"Dodgy" Bet Could Lose JP Morgan Up to $9 Billion

Thursday, June 28, 2012

Last month, chief executive Jamie Dimon said the bank had lost $2 billion on a bet on credit derivatives. But according to The New York Times, that's just the tip of the iceberg. Michael de la Merced is a reporter with The New York Times' DealBook.

This wager on credit derivatives was one of a series of bets, which the firm made to protect itself during the financial crisis. "But, as the economy seemed to improve, they actually took out another bet on top of that first bet, and that's what seems to have gone wrong," de la Merced explains. "Once people got wind of it, and other traders from other firms got wind of it, they started moving against the firm, and that's what's led to this big loss."  

Total losses could grow to a $8 or $9 billion, but those aren't concrete figures — the bank could report larger or smaller losses. Depending on how successful JPMorgan is in covering the losses, Dimon still believes that the firm could actually stay in the black. As Jessica Silver-Greenberg and Susanne Craig write in the New York Times, "Despite the loss, the bank has said it will be solidly profitable for the quarter — no small achievement given that nervous markets and weak economies have sapped Wall Street’s main businesses."

Despite the firm's optimism, the massive losses incurred by a bank with a reputation for smart investing have affected other firms. "It's really cast a black eye on the financial industry, and it's got regulators looking much more closely at the banks," de la Merced says. "I think that there may in fact be a stronger push for bank regulation because of all this."

Besides the fallout from the wager, JPMorgan also has to worry about a recent financial development — the American banking giant is under investigation, along with approximately 20 other banks worldwide, for the alleged manipulation of interest rates. Barclays was recently fined $453 million for its participation in swaying Libor, short for "London Interbank Offered Rate", which affects all kinds of interest rates. 

"This is something that could pick up a lot of steam," de la Merced says. "It's something that floated under the radar, but with Barclays paying such a huge fine, and with other banks still in the crosshairs, this could turn out to be really significant."

"Regulators have paid a lot of attention to this case and it is seen as very important. As for whether it'll affect the way regulators look at banks and whether they need to have a tighter handle on them, this could very well be a huge factor." 

Guests:

Michael De La Merced

Produced by:

Robert Balint, Javier Guzman and Elizabeth Ross

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