Losses at JPMorgan nearly $6B, not $2B

Traders may have tried to hide data

7/14/2012

NEW YORK -- JPMorgan Chase said Friday its traders may have tried to conceal losses from a soured bet that has embarrassed the bank and cost it almost $6 billion -- about three times more than its chief executive first suggested.

JPMorgan, America's largest bank, said it planned to revoke two years' worth of pay from some of the senior managers involved in the bad bet and that it had closed the division of the bank responsible for the mistake.

"This has shaken our company to the core," Chief Executive Officer Jamie Dimon said.

The bank said the loss, which Mr. Dimon estimated at $2 billion when he disclosed it in May, had grown to $5.8 billion and could grow larger than $7 billion if financial markets deteriorate severely.

Mr. Dimon said the worst appeared to be behind the bank, and investors seemed to agree: They sent JPMorgan stock up 6 percent Friday, making it the best performer in the Dow Jones industrial average.

The market ended a six-day losing streak and the Dow Jones industrial average was up 204 points, the best day this month.

JPMorgan stock gained $2.03 to $36.07. That left it 11 percent below its closing price of $40.74 on May 10, the day Mr. Dimon surprised analysts with a conference call to disclose the loss.

Daniel Alpert, a founding managing partner with New York investment bank Westwood Capital Partners LLC, said the bank and Mr. Dimon appeared to have learned from the crisis.

He said Mr. Dimon now realizes how complex and difficult to manage the bank is, will be more diligent, and probably won't be the crusader he has been against proposed financial regulation.

An internal inquiry by JPMorgan, which covered more than a million emails and tens of thousands of voice messages, suggested traders tried to make losses look smaller, the bank said.

The revelation could expose JPMorgan to civil fraud charges.

If regulators decide employee deceptions caused JPMorgan to report inaccurate financial details, they could pursue charges against the employees, the bank, or both.

The criminal investigation began in earnest the last few weeks after JPMorgan's internal inquiry uncovered that traders may have intentionally masked losses, said one source not authorized to speak about the matter.

"I see little doubt that someone is going to get charged with fraud," said Bill Singer, a lawyer at Herskovits in New York who provides legal counsel to securities industry firms and publishes the BrokeandBroker Web site.

Authorities ranging from the FBI to the U.S. Securities and Exchange Commission are investigating the bank.

The SEC could charge JPMorgan with weaknesses in oversight and internal controls, said James Cox, a securities law expert at Duke University.

JPMorgan could not necessarily hide behind its employees' actions.

Regulators could decide its oversight or risk management contributed to the problematic statements.

As a result of what it found, JPMorgan lowered its reported net income for the 2012 first quarter by $459 million.

The bank was still profitable: Even after the adjustment, JPMorgan reported net income for the second quarter, which ended June 30, of $4.9 billion, far higher than the $3.2 billion analysts expected.

The bank credited stronger mortgage lending and credit-card business.

JPMorgan has said the trade in question was aimed at offsetting potential losses made by its chief investment office. Mr. Dimon told Congress last month it was meant to protect the bank in case "things got really bad" in the global economy.

JPMorgan has more than $1 trillion in customer deposits and more than $700 billion in loans. The chief investment office invests the excess cash in a variety of securities, including government and corporate debt and mortgage-backed securities.

Banks typically build hedging strategies to limit losses if a trade turns against them.

In JPMorgan's case, instead of offsetting losses, the trade backfired and added to them.

Mr. Dimon said Ina Drew, the bank's former chief investment officer, who left after the loss came to light, volunteered to return as much of her pay as was allowed under the so-called clawback provision in her contract. She made more than $30 million combined in 2010 and 2011, according to an Associated Press analysis of regulatory filings. It was not clear how much she was voluntarily paying back.

When she resigned under pressure in May after more than 30 years at the bank, she left unvested stock and stock options worth close to $14 million from the last two years.

In addition, the bank said it would revoke two years' worth of pay from three other senior managers in the bank division where the trade occurred. The bank would not say how much money it expected to recover.

Those three senior managers have left the bank; four others are expected to leave soon.