Yesterday, JP Morgan Chase chairman Jamie Dimon had excruciating calls with analysts, admitting that a series of April trades—by a mysterious person nicknamed the "London Whale"—had resulted in a $2 billion loss for the investment bank. Bloomberg News says the loss "jeopardiz[es] Wall Street banks’ efforts to loosen a federal ban on bets with their own money."
What happened? The Explainer succinctly breaks it down, "A JP Morgan trader, Bruno Iksil, has been accumulating a giant bet on U.S. corporate bonds. He used derivatives to do it, and he messed up the bet and lost $2 billion for the bank. He could end up losing $1 billion more if the market doesn't cooperate." And no, he wasn't a rogue trader: "Iksil worked for JP Morgan and had the full support of the bank and did all his trades with the full knowledge of these four Very Important People at the top."
Senator Carl Levin, the Michigan Democrat who is trying to get banks to limit their speculative trading, said, ""The enormous loss JP Morgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making. Today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards to implement the Merkley-Levin language to protect taxpayers from having to cover such high-risk bets."
Here's some more narrative about what happened:
"The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure." - Bloomberg News
"The bank, betting on a continued economic recovery with a complex web of trades tied to the values of corporate bonds, was hit hard when prices moved against it starting last month, causing losses in many of its derivatives positions. The losses occurred while J.P. Morgan tried to scale back that trade." - Wall Street Journal
"JPMorgan likely structured the trade in such a way that effectively magnified losses. Specifically, the bank bought insurance against losses on corporate debt through credit derivatives that increase in value if the underlying creditworthiness of companies is perceived to have deteriorated. But JPMorgan stumbled when it tried to modify that trade by also making an opposite bet with credit derivatives." - NY Times
Dimon told analysts that the strategy was "poorly constructed and poorly monitored" and "There were many errors, sloppiness and bad judgment. These were grievous mistakes, they were self-inflicted." Well, you know, hindsight.
On April 13, during a first-quarter earnings call, Dimon, who is known as the King of Wall Street, told that concerns about outsize trading (which were being reported all over the place were "a complete tempest in a teapot." A JP Morgan source tells the WSJ that Dimon didn't learn the full extent of the losses until after the call. Brilliant.