JPMorgan Chase & Co. (JPM:US) had already lost more than $700 million on synthetic credit bets and Chief Executive Officer Jamie Dimon was told that number could climb to almost $1 billion when he dismissed press reports about the positions in April as a “tempest in a teapot.”
While JPMorgan booked a $718 million loss on the positions held by its chief investment office in the first quarter, it didn’t publicly specify the loss when releasing the results April 13. When an analyst asked Dimon that day about media coverage of the trades, he dismissed them as a minor issue.
Dimon first disclosed the CIO loss May 10, after it surpassed $2 billion, and by the end of the second quarter, it grew to $5.8 billion, the bank said today while announcing earnings. The botched trades led to the retirement of Chief Investment Officer Ina Drew and the shutdown of the London team that had built up a position too big for it to handle. Dimon said in Congressional testimony last month that he was “dead wrong” when he made the teapot remark.
“They talked today about the year-to-date loss and we were thinking, ‘When did this additional loss happen?’ ” said Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis. “None of this was brought to the investment community’s attention until May.”
The first-quarter loss figures were listed in a footnote on page 14 of a presentation posted today on the bank’s website.
Dimon and Chief Financial Officer Doug Braunstein asked for a review of the portfolio in preparation for the April 13 earnings announcement, said Mike Cavanagh, who led the firm’s internal investigation into the loss. The result of that review was an analysis that pegged the maximum “probable” loss for the second quarter at $250 million, Cavanagh said on a conference call with analysts today. The review said the positions could also gain $350 million with the analysis showing a “bias” toward a gain, he said.
JPMorgan today reported a $4.4 billion loss for the second quarter tied to the portfolio. It also restated first-quarter earnings to add $660 million of declines tied to the bad bets. That boosted the total first-quarter trading loss to $1.38 billion and cut the firm’s net income by $459 million.
JPMorgan, the largest U.S. bank by assets, is under investigation by the Securities and Exchange Commission and the Federal Bureau of Investigation, among other enforcement agencies, over how it handled and disclosed risks taken by the London trading unit. While Dimon’s teapot comment proved wrong, investigators and shareholders would likely find it hard to make the case that he was purposely misleading, said John Coffee, a securities law professor at Columbia University Law School.
Focus on Traders
“ ‘Tempest in a teapot’ is a characterization,” Coffee said. “You have to show that not only was it objectively wrong but that it was subjectively not made in good faith.”
Joseph Evangelisti, a spokesman for the bank, didn’t have an immediate comment.
Cavanagh today said that traders may have intentionally tried to mask losses in the first quarter by marking the value of their positions “aggressively.” The bank plans to claw back two years of pay from three London-based employees that oversaw the trades. It also accepted an offer from Drew to return compensation from a similar period.
Decisions on Dimon’s 2012 compensation and potential clawbacks will consider involvement in and responsibility for the losses in the CIO division, Cavanagh said today.
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