According to analysts at Morgan Stanley (
MS
), the losses sustained by JPMorgan Chase's (
JPM
) chief
investment
office in London will reach $5 billion rather than the $3 billion
figure now being cited by JPMorgan chief executive officer
Jamie Dimon, the
Financial Times
reported this week.
The rival bank's team cited the fact that eurozone volatility
appears to be increasing and the growth outlook for both Europe and
the U.S. seems to be moderating, which could have a downside impact
on
credit
markets and hurtJ PMorgan's bullish bets on corporate credit
quality.
As I
stated
last week, one of the biggest challenges facing Dimon and
JPMorgan is the bank's dominant position in the relatively
illiquid derivatives
market
where it made the bets. Now that the bank's
liability
is out in the open,
hedge fund
sharks will be circling "the London Whale," as one of JPMorgan's
traders came to be known because of the trade's size, waiting for
the right moment to strike and bite their own profits out of the
bank's difficulties.
Another group the bank will have to face is its shareholders -
since May 10, the bank's shares declined more than 16 percent, and
the full details of the trade haven't even come to light yet.
JPMorgan's position is highly leveraged, involving hedges purchased
against multiple credit indices.
Of course, the bank also needs to consider its relationship with
regulatory bodies and the government, as both the
Commodity
Futures
Trading
Commission and the Securities and Exchange Commission say they've
begun investigating the losses. According to
The New York Times
, the latter agency is mainly concerned with how well the bank
disclosed its trades and its
risk
, while the former is looking at the overall impact on the credit
derivatives market.
In the Senate, Democrat Tim Johnson of South Dakota said "The
company's massive trading loss is a stark reminder of the financial
crisis of 2008 and the necessity of Wall Street reform. This
trading loss has been a wake-up
call
for many opponents of Wall Street reform."
One interesting dynamic to watch will be the relationship between
JPMorgan's disclosure of the trades and the losses against its
efforts to hedge or unwind them. Dimon and his fellow executives
certainly knew of them before the announcement two weeks ago, and
the bank probably began taking action to offset the losses or shed
the positions weeks or months ago. But the longer the chief
investment office sat on the losses, the worse the reckoning with
official bodies may be.