US probes whether Jpmorgan traders hid losses
US FEDERAL investigators are looking at whether JPMorgan Chase & Co. traders hid trading losses that have since grown to $5.8 billion, according to a person familiar with the matter, after the bank said its own probe found reason for suspicion.
JPMorgan, the largest US bank, said it believes it will lose, at most, another $1.7 billion from the bad credit trades.
Problems at the group that made the bets, the Chief Investment Office, have been fixed, said chief executive Jamie Dimon. CIO traders had used derivatives to bet on corporate debt.
Investors cheered the bank for capping losses and taking steps to ensure it avoids similar bad bets in the future.
JPMorgan’s shares rose 6 percent on Friday.
Even with the trading losses, JPMorgan earned nearly $5 billion overall in the second quarter, thanks to its strong performance in areas such as mortgage lending.
The trading losses may be mostly over, but with the disclosure that traders may have lied about their losses, regulatory and legal consequences will linger for some time.
Blame for the problems at the CIO office may go further up the management chain to some of the most senior executives at the firm, lawyers said.
The source said that federal criminal investigators are looking at people at JPMorgan in London, where the CIO’s risky bets were placed. The criminal investigation began in earnest in the past few weeks after JPMorgan’s internal investigation uncovered that CIO traders may have intentionally masked losses, said the source, who is not authorized to speak about the matter and declined to be identified.
“I see little doubt that someone is going to get charged with fraud,” said Bill Singer, a lawyer at Herskovits in New York who provides legal counsel to securities industry firms, and publishes the BrokeandBroker website.
Authorities ranging from the FBI to the US Securities and Exchange Commission are probing the bank. The SEC could charge JPMorgan with weaknesses in oversight and internal controls, said James Cox, a securities law expert at Duke University.
“I think the SEC will continue to look at ‘What exactly did Jamie Dimon know and when did he know it?’” Cox said.
An internal review found that some of the CIO traders appear to have deliberately ignored the massive size of their trades—and the difficulty in liquidating them—when valuing their positions. The values they reported ended up being too high, which is forcing JPMorgan to restate its first-quarter results.
The bank is cooperating with authorities.
The trading losses and possible deception from traders are a black eye for Dimon, who was respected for keeping his bank consistently profitable during the financial crisis. Dimon, who has criticized regulators for meddling too much with banks, has lost credibility because of difficulties in his own house.
“How do we know there are not more roaches in the kitchen?” said Paul Miller, an analyst at FBR Capital Markets, referring to the maxim that seeing a single roach typically means there are far more hiding in the woodwork.
The Chief Investment Office became infamous in May when JPMorgan said bad derivatives bets had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.
One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname “The London Whale.” He made at least some of the big bets that caused trouble for the bank, and has since left JPMorgan, a source said on Friday.
Ina Drew, who headed the CIO, has also left, and offered to give back as much of her pay as the bank was contractually entitled take back, said Dimon, whose pay could be taken back as well.