JPMorgan Chase has admitted that its traders may have deliberately hidden losses that have since climbed to $5.8 billion for the year, a development that may result in criminal charges against traders at the bank.
"This has shaken our company to the core," CEO Jamie Dimon said on Friday. Dimon said he believed the loss was mostly contained.
The US bank has fired all the managers in the London office responsible for the trade and planned to revoke two years worth of pay from each of those executives.
The bank's Chief Investment Office made big bets now known as "the London Whale trades" on corporate debt using derivatives. JPMorgan said in the worst-case scenario those trades will lose another $1.7 billion, and it has fixed the problems in the CIO's office.
But JPMorgan's disclosure that CIO traders may have lied about their positions could bring even more intense regulatory scrutiny to the bank, analysts said. It is already under investigation by agencies ranging from the FBI to the UK's Financial Services Authority.
The bank's original estimate of the loss from the bad trade, disclosed in a surprise conference call with Wall Street analysts in May, was $2 billion.
Even with the bank's trading losses, it earned nearly $5 billion overall in the second quarter, thanks to strong performance in areas like mortgage lending, But investors appeared relieved, and sent JPMorgan's stock price up $1.50, or more than 4 per cent, to $35.54.
The initial acknowledgment of the problem came in May amid scrutiny of the actions of one trader, Bruno Michel Iksil, nicknamed "the London Whale". He has now been fired.
Dimon told US Congress last month that the trade was meant to hedge risk to the company and protect it in case "things got really bad" in the global economy.
Instead, the trade has backfired and damaged the bank's reputation.
The scandal was a humiliation for Dimon, one of Wall Street's best known titans, and for the bank, after it proudly came through the 2008 financial crisis in far better shape than its rivals.