JPMorgan’s Trading Loss to Rise by at Least $1 Billion

The biggest U.S. bank by assets has already disclosed $2 billion of paper losses, and Chief Executive Jamie Dimon said it could lose another $1 billion or more.

The trading losses suffered by JPMorgan Chase have surged in recent days, surpassing the bank’s initial $2 billion estimate by at least $1 billion, according to people with knowledge of the losses. Photo: Thomas Belknap/Flickr

The New York Times reported that the trading losses suffered by JPMorgan Chase have increased in recent days, surpassing the bank’s initial $2 billion estimate by at least $1 billion.

Some traders say the losses will continue to grow because JPMorgan has only sold a small portion of its position, leaving it vulnerable to price swings in a thinly traded market.

Jamie Dimon, JPMorgan’s chief executive, announced the losses last Thursday and indicated that they could double within the next few quarters.

Dimon has also noted that the total paper trading losses will be volatile depending on day-to-day market fluctuations.

According to Reuters, the source of JPMorgan’s losses is an obscure group of indeces that track the performance of corporate bonds. The Markit CDX NA IG Series 9 maturing in 2017, one of such indexes,  is essentially a portfolio of credit default swaps – basically contracts that protect against default by a borrower.

JPMorgan used that index, and several others, to bet that credit markets would strengthen. That position is widely known on Wall Street and a lot of traders are betting the opposite way in the hope of profiting as the bank’s losses increase. The index has been moving against JPMorgan in recent days.

However, the overall health of JPMorgan is still strong, even with the additional losses, and the bank has been able to increase its stock dividend faster than its rivals because of stronger earnings and a more solid capital buffer.

Meanwhile, The White House officials have started talks with the Treasury Department in the several days since the staggering loss was disclosed by the bank, reports The Huff Post.

On Tuesday Treasury Secