JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said the firm lost about $2 billion on synthetic credit securities after an egregious failure in its chief investment office, which the bank says focuses on hedging. This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed, the New York-based company said today in a quarterly securities filing. JPMorgan declined 5.5 percent to $38.50 in extended trading at 5:55 p.m. in New York.
The chief investment office has been transformed in recent years under Dimon into a unit that makes bigger and riskier speculative bets with the banks money, according to five former employees, Bloomberg News reported April 13. Some bets were so big that JPMorgan probably couldnt unwind them without losing money or roiling financial markets, the former executives said.
Bloomberg News first reported April 5 that London-based trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market.
After the Bloomberg report, Dimon on a conference call said the news coverage was a complete tempest in a teapot.
The losses disclosed today were a little bit to do with the article in the press, Dimon said, without specifying who in the bank oversaw the trades. I also think we acted a little bit too defensively to the reports.
Flawed, Complex
Synthetic credit products are derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt. The losses occurred as the company sought to unwind a portfolio of the instruments used to hedge JPMorgans credit exposure.
In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored, Dimon said.
JPMorgan said the losses were partly offset by gains from the sales from its available-for-sale credit portfolio, resulting in a net loss for the firms corporate division, which includes the CIO, of about $800 million after taxes. The losses could widen or narrow during the rest of the quarter, Dimon said.
The bank is repositioning the synthetic credit portfolio, and the CIO may hold certain of its current synthetic credit positions for the longer term, the firm said.