JPMorgan Trading Loss
Saba Capital Management founder Boaz Weinstein was the first one to draw attention to outsize bets by a JPMorgan Chase (JPM) trader. It was only then that on May 10, 2012, JPM's CEO first announced a credit derivatives trade loss of $2 billion, and figured that it may surge by at least another $1 billion. As a result, the shares sharply plunged by 5% during extended trading. The figure was not revised since then, until Thursday, June 28. On Thursday, The New York Times reported that the loss could surge up to $9 billion. The stock has lost 1.36% of its value since June 28 and 11.4% since May 10. CNBC reported last week that the bank has offloaded 65%-70% of its loss-making holdings. While it could take a year to unwind the entire position, the bank is exiting this position quicker than expected, which could lead to further losses.
The reputation of JPM's CEO as the best risk manager of the industry has been tarnished, which is why he asked Feldstein, a former JPM executive and the fund manager at BlueMoutain Capital Management, to assist the bank in unwinding the trades. Feldstein bet against JPM before assisting the bank in unwinding more than $20 billion of its trades. His fund made $300 million by exploiting price distortions caused by JPM's outsized bets. Feldstein's gains from JPM's flawed trades exceeded that of Weinstein of Saba Capital Management. The New York Times also reported that JPM's former brokers have accused the bank of favoring selling its own funds over that of others. Geoffrey Tomes, who left JPM last year to work for Urso Investment Management, said this was clearly being done to enrich the bank, meaning it was all about the money and not the clients. JPM's advisors were put under pressure by the bank's sales culture to do so, even when the competitors' products performed better. In its defense, JPM management says it has customers who want proprietary funds, and that they have in-house expertise to provide that service. These controversial practices created clear conflicts of interest.
The latest development is that the bank is being probed for possible power market manipulations, and is being scrutinized for its internal controls. Regulators have asked the bank to demonstrate whether or not its risk models are working properly.
It seems as if problem after problem keeps creeping up for the bank. However, we are of the view that a lot of this has been priced in already. JPM's second-quarter earnings are expected to be filed on July 13, 2012. This is when the CEO will provide a clear picture on the loss-making holdings. Among a variety of options that the bank could opt for in order to offset the trading loss and boost its quarterly income, it could sell high-yielding securities to book a onetime gain. Despite the ballooned losses, the bank is expected to show strong profitability, as stated by its CEO. Since the markets have realized a lot of this already, the earnings report could be a turnaround for the bank. Other bank stocks like Citigroup (C), Bank Of America (BAC), and Morgan Stanley (MS) will also start reporting next week.
Similarly, the news from other large banks around the world is not very encouraging. U.K.'s Barclays Bank CEO Robert Diamond resigned on Tuesday amid intense investor and political pressure over rigging the LIBOR and TIBOR. This resignation takes place a day after its chairman stepped down. The bank's ADR (BCS) is down by 1.76%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.