JPMorgan Chase & Co said on Thursday that it suffered a $2 billion trading loss from a failed hedging strategy, a disclosure that hit financial stocks and the reputation of the bank and its prominent CEO, Jamie Dimon.
Since the end of March, the company's Chief Investment Office "has had significant mark-to-market losses in its synthetic credit portfolio," the company said in a quarterly filing with the Securities and Exchange Commission.
JPMorgan said that other gains partially offset the trading loss, and that it estimates that the business unit with the portfolio will post a loss of $800 million in the second quarter, excluding private equity results and litigation expenses. That compares with a profit of about $200 million that the bank had forecast previously.
"It could cost us as much as a $1 billion or more," Dimon said in a hastily scheduled conference call in which he apologized to stock analysts. "It is risky and it will be for a couple quarters," Dimon said.
The dollar loss, though, could be less significant than the hit to Dimon and the bank's reputation. JPMorgan had $2.32 trillion of assets supported by $190 billion of shareholder equity at the end of March. The bank is the biggest in the United States by assets.
"This puts egg on our face," Dimon admitted.
JPMorgan has been viewed as a strong risk manager after never reporting a loss during the financial crisis and being the bank that was strong enough to take over investment bank Bear Stearns and consumer bank Washington Mutual when they collapsed in 2008.
This announcement could taint that reputation "as well as hurt management's credibility," Barclays analyst Jason Goldberg wrote in a note to clients.
Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial, said, "Jamie has always styled himself as one of the kings of Wall Street," she said. "I don't know how this went so bad so quickly with his knowledge and aversion to risk."
JPMorgan shares fell 5 percent after the closing bell, and other financial shares also fell sharply. Citigroup was down 2.4 percent and Bank of America was down 1.7 percent.
Dimon called the bank's mistake "egregious." He acknowledged that the errors are especially embarrassing in light of his public criticism of the so-called Volcker rule to ban proprietary trading by big banks.
"It plays right into the hands of a bunch of pundits out there, but that is life," Dimon said. He said he still believes in his arguments against the Volcker rule. The problem at JPMorgan, he said, was with the execution of the hedging strategy.
The strategy "morphed over time" and it was "ineffective, poorly monitored, poorly constructed and all of that," Dimon said.
"This violated our principles. This trading violates the Dimon principle."
The Chief Investment Office is an arm of the bank that JPMorgan has said is used to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.