JPMorgan lost $2 billion in a trading portfolio designed to hedge against risks the company takes with its own money, the bank announced this afternoon after the close of trading on Wall Street. The announcement sent JPMorgan’s shares sharply down by over 6% in after-hours trading.
JPMorgan Chase & Co. is the largest bank in the United States by assets and market capitalization, and a major provider of financial services, with assets of $2 trillion. The hedge fund unit of JPMorgan Chase is one of the largest hedge funds in the United States.
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.
Joe Weisenthal reports for Business Insider, May 10, 2012, that JPMorgan shocked the world by announcing a surprise $2 billion+ trading loss in its synthetic derivatives portfolio. In particular, this paragraph from the company’s 10-Q filing is what’s causing people to get nervous:
“Since March 31, 2012, CIO 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.”
CIO or 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.
The company held a conference call starting at 5 PM, where CEO Jamie Dimon insisted that this was a pure trading screwup (“egregious, self-inflicted mistakes”) due to the company’s own errors and stupidity and not something fundamental. Dimon characterized these losses as a result of sloppiness –an internal blunder, not something more fundamental.
How can a bank make a “sloppy mistake” of TWO BILLION DOLLARS ($2,000,000,000)?
Let’s hope this is not another MF Global.