Veronique DuPont New York
ONE OF the pillars of Wall Street, bank JPMorgan Chase, faced new scrutiny after it reported a shocking $2 billion (R16bn) derivatives loss that even its chief executive called “egregious”.
“It ought to be a concern to the Securities and Exchange Commission (SEC). They are the ones who ought to have a concern about that,” said Senator Carl Levin.
“The SEC should surely take a look at it,” added the Democratic legislator, who heads the Senate’s Permanent Subcommittee on Investigations.
According to The New York Times, the SEC was already on the case. The inquiry, which is being run from New York, would probably examine the bank’s past regulatory filings about the internal unit that placed the trades, as well as recent statements from the firm’s top executives, the paper said, citing unnamed people “briefed on the matter”.
The huge New York bank sent shivers through the markets with the loss, after having convinced many that a well-managed bank could manage the risks of complex derivatives that lay behind the 2008 financial crisis.
Politicians called for tightening regulation and tough controls on hedging activities, and a Republican senator requested a hearing into the case. “Are we confident that taxpayers are fully protected from losses at major financial institutions?” asked Senator Bob Corker in a letter to the Senate Banking Committee head.
JPMorgan chief executive Jamie Dimon revealed the losses last week in an unscheduled call to analysts, saying they were incurred in the last six weeks by the New York bank’s risk management unit, the chief investment office.
They involved trading in credit default swops usually meant to offset other risks in the bank’s investments, but Dimon said the strategy “morphed” into trading that was overly complex, poorly executed and badly overseen.
“These were egregious mistakes,” Dimon said. “They were self-inflicted and… this is not how we want to run a business.”
Although he said the bank was still profitable, Dimon acknowledged the positions could possibly lead to another $1bn in trading losses by the end of this quarter.
“Hopefully by the end of the year… this won’t be a significant item for us,” he said.
Investors made their displeasure brazenly apparent, savaging the bank’s shares from the start of Friday’s trading. The firm’s stock closed down 9.3 percent at $36.96, wiping around $14bn off the market value of the country’s largest bank.
There was little new information about what happened at the bank. Attention focused on the role of a London-based JPMorgan trader, French-born Bruno Michel Iksil, nicknamed “The London Whale” and “Voldemort”, after the villain in the Harry Potter books.
A source close to the matter said the loss was “related, but not exclusively” attributable to Iksil’s activities, which had been reported from London last month by The Wall Street Journal. “Everyone is talking about this, because once again it shows the power that a handful of people can have on the market,” a London trader said.
But others said such a large loss could not have occurred without the knowledge of Iksil’s superiors.
The Wall Street Journal said on Saturday that JPMorgan told traders several months ago to make bets aimed at shielding the bank from the market fallout of Europe’s deepening crisis.
But instead of shrinking the risk, their complicated bets backfired into losses of as much as $200 million a day in late April and early May, the paper pointed out. – Sapa-AFP