Mon, May 14, 2012

JPMorgan will move to limit the fallout from a shock trading loss that could reach $3 billion or more by parting company with three top executives involved in its costly failed hedging strategy, sources close to the matter said.

The bank – the biggest in the United States by assets – is expected to accept the resignation this week of Ina Drew, its New York-based chief investment officer and one of its highest-paid executives, in the next few days, the sources said.

Two of Drew’s subordinates who were involved with the trades, London-based Achilles Macris and Javier Martin-Artajo, are also expected to be asked to leave, they said. Neither was available for comment on Monday.

The departures come after the unit Drew runs, known as the Chief Investment Office (CIO), mismanaged a portfolio of derivatives tied to the creditworthiness of bonds, according to bank executives.

The portfolio included layers of instruments used in hedging that became too complicated to work and too big to quickly unwind in the esoteric, thinly traded market.

One hedge fund manager who previously ran a proprietary (or prop) trading book at JPMorgan said the bank’s public commitments to trim balance sheet risk were at odds with its network of trading silos, who were making bets independently with only a handful of the bank’s most senior executives notified of their vast, complex exposures.

“This (CIO) group was completely separate, completely distinct from the prop trading unit. We had no clue about their prop book and they would have no clue about ours for that matter,” the manager said.

“They were all totally independent. All the activities were reported to New York and they ran the allocation of capital to each and every strategy … those decisions were definitely not taken in London. These things were very, very opaque. Every bank is, whether you’re Goldman, Morgan (Stanley) or JP.”

Drew had repeatedly offered to resign in recent weeks after the magnitude of the debacle became clear, according to one of the sources, but the resignation was not immediately accepted because of her past performance at the bank.

Until the loss was disclosed late on Thursday, Drew was considered by some market participants as one of the best managers of balance sheet risks. She earned more than $15 million in each of the last two years.

“Ina is an amazing investor,” said a money manager who knows Drew, but who declined to be quoted by name. “She’s done a really good job over a lot of years. But they only remember your last trade.”

RISK MANAGEMENT

Departures had been on the cards in the wake of the trading losses, though in disclosing the losses on Thursday, CEO Jamie Dimon said only that the bank was continuing to investigate and would take disciplinary action with those involved.

Dimon said the bank’s losses could reach $3 billion or more as it unwinds the positions in coming months.

The losses have marred JPMorgan’s reputation for risk management, prompted a downgrade in its credit ratings and thrown an unflattering spotlight on Dimon, a critic of increased regulation who had become one of America’s best-known bankers.

On Sunday, Dimon’s bravado was badly tarnished when the New York Times reported remarks he made recently at a dinner party in Dallas. Dimon called arguments about too-big-to-fail banks – arguments made by former Federal Reserve chief Paul Volcker and Richard Fisher, president of the Federal Reserve Bank of Dallas – “infantile” and “nonfactual,” according to the Times.

Dimon is himself a board member of the Federal Reserve Bank of New York. Elizabeth Warren called for him to resign that post on Sunday. Warren, who chaired the congressional committee that oversaw the bank bailout program known as TARP and is running for the Senate, said he should not be on the panel advising the Fed on bank management and oversight.

“We need to stop the cycle of bankers taking on risky activities, getting bailed out by the taxpayers, then using their army of lobbyists to water down regulations,” Warren said.

Dimon has struck a more contrite pose since revealing the losses. In an interview that aired on Sunday, he told NBC’s “Meet the Press” the bank’s handling and oversight of the derivative portfolio was “sloppy” and “stupid” and that executives had reacted badly to warnings last month that the bank had large losses in derivatives trading.

He said executives were “completely wrong” in public statements they made in April after being challenged over the trades in news reports.

“We got very defensive. And people started justifying everything we did,” Dimon said. “We told you something that was completely wrong a mere four weeks ago.”

The loss, and Dimon’s failure to heed the warnings, have become major embarrassments and have given regulators new arguments for tightening controls on big banks and requiring them to hold more capital to cushion possible losses.

Issues relating to the bank’s internal controls were raised in 2010 when it was fined 33 million pounds by Britain’s Financial Services Authority for failing to segregate client month from its own in the UK – an incident that also led to its auditor PwC being fined 1.4 mln by its professional body for failing to spot the transgression.

