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In the latest fallout of the huge trading loss, JPMorgan Chase & Co. (JPM - Analyst Report) has decided to remove the private equity-like operations – the special investments group – from its Chief Investment Office (CIO). This was first reported by Financial Times on Thursday. This group makes investments in other companies.
The special investments group has made noticeable private equity investments in Johnson Publishing, the publisher of Ebony magazine as well as in LightSquared, which recently filed for bankruptcy protection and France-based Technicolor SA.
Though not implicated in the trading loss, special investments group is banned from looking for fresh investment opportunities such as the private equity investments and risky credit derivatives positions. The group is now being included in JPMorgan’s Corporate division within the Corporate/Private Equity segment. Moreover, the unit will be re-focusing on its main activity, which is asset-liability management.
The restructuring efforts are part of the overall audit of the risk management ability of JPMorgan. In May, in its quarterly regulatory filing, the company stated that its CIO incurred nearly $2 billion mark-to-market losses during the first six weeks of the current quarter in its synthetic credit portfolio.
This portfolio was to protect the company against the potential losses on its large holdings of loans, deposits and bonds. However, the company’s strategy backfired as the repositioning of the credit portfolio was poorly monitored and executed.
The CIO unit is a big money-making division of JPMorgan, creating billions in revenue from hedging and other types of risk mitigating techniques. The customers considered the company to be a safe haven and entrusted their money with them, which eventually led to huge amount of deposits lying idle with the company.
Near-term End to Woes Unlikely
Since the announcement of the trading loss, JPMorgan has been facing the wrath of the investors, employees and regulators alike. Moreover, Fitch Ratings and Standards & Poor’s (S&P) revised their assessments for the company. Further, Gregory Scrydloff, a former employee of JPMorgan, and the company’s shareholders recently sued the CEO and the top management for alleged misrepresentations of the facts in three separate lawsuits.
The proclamation of significant trading losses at JPMorgan is also pressurizing the regulators to apply stringent regulations on financial companies. In addition to this, the company’s losses have been under intense scrutiny by the Department of Justice, the Commodity Futures Trading Commission (CFTC) and the Federal Reserve. The FBI has also joined the bandwagon to inquire about the same.
Additionally, JPMorgan temporarily suspended its $15 billion share repurchase program. The primary reason for the halt was the fact that it does not want any glitches in the path of meeting the Basel III capital requirements. JPMorgan would re-start the program once it is able to rebuild the capital it lost as a result of the trading loss.
We hope that the reorganization of the CIO unit would be last one resulting from the trading loss. Also, all the major banks in the country such as Bank of America Corporation (BAC - Analyst Report), Wells Fargo & Company (WFC - Analyst Report), The Goldman Sachs Group Inc. (GS - Analyst Report), Citigroup Inc. (C - Analyst Report) and Morgan Stanley (MS - Analyst Report) follow the trend set by JPMorgan. However, we hope that other banks are not going to turn up with similar trading loss announcements.
Currently, JPMorgan retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral rating on the stock.