After reviewing an internal report related to
JPMorgan Chase & Co.
) controversial hedging strategy,
The New York Times
on Thursday reported that the company's trading losses could swell
up to $9 billion in a worst-case scenario. This figure is almost
triple the amount expected by the CEO, when he made the
announcement of the trading loss in early May.
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JPMorgan had announced that in the first six weeks of the second
quarter, its chief investment office had incurred nearly $2 billion
of mark-to-market losses in an index of credit default swap, which
was meant to protect the company against potential losses on its
large holdings of loans and bonds. However, the strategy backfired
as the repositioning of the credit portfolio was poorly monitored
Last week, CNBC reported that the company offloaded approximately
65-70% of its holdings in Series 9 of the CDX North America
Investment Grade Index. While declaring the loss, the CEO had
commented that it would take almost a year to unwind these risky
positions. However, the company has been exiting from the
loss-making trade at a faster-than-expected pace. This undue haste
in unwinding these risky positions is believed to lead to further
Though management has been trying to conceal the details related to
its failed derivatives, many traders and other hedge fund investors
in apprehension of the distress at JPMorgan are creating swift
drops in the underlying positions that are held by the company.
Nevertheless, a few other investors are also helping the company to
offload positions profitably.
In the major fallout of the mounting trading loss, the reliability
of JPMorgan and its top management is at stake. This also questions
the risk management ability of the company that remained steadfast
during the financial crisis of 2008 and continued to report profit.
Moreover, JPMorgan continues to face the wrath of the investors,
employees and regulators alike. Further, Fitch Ratings and Standard
& Poor's (S&P) revised their assessments on the company.
The huge trading loss has also renewed the debate on the severity
with which large banks and financial institutions should be
Further, JPMorgan's share price has fallen nearly 12% since the
announcement of the trading loss on May 10, thereby wiping out
billions of dollars worth of shareholder returns.
We hope that the major banks in the country such as
Bank of America Corporation
Wells Fargo & Company
The Goldman Sachs Group Inc.
), which follow the trend set by JPMorgan, will not report similar
losses in the near future.
We are expected to receive further clarity on JPMorgan's trading
losses and updated loss forecast while announcing its second
quarter results on July 13.
Currently, JPMorgan retains a Zacks #4 Rank, which translates into
a short-term Sell rating.