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By Catholic Online (NEWS CONSORTIUM)

5/14/2012 (1 year ago)

Catholic Online (www.catholic.org)

Portfolio was 'riskier, more volatile and less effective as an economic hedge than we thought'

The largest bank in the United States, JPMorgan Chase has admitted that it lost $2 billion over the past six weeks in a trading portfolio. The portfolio was supposedly designed to hedge against risks the company takes with its own money.

The losses were blamed for complex financial instruments, known as derivatives and in a division of JPMorgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

The losses were blamed for complex financial instruments, known as derivatives and in a division of JPMorgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

Article Highlights

By Catholic Online (NEWS CONSORTIUM)

Catholic Online (www.catholic.org)

5/14/2012 (1 year ago)

Published in Business & Economics

Keywords: JPMorgan, variavbles, hedge funds, portfolio, derivatives


LOS ANGELES, CA (Catholic Online) - The company's stock plunged almost 7 percent in after-hours trading after the loss was announced. Citigroup and Bank of America, other bank stocks, suffered heavy losses as well.

"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," CEO Jamie Dimon told reporters. "There were many errors, sloppiness and bad judgment."

The losses were blamed for complex financial instruments, known as derivatives and in a division of JPMorgan designed to help control its exposure to risk in the financial markets and invest excess money in its corporate treasury.

Some analysts were skeptical. They said the bank appeared to have been betting for its own benefit, a practice known as "proprietary trading." Bank executives, including Dimon, have argued for weaker rules and broader exemptions.

Michael Greenberger, former enforcement director of the Commodity Futures Trading Commission, which regulates many types of derivatives, said that JPMorgan has been a strong critic of several provisions that would have made this loss less likely.

The trading loss is an embarrassment for a bank that came through the 2008 financial crisis in much better health than its peers, by previously keeping clear of risky investments that hurt many other banks.

Bloomberg News reported last month that a single JPMorgan trader in London, known in the bond market as "the London whale," was making such large trades that he was moving prices in the $10 trillion market.

Dimon explained that the losses were "somewhat related" to that story, but seemed to suggest that the problem was broader. He also said the company had "acted too defensively," and should have looked into the division more closely.

Last month, the Wall Street Journal reported that JPMorgan had invested heavily in an index of credit-default swaps, insurance-like products that protect against default by bond issuers.

"These instruments are not regularly and efficiently priced, and a company can wake up one day, as AIG did in 2008, and find out they're in a terrific hole. It can just blow up overnight," Greenberger, a professor at the University of Maryland said.

Hedge funds were betting that the index would lose value, which forced JPMorgan to sell investments at a loss. The losses came in part because financial markets have been far more volatile since the end of March.

Partly because of the $2 billion trading loss, JPMorgan said it expects a loss of $800 million this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200 million.

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