The trade gone wrong at JPMorgan was initially thought to have caused a $2 billion loss, as disclosed by CEO Jamie Dimon on May 10. According to a NY Times Dealbook report, the loss has increased by more than 50 percent to $3 billion, citing people close to the situation at the bank.
While Dimon said from the beginning that losses could worsen, and possibly double, in a few months, nobody thought that the losses would expand so quickly, in a matter of days.
The bank also said that the final loss may not reflect the interim, as day-by-day values could fluctuate. Such mark-to-market losses are unrealized, and could move until the positions are closed out. Nevertheless, the losses do not bode well for Dimon and the bank.
The losses were due to large credit default swap positions accumulated by the firm’s Chief Investment Office (CIO) in London. Dimon has characterized the trades as being hedges gone wrong, however, some critics have argued that they are hard to envision as merely hedges.
Bruno Iksil, the infamous “London Whale” who accumulated the trading positions, will leave the bank, according to a report. Iksil follows the departure of Ina Drew, the 55-year old head of the CIO group. With Iksil—who has intimate knowledge of the trades—out of the picture, it is unclear whether the efficacy of the unwinding of the positions would be affected.
Calls for Regulation
The massive losses at JPMorgan have increased calls for more regulations over the banking sector, something which Wall Street banks have rallied against.
Critics argue that large banks—which are dubbed “too big to fail”—such as JPMorgan would cost taxpayers money by making reckless bets, with little repercussions because they would eventually be bailed out by the federal government in the event of insolvency. Moreover, given the inter-woven nature of the banking system, even if these big banks were allowed to fail, the damage they might cause could harm the larger economy.
“Even with this loss, I believe they’re one of the most profitable institutions in the country,” said Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services committee. “There is no risk from this loss to depositors or taxpayers.”
While that may be true, the loss raises questions over JPMorgan’s risk management and internal controls.
The U.S. FBI has put forth queries regarding the loss to the bank, and at least two shareholder lawsuits have been filed by JPMorgan shareholders this week.
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