JPMorgan’s Derivatives Losses Reach $9 Billion and Counting


The New York Times reported that JPMorgan’s trading losses from credit derivatives may total as much as $9 billion, far exceeding the firm’s initial estimate. Initially, CEO Jamie Dimon disclosed that the bank lost more than $2 billion. The losses have increased as the bank has unwound the trades. (“Would you believe $9B? JPMorgan trading loss said to be growing exponentially,” InvestmentNews).
“We are now in the realms of speculation in terms of the sheer scale,” Christopher Wheeler, a London-based analyst at Mediobanca SpA, was quoted as saying.
JPMorgan said it plans to disclose part of the loss in its quarterly filings on July 13.

If the $9 billion figure holds, that would be about 1.67 times the amount of its first quarter profit of $5.4 billion, according to the Times article. Perhaps more significantly, the debacle undermines Mr. Dimon’s credibility in arguing that banks are over-regulated, and should be left alone to pursue the kind of risky bets that led to the loss.

“[T]he sharply higher loss totals will feed a debate over how strictly large financial institutions should be regulated and whether some of the behemoth banks are capitalizing on their status as too big to fail to make risky trades” (“JPMorgan Trading Loss May Reach $9 Billion,” New York Times DealBook).

What JPMorgan put at risk was federally insured deposits, according to Mark Williams, a professor of finance at Boston University, who has also served as a Federal Reserve bank examiner. “Essentially, JPMorgan has been operating a hedge fund with federal insured deposits within a bank,” Mr. Williams was quoted as saying.

The loss was not a bolt out of the blue that caught JPMorgan by surprise. Senior JPMorgan executives had long worried about the trades of the trader in question, Bruno Iksil, but took no action. Iksil was known as the London Whale for his outsize trades in the credit markets. In addition to being overly large and risky, the positions were illiquid. In fact, in 2010, a senior JPMorgan executive prepared a detailed estimate of how much money the bank stood to lose if it had to get out of all Iksil’s trades within 30 days. The senior executive recommended that JPMorgan consider setting aside reserves to cover possible losses that might stem from Iksil’s trades. “It is not known how much was recommended as a reserve or whether Mr. Dimon saw the report, but the warning went unheeded.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.