JPMORGAN CHASE’S shock trading losses wiped billions of dollars from banks’ market capitalisation yesterday and intensified political pressure on regulators to clamp down hard on risk-taking at financial groups.
Shares in JPMorgan fell more than 8 per cent, knocking in excess of $10 billion (€7.7 billion) from the bank’s equity value and also dragging down Citigroup, Morgan Stanley and Goldman Sachs as investors bet that the impact would spread to other institutions.
Mary Schapiro, chairman of the Securities and Exchange Commission, said regulators were looking into the JPMorgan disclosure late on Thursday that it had incurred losses of $2 billion from trading credit derivatives in its chief investment office.
Traders said moves in the derivatives index thought to be linked to JPMorgan’s positions indicate that the bank is losing more money.
Positions taken by Bruno Iksil, a trader nicknamed “the London Whale” or “Voldemort” for his outsize positions in a credit derivatives index, are implicated in the losses, according to people familiar with the matter.
Jamie Dimon, JPMorgan’s chief executive, said during an extraordinary conference late on Thursday that the losses were “somewhat related” to those trades, which he had previously dismissed as “a complete tempest in a tea pot”.
Rival bank executives privately expressed concern that rules governing trading could be toughened in the aftermath of JPMorgan’s revelation.
Regulators are finalising the so-called Volcker rule, designed to prohibit banks from proprietary trading, but elected officials pressured them yesterday to ensure that the supposed “hedging” from JPMorgan would also be covered in an expansive clampdown.
“The draft rules on this are way too lax,” said Jeff Merkley, a Democratic senator. “They do not have the bright lines that are needed.”
JPMorgan has refused to detail how its trading strategy went awry, partly because it still holds some of the lossmaking positions and is afraid of allowing rivals to bet against it, which would potentially worsen its losses.
Hedge funds which have traded against JPMorgan’s positions said the bank’s estimate of $1 billion to exit the trades was highly optimistic, and could be a multiple of that. “The position may have started as a hedge, and may have been justified as a hedge,” said one, “but it would have been a very poor hedge”.
The chief investment office, run by Ina Drew, a member of the bank’s operating committee, is supposed to hedge the bank’s exposures and invest its excess deposits. But critics have warned it is a source of risk-taking beyond the scrutiny of regulators. Some inside JPMorgan have previously expressed concern about the strategy of the unit, according to people familiar with the situation.
“Given the volume of trading, it is hard for me to believe that they haven’t set up the CIO as a proprietary profit centre – although much remains to be explained,” said Daniel Alpert, managing partner of Westwood Capital.
JPMorgan also faces possible regulatory questions over restating its “value at risk” in the CIO. On Thursday, the bank said its maximum daily losses in the division were about double the level it had previously disclosed. – (Copyright The Financial Times Limited 2012)
