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After reviewing an internal report related to JPMorgan Chase & Co.’s (JPM - Analyst Report) controversial hedging strategy, The New York Times on Thursday reported that the company’s trading losses could swell up to $9 billion in a worst-case scenario. This figure is almost triple the amount expected by the CEO, when he made the announcement of the trading loss in early May.
JPMorgan had announced that in the first six weeks of the second quarter, its chief investment office had incurred nearly $2 billion of mark-to-market losses in an index of credit default swap, which was meant to protect the company against potential losses on its large holdings of loans and bonds. However, the strategy backfired as the repositioning of the credit portfolio was poorly monitored and executed.
Last week, CNBC reported that the company offloaded approximately 65–70% of its holdings in Series 9 of the CDX North America Investment Grade Index. While declaring the loss, the CEO had commented that it would take almost a year to unwind these risky positions. However, the company has been exiting from the loss-making trade at a faster-than-expected pace. This undue haste in unwinding these risky positions is believed to lead to further trading losses.
Though management has been trying to conceal the details related to its failed derivatives, many traders and other hedge fund investors in apprehension of the distress at JPMorgan are creating swift drops in the underlying positions that are held by the company. Nevertheless, a few other investors are also helping the company to offload positions profitably.
In the major fallout of the mounting trading loss, the reliability of JPMorgan and its top management is at stake. This also questions the risk management ability of the company that remained steadfast during the financial crisis of 2008 and continued to report profit.
Moreover, JPMorgan continues to face the wrath of the investors, employees and regulators alike. Further, Fitch Ratings and Standard & Poor’s (S&P) revised their assessments on the company. The huge trading loss has also renewed the debate on the severity with which large banks and financial institutions should be regulated.
Further, JPMorgan’s share price has fallen nearly 12% since the announcement of the trading loss on May 10, thereby wiping out billions of dollars worth of shareholder returns.
We hope that 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), which follow the trend set by JPMorgan, will not report similar losses in the near future.
We are expected to receive further clarity on JPMorgan’s trading losses and updated loss forecast while announcing its second quarter results on July 13.
Currently, JPMorgan retains a Zacks #4 Rank, which translates into a short-term Sell rating.
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