JPMorgan's Dimon defends derivatives in letter

NEW YORK (Reuters) - Derivatives did not cause the financial crisis and the financial instruments remain a large business for JPMorgan Chase & Co JPM.N Chief Executive Jamie Dimon said in his annual letter to shareholders.

Chairman and CEO of JPMorgan Chase Jamie Dimon listens to his introduction before a keynote address on "Global Banking and Regulatory Challenges" at the U.S. Chamber of Commerce in Washington in this March 11, 2009 file photo. REUTERS/Jim Young

Dimon was defending derivatives -- a broad term describing securities ranging from stock options to credit default swaps -- after the financial crisis spiraled in 2008 and the largely unregulated financial contracts contributed to losses at banks and other financial companies.

The U.S. bank has $133 billion in derivatives counterparty exposures, Dimon wrote in the letter published on the bank’s Web site on Tuesday. “The company manages those exposures name by name -- like a hawk,” he said.

"There are regulatory gaps that need serious attention," Dimon went on to write, noting that a systemic risk regulator may have been able to prevent "a future AIG." The U.S. government has committed about $180 billion in bailout funds to prevent the collapse of American International Group Inc AIG.N, which has struggled as a result of mounting losses on derivatives contracts.

Dimon called for a systemic risk regulator that would have a broader authority than the existing network of U.S. regulators.

That’s in line with the regulatory blueprint outlined last week by U.S. Treasury Secretary Timothy Geithner, which called for such a regulator to require firms whose collapse could pose a risk to the financial system to hold more capital than other financial companies and face tougher rules.

Dimon said also that some of the temporary measures that have been enacted to improve liquidity and help banks during the crisis could be in place on a permanent basis to prevent future crises.

JPMorgan on Wednesday took advantage of one of these temporary measures to support banks by launching a $5.85 billion two-part debt issue, backed by the U.S. Federal Deposit Insurance Corp, according to IFR, a Thomson Reuters service.


JPMorgan’s consumer businesses, particularly its large credit card unit, will face a tough 2009, Dimon wrote.

While the bank has largely avoided the losses and writedowns on complex debt securities and subprime mortgages that hurt other banks in 2008, JPMorgan is more heavily exposed to consumer credit. Rising unemployment will lead to higher losses for the bank’s consumer lending businesses in 2009, Dimon warned.

Increasing consumer borrowing was in part responsible for the financial crisis, he said, noting that hedge funds, private equity, and a range of other financial firms all played a part in driving up asset prices.

“Basically, the whole world was at the party, high on leverage -- and enjoying it while it lasted,” he said.

Shares in JPMorgan were up about 5 percent on Wednesday to $27.91. JPMorgan shares had fallen just under 13 percent so far this year, compared with a 36 percent slump in the KBW Banks Index.

Reporting by Elinor Comlay, editing by Gerald E. McCormick