JPMorgan Chase earned much ire in May when CEO Jamie Dimon announced that the firm lost $2 billion gambling on credit derivatives, but now it appears his initial estimate vastly underestimated the true losses.
The bank’s losses could be closer to $9 billion, sources briefed on the situation told the New York Times. Dimon had initially said that losses could double in the coming quarters, but in recent weeks the bank has been swimming in red ink, the Times reported. The ever-worsening situation could hasten the bank’s exit from the money-losing trade, as it has already moved rapidly to clear itself of the most volatile assets, the report said.
While some analysts still believe the bank’s losses will not exceed $6 billion or $7 billion, JPMorgan Chase’s own projections paint a darker picture. The bank’s initial internal models initially showed that in the worst case scenario it would lose between $8 billion and $9 billion, but more recent models have put the losses at the high end of that projection, the Times reported.
JPMorgan Chase will give a clearer picture of the losses when it reports second-quarter earnings on July 13. But the bank could be facing more than just lost revenue, the Times reported, as Dimon’s own credibility is at stake. He has been a vocal opponents of regulatory changes that would end the type of high-risk trading that put JPMorgan Chase in the money-losing situation to begin with.
The bank’s loss came from trading in credit derivatives intended to hedge against financial risk, not make profit for the bank, the Washington Post reported. Instead the massive losses have raised fears that banks still pose a great threat to the nation’s financial system, just four years after these institutions hastened the financial crisis of 2008, the report said. Since news of the trade became public, JPMorgan Chase has lost about $23 billion in market value.
Even if the bank’s losses are better than worst-case projections, the public harm will not be undone, Paul Miller Jr., an analyst for FBR Capital Markets & Co., told the Washington Post.
“The bottom line is the reputation of (JP Morgan Chase) is hurt,” he said. “I don’t think people care if it is a $6 billion or $9 billion loss.”