JP Morgan Drops A Bomb; Derivatives The Villain Again

After the close of trading on Thursday the Chief Executive Officer of JP Morgan, Jamie Dimon, revealed that the bank was going to take at least a $2 billion dollar hit on some of its derivative trading strategies.

The spreads that were in place were managed by the chief investment office and were supposed to insure that the banks positions were being hedged.

The chief investment office has been transformed in recent years under Dimon into a unit that makes bigger and riskier speculative bets with the bank’s money, according to sources close to the bank.

Apparently someone was asleep at the switch.

Dimon said in a prepared statement that the firm had lost the amount because of “egregious” failures in the risk management at the bank. He further stated that the “banks portfolio has proven to be much riskier and more volatile than was previously thought.”

Synthetic credit products are derivative trades that can generate gains or losses to credit performance of any asset that do not require the owner to actual buy or sell the underlying asset. In this case that asset was actually debt. The losses occurred as the company sought to unwind a portfolio of the instruments used to hedge JPMorgan’s credit exposure.

“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Dimon said.

JPMorgan said the losses were partly offset by gains from other areas of the banks portfolio, resulting in a net loss for the firm’s corporate division, which includes the CIO, of about $800 million after taxes. The losses could widen or narrow during the rest of the quarter, Dimon said.

The bank is “repositioning” the synthetic credit portfolio, and the CIO “may hold certain of its current synthetic credit positions for the longer term,” the firm said.

Wall Street had a knee jerk reaction, and in after hours trading major indexes were sharply lower.

Will the mess at JP Morgan prove to be the tip of the iceberg?

Is it an isolated incident and will prove to be a buying opportunity?

The market will let us know. One thing is for sure, no matter what happens it is going to create a lot of opportunities, and my teaching can help you to take advantage of those chances.

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