Jamie Dimon will seek to restore investor confidence this week after a trading loss wiped out $39 billion of JPMorgan Chase & Co. (JPM:US)’s market value and marred his reputation as one of the industry’s best risk managers.
In a departure from his customary earnings-day conference call, Dimon will meet analysts for two hours on July 13 at the bank’s New York headquarters to field questions about the loss and what he’s doing to contain the damage. The firm also is being probed over the possible gaming of U.S. energy markets and was subpoenaed in global investigations of interest-rate fixing.
There has been a “sudden change of perception in the company,” said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a research firm based in Charlottesville, Virginia. “I’ve been watching banks for 30 years now and when they lose the luster, it is extremely hard for them to get it back, particularly when you have someone who was built up and lionized like Dimon.”
Bush said the 56-year-old chief executive officer did an “admirable job of saying nothing” when he appeared before Congress twice last month to testify about the trading loss, which stemmed from bets on credit derivatives at the firm’s chief investment office in London. “But I don’t know if that can go on,” Bush said.
JPMorgan intends to reclaim millions of dollars in stock from executives involved in the trading loss, including former Chief Investment Officer Ina Drew, and may disclose those details as early as July 13, when the company announces second- quarter results, the Wall Street Journal reported, citing people familiar with the firm’s plans.
The trading blunders will cost the company just over $5 billion in the quarter, in which the bank is expected to report a profit, according to the newspaper. Future losses on the trade are projected to stay below $1 billion and the remaining position could turn profitable if the market turns in the company’s favor, the newspaper said. The firm is confident that the losses have been capped as 80 percent to 90 percent of the position has been closed, the people said.
The bank also is expected to report that its internal investigation found that the risk failures were isolated to the CIO, according to the report. Joseph Evangelisti, a JPMorgan spokesman, declined to comment.
Dimon said last month that the bank probably will seek to reclaim pay from executives.
“We will take proper corrective action and it is likely there will be clawbacks,” he told the Senate Banking Committee on June 13.
JPMorgan, the biggest U.S. bank by assets, kicks off the industry’s second-quarter earnings season and may report a profit of 76 cents a share, excluding accounting adjustments, according to the average estimate (JPM:US) of 18 analysts in a Bloomberg survey.
“Nobody on the Street is going to care what net income is,” said Paul Miller, a former examiner for the Philadelphia Federal Reserve and an analyst with FBR Capital Markets Corp. in Arlington, Virginia. “We only care about core earnings, how big the loss was, how big can the loss grow, how far have you unwound the trade and then what was the contribution to profits from the CIO.”
Moshe Orenbuch, a Credit Suisse Group AG analyst in New York, said the meeting will help him determine the likelihood that JPMorgan might run into similar trouble again.
“He’s got some explaining to do about, first of all, what has transpired, what the size of the loss is, is there any remaining volatility and how should we be confident the problem won’t recur,” Orenbuch said yesterday in an interview with Tom Keene on Bloomberg Radio. Losses incurred since the period ended June 30 should be disclosed on the conference call, he said.
Second-quarter results also will be hurt by weak trading and investment-banking revenue (JPM:US) and shrinking margins on lending, Orenbuch said in an earlier interview. That will be mitigated by improving consumer-credit quality, strong mortgage volume and the release of reserves set aside to cover bad loans, he said.
“It’s kind of not the worst and not the best,” said Orenbuch, who estimates a $4 billion trading loss at the CIO and earnings per share of 68 cents. “They’ve had weaker (JPM:US) operating quarters in the back half of last year.”
Dimon said last month that the bank would be “solidly profitable” for the quarter even after the trading loss.
JPMorgan probably offset some of the loss with securities sales as well as gains from a so-called debt-valuation adjustment, said Charles Peabody, an analyst at Portales Partners LLC. Peabody estimated that DVA gains, which are paper profits that boost earnings when the cost of a company’s debt falls, will be $500 million. Orenbuch projected $760 million.
‘Smoke and Mirrors’
“It’s all smoke and mirrors,” said FBR’s Miller. “That’s why nobody’s going to care about” net income, he said.
JPMorgan said May 10 that it already took $800 million in profits from securities sales in the CIO to mitigate the trading loss. Peabody’s earnings-per-share estimate of 95 cents includes the accounting adjustment, a $3 billion loss on the London trading book and a $2 billion gain on securities sales. The total trading loss could be as big as $5 billion, he said.
Investors “want to know what happened, they want to know what Dimon knew and when he knew it,” said SNL’s Bush. “I don’t know if he’s going to be able to tell them that, because there’s always the consideration of what lawyers (JPM:US) are going to be listening for and what they will jump on.”
“You can imagine plaintiffs’ lawyers are licking their chops,” she said.
Investors also will be watching to see if JPMorgan reinstates its $15 billion share-repurchase program, which was suspended May 21 until the company could get a better handle on the trading loss, Goldman Sachs Group Inc. (GS:US) analysts including Richard Ramsden wrote in a June 26 note. “JPM could re-initiate its buyback program this year, particularly if it has been largely successful at exiting the CIO position,” the analysts wrote, referring to the bank’s stock ticker.
JPMorgan’s market value has plunged $38.9 billion since April 5, when Bloomberg News first reported the company had amassed an illiquid book of credit derivatives at the CIO in London. The stock has dropped 10 percent (JPM:US) since mid-2004, when Dimon joined JPMorgan as president and chief operating officer in its merger with Bank One Corp, compared with a 54 percent decline of the 24-company KBW Bank Index. (BKX)
“In five years, if the stock is not $100, I will eat my hat,” the New York Times quoted Dimon saying at an executive meeting about a week before the July 1 merger, when the stock closed at $38.17 a share. It settled yesterday at $34.25.
“He’s incessantly patting himself on the back because he didn’t burn the place to the ground,” said Janet Tavakoli, founder of Tavakoli Structured Finance Inc. in Chicago. “Where’s the price appreciation? You’d have been better off in T-Bills.”
JPMorgan and Wells Fargo & Co. (WFC:US) are the first of the six biggest U.S. banks to announce second-quarter results, and analysts estimate they will post the highest earnings of the group. San Francisco-based Wells Fargo, which reports an hour after JPMorgan, may say net income climbed 13 percent to $4.47 billion, or 81 cents a share, according to the average estimate of analysts in the Bloomberg survey.
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