JPMorgan Chase Blows $2 Billion On High-Risk Derivatives

Remember last month, when I wrote about JPMorgan Chase gambling heavily on high-risk credit derivatives, and Jamie Dimon said it was a "tempest in a teapot"? Oops. JPMorgan Chase disclosed on Thursday that a trading group had suffered

Remember last month, when I wrote about JPMorgan Chase gambling heavily on high-risk credit derivatives, and Jamie Dimon said it was a "tempest in a teapot"?

Oops.

JPMorgan Chase disclosed on Thursday that a trading group had suffered “significant” losses in a portfolio of credit investments, with the chief executive, Jamie Dimon, estimating losses at $2 billion in a conference call.

“These were egregious mistakes,” Mr. Dimon said on the call. “They were self-inflicted and this is not how we want to run a business.”

And yet, apparently this is exactly how you run a business, Jamie! (Remember, this is the man who, not so long ago, was considered a shoo-in to replace Tim Geithner.) Ironic that JPMorgan Chase is considered the prudent bank, relatively speaking.

The troubles at the unit, the so-called Chief Investment Office, which makes trades to balance the bank’s assets and liabilities, are expected to weigh on the bank’s broader earnings.

For example, the corporate group, which includes the Chief Investment Office, is now expected to lose $800 million in the second quarter, the company said in a filing. Previously, JPMorgan had estimated that the group would report net income of roughly $200 million.

Ultimately, JPMorgan said, the final tally will depend on the markets and other actions by the bank. Mr. Dimon added that it could “easily get worse.”

Shares of JPMorgan were down 5.5 percent in after-hours trading, dragging down other bank stocks.

The trading group has been a focus in recent weeks as questions surfaced about big bets the JPMorgan unit was reportedly making in credit default swaps. Reports emerged in April about a JPMorgan trader in London whose positions were so big that they were distorting the market.

Mr. Dimon played down the significance. In a conference call on April 13, he called the matter “a complete tempest in a teapot.”

“Every bank has a major portfolio. In those portfolios you make investments that you think are wise to offset your exposures,” Mr. Dimon said in the April call. “At the end of the day, that is our job — is to invest that portfolio wisely, intelligently over a long period of time to earn income and to offset other exposures that we have.”

Now, the portfolio is wreaking havoc at the bank. In its filing on Thursday, JPMorgan pointed specifically to problems with its bets on credit.

Now remember, these are exactly the kinds of transactions the banking industry lobbied so hard to protect.

The Chief Investment Office “has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the company said in its regulatory filing.

“We have egg on our face,” Mr. Dimon said on Thursday. “We deserve any criticism we get.”

So if I point out that you're a scum-sucking bottom feeder (or, as Max Keiser calls you, "a tapeworm") who helped crash the international economy, pushed millions of Americans into the poorhouse and that your attitude that moral hazard is only for the little people who bought the crap you so blatantly peddled to them, you're acknowledging that you deserve it?

No, what you "deserve" is to be impoverished, left homeless and facing a long prison term. But we have a two-tiered justice system and that ain't happening. At least now we're going to see a closer look at regulating derivatives:

JPMorgan Chase’s $2 billion trading loss, which was disclosed on Thursday, could give supporters of tighter industry regulation a huge new piece of ammunition as they fight a last-ditch battle with the banks over new federal rules that may redefine how banks do business...The centerpiece of the new regulations, the so-called Volcker Rule, forbids banks from making bets with their own money, and a final version is expected to be issued by federal officials in the coming months. With the financial crisis fading from view, banks have successfully pushed for some exceptions that critics say will allow them to simply make proprietary trades under a different name, in this case for the purposes of hedging and market-making. The missteps by JPMorgan could highlight that murky line between proprietary trading and hedging. The bank unit responsible for losses takes positions to hedge activities in other parts of the bank.

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