NEW YORK (Reuters) - JPMorgan Chase & Co's losses from disastrous derivatives trades will likely amount to $4 billion to $6 billion in the second quarter, far more than the original estimate of at least $2 billion, according to a person familiar with the matter.
The bank has gotten out of more than half of the position, which it disclosed to investors last month, according to the source.
In exiting those trades, the bank dealt directly with hedge fund Saba Capital Management to close out that hedge fund's winning trades, according to a source familiar with the fund. Saba founder Boaz Weinstein was among the first to call attention to the outsize bets by a JPMorgan trader dubbed the "London Whale."
Despite the loss, JPMorgan is still expected to deliver the "solidly profitable" results that CEO Jamie Dimon predicted last week in congressional testimony, the source said.
The bank declined to comment.
The company has a variety of tactics it can use to offset the derivatives trading losses and boost its quarterly results, including selling securities at a profit to book one-time gains and drawing down its provisions for bad loans and lawsuits.
The bank, the biggest in the United States by assets, earns about $5 billion each quarter.
JPMorgan shares fell more than 5 percent early Thursday following a New York Times article that said internal projections at the bank in April said the losses could reach $8 billion to $9 billion, assuming worst-case conditions.
The shares dropped 2.45 percent to $35.88 at the close of New York Stock Exchange trading on Thursday while the KBW Bank stock index slipped 0.36 percent.
On May 10, Dimon, the bank's CEO, pegged the loss at $2 billion and warned the figure could rise by an additional "$1 billion or more." He has not publicly raised the loss estimate since, but has said the bank has made progress in limiting the loss.
Guessing the ultimate size of the loss has been a pastime on Wall Street, with estimates running as high as $5.9 billion, based on movements of obscure credit market indexes at the heart of the trades.
JPMorgan's stock, at Thursday's NYSE closing price of $35.88, has lost 12 percent since the bank's May 10 disclosure. It's recovered slightly from its drop of nearly 17 percent in the first week after the disclosure of the trading loss.
Dimon has promised to give a more complete report on the situation on July 13 when the company releases results for the second quarter.
More important than the exact amount of the trading loss, investors should be concerned about the impact of JPMorgan's response to this debacle on the company's earnings power, said Christopher Mutascio, an analyst at brokerage Stifel Nicolaus & Co.
"When they unwind that trade fully, those losses are going to be history," Mutascio said.
JPMorgan may move to keep up its profit by taking more one-time gains from selling securities that yield relatively high rates of interest, Mutascio said. Doing so would reduce profits in future quarters.
The bank has said it has already taken $1 billion of such gains to offset the losses. It sold an estimated $25 billion of profitable securities to take the gains.
Investors may also find that JPMorgan's earnings power was exaggerated in the past by risk-taking that has now been reduced, Mutascio said. That would bode poorly for earnings in 2013 and 2014, he added.
The bank's Chief Investment Office, where the bad trades were made, is expected to rein in its bets in many markets.
Investors should also be concerned about the impact of the loss on the company's plans to buy back stock, analyst Andrew Marquardt of Evercore Partners said in a note Thursday.
The bank suspended its buyback program shortly after announcing the trading loss because, Dimon said, it wanted to continue building capital to meet higher minimums being set by regulators.
The loss is a stunning setback for Dimon whose risk- management prowess had been virtually unquestioned until the May 10 announcement.
While the bank had loans go bad and lost billions of dollars on mortgage-related securities, it remained profitable through the financial crisis under Dimon and was strong enough to take over two failing financial institutions at the urging of the government, investment bank Bear Stearns and consumer bank Washington Mutual.
In April, Dimon confidently dismissed press reports of outsized positions at the bank's CIO office as a "tempest in a teapot." In May, he apologized to stock analysts and investors for those remarks. This month, he was called before two congressional committees to answer for the bank's mistakes.
Dimon said then that the trades had started out as hedges against losses that would come with trouble in the economy. The portfolio was mismanaged and morphed into something he said he could not defend.
Lawmakers want to know if the Volcker Rule, a pending ban on proprietary trading by banks, would have stopped the kind of losses incurred by the trader known as the London Whale and his colleagues.
U.S. Representative Barney Frank, co-author of the biggest reform law to come out of the financial crisis, said in an interview on Thursday that he was troubled by the increase in the bank's loss.
"The problem is this very highly regarded CEO at one of the best-run institutions had no idea what was going on, how much money he was losing," Frank said.
Reporting by David Henry in New York, Alexandra Alper in Washington and Douwe Miedema in London.; Editing by Bernadette Baum, John Wallace and Jan Paschal