One trader in the CIO took big enough positions in credit derivatives markets to earn the nickname “London Whale.”.
Dimon and his team on Friday plan to disclose more about the bad derivatives bets its Chief Investment Office made on portfolios of corporate bonds, bets likely to cost the bank $4 billion to $6 billion, according to a source.
N) reports earnings, telling Wall Street that the bank has capped losses from the bad trades and found the key risk management flaw behind the positions.
The CIO mis valued its credit derivatives positions in the first quarter, which overstated the group’s net income by $459 million for that period, JPMorgan said.
However, the strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency, can cause capital markets to underprice credit risk.
The CIO, which manages risk for the overall bank and invests excess deposits, will now focus on conservative investments and will no longer trade credit derivatives, JPMorgan said.
Indeed, the use of derivatives to mask credit risk from third parties while protecting derivative counterparties contributed to the financial crisis of 2008 in the United States.
The update will come as the bank reports second quarter results that Chief Executive Jamie Dimon said were on the whole “solidly profitable.”.
The trading losses have been a black eye for a Chief Executive Officer who was respected for keeping his bank consistently profitable during the financial crisis.
Put option volume that day exceeded 400,000 contracts, surpassing the peak seen during the 2008 financial crisis, according to Edwards.
Even with the CIO losses, JPMorgan posted second quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.
Analysts expect JPMorgan to earn 72 cents per share on roughly $22 billion of revenue in the second quarter.
The derivative loss after taxes reduced earnings per share by 69 cents, the company said.
The bank expects to file new, restated first quarter results in the coming weeks.
The derivatives loss stemmed from a hedging strategy gone wrong in the London office, where market sources said trader Bruno Iksil was among those making whale sized bets.
Friday’s financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a “tempest in a teapot.
Nicole Hansch is a business journalist based in Sydney, Australia. Nicole has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Nicole spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.