It’s been two months now since the JPMorgan trader known as the London Whale was harpooned on the market for credit derivatives, and it has not been an easy two months. For even if the bank recorded $5 billion in net income for the second-quarter, as it announced before a conference call with analysts today, and even if the bank’s famous fortress balance sheet was undented, you couldn’t say the same thing for the bank’s reputation. Mr. Dimon was called to Washington not once but twice, and if he acquitted himself well, he’d certainly lost his luster as America’s least-hated banker. Worse, while the bank conducted an internal review of the disastrous trade, the rest of the world speculated; and with every tale of the oversight failures that precipitated the losses, it was harder to credit the bank’s reputation as the gold standard in risk management.
Well, today’s earnings announcement gave the firm a chance to set the record straight, or at any rate, to put an end to the speculation of how bad the losses were, and just what caused them. And so The Observer was glued to computer screen for the firm’s two-hour webcast. What you need to know is here:
The damage to date: The firm reported a $4.4 billion trading loss in the chief investment office in the second quarter. Add to that an additional $459 million loss that will be attributed to first quarter earnings when the bank restates those results in coming days—more on this in a bit—and the total losses to date are $5.8 billion. That’s less than the $9 billion in potential losses that one outlet reported, but essentially line with the $4 to $6 billion figure others were touting. The potential future losses from the portfolio range from $800 million to $1.7 billion, Mr. Dimon said.
Here’s how it happened: In late 2011, JPMorgan instructed its chief investment office to reduce its short position in credit derivatives. The CIO sought to do this by increasing net long positions—an attempt to balance the portfolio by increasing to its overall size. Why didn’t they seek to shrink the portfolio? “It appears that they thought about it a bit, but they believed it would be more expensive than the approach they chose,” said Michael J. Cavanagh, the executive who lead the firm’s internal inquiry, on today’s conference call. “Obviously, they were wrong.”
How wrong? After the first press reports of the London Whale surfaced in early April, Mr. Dimon and chief financial officer Doug Braunstein called for a review of the positions ahead of the firm’s first-quarter earnings report. The review—led by Chief Investment Officer Ina Drew and her staff—showed probable results for the portfolio ranging from a gain of $350 million to a loss of $250 million for the second quarter.
Thus, a tempest in a teapot. What’s more, JPMorgan said today that the traders responsible for the position may have lied about how far the bet had moved against them. Per a filing with the Securities and Exchange Commission: “Recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter.” And which caused the bank to attribute an additional $459 million in losses to first-quarter results.
Will there be clawbacks? The three managers responsible for the chief investment office’s London unit have left the firm without severance pay or 2012 bonus, and the company will seek to claw back two years total compensation. Ms. Drew, who Mr. Dimon said “acted with integrity and tried to what was right,” offered to give the bank some money back. That same two years total comp that represents the max amount the bank can seek under clawback guidelines. All other employees, including the chief executive officer, will have their compensation determined by standard process.
Most aggressive question: Asked by a “buy-sider and long-suffering shareholder” whose name was lost to our tinny computer speakers: “Even if there are economies of scale, the stock market refuses to acknowledge it in terms of the multiple continuing to come down, I look at the track record of the past year or so, and notwithstanding the great performance, relative to a pretty low bar, but still good performance, we’ve had the mortgage servicing issues, mortgage foreclosure issues, military veterans issues, energy, commodities, sales practices, now this inexcusable, just unbelievable CIO debacle, now potential Libor, and I think about what has to happen for you as a management team or you as a board to finally say, ‘We are a great institution, and we own a lot of great businesses, but we’ve reached a point where we are too big to manage, and in the interest of our shareholders there’s a different corporate structure that would better serve your owners?'”