Surveying the Wreckage from JPMorgan’s $2 Billion Bombshell

When the financial world was captivated by reports of the London Whale, or Voldemoort, a London-based JPMorgan trader whose massive

When the financial world was captivated by reports of the London Whale, or Voldemoort, a London-based JPMorgan trader whose massive derivatives bets were said to be distorting a corporate credit index, we don’t recall suspecting that it might blow up like this: CEO Jamie Dimon said in a conference call following the release of JPMorgan’s 10-Q that the bank suffered a $2 billion trading loss in its chief investment office, and that further losses in this quarter or next could amount to an additional $1 billion.

It’s stating the obvious to say we weren’t the only ones surprised, but it was less than a month ago that Jamie Dimon described the media coverage of the whale sightings as “a tempest in a teapot,” and CFO Doug Braunstein said the bank was simply hedging “downside risk.” That is, the lender takes in more in deposits than it extends in loans, its chief investment office invests the difference in high grade securities, and the CIO’s derivatives position was a hedge against those investments, not a proprietary bet.

Well, the hedge was “flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Dimon said yesterday.

What happens next will be interesting: Dimon said “we’re not going to do something stupid,” and that maximizing value for shareholders could mean holding the position and bearing out volatility.

JPMorgan’s share price lose more than 7 percent in trading before markets opened, wiping out billions in market value, and Volcker rule proponents jumped on news to reiterate their call for a ban on proprietary trading.

“The enormous loss JPMorgan 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,” said Sen. Carl Levin, a Michigan Democrat and co-sponsor of the Volcker rule, in a statement.

“We do believe we need to have the ability to hedge in a CIO-type position, and that Volcker allows that,” said Dimon, who has been at the forefront of lobbying efforts against the ban. The losses “plays right into the hands of a bunch of pundits out there,” he added

More from around the Web:

Ina Drew, the executive in charge of the JPMorgan’s Chief Investment Office, is a 30-year veteran of the bank, one of two women on its operating committee and “was all about risk-taking,” a former colleague told Bloomberg.

Felix Salmon described JPMorgan’s basis-trade blow-up: “Whenever a trader has a large and known position, the market is almost certain to move violently against the trader—and that seems to be exactly what happened here.”

The Wall Street Journal has a London whale timeline and an annotated copy of the bank’s 10-Q.

Alphaville’s Lisa Pollack went on a whale-watching tour in hopes of understanding the CIO’s massive credit position when the Iksil stories first surfaced last month.

Dealbreaker’s Matt Levine, who also dove headlong into the early Voldemoort stories, points to changes in JPMorgan’s risk-modeling announced in the 10-Q: “This was not driven by the market moving against them (though it seems to have), it was driven by them getting the math wrong.

[Mario Tama/Getty Images News]

Surveying the Wreckage from JPMorgan’s $2 Billion Bombshell