Bloomberg News

JPMorgan Moves Whale’s Trades to Investment Bank as Loss Grows

July 13, 2012

Credit derivatives trades in JPMorgan Chase & Co. (JPM:US)’s chief investment office that triggered $5.8 billion in losses have been “significantly reduced,” with the remainder moved to its investment bank, the lender said.

JPMorgan, the biggest U.S. bank, shut down synthetic trading in its CIO unit with the exception of an $11 billion short position in “basically liquid indexes” to hedge other credit assets, Chief Executive Officer Jamie Dimon said in a meeting in analysts today. Positions in Series 9 of the Markit CDX North America Investment Grade Index, a credit-swaps benchmark known as IG9 that’s at the heart of much of the loss, were cut by 70 percent, Dimon said.

The residual portfolio, largely trades in so-called tranches of indexes that wager on the degree to which companies will default together, was transferred to the investment bank, where they have “the expertise” to manage it, Dimon said. The bank transferred about $30 billion of risk-weighted assets to the investment bank, an amount that is “down substantially” from the peak and back to levels at the end of 2011, he said.

The bank shifted the positions as it seeks to stem losses from a group in London that included Bruno Iksil, the trader who became known as the London Whale because the size of his bets grew so large they drove price disparities in the market. Total losses from those trades this year reached $5.8 billion, Chief Financial Officer Doug Braunstein said today in a meeting with analysts.

Trades Backfire

The CIO’s credit swaps trades, initially intended as a hedge against another financial crisis or economic downturn, backfired as the group sought to comply with orders from executives late last year to reduce its positions. The bank was left with even bigger and harder-to-manage exposures, Chief Executive Officer Jamie Dimon said last month before the Senate Banking Committee.

A review of the CIO also found that employees may have sought to hide losses, the bank said today in a restatement of its first-quarter results that reduced net income by $459 million.

An internal review “identified concerns around the integrity of traders’ marks,” the bank said in a presentation. The bank found “e-mails, voice tapes and other documents, supplemented by interviews, suggestive of trader intent not to mark positions where they believed they could execute,” according to the presentation. “Traders may have been seeking to avoid showing full amount of losses.”

Obscured Loss

Citing people familiar with the matter, Bloomberg News reported May 30 that CIO was valuing some of its trades at prices that differed from those of its investment bank, the biggest swaps dealer in the U.S., potentially obscuring by hundreds of millions of dollars the magnitude of the loss before it was disclosed.

The net amount of credit protection bought or sold through the Markit CDX North America Investment Grade Index, a credit- swaps benchmark known as IG9 that market participants say was at the heart of the loss, has dropped 22 percent to $117.4 billion in five weeks ended July 6, according to the Depository Trust & Clearing Corp. That’s the least since the period ended Jan. 27.

The so-called net notional outstanding had surged an unprecedented 67 percent to $150 billion in the 17 weeks ended April 27.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $60.3 USD
    • -0.66
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