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JPMorgan loses $2bn in hedging 'error'
Investment bank blames "sloppiness and bad judgment" as loss wipes seven per cent off stocks in after-hours trading.
Last Modified: 12 May 2012 11:01

JPMorgan Chase, the largest bank in the United States, says it has lost $2bn in the past six weeks on a trading portfolio designed to hedge against risks the company takes with its own money.

The company's stock plunged almost seven per cent in after-hours trading after the loss was announced. Other bank stocks, including Citigroup and Bank of America, suffered heavy losses as well.

"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," CEO Jamie Dimon told reporters. "There were many errors, sloppiness and bad judgment."

The trading loss is an embarrassment for a bank that came through the 2008 financial crisis in much better health than its peers. It kept clear of risky investments that hurt many other banks.

The loss occurred in a division of JPMorgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

Maricruz Magowan, an economist, told Al Jazeera, that JPMorgan violated the Volcker Rule, which "prohibits banks to engage and invest in speculative deritives with money that is not going to benefit their customers."

"The first thing we have to do is have the best regulations, but make it clear so they understand the Volcker Rule," she said. "We're still confronted with the 'too big to fail' problem."

"It will take time to implement the ideas and lessons learnt from 2008."

'London whale'

Bloomberg News reported in April that a single JPMorgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in a $10 trillion market.

Dimon said the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader.

Dimon also said the company had "acted too defensively," and should have looked into the division more closely.

Partly because of the $2bn trading loss, JPMorgan said it expected a loss of $800m this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200m.

The loss is expected to hurt JPMorgan's overall earnings for the second quarter, which ends on June 30. Dimon apologised for the losses, which he said occurred since the first quarter, which ended March 31.

"We will admit it, we will learn from it, we will fix it, and we will move on," he said. Dimon spoke in a hastily scheduled conference call with stock analysts.

JPMorgan is trying to unload the portfolio in question in a "responsible" manner, Dimon said, to minimise the cost to its shareholders.

Source:
Agencies
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