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JPMorgan Chase Loses $2 Billion In Risky Trades
Originally published on Fri May 11, 2012 7:10 am
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JPMorgan Chase has acknowledged losing at least $2 billion over the last six weeks in an investment strategy that went awry. The losses are a big embarrassment to a bank that's usually seen as one of the best-managed on Wall Street. And the incident is already prompting new calls for tighter restrictions on bank trading.
NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: Unlike some other big banks, JPMorgan Chase came through the financial crisis with its reputation pretty much intact. Yesterday, it, too, had to take its licks. The bank admitted something that had been widely rumored in the markets for weeks. In a hastily arranged call with analysts yesterday afternoon, chief executive Jamie Dimon said the bank had lost a lot of money through risky investments.
JAMIE DIMON: It was a bad strategy. It was badly executed. It became more complex. It was poorly monitored.
ZARROLI: The trades took place in a unit of the company that is supposed to manage or hedge risk. But this time, the unit employed an unusually complex strategy that ended up backfiring on the bank.
Karen Shaw Petrou is managing partner of Federal Financial Analytics.
KAREN SHAW PETROU: Hedging is vital to safe and sound banking. The real question is: Was this a legitimate hedge? That's the issue.
ZARROLI: The losses are especially embarrassing for Dimon, because he had taken pains to deny the rumors circulating around the bank. The Wall Street Journal reported last month that a single trader based in London was making big bets in a kind of insurance policy known as credit default swaps.
During a conference call with analysts last month. Dimon called the reports a complete tempest in a teapot. Yesterday, Dimon apologized to those same analysts for misleading them.
DIMON: We operate in a risk business, and obviously it puts egg on our face and we deserve any criticism we get. So feel free to give it to us, and we'll probably agree with you.
ZARROLI: Dimon said we run a pretty good company with pretty good risk management. But not this time.
DIMON: We are not in a business where we're not going to make mistakes. We are going to make mistakes. We've always said that. Hopefully, they're small. Hopefully, they're few and far between. So I can never promise you no mistakes. This one, we would put in the egregious category.
ZARROLI: The call sometimes seemed like one long episode in self-flagellation. Dimon went out of his way to concede the bank's mistakes, and then some. One analyst asked him whether he thought other banks might have used the same hedging strategy that had gotten JP Morgan Chase in so much trouble.
DIMON: I don't know. Just because we're stupid doesn't mean everybody else was. I have no idea what other people are doing.
ZARROLI: That kind of bluntness has made Dimon stand out on Wall Street, says Karen Shaw Petrou.
PETROU: That's his personality. There's no securities law requirement that CEOs say what they really think, but Jamie Dimon, to his credit, tends to do that.
ZARROLI: Dimon would surely like to put the episode behind him, but that won't be so easy. He acknowledged yesterday that he had been speaking to bank regulators about what had happened. They are likely to launch an investigation.
The incident comes at a time when Congress is debating the so-called Volcker Rule, which would bar banks from trading with their own money. Dimon himself has been a big critic of the measure. It's not clear the Volcker Rule would have applied in this case, but critics are already using the incident to press for tighter restrictions on banks.
Democratic Senator Carl Levin of Michigan said the losses at Chase are just the latest evidence that what banks call hedges are often risky bets that big banks have no business making.
Dimon conceded that Chase's troubles would give bank critics new ammunition. It's very unfortunate, he said, but that's life.
Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.