JPMorgan Probes Expand to at Least 11 Agencies

JPMorgan CIO Loss Investigations Expand to at Least 11 Agencies
JPMorgan Chase & Co. ended synthetic trading at the chief investment office and transferred the rest of the position to the investment bank, executives said last month. Photographer: Jin Lee/Bloomberg

JPMorgan Chase & Co. is being investigated by at least 11 state, federal and international enforcement bodies as the bank struggles to contain damage from a botched derivatives trade that cost it at least $5.8 billion.

Authorities in Singapore, Germany and Japan have joined the list of agencies probing the largest U.S. bank’s trading errors, the company said in a regulatory filing today. The U.S. Justice Department, Congress, Securities and Exchange Commission and U.K. Financial Services Authority are among those examining the bank, which could still lose as much as $1.7 billion more on its credit derivatives portfolio, the company said. The bungled trade may also make it more difficult to resolve other pending reviews, the company said.

“The firm expects heightened scrutiny by its regulators of its compliance with new and existing regulations,” the company said. Regulators will more frequently bring “formal enforcement actions for violations of law rather than resolving those violations through informal supervisory processes.”

The bank reiterated it found “material weakness” within its internal controls and financial reporting related to the trade and, as a result, its initial first-quarter results couldn’t be relied on.

Eight civil lawsuits have already been filed since the bank initially disclosed problems in its synthetic credit derivatives book on May 10, the bank said. It is “reasonably possible” that JPMorgan’s legal troubles could exceed its litigation reserves by as much as $5.3 billion as of June 30, the bank said. The Justice Department and SEC are also among agencies investigating the bank’s possible role in an international bid-rigging scheme to manipulate the London interbank offered rate, or Libor, the bank said.

Stock Slump

The company’s stock market value has declined by more than $25 billion since Bloomberg News first reported April 5 that the bank had amassed a large and illiquid position in credit derivatives at its chief investment office in London. JPMorgan was unchanged at $37.16 at 9:50 a.m. in New York.

Chief Executive Officer Jamie Dimon, 56, ousted traders and managers and overhauled the ranks of senior executives after initially disclosing trading losses in May. Chief Investment Officer Ina Drew retired days later, voluntarily forfeiting as much as two years of compensation, and the New York-based company said it would seek to claw back pay of other executives.

The bank restated first-quarter results last month, paring profit by $459 million, in part because an internal review revealed that U.K. traders had priced their books “aggressively,” Mike Cavanagh, who ran the investigation, told analysts on July 13. Cavanagh, 46, was elevated in the shakeup announced July 28 from head of Treasury and Security Services to co-CEO of an expanded corporate and investment bank.

Credit Derivatives

The mispricing made losses on a portfolio of credit derivatives look smaller than they were, and executives concluded that traders may have sought to hide the “full amount of losses,” JPMorgan said in a presentation.

The decision to restate results was made one day before JPMorgan reported second-quarter net income of $4.96 billion, and after executives and lawyers interviewed employees, and reviewed thousands of hours of calls and about 1 million e-mails, Cavanagh said in the call last month.

JPMorgan ended synthetic trading at the chief investment office and transferred the rest of the position to the investment bank, executives said last month. The CIO retained an $11 billion short position in “basically liquid indexes” to hedge other credit assets, Dimon said during a July 13 meeting with analysts. Positions in Series 9 of the Markit CDX North America Investment Grade Index, a credit-swaps benchmark known as IG9 that’s at the heart of much of the loss, were cut by 70 percent, he said.

‘Down Substantially’

The bank transferred about $30 billion of risk-weighted assets from the CIO to the investment bank, an amount that’s “down substantially” from an earlier peak and back to levels at the end of 2011, he said.

Ohio Attorney General Mike DeWine said July 14 that he’s seeking to lead a proposed class-action against JPMorgan after state pension funds lost more than $27.5 million due to the “alleged fraud.” Two funds for state employees held about 10.2 million JPMorgan shares as of March 31, data compiled by Bloomberg show.

Dimon transformed the unit in recent years to boost profit by buying higher-yielding assets such as structured credit, equities and derivatives, Bloomberg News reported on April 13, citing former employees.

Dimon dismissed initial news reports about the London operation as a “tempest in a teapot” when the bank reported first-quarter results April 13. He reversed course less than four weeks later, disclosing a $2 billion loss that he said could grow to $3 billion or more during the quarter.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE