Monday, November 20, 2017

JPMorgan says inquiry shows traders may have tried to conceal losses

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

The bank said an internal investigation uncovered evidence that has led executives to "question the integrity" of the values, or marks, that traders assigned to their trades.

"This has shaken our company to the core," CEO Jamie Dimon said.

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

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

"We are not proud of this moment, but we are proud of our company," Dimon said Friday.

The investigation, which covered more than a million emails and tens of thousands of voice messages, suggested traders were trying to make losses look smaller, the bank said.

The revelation could expose JPMorgan and individual employees to civil fraud charges.

The Justice Department, the Securities and Exchange Commission and other regulators, including one in Britain, are looking into the loss. The Justice Department and the SEC declined to comment.

As a result of what it found, JPMorgan lowered its reported net income for the first quarter of this year by $459 million. The bank was still widely profitable: Even after the adjustment, it made $4.9 billion for the quarter.

JPMorgan also reported net income for the second quarter, which ended June 30, of $5 billion, far higher than the $3.2 billion that Wall Street analysts were expecting. The bank credited stronger mortgage lending and credit card business.

JPMorgan has said the trade in question was designed to offset potential losses made by its chief investment office. 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.

Banks typically build hedging strategies to limit losses if a trade turns against them. Hedges often involve credit default swaps, essentially insurance contracts that pay out if a given corporate bond goes into default.

In JPMorgan's case, instead of offsetting losses, the trade backfired and added to them. While the bank hasn't provided too many specifics on the trade, it appears that the bank believed it had bought too much protection against possible bond defaults, so it hedged its hedge by increasing its risk. In other words, instead of buying insurance, it was selling insurance. The bank found itself with a pool of investments that were difficult to sell quickly. The drawn-out process of unwinding that portfolio caused JPMorgan's losses to grow.

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