Bloomberg News

JPMorgan Swaps Fall as Bank Shifts Losing Credit-Index Trades

July 13, 2012

A gauge of risk for investors in JPMorgan Chase & Co. debt fell to the lowest in two months as the biggest U.S. bank said it shut down a credit-derivatives group that caused $5.8 billion in trading losses.

Five-year credit-default swaps on JPMorgan fell 6.4 basis points to a mid-price of 122.4 basis points as of 4:54 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s about the lowest since May 10, the day JPMorgan first disclosed a loss from credit derivatives traded in its chief investment office in London.

JPMorgan said today it shifted almost all of its credit derivatives trades in the CIO unit to its investment bank after a botched hedging strategy. The bank also shut down the trading group, which had amassed positions that had a pretax loss of $4.4 billion in the second quarter, according to a statement. Second-quarter profit dropped 9 percent to $4.96 billion as the loss spoiled what Chief Executive Officer Jamie Dimon called “really good underlying performance” in other businesses.

“Credit investors are taking comfort that the trade issues are moving to the rear-view mirror,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, wrote in an e-mail. “Core earnings were solid. What’s left is a well-capitalized bank that can earn $20 billion annually.”

‘Reasonable’ Outcome

The credit-derivatives losses offset gains in mortgage fees and retail banking revenue. Earnings for the quarter ended June 30 were also boosted by $1 billion in securities gains, $2.1 billion in reserve releases and an $800 million accounting gain on the cost of the bank’s debt.

The loss “is within the market’s scope of reasonable outcomes,” Adrian Miller, director of global markets strategy at GMP Securities LLC in New York, wrote in an e-mail. “Jamie has seemingly succeeded at mostly righting the ship after an initial black eye.”

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said the trading loss was “not that significant” and hadn’t swayed his opinion of JPMorgan’s reputation.

“I’ve had enough mistakes of my own that I’m very forgiving when something like that happens,” Buffett said today on Bloomberg Television’s “In the Loop With Betty Liu” in an interview from the Allen & Co. media conference in Sun Valley, Idaho.

CDX Index

A benchmark credit-default swaps gauge in the U.S. declined, with the Markit CDX North America Investment Grade Index falling 1.4 basis points to a mid-price of 111.9 basis points at 5 p.m. in New York, Bloomberg prices show.

The measure decreased even as a report showed U.S. consumer confidence unexpectedly dropped in July to the lowest level this year. The Thomson Reuters/University of Michigan index of consumer sentiment fell to 72 from a reading of 73.2 in June. The decline missed estimates that had called for a rise to 73.5, according to the median forecast of 69 economists surveyed by Bloomberg News.

The credit-swaps index, used to hedge against losses on corporate debt or to speculate on creditworthiness, typically falls as investor confidence improves and rises as it deteriorates.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

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


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