No-one at PwC, JPM’s global auditor, could immediately be reached for comment.

JPMorgan lost $15 billion in stock market value the day after the latest loss announcement. Some analysts were shocked Dimon did not have as much control of the company’s derivatives book as they had thought. Before the loss, Dimon had been widely praised for successfully managing the company through the credit bubble and the financial crisis.

His strategy in dealing with the issue has been to apologize repeatedly and say straight-forwardly that he and the bank erred. He has not, however, been willing to describe the exact trading positions, for hear of giving traders in the market information with which to inflict deeper losses.

Dimon is scheduled to speak on Tuesday at the bank’s annual meeting in Tampa, Florida.

GRANT ROBERTSON

Friday, May. 11, 2012

JPMorgan Chase & Co., (JPM-N40.740.100.25%) long viewed as one of the best-managed U.S. banks, has suffered a multibillion-dollar trading blunder that its chief executive officer called “stupid” and “egregious.”

Speaking to analysts and investors on a hastily arranged conference call Thursday evening, JPMorgan CEO Jamie Dimon said the bank had made a massive mistake in its hedging strategy, causing up to $2-billion (U.S.) in losses in the last six weeks. But Mr. Dimon warned the damage could worsen: the bank may also face an additional $1-billion in losses for the second quarter due to market volatility.

It is a humbling turn for the swashbuckling Mr. Dimon, who emerged during the recent credit crisis as the brash, no-nonsense CEO of one of the largest American banks and one who had Washington’s ear. Mr. Dimon upbraided several of his rival CEOs for their reckless ways leading up to the U.S. banking crisis, and often touted JPMorgan’s record of planning and managing risk.

The bank’s shares outperformed those of many other banks during the credit crisis, and recently came back to almost their pre-crisis levels. But they fell more than 6 per cent during after-hours trading to $38.15 after the disclosure of the trading loss.

Though Mr. Dimon said the trading mistake wouldn’t leave JPMorgan in peril, he noted the losses are an embarrassing and costly mistake that the bank must now wear. The bank was attempting to unwind a hedge position it held against volatility in the credit markets, but the strategy began to backfire, causing further mistakes that the bank’s top executives didn’t oversee properly.

“It was a bad strategy, it was badly executed, became more complex, [and] it was poorly monitored,” Mr. Dimon said, laying the blame at the feet of JPMorgan’s traders and on his own management team for not properly handling the situation. Though he refused to get into the specifics of what went wrong, Mr. Dimon did not put the blame on market volatility for the losses. “That’s usually just an excuse,” he said.

Banks typically use hedges to protect themselves against large swings in the market. As the previous hedge expired, JPMorgan traders, working out of the bank’s London office, began building a new hedge position to replace it.

However, through market swings over the last several months, the traders made a series of bad bets and increasingly complex trades, which compounded the damage as the losses mounted.

Asked if other major banks could find themselves with the same problem on their hedges, Mr. Dimon said bluntly that he doubted they would. “Just because we’re stupid, it doesn’t mean everybody else was. I have no idea what other people are doing,” he said.

“Obviously it puts egg on our face, and we deserve any criticism we get,” Mr. Dimon said. “So feel free to give it to us, and we’ll probably agree with you.”

It was a remarkable conference call as Mr. Dimon offered multiple mea culpas. He said some of the trades were so large that unwinding the positions meant inevitable losses. The bank will be working over the remainder of the year to mitigate the losses through further trades, and hoped to lessen the impact, he added

JPMorgan has moved many of its trading functions to London over the past year in the face of new rules designed by former U.S. Fed chairman Paul Volcker that were created to limit banks speculating in the market. Known as the ‘Volcker Rule,’ the new regulations are intended to get banks to focus more on what they traditionally do, taking deposits and making loans, rather than speculating with their own funds.

However, Mr. Dimon has been a staunch opponent of the reforms, saying banks need to make such moves to build hedges. Further, JPMorgan has said its London office was being used primarily to hedge risk, rather than create bets in the market in search of profits.

Mr. Dimon acknowledged Thursday that the losses suffered by JPMorgan will give ammunition to his critics who support the implementation of the Volcker Rule. However, Mr. Dimon said the hedging activities the bank was doing before the losses wouldn’t violate the Volcker Rule, though they did go against “the Dimon principle,” he said, in that is was a series of poorly executed trades.

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