JPMorgan Chase & Co, the biggest US bank, said it had lost US$5.8 billion this year from disastrous credit bets and that traders might have tried to conceal the extent of the losses earlier this year.
Of the trading losses, US$4.4 billion came in the second quarter, but the bank still generated nearly US$5 billion of overall profit for the period.
JPMorgan’s disclosure about traders misstating the value of their positions was the first indication that the problems with the company’s bad trades might have extended beyond bad judgement about markets.
JPMorgan said it had cleaned up its Chief Investment Office (CIO), which made the bad trades, and that any problems were isolated to the group. The trades may lose another US$700 million to US$1.7 billion, JPMorgan chief executive officer Jamie Dimon said on a conference call with investors.
The CIO became infamous in May, when JPMorgan said bad derivatives bets on portfolios of corporate bonds had triggered about US$2 billion of paper losses, a figure that turned into US$4.4 billion of actual losses in the second quarter.
One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname “The London Whale.” Iksil has left the bank, a source said on Friday.
Ina Drew, who headed the CIO, has also left, and offered to give back her pay for two years, said Dimon, whose pay is subject to being taken back as well.
The bank said it had moved the bad trades from the CIO, which invests some of the company’s excess funds, to its investment bank. JPMorgan was one of the key inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street.
The CIO will now focus on conservative investments, JPMorgan said.
“We have put most of this problem behind us and we can now focus our full energy on what we do best,” Dimon said in a statement.
The company’s shares rose 3.4 percent to US$35.20 in early trading.
JPMorgan said misvaluations for the first quarter had overstated the CIO’s net income for the period by US$459 million.
The trading losses have been a black eye for a CEO who was respected for keeping his bank consistently profitable during the financial crisis.
JPMorgan posted second-quarter net income of US$4.96 billion, or US$1.21 a share, compared with US$5.43 billion, or US$1.27 a share a year earlier.
The derivative loss after taxes reduced earnings per share by US$0.69, the company said.
JPMorgan made more mortgage loans, which helped results. Because it is experiencing fewer defaults and delinquencies than it expected, the bank reduced the amount of money it had previously set aside to cover bad loans. That reduction boosted profit by US$2.1 billion, before taxes.
Friday’s financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a “tempest in a teapot.”