JPMorgan reveals shock $2bn trading loss on investments
Chief executive Jamie Dimon blamed "errors, sloppiness and bad judgement" for the losses and warned "it could get worse".
The risky hedging strategy could cost the bank an additional $1bn, he added.
JPMorgan shares dropped 7% in after-hours trading, and other bank shares also fell.
Goldman Sachs, Citigroup and Bank of America suffered heavy losses in electronic trading after the market close on Wall Street.
Shares in European banks were also affected, with Barclays falling 2.85%, Deutsche Bank down 2%, and BNP Paribas 2.6% lower.
Overall, after accounting for other gains, losses at JPMorgan's chief investment office (CIO) are estimated to come in at $800m in the second quarter.
The strategy taken at the CIO unit, run by Ina Drew in New York and Achilles Macris in London, had been "riskier, more volatile and less effective" than previously believed, Mr Dimon said.
"These were egregious mistakes," he said. "They were self-inflicted and this is not how we want to run a business.
"It could get worse", he warned. "This could go on for a little bit.
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It is the surprise factor - the shock evinced by Mr Dimon - that will reignite the debate about whether regulators need to take more decisive action to curb the complexity of investment banks, to better prevent this kind of accident.”
Robert Peston
Business editor
Read more from Robert
JPMorgan’s loss may cost all banks
The CIO is an arm of the bank used to make broad bets to hedge its portfolios of individual holdings. Hedging is an investment practice used to reduce the risk of price fluctuations to the value of an asset.
Attention has focused on the activities of Bruno Michel Iksil, a London-based JPMorgan trader known as the London Whale, who reportedly made big bets on the financial markets as part of this hedging strategy.
But a source close to the bank told the BBC: "We're not talking about a rogue trader here. His was one trade in a big portfolio of trades. It was a global hedging strategy known by the bank but executed poorly. It failed."
The trading loss, revealed in a regulatory filing, is expected to hurt JPMorgan's overall earnings in the quarter, and will come as an embarrassment to the bank.
It had emerged from the 2008 financial crisis in much better health than many of its rivals after avoiding risky investments that had hurt others.
"We will admit it, we will learn from it, we will fix it, and we will move on," Mr Dimon said.
He added that the bank was trying to unload the portfolio in question in a "responsible" manner in order to minimise the cost to shareholders.Sobrang saya ko. I keep on tellingmyself, “Woohooh! You’ve finally moved on!’….. Until the next day..
It was raining, just as I wish. (hehe, yeah! I wished na sana umulan. Ewan ko, trip lang.. ^^,). Then, there he was, sa tapat ng pinto, dala ang basang payong at binabati ako ng “Happy Birthday..”
I was shocked. Una, hindi ko siya actually and personally ininvite. I mean all my classmates are invited, he was a classmate.. But it was my close friend that invited him. Which I overheard that sounds like this..
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I was shocked. What’s with DAW? Bakit may ganun pa? Nag-excuse na lang ako at umalis. Walk fast to the comfort room and stayed at a cubicle. What was that? Wah!!
Finally, I went out. Paglabas ng comfort room, along the corridor, he was standing, his back against the wall, as if waiting for someone. As if waiting for me,like old times.
But I walked through. Passed him, ignored him.
Secondly, hindi ko naman talaga akalaing pupunta siya. So I was really shocked… Afterwards, I offerred him food and act like a good host.
Finally, he said his goodbyes.
That whole day, I was shaking. Seryosong na-shock ako. Na-traumatized. Iniwasan ko siya for more than a year then this day came when we actually talked face to face.
But what’s more shocking is that on the following days, nothing really happened. I went on with the same feeling. Clearly moved on.. ^^,
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Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Hedging
Hedging
Making an investment to reduce the risk of price fluctuations to the value of an asset. Airlines often hedge against rising oil prices by agreeing in advance to to buy their fuel at a set price. In this case, a rise in price would not harm them - but nor would they benefit from any falls.
Glossary in full
Mr Dimon said the type of trading that led to the loss would not be banned by the so-called Volcker rule, designed to censure certain types of trading by banks with their own money.
But he acknowledged that the errors would be particularly embarrassing, given his public criticism of the Volcker rule.
"It plays right into the hands of a bunch of pundits out there, but that's life," he said.
Prof Mark Williams from Boston University, and a former Federal Reserve regulator, said taxpayers should be concerned about these trading losses.
"Taxpayers ultimately have to bail out these 'too big to fail' banks. And that's what JPMorgan is - it is too big to fail," he told BBC World Service radio.
"How could a bank that's supposed to be the premier bank in setting the leadership role allow such risk taking?"When New York Times reporter Andrew Ross Sorkin penned his book “Too Big To Fail” on the U.S. government’s decision to bail out the big banks in 2008, it’s unlikely he was thinking that William Hurt would make a great Treasury Secretary Henry Paulson. And yet, he does. Last night, HBO aired a dramatic historical reenactment of the tense days chronicled in Sorkin’s book, “Too Big To Fail.” The made-for-TV movie stars Hurt as Paulson and Paul Giamatti as a dead ringer for Federal Reserve Chairman Ben Bernanke as they attempt to revive the American economy as it teeters on the brink of collapse in light of bad debt, over lending, and greed. It’s like a modern day Cuban Missile Crisis, with banks standing in for Russia and mortgage-backed securities standing in for missiles. There’s a lot less smoking, though. And, unfortunately, a lot less drama.
There is no doubt that writing a thriller based on the world of credit default swaps and Congressional oversight meetings is tough going. Toxic assets are far less compelling than the Toxic Avenger and billion-dollar banks aren’t exactly the grieving widows of melodramas. However, when adapting the book, the movie seems to have taken its cues from a “Law & Order” episode, with bank owners and public employees standing in for the district attorneys. Except minus an actual body, the action seems unnecessarily dramatic. There’s a lot of staring out windows meaningfully, thumping music, and the number of times some variation of the phrase, “If we do nothing, the economy will be dead by morning,” made it feel like the screenwriters were relying on “The Secret” to sell the drama. If they say the story is dramatic often enough, then it will be. Unfortunately, it’s not. However, If watching white men in suits arguing with other white men in suits gets you on the edge of your seat, this movie is for you.
Not to say the story isn’t compelling. The U.S. economy was on the brink of collapse and seeing a somewhat fictionalized account of the behind-the-scenes machinations of the U.S. government and the symbiotic relationship with Wall Street is both fascinating and horrifying. Additionally, the acting by the star-studded cast (Ed Asner! Billy Crudup! Topher Grace! James Woods! Bill Pullman! Cynthia Nixon!) is phenomenal and there is no doubt this will dominate the appropriate categories at the Emmy Awards. However, it’s also just a tetch dull and ends up feeling like you’re sitting through a high production value civics class run by a really cool professor. However if you are interested in learning about the near collapse of the economy and the bailout, your time may be better spent listening to This American’s Life’s fascinating story,
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