JPMorgan losses grow as speculation intensifies


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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Daniel Pereira

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