JPMorgan Chase & Co. chief executive officer Jamie Dimon took another step that showed humility and caution in the wake of a stunning $2-billion (U.S.) loss, or more, on derivatives by announcing on Monday that the company will quit spending capital on stock buybacks.
The company will suspend for now a $15-billion share repurchase plan that Federal Reserve regulators had just approved in March after running stress tests on the bank's capital, Mr. Dimon said at an investor conference.
The move will give JPMorgan added protection against having to reduce its quarterly dividend of 30 cents a share, which Mr. Dimon said the bank will maintain. It also gives Mr. Dimon a hedge against the long-shot chance that the bank's cash payouts might equal its reported earnings in a quarter.
Mr. Dimon's latest move reflects his strategy of handling the embarrassment from the loss by trying to get ahead of criticism.
"By getting ahead of the issue, JPMorgan is reducing the pressure on Capitol Hill for more severe responses, such as cutting the dividend," said Jaret Seiberg, a senior policy analyst in Washington for Guggenheim Securities.
"The further ahead you can get, the more you can mitigate the response and I think that is what we are seeing at play," said Mr. Seiberg.
When JPMorgan disclosed the losses on May 10, Mr. Dimon called the bank's handling of the credit derivatives portfolio "stupid" and said "egregious mistakes" were made with the trades.
Mr. Dimon normally relishes the chance to buy back shares at prices below $45, he said in early April in his annual letter to shareholders. Paying prices that are lower than what he believes is the company's true value increases the value of remaining shares held by investors, he explained. He complained last fall that regulators would not allow the bank to buy back more stock at low prices under a prior capital plan.
But without suspending the current repurchases, or booking gains on asset sales to offset the derivatives losses, JPMorgan would have run a heightened risk of paying out as much cash for shares and dividends as it reports in profits in a quarter.
That would have looked bad at a time when regulators want banks to continue building up capital to become safer.
The company has already paid out $2.1-billion this quarter, $1-billion for buybacks and $1.1-billion for dividends, according to Morgan Stanley analyst Betsy Graseck's calculations.
That would be as much as net earnings if the loss from the derivatives trade reaches $5-billion, before taxes, by end the of June, Ms. Graseck said.
Other analysts also have said the losses could reach $5-billion by year-end. Mr. Dimon has said the $2-billion in losses as of May 10 could rise another $1-billion or more.
Mr. Dimon said at Monday's conference that the bank is holding off on buybacks to make sure it stays on its planned "glide path" to reach rising capital requirements being imposed under so-called Basel 3 standards.
JPMorgan already had many ways to keep its reported profits above its payouts, Ms. Graseck said. She listed them in a report: selling assets to book gains, cutting costs, and drawing down on reserves already taken for bad loans.
Mr. Dimon said Monday the bank has made progress working down the losing trades. "We are going to wrestle the problem down," he said.
JPMorgan's stock has lost more than 20 per cent, or $30-billion, of market value since the trading losses were announced.
Mr. Dimon said the bank intends to restart stock buybacks once it has replenished the lost capital. The bank is capitalized well enough to withstand the losses, analysts said. It had $190-billion of shareholder equity supporting $2.32-trillion in assets at the end of March.
The faulty portfolio was built of layers of supposedly offsetting bets with credit derivatives tied to corporate bonds, both investment grade and junk. A model for measuring risk in the portfolio was changed some time during the first quarter. The change made the portfolio look less dangerous than it would have under an older risk model the bank had used for years.