JPMorgan Trading Loss Drove Three-Level Standalone Cut

JPMorgan Trading Loss Drove Three-Level Standalone Rating Cut
Signage is displayed outside of the JPMorgan Chase & Co. offices in New York. Photographer: JB Reed/Bloomberg

JPMorgan Chase & Co.’s $2 billion trading loss in its chief investment office was an “important factor” in Moody’s Investors Service’s decision to cut the lender’s standalone credit rating by three levels.

JPMorgan was among 15 global banks downgraded yesterday and one of the three strongest evaluated by Moody’s, the ratings firm said in a statement. The New York-based bank’s standalone assessment fell to a3 from aa3 and would have been even lower without implicit support from the federal government, Moody’s said.

“It illustrates the challenges of monitoring and managing risk in a complex global organization and highlights the opacity of such risks,” Moody’s said. JPMorgan’s capital markets business, which accounted for 26 percent of the firm’s revenue in 2011, and high levels of wholesale funding also hurt its standalone rating, according to the statement.

JPMorgan benefited from the assumption that there’s a “very high likelihood” the U.S. government would back the bank’s bondholders and creditors if it defaulted on its debt, according to the statement. Without the implied federal backing, JPMorgan’s long-term deposit rating would have been three levels lower and its senior debt would have dropped two more steps, Moody’s said.

Joe Evangelisti, a spokesman for the bank, declined to comment on Moody’s actions.

Unwinding Losses

The lender’s long-term senior debt fell two levels to A2 and its long-term deposit rating was also cut two steps to Aa3, Moody’s said.

The outlook for JPMorgan’s standalone and operating subsidiaries grades was stable while ratings for the parent holding company’s senior and subordinated debt were negative, Moody’s said.

JPMorgan is seeking to stem at least $2 billion in trading losses from it U.K. CIO operation, where Bruno Iksil, known as the London Whale, managed a portfolio of credit derivatives so large it distorted the market. Trading in the index that contributed to the bank’s losses soared to a record June 19 as the lender worked to unwind its position.

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