JPMorgan announced Thursday that it lost $2 billion in a trading portfolio designed to hedge against risks the company takes with its own money. As a result, that segment of its business is expected to record a second-quarter loss of at least $800 million.
JP Morgan Chase headquarters
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The bank's [JPM 40.74 0.10 (+0.25%) ] announcement, which came after the close of trading, sent its shares down sharply in after-hours trading. Click here to see the latest quote.
"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," CEO Jamie Dimon told reporters. "There were many errors, sloppiness and bad judgment."
The trading loss is an embarrassment for a bank that came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt most of its peers.
The loss came in a division of JPMorgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.
Since the end of March, the company's chief investment office, where the trading loss occurred, "has had significant mark-to-market losses in its synthetic credit portfolio," the company said in a filing.
The Chief Investment Office is an arm of the bank that JPMorgan uses to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.
In an April 13 interview on CNBC, JPM CFO Doug Braunstein talked about the CIO operation. (Click here to watch the interview)
In a surprise conference call after the announcement, Dimon said the losses came from the bank's "synthetic credit portfolio." Trades in that portfolio were "poorly executed" and the losses were "egregious, self-inflicted mistakes," he said.
"Just because we're stupid doesn't mean everybody else was," Dimon added. Investigation into trade was started by a Wall Street Journal report, Dimon said, which led to his admitting the mistake "violated the Dimon rule."
Bloomberg News reported in April that a single JPMorgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in the $10 trillion market.
Dimon said the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader. Dimon also said the company had "acted too defensively," and should have looked into the division more closely.
The Wall Street Journal reported last month that JPMorgan had invested heavily in an index of credit-default swaps, insurance-like products that protect against default by bond issuers.
Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss. The losses came in part because financial markets have been far more volatile since the end of March.
Partly because of the $2 billion trading loss, JPMorgan said it expects a loss of $800 million this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200 million.
The loss is expected to hurt JPMorgan's overall earnings for the second quarter, which ends June 30. Dimon apologized for the losses, which he said occurred since the first quarter, which ended March 31.
"We will admit it, we will learn from it, we will fix it, and we will move on," he said, adding that he hopes by the end of this year, the loss won't be an issue. Dimon spoke in a hastily scheduled conference call with stock analysts. Reporters were allowed to listen.
JPMorgan is trying to unload the portfolio in question in a "responsible" manner, Dimon said, to minimize the cost to its shareholders.
Dimon said the type of trading that led to the $2 billion loss would not be banned by the so-called Volcker rule, which takes effect this summer and will ban certain types of trading by banks with their own money.
The Federal Reserve said last month that it would begin enforcing that rule in July 2014.
Some analysts were skeptical that the investments were designed to protect against JPMorgan's own losses. They said the bank appeared to have been betting for its own benefit, a practice known as "proprietary trading."
Sen. Carl Levin, the chairman of the Senate Permanent Subcommittee on Investigations and co-author of the Merkley-Levin language establishing the Volcker Rule, said JPMorgan's $2 billion trading loss was a reminder of the need to regulate risky trading.
“The enormous loss JPMorgan 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," Levin, a Democrat from Michigan, said in a statement. "Today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards to implement the Merkley-Levin language to protect taxpayers from having to cover such high-risk bets.”
Bank executives, including Dimon, have argued for weaker rules and broader exemptions.
JPMorgan has been a strong critic of several provisions that would have made this loss less likely, said Michael Greenberger, former enforcement director of the Commodity Futures Trading Commission, which regulates many types of derivatives.
"These instruments are not regularly and efficiently priced, and a company can wake up one day, as AIG did in 2008, and find out they're in a terrific hole. It can just blow up overnight," said Greenberger, a professor at the University of Maryland.
Other financials' stocks were dragged down after the news broke, including Wells Fargo [WFC 33.19 0.56 (+1.72%) ], Bank of America [BAC 7.70 -0.03 (-0.39%) ] and Citigroup [C 30.65 0.20 (+0.66%) ]. (Click here for after-hours quotes)
Earlier Thursday, Standard & Poors lowered its rankings on JPMorgan Chase as a residential mortgage prime, subprime, and special servicer to "average" from "above average."
S&P said the downgrades "reflect several internal audits that were not considered satisfactory," in a statement, but was not specific as to what that meant.
In response to the audit, JPMorgan indicated that it will now focus on "ensuring that it meets the requirements of the March 2012 settlement with 49 state attorneys general and the U.S. federal government and initiate appropriate changes as necessary."
—The Associated Press contributed to this report.