JPMorgan Chase & Co. (JPM) fell more than 6 percent in New York trading after the New York Times reported the lender’s losses from credit derivatives may eventually total as much as $9 billion, exceeding the firm’s initial estimate.
JPMorgan dropped to $35.77 as of 8:44 a.m. from the $36.78 close in New York yesterday, and reached $34.50 earlier today.
Chief Executive Officer Jamie Dimon said on May 10 the bank lost more than $2 billion on bets in credit markets taken by its chief investment office in London and that the loss could increase by as much as $1 billion this quarter. Dimon, 56, has said JPMorgan doesn’t want to “do anything stupid” by unwinding the trades too quickly, and he hopes that by the end of the year the holdings will no longer have a significant impact on results.
The firm’s losses have increased in recent weeks as JPMorgan sought to exit its holdings, the New York Times reported, citing unidentified former traders and executives at the bank. The company has already closed out more than half of its positions, the newspaper said.
“We are now in the realms of speculation in terms of the sheer scale,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA, who has a neutral recommendation on JPMorgan shares. “The final loss will be offset by a number of items including a debt-valuation adjustment gain and gains on the sale of some of their Treasury securities. However, the larger the number, the more difficult it is to reduce the impact.”
Andrew Ross Sorkin, editor of the New York Times DealBook and a host of CNBC’s Squawk Box program, said on CNBC today that the losses would be in the range of $4 billion to $6 billion, citing sources he didn’t identify.
Dimon told lawmakers this month the company would be “solidly profitable” when it reports second-quarter earnings on July 13. Although the trading loss had grown to $2 billion for the quarter when the bank disclosed it in May, the net loss for the CIO division at that time was $800 million. Dimon said JPMorgan had $8 billion in gains in another trading portfolio within the CIO and had used $1 billion of that to offset the loss on the credit derivatives portfolio in London.
The New York Times said JPMorgan may be able to get out of the money-losing holdings by the end of this year, faster than previous estimates. That would mean the company could earn $22 billion in 2013, “more money than any other bank in the world,” Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida, said today in an interview with Tom Keene on Bloomberg Radio and Television’s “Bloomberg Surveillance.”
“If this company has got earnings power in the $22 billion range, how bad can it be?” Bove said. “To assume that this one-time loss or this one-time event should change all theories or concepts about JPMorgan or about big banks would be a terrible mistake.”
JPMorgan is perceived to be the second-most creditworthy of the six biggest U.S. banks, according to credit-default swap prices compiled by Bloomberg. The cost of the contracts, which protect investors against default on JPMorgan’s debt, is less than any of those lenders except for San Francisco-based Wells Fargo & Co. (WFC), the data show.
Credit-default swaps on JPMorgan eased to 139.3 basis points today, from 172.1 basis points on June 12, the data show.
That compares with the average of contracts on JPMorgan, Wells Fargo, Bank of America Corp. (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) of 237.9 basis points through yesterday, the data show. A basis point is 0.01 percentage point.
Joe Evangelisti, a spokesman for JPMorgan in New York, declined to comment on the New York Times story.
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