NEW YORK (AP) — Just three months ago, JPMorgan Chase was viewed as the top American bank, led by the steady hand of veteran CEO Jamie Dimon.
In the last couple of months that stellar reputation has eroded, with Dimon appearing before Congress twice to explain a $2 billion trading loss, which could be growing. Several government agencies have also launched investigations.
On Friday morning, Dimon will appear before Wall Street analysts to apprise them of the size of the loss and what he has done to protect the bank from a similar kind of loss happening again. A lot rides on his ability to restore trust in the bank and calm angry investors who feel betrayed at being misled just three months ago, when Dimon characterised the losses as a “tempest in a teapot.”
The surprise loss, which was disclosed May 10, has come to symbolise much more than a line item on an earnings report. It has become a glaring example of how large banks can incur huge losses by taking risky bets that can jeopardize the global financial system. Coming just four years after the 2008 financial crisis, its significance wasn’t lost on members of Congress, the American public, or on investors.
JPMorgan has lost about 15 per cent of its in market value since the loss came to light.
JPMorgan’s future has become even shakier with new revelations that the British bank Barclays was manipulating a key benchmark interest rate that is used to set global rates on mortgages, municipal bonds and many kinds of loans.
While JPMorgan hasn’t been implicated in that scandal, investors are nervous that it could be targeted in lawsuits. That’s because it is one of three banks, along with Citigroup and Bank of America, on a reference panel that sets those rates.
Adding to its woes, a top energy regulator revealed it is investigating whether JPMorgan manipulated electricity markets in California and the Midwest, resulting in higher prices and possibly millions of dollars in improper payments.
In the specially scheduled investor meeting on Friday morning, which begins at 7:30 a.m. Eastern, Dimon is expected to touch upon how these events may affect the bank’s earnings and future growth potential.
People will also be listening closely for Dimon to reveal if and how much pay the bank will take back from executives who were in charge of the division where the losses occurred. Known as a “clawback,” it is a process where stock grants and bonuses can be recovered from executives who were responsible for losses at the bank.
If that happens, it will be first time on Wall Street that any bank will be exercising a clawback from a top executive. The most likely candidate would be Ina Drew, JPMorgan’s chief investment officer, who oversaw the division responsible for the loss and left the bank days after the disclosure. In 2011 Drew’s compensation package totaled $15 million.
The term clawback was popularised after the financial crisis following the public’s furor over a lack of accountability on Wall Street. Despite taxpayer-funded bailouts, top bank executives and other employees kept millions of dollars of pay, even if they bore responsibility for the billion-dollar losses at those institutions. The Wall Street Reform Act also has clawback provisions that banks have incorporated.
Wall Street analysts will look for clarity from Dimon, especially on how big the trading loss is and how much larger it might become. JPMorgan might not be able to give the full extent of the loss because all the trades haven’t been completed yet. Barclays bank analyst Jason Goldberg wrote in a research report that the losses could range between $2 billion and $9 billion.
On the day Dimon disclosed the trading loss, he said JPMorgan was still expected to report a profit of about $4 billion for the second quarter. Analysts now expect JPMorgan to earn $3.2 billion, according to estimates provided by FactSet, a financial data service. Analysts have lowered profit forecasts for JPMorgan because of the trading loss and also because of challenging conditions for banks, including a slowdown in corporate deals and weakness in the economy.
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