow or the wind will blow in Kansas (where the weather changes every 10 minutes). Hedges come in to play by buying "insurance" against the bet from someone like AIG (also unregulated) so that if I guess wrong, my loss is covered. That was why it was sooooo important for AIG to be bailed out. They had issued "insurance" at will never considering that the market would fail and they would have to pay out. At that point it was a 2 sided domino line. If AIG wasn't bailed out, many people would have lost retirement funds and the banks would not have been covered on their bets so the big banks would have fallen. It was truly a no win situation and would have left the country in worse shape than 1929 let alone the rest of the world. There is an excellent book All the Devils Are Here that goes into detail as to what happened and the explaination of the ridiculous methodologies these people use to do business every day.

[mjc]

11:12 AM on 05/12/2012

Chase is, unfortunately, my bank and has been for many decades but like most way-too-big-to-fail corporations anti-regulation talk is like a second language to guys like Dimon. These guys gamble on the stockmarket and on their own financial institution. It is exciting and so if they lose a few billion? The government will make sure they don't go under. Me? Have no influence on the risky stuff.