JPMorgan Chase loses big in derivatives gamble | Business| Economy and finance news from a German perspective | DW | 11.05.2012
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JPMorgan Chase loses big in derivatives gamble

The biggest bank in the US has squandered $2 billion (1.54 billion euros) in an investment aimed at profiting from the eurozone debt crisis. The mistaken gamble has thrust the regulation question back into the spotlight.

The huge loss had emerged over the past six weeks in an investment portfolio originally designed to help the bank control financial market risks, JPMorgan Chase announced late on Thursday.

Admitting that there were "many errors, sloppiness and bad judgment" involved in managing the portfolio, JPMorgan's Chief Executive Jamie Dimon told a hastily scheduled news conference that the investment "proved to be riskier, more volatile and less effective as an economic hedge than we thought."

"We will admit it, we will learn from it, we will fix it, and we will move on," Dimon said, adding that the bank would seek to unload the portfolio in a "responsible manner" to limit damage to its shareholders.

However, analysts told the AP news agency they were skeptical that the investment had been designed to protect against financial market risks, and that the bank appeared to have been betting for its own profit.

A case of casino capitalism

According to an article in the Wall Street Journal last month, JP Morgan was heavily invested in an index of so-called credit default swaps (CDS), which are products to ensure against default by debt issuers.

In addition, Bloomberg News reported in April, that a single JPMorgan trader in London, known in the bond market as 'the London whale' was moving prices through exceptionally large trades. Chief Executive Jamie Dimon admitted that the loss was "somewhat related" to that story.

Presumably in connection with the Greek debt swap completed in April, the CDS index had lost value, forcing JPMorgan to sell its investments at a loss.

"These instruments are not regularly and efficiently priced, and a company can wake up one day, and find out they're in a terrific hole," Michael Greenberger, a professor at University of Maryland, told AP news agency.

The announcement of the loss has led to mounting calls for tougher regulation to monitor banks' trading activities.

"The enormous loss is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making," US Democratic Senator Carl Levin said Thursday.

JPMorgan Chase CEO Jamie Dimon is one of the staunchest critics of tighter US trading rules which come into force in July 2014, and which would have made this loss "less likely," as Michael Greenberger told AP.

The bank's shares fell 6.7 percent in after-hours trade, pulling fellow banks down with it.

uhe/ar (Reuters, AP)