Dimon, who asked regulators in a February letter to loosen up their definition of portfolio hedging, said on a May 10 call with analysts that JPMorgan’s chief investment office made ‘‘egregious mistakes’’ by taking flawed positions on synthetic credit. He previously pushed the unit, which oversees about $360 billion, to seek profit by speculating on higher-yielding assets, ex-employees said in April.
The positions were ‘‘done with the intention to hedge the tail risk for JPMorgan’’ and could result in an additional $1 billion loss or more as they’re wound down, Dimon said. ‘‘But I am telling you it morphed over time; and the new strategy, which was meant to reduce the hedge overall, made it more complex, more risky, and it was unbelievably ineffective.’’
JPMorgan profited in 2011 by betting that credit conditions would worsen. Then in December, the European Central Bank provided long-term loans to Eurozone banks, igniting a bond rally and leaving JPMorgan’s bearish bets vulnerable. So the chief investment office made offsetting bullish investments using credit-default-swap indexes that are thought to expire at the end of 2017, according to market participants.
The office put on another bearish trade to protect against short-term losses using contracts due in 2012, market participants said. Losses may have mounted when prices between the two indexes became distorted because JPMorgan was such a big seller of insurance. The trader who built the credit-derivatives positions, Bruno Iksil, was nicknamed the ‘‘London whale’’ because the investments became so large.
Credit conditions subsequently deteriorated, and hedge funds increased purchases of the 2017 contracts, sending those higher than the 2012 index and boosting JPMorgan’s losses.
The company’s investments can’t ‘‘be described in any way as a hedge,” Michael Platt, co-founder and CEO of BlueCrest Capital Management LLP, said in a May 21 interview with Bloomberg Television. “I think it’s a trading loss. They deliberately put the positions on. The London whale, who has subsequently been harpooned, put the positions on.”
Geneva-based BlueCrest manages $32 billion and took a “small” position against JPMorgan, Platt said.