Shares of JPMorgan are off over 6% after hours.
The reason? The company has shocked the world by announcing a surprise $2 billion+ trading loss in its synthetic derivatives portfolio.
In particular, this paragraph from the company’s 10-Q filing is what’s causing people to get nervous:
Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realised gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realised gains in the second quarter to date) has appreciated in value.
The company held a conference call starting at 5 PM, where Jamie Dimon insisted that this was a pure trading screwup due to the company’s own errors and stupidity and not something fundamental.
Dimon characterised these losses as a result of sloppiness.
Linette Lopez and Lisa Du in their liveblog of the call hit on these two points:
“We’ve already changed some policies and procedures as we have gone along.”
– Dimon says this has been an egregious mistake, self-inflicted. Violates how he runs the company, this is NOT how he wants to run a business.
He’s really hammering that this is about an internal blunder, not something more fundamental.
According to Michael De La Merced, when asked about the ramifications at other firms, Dimon said: “Just because we’re stupid doesn’t mean everybody else was”
One thing that makes this loss particularly interesting is that it was just last month that JPMorgan came under fire due to stories about the “London Whale,” a trader who supposedly had a gigantic CDS portfolio that was at risk.