* Shares drop more than 9 percent; credit rating cut
* Hedging loss dents CEO Dimon’s reputation
* Union calls for separation of CEO/chairman roles
By David Henry and Douwe Miedema
NEW YORK/LONDON May 11 (Reuters) – JPMorgan Chase & Co
lost $15 billion in market value and a notch in its
credit ratings on Friday while a chorus of regulators and
politicians reacted to its surprise $2 billion trading loss by
demanding stiffer oversight for the banking industry.
Republican Senator Bob Corker of Tennessee called for a
hearing into the losses that the largest U.S. bank disclosed
Thursday, while Securities and Exchange Commission Chairman Mary
Schapiro told reporters: “It’s safe to say that all the
regulators are focused on this.”
The debacle sparked new fears about big banks and prompted
Dallas Federal Reserve Bank President Richard Fisher, who has
called for the breakup of the top five U.S. banks, to say he is
worried the biggest banks do not have adequate risk management.
The fallout extended across much of the banking sector, with
shares of some of Wall Street’s top names declining on Friday.
Among others, Citigroup dropped 4.2 percent, Goldman Sachs
fell 3.9 percent and Bank of America slipped 1.9
percent.
JPMorgan was far away the worst performer, however, falling
9.3 percent on a day when some 212 million of its shares traded,
the most volume in its history.
Fitch Ratings downgraded JPMorgan’s debt ratings by one
notch and put all of the ratings of the bank and its
subsidiaries on negative ratings watch.
While Fitch saw the size of the loss as manageable, “the
magnitude of the loss and ongoing nature of these positions
implies a lack of liquidity,” the ratings agency said. “It also
raises questions regarding JPM’s risk appetite, risk management
framework, practices and oversight; all key credit factors.”
“Fitch believes the potential reputational risk and risk
governance issues raised at JPM are no longer consistent with an
‘AA-’ rating,” it said.
Standard & Poor’s put JPMorgan and its banking units on a
negative outlook, but affirmed its current ratings.
Chief Executive Jamie Dimon’s reputation also took a hit.
For a leader lauded for steering his bank through the fallout
from the 2008 financial crisis without reporting a loss, the
incident was embarrassing, especially given Dimon’s criticism of
the so-called Volcker rule to ban proprietary trading by big
banks.
“We know we were sloppy. We know we were stupid. We know
there was bad judgment,” Dimon said in an interview with NBC
television to be broadcast on Sunday.
He said it wasn’t clear whether the bank had broken any laws
or violated any rules. “We’ve had audit, legal, risk,
compliance, some of our best people looking at all of that.”
Dimon recorded the segment to go with a wide-ranging
interview he had done on Wednesday for NBC’s Sunday “Meet the
Press” program.
The New York Times reported that the Securities and Exchange
Commission has opened a preliminary investigation into
JPMorgan’s accounting practices and public disclosures about the
trading loss.
In a conference call disclosing the problem on Thursday,
Dimon said the $2 billion in losses could rise by a further $1
billion, and acknowledged they were linked to a London-based
credit trader Bruno Iksil. Nicknamed the ‘London Whale’, Iksil
amassed an outsized position which hedge funds bet against,
according to a report in The Wall Street Journal in April.
The Federal Reserve Bank of New York, meanwhile, had been
aware of JPMorgan’s big trading loss and is currently monitoring
the situation, according to a source close to the situation.
The Fed, which is JPMorgan’s primary regulator, aims to
ensure banks are sufficiently capitalized to withstand such
trading mistakes, not to prevent them, the source said.
‘STAKES ARE TOO HIGH’
The exact nature of the trading loss is still unclear,
although sources said a host of asset managers, arbitrageurs and
hedge funds were on the other side of the bet, viewing it as
good value and a effective way to insure portions of their
portfolio.
Blue Mountain, a hedge fund with offices in New York and
London, was among those on the other side of JPMorgan’s trade,
according to two people familiar with the situation.
Dimon will undoubtedly be pressed by investors for more
details about what exactly went wrong when he hosts the bank’s
annual shareholder meeting on Tuesday in Tampa, Florida.
A national union on Friday urged shareholders to approve a
stockholder resolution calling for an independent board chairman
at JPMorgan. Dimon currently holds the chairman and CEO titles.
“The stakes are too high to leave Jamie Dimon unsupervised,”
said Gerald McEntee, president of the American Federation of
State, County & Municipal Employees, which sponsored the
proposal. “Dimon denied that the ‘London Whale’ was making risky
bets, and now that this has turned out to be a fish story,
shareholders need to step in.”
Dimon had parlayed his bank’s reputation as a white knight
during the financial crisis into a position as the de facto
representative fighting against excessive post-crisis
regulation.
“What concerns me is risk management, size, scope,” said
Dallas Federal Reserve Bank’s Fisher answer to a question about
JPMorgan’s trading loss. “At what point do you get to the point
that you don’t know what’s going on underneath you? That’s the
point where you’ve got too big.”
The trader at the center of the storm, Iksil, who graduated
in engineering from the Ecole Centrale in Paris in 1991, was not
available for comment. The Frenchman, and the Chief Investment
Office (CIO) where he works, are known by rival credit traders
for taking extremely large positions.
Friends, colleagues and fellow traders describe an
unassuming man, a far cry from the brash image normally
associated with traders staking huge bets in fast-moving
financial markets, including derivatives.
“He’s a really nice bloke. A quiet bloke. He’s not an
arrogant trader, he’s quite the opposite. He’s very charming,”
one former colleague at JPMorgan said of Iksil, whom he said was
married with “a couple of kids”.
A friend and former JPMorgan colleague said Iksil and his
team were not carrying out so-called prop trading, where a bank
makes bets with its own money, in disguise and its activities
were known about at the highest levels.
“The CIO does not do prop trading, let’s be clear on that…
It involves taking positions in the form of investments, trades,
credit-default swaps, or other, with the aim of rebalancing the
risks of JPMorgan’s balance sheet.
“The information comes from the very top of the bank and I
do not even think that the CIO team members at Bruno’s level are
given the full picture,” the ex-colleague said.
Iksil was brought into the CIO unit to head its credit desk,
an asset class it had not previously covered, a person who
worked in the unit said. It built up large credit positions over
several years through trades which were vetted by management and
the losses now likely resulted from a combination of these
trades going wrong, the person said.
The CIO desk had grown rapidly in the past five years and
was given free range to trade in a whole range of financial
products, the only exception being commodities, they added. The
CIO is run by New York-based Ina Drew, who is Chief Investment
Officer.
Credit market traders said other banks have comparable
functions to JPMorgan’s CIO. The French banks, Citigroup,
Deutsche Bank and UBS were all cited as
examples of large treasury functions that hedge credit exposures
in similar ways.
“The argument that financial institutions do not need the
new rules to help them avoid the irresponsible actions that led
to the crisis of 2008 is at least $2 billion harder to make
today,” U.S. Representative Barney Frank said in a statement.
The Democrat co-authored the 2010 Dodd-Frank financial
reform law designed to avoid a repeat of the recent credit
crisis.
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