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JPMorgan Chase Announces $5.8 Billion Fail Whale Loss to Date

$5.8 Billion and counting (image: kun530 / flickr)

In an earnings statement for the second quarter of 2012, JPMorgan Chase announced that they lost $4.4 billion in Q2 on the “Fail Whale” trades out of their Chief Investment Office in London. Overall they still managed to book a $5 billion profit for the quarter.

This comes up on the low end of estimates of losses from the trades, but there are more quarters to come where they can book additional reductions. And even at the low end, this is more than twice the loss that JPMorgan Chase initially announced from the trades. Not to mention the fact that the bank had $1.4 billion in losses from the trades in the first quarter. So as Jill Schlesinger reports, the total losses come to $5.8 billion, nearly three times the original estimates. And CEO Jamie Dimon set the worst-case scenario for continued losses at $1.7 billion. That’s a potential $7.5 billion hit from these trades. We should look at that with the understanding of not how JPMorgan Chase managed it, but how a weaker bank would. And then you can see the potential for disaster here.

The net income of $5 billion for Q2 was actually down from $5.4 billion in Q2 last year. The bank also restated their total losses from Q1, adding an additional $459 million. This interesting footnote appeared in their 8-K filing:

“Recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the firm is no longer confident that the trader marks used to prepare the firm’s reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end.”

This refers to the Fail Whale trades, and suggests that their traders tried to cover up the numbers. Dimon referred to clawbacks of compensation from traders and executives on the earnings call, which has been reported previously. He also announced on the call that they would shut down their synthetic credit portfolio, where all these losses took place. This doesn’t create much solace after the fact.

Despite all this, JPM made money on paper, helped in no small part by a fire sale of assets and scratching a plan for a share buyback. The full press release is available here.

In reaction to the report, Elizabeth Warren restated her desire to impose new rules to prevent these kinds of losses at depository institutions:

“Banking should be boring. JP Morgan’s disclosure today of massive losses shows they are still riding the roller coaster – and they need months to figure out how much risk they have taken. The announcement of losses that are more than twice the amount that was initially disclosed shows how Wall Street continues to load up on risks that can threaten both our economy and the security of regular people,” Warren said. “A new Glass-Steagall would separate high-risk investment banks from more traditional banking. It would preserve Wall Street’s ability to take risks without threatening people’s retirement accounts and life savings.”

More on the earnings call here.

CommunityThe Bullpen

JPMorgan Chase Announces $5.8 Billion Fail Whale Loss to Date

In an earnings statement for the second quarter of 2012, JPMorgan Chase announced that they lost $4.4 billion in Q2 on the “Fail Whale” trades out of their Chief Investment Office in London. Overall they still managed to book a $5 billion profit for the quarter.

This comes up on the low end of estimates of losses from the trades, but there are more quarters to come where they can book additional reductions. And even at the low end, this is more than twice the loss that JPMorgan Chase initially announced from the trades. Not to mention the fact that the bank had $1.4 billion in losses from the trades in the first quarter. So as Jill Schlesinger reports, the total losses come to $5.8 billion, nearly three times the original estimates. And CEO Jamie Dimon set the worst-case scenario for continued losses at $1.7 billion. That’s a potential $7.5 billion hit from these trades. We should look at that with the understanding of not how JPMorgan Chase managed it, but how a weaker bank would. And then you can see the potential for disaster here.

The net income of $5 billion for Q2 was actually down from $5.4 billion in Q2 last year. The bank also restated their total losses from Q1, adding an additional $459 million. This interesting footnote appeared in their 8-K filing:

“Recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter. As a result, the firm is no longer confident that the trader marks used to prepare the firm’s reported first quarter results (although within the established thresholds) reflect good faith estimates of fair value at quarter end.”

This refers to the Fail Whale trades, and suggests that their traders tried to cover up the numbers. Dimon referred to clawbacks of compensation from traders and executives on the earnings call, which has been reported previously. He also announced on the call that they would shut down their synthetic credit portfolio, where all these losses took place. This doesn’t create much solace after the fact.

Despite all this, JPM made money on paper, helped in no small part by a fire sale of assets and scratching a plan for a share buyback. The full press release is available here.

In reaction to the report, Elizabeth Warren restated her desire to impose new rules to prevent these kinds of losses at depository institutions:

“Banking should be boring. JP Morgan’s disclosure today of massive losses shows they are still riding the roller coaster – and they need months to figure out how much risk they have taken. The announcement of losses that are more than twice the amount that was initially disclosed shows how Wall Street continues to load up on risks that can threaten both our economy and the security of regular people,” Warren said. “A new Glass-Steagall would separate high-risk investment banks from more traditional banking. It would preserve Wall Street’s ability to take risks without threatening people’s retirement accounts and life savings.”

More on the earnings call here.

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David Dayen

David Dayen