JP Morgan Chase (NYSE: JPM) cannot escape its enormous loss on a credit derivatives bet gone bad.
The London Whale trade, as it is informally known, was originally reported as a $2 billion loss. But now The New York Times has reported the loss will total $9 billion — and maybe more.
But Money Morning subscribers were well aware of the possibility JP Morgan's losses would exceed $4 billion or $5 billion. Money Morning Capital Wave Strategist Shah Gilani repeatedly said this "hedge" was really a bet, and was among the first to predict how large the losses would eventually turn out to be.
Gilani, who hosts the radio show "On the Money!" in addition to his Money Morning duties, had this to say about JP Morgan's ill-conceived bet:
"What it does is shine the light on what is actually happening. It's not the loss in terms of the money, it's the loss in terms of faith for [CEO] Jamie Dimon, that he has been pushing hard against the regulators… in particular to the Volcker Rule, saying there is no need for it and it and that banks have a good handle on their risk… and that we (JP Morgan) don't have a problem with it because we are just hedging."
Just hedging? Gilani certainly doesn't think so.
Gilani said that statement is a flat-out lie and that Dimon has basically lied to Congress in his testimonies over the past weeks.
In the testimony before the House Financial Services Committee last week, Dimon said the London unit had "embarked on a complex strategy" that exposed the bank to greater risk even though it had intended to minimize risk.
JP Morgan Ignored Warning
Even though JP Morgan has worked quickly to exit its position in the trade (it's reported to be out of more than half of the trade already), there is no denying the bank is continuing to reel from the loss.
The Times article stated that in 2010 a senior executive at the chief investment office put together a detailed report estimating how much money the bank stood to lose if it had to get out of all of Bruno Iksil's (the London Whale) trades within 30 days. The executive recommended putting aside assets to protect the company from any losses incurred by the trades.
It's unclear whether Dimon knew of this report, but either way, the fact no action was taken doesn't look good.
In fact, JP Morgan's reputation – as well as that of Dimon — may be the biggest long-term casualty of the fiasco.
Whether the final tally for the losses is closer to $6 billion or $9 billion won't matter as much as the loss of confidence in the bank from investors and businesses alike.
Gilani said that banks like JP Morgan get into trouble because they're doing things they're not supposed to be doing. "They knew what they were doing, they knew they were pushing garbage, they were liars."
(To listen to Gilani's entire "On the Money" radio broadcast, which covers JP Morgan, what's going on in Europe, and the course the U.S. economy is on in 2012, click here.)
JP Morgan has announced it will disclose part of the total losses on the abysmal bet on July 13, when it reports second-quarter earnings.
Despite the setback, the bank has said it will be solidly profitable for the quarter. That's a testament to the bank given how volatile the markets have been and the lack of volume which has hurt Wall Street. JP Morgan reported a first-quarter profit of $5.4 billion.
We won't know for sure the full extent of the London Whale loss until JP Morgan completely exits its position, which won't be until the end of this year at the earliest.
Related Articles and News:
- Money Morning:
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- Money Morning:
This is the Ultimate Liar's Club
- Money Morning:
Inside JPMorgan's (NYSE:JPM) Magical Fun Palace
- The New York Times:
JP Morgan Loss May Reach $9 Billion