JPMorgan Chase & Co., long viewed as one of the best-managed U.S. banks, has suffered a multibillion-dollar trading blunder that its chief executive officer called "stupid" and "egregious."
Speaking to analysts and investors on a hastily arranged conference call Thursday evening, JPMorgan CEO Jamie Dimon said the bank had made a massive mistake in its hedging strategy, causing up to $2-billion (U.S.) in losses in the last six weeks. But Mr. Dimon warned the damage could worsen: the bank may also face an additional $1-billion in losses for the second quarter due to market volatility.
It is a humbling turn for the swashbuckling Mr. Dimon, who emerged during the recent credit crisis as the brash, no-nonsense CEO of one of the largest American banks and one who had Washington's ear. Mr. Dimon upbraided several of his rival CEOs for their reckless ways leading up to the U.S. banking crisis, and often touted JPMorgan's record of planning and managing risk.
The bank's shares outperformed those of many other banks during the credit crisis, and recently came back to almost their pre-crisis levels. But they fell more than 6 per cent during after-hours trading to $38.15 after the disclosure of the trading loss.
Though Mr. Dimon said the trading mistake wouldn't leave JPMorgan in peril, he noted the losses are an embarrassing and costly mistake that the bank must now wear. The bank was attempting to unwind a hedge position it held against volatility in the credit markets, but the strategy began to backfire, causing further mistakes that the bank's top executives didn't oversee properly.
"It was a bad strategy, it was badly executed, became more complex, [and]it was poorly monitored," Mr. Dimon said, laying the blame at the feet of JPMorgan's traders and on his own management team for not properly handling the situation. Though he refused to get into the specifics of what went wrong, Mr. Dimon did not put the blame on market volatility for the losses. "That's usually just an excuse," he said.
Banks typically use hedges to protect themselves against large swings in the market. As the previous hedge expired, JPMorgan traders, working out of the bank's London office, began building a new hedge position to replace it.
However, through market swings over the last several months, the traders made a series of bad bets and increasingly complex trades, which compounded the damage as the losses mounted.
Asked if other major banks could find themselves with the same problem on their hedges, Mr. Dimon said bluntly that he doubted they would. "Just because we're stupid, it doesn't mean everybody else was. I have no idea what other people are doing," he said.
"Obviously it puts egg on our face, and we deserve any criticism we get," Mr. Dimon said. "So feel free to give it to us, and we'll probably agree with you."
It was a remarkable conference call as Mr. Dimon offered multiple mea culpas. He said some of the trades were so large that unwinding the positions meant inevitable losses. The bank will be working over the remainder of the year to mitigate the losses through further trades, and hoped to lessen the impact, he added
JPMorgan has moved many of its trading functions to London over the past year in the face of new rules designed by former U.S. Fed chairman Paul Volcker that were created to limit banks speculating in the market. Known as the 'Volcker Rule,' the new regulations are intended to get banks to focus more on what they traditionally do, taking deposits and making loans, rather than speculating with their own funds.
However, Mr. Dimon has been a staunch opponent of the reforms, saying banks need to make such moves to build hedges. Further, JPMorgan has said its London office was being used primarily to hedge risk, rather than create bets in the market in search of profits.
Mr. Dimon acknowledged Thursday that the losses suffered by JPMorgan will give ammunition to his critics who support the implementation of the Volcker Rule. However, Mr. Dimon said the hedging activities the bank was doing before the losses wouldn't violate the Volcker Rule, though they did go against "the Dimon principle," he said, in that is was a series of poorly executed trades.