For a bank viewed as a strong risk manager that went through the financial crisis without reporting a loss, the errors are embarrassing, especially given Dimon’s public criticism of the so-called Volcker rule to ban proprietary trading by big banks.
“This puts egg on our face,” Dimon said, apologising on a hastily called conference call with stock analysts. He conceded the losses were linked to a Wall Street Journal report last month about a trader, nicknamed the London Whale, who, the report said, amassed an outsized position which hedge funds bet against.
JPMorgan said in a filing with the Securities and Exchange Commission that since the end of March, its chief investment office has had significant mark-to-market losses in its synthetic credit portfolio, a product that typically includes derivatives in a way intended to mimic the performance of securities.
While other gains partially offset the trading loss, the bank estimates the business unit with the portfolio will post a loss of $800 in this quarter, excluding private equity results and litigation expenses. The bank previously forecast the unit would make a profit of about $200m.
“It could cost us as much as $1bn or more,” in addition to the loss estimated so far, Dimon said. “It is risky and it will be for a couple quarters.”
The dollar loss, though, could be less significant than the hit to Dimon and the reputation of a bank which was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008. JPMorgan had $2.32tn of assets supported by $190bn of shareholder equity at the end of March — an equity ratio of almost 13%, four times the industry mean and ahead of 10%-11% at Citigroup and Bank of America Corp — and 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 Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. “I don’t know how this went so bad so quickly with his knowledge and aversion to risk.”