JPMorgan said last night that it suffered a trading loss of at least $2 billion from a failed hedging strategy, a surprise disclosure that hit financial stocks and the reputation of the bank and its prominent chief executive Jamie Dimon.
For a bank viewed as a strong risk manager that never reported a loss throughout the financial crisis, the errors are embarrassing, especially in light of Mr Dimon's public criticism of the so-called Volcker rule to ban proprietary trading by big banks, and could lead to more heat from Washington on the sector.
"This puts egg on our face," Mr Dimon said, apologising in a hastily called conference call with stock analysts and conceded that the losses were linked to a Wall Street Journal report in April about a trader, nicknamed the "London Whale", who, the report said, had amassed an outsized position.
JPMorgan shares were down 7.5 per cent to $37.70 in New York trading after tumbling as much as 9.9 per cent earlier today, the biggest intraday slide since August. The shares were at $40.74 before the news. They reached an almost one-year high of $46.27 in March.
JPMorgan said in a filing with the Securities and Exchange Commission that since the end of March, its Chief Investment Office has had significant mark-to-market losses in its synthetic credit portfolio. Synthetic portfolios typically include derivatives in a way intended to mimic the performance of securities.
While other gains partially offset the trading loss, the bank estimates the business unit with the portfolio will post a loss of $800 million in the second quarter, excluding private equity results and litigation expenses.
That compares with a profit of about $200 million for the unit it had forecast previously. "It could cost us as much as $1 billion or more," in addition to the loss estimated so far, Mr Dimon said. "It is risky and it will be for a couple quarters."
The dollar loss, though, could be less significant than the hit to Dimon and the reputation of the biggest US bank by assets - a bank which was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.
JPMorgan had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March and has been earning more than $4 billion each quarter, on average, for the past two years.
"Jamie has always styled himself as one of the kings of Wall Street," said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. "I don't know how this went so bad so quickly with his knowledge and aversion to risk."
