JPMorgan Chase & Co’s shock trading loss of at least $2bn from a failed hedging strategy knocked financial stocks across the globe yesterday, as well as the reputation of the biggest US bank by assets and its chief executive Jamie Dimon.
For a bank viewed as a strong risk manager that navigated the fallout from the 2008 financial crisis without reporting a loss, the errors are embarrassing, especially given Mr Dimon’s public criticism of the so-called Volcker rule to ban proprietary trading by big banks.
“This puts egg on our face,” Mr Dimon admitted.
He conceded the losses were linked to a Wall Street Journal report last month about a London-based trader, Bruno Iksil, nicknamed the ‘London Whale’, who, the paper said, amassed an outsized position which hedge funds bet against.
JPMorgan had informed the Financial Services Authority (FSA) of the situation, but this was a regulatory requirement and there was no indication at this stage that the regulator would take any action, a source familiar with the situation said. Talks between the bank and the watchdog were continuing.
Mr Iksil, who is French and graduated in engineering from the Ecole Centrale in Paris in 1991, was not immediately available for comment.
JPMorgan’s chief investment office – and Mr Iksil in particular – are well known by credit traders for taking large positions.
He was brought into the CIO unit to head its credit desk, an asset class the unit had not previously covered, a person who worked in the unit said.
It built up credit positions over several years through trades vetted by management and the losses now likely resulted from a combination of these trades, the person said.
These traders say other banks have comparable functions to JPMorgan’s CIO. The French banks, Citigroup, Deutsche Bank and UBS were all cited as examples of large treasury functions that hedge credit exposures in similar ways.
In a Securities and Exchange Commission filing, JPMorgan reported that since the end of March, its chief investment office has had significant mark-to-market losses in its synthetic credit portfolio – these typically include derivatives intended to mimic the performance of securities.
JPMorgan had $2.32 trillion of assets supported by $190bn of shareholder equity at the end of March – an equity ratio of almost 13 per cent.
That is four times the industry mean and ahead of 10-11 per cent at Citigroup and Bank of America Corp.
JPMorgan has been earning more than $4bn each quarter, on average, for the past two years.
“Jamie has always styled himself as one of the kings of Wall Street,” said a banking analyst. “I don’t know how this went so bad so quickly with his knowledge and aversion to risk.”