JP Morgan is taking a loss of at least $2 billion from a failed hedging strategy, dragging shares, and the markets, lower on Friday. CEO Jamie Dimon said the losses are linked to a Wall Street Journal report last month about a London trader who had allegedly amassed an outsized position that hedge funds bet against. The trader heads up the credit desk at JP Morgan’s Chief Investment Office (CIO) and was well known for taking large positions.
In an SEC filing, JP Morgan said that since the end of March, its CIO has had significant mark-to-market-losses in its synthetic credit portfolio. Dimon said the blunder could cost an additional $1 billion or more, noting that “it is risky and it will be for a couple quarters.”
While the dollar loss is a big figure, an even larger issue could be the impact on the firm and Dimon’s reputation. Dimon has long been praised for his risk aversion and the bank has been viewed as a strong risk manager, specifically after it made its way through 2008 without reporting a loss. Additionally, Dimon has publicly criticized the Volcker rule, which is proposed to ban proprietary trading by big banks. Some analysts believe that the $2 billion loss could create further the support for the Volcker rule; although one notes that if the trades were meant to hedge a position as opposed to a proprietary bet on the markets it may not play as prominent role in the decision making process surrounding the Volcker rule as some think.
Late Friday it was announced the Securities and Exchange Commission has begun reviewing JP Morgan's disclosures related to the trading loss. The review is at an early stage and hasn't progressed to the status of a formal investigation. Such reviews are routine after public companies report unexpected losses that send their stock prices sharply lower.
JP Morgan (JPM : NYSE : US$36.95), Net Change: -3.79, % Change: -9.30%, Volume: 211,767,748