JP Morgan (NYSE: JPM) Earnings Pinched by Trading Blunder

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Despite a $4.4 billion loss stemming from bad credit bets, JPMorgan Chase (NYSE: JPM) still posted a profit of $4.96 billion for the second quarter.

Total losses from the botched trades have reached $5.8 billion, according to Dough Braunstein, JP Morgan's CFO. And it's not over – CEO Jamie Dimon said in the earnings conference call Friday (today) that the fiasco could result in $700 million to $1.7 billion in further losses.

"We learned lessons that will make a stronger company," a contrite Dimon said.

And what expensive lessons they were. The company revealed that the loss on credit derivatives executed by traders in its London's chief investment office (CIO) swelled to $4.4 billion in the second quarter, up from the $2 billion loss it first reported in May when the trading gaffe was exposed.

Dimon nevertheless assured the analysts that JP Morgan has the crisis under control.

"We think we've boxed this," Dimon said.

While Dimon said his bank is eager to put the botched trades behind it, shareholders, regulators and the media have not been willing to let the story die. The massive trading loss from the London "whale trade" was on everyone's mind during and following the earnings report.

The bank also said it would restate first quarter earnings "because it was no longer confident the company's traders had fairly valued positions with the CIO office" that handled the notorious trades. In other words, traders may have attempted to hide the losses and cook the books.

That's not what investors or regulators want to hear, especially from a member of an industry that has been less than transparent, saddled with scandal and has lost a great deal of the consumer's confidence.

Both the Justice Department and the Securities and Exchange Commission have launched investigations into the trading loss.

JP Morgan's Earnings By the Numbers

The second quarter profit of $4.96 billion was down 9% from a year earlier, a remarkable feat considering the heavy losses from the bungled trade. On an after-tax basis, the trading loss reduced the company's second quarter profit by 69 cents.

JP Morgan earned $1.21 a share for the second quarter, down from $1.27 a share from the same period a year ago. That easily beat analysts' estimates of 70 cents.

Total revenue dropped to $22.9 billion, down 16% from $27.4 billion from a year earlier.

Revenue for the investment bank division fell from $7.3 billion a year earlier to $6.8 billion in Q2. A bright spot was its retail financial services unit, which reported net income of $2.3 billion — far better than the $383 million earned in the same quarter a year ago.

Meanwhile, the restatement of the first quarter earnings will drop that period's net income by $459 million.

JP Morgan also said it would cut compensation within the investment bank by 22% to $2.01 billion.

In addition, the bank said it will "claw" back compensation from at least three executives in London responsible for the trading debacle. Among them is Ina Drew, who oversaw the CIO office. Specific numbers were not disclosed, however.

Restoring JP Morgan's Reputation

Dimon continues to maintain that the bank's "fortress balance sheet" is sound.

"Importantly, all of our client-driven businesses had solid performance," the CEO said on the conference call.

Throughout the call, Dimon reiterated that the company has strengthened its risks controls to avoid further losses.

With the bad trades now transferred to the investment bank division, the CIO unit will now refocus on its "core mandate of conservatively investing excess deposits to earn a fair return," he said.

Still, Dimon has much work to do to restore the storied bank's once stellar reputation. What three months ago Dimon referred to as a mere "tempest in a teapot" is still simmering and not going away any time soon.

No doubt the Dow bellwether hopes that with other big banks reporting next week, attention will shift in another direction.

In midday trading, JP Morgan stock was up 5.8% at 36.01, but still well off its 52-week high of $46.69.

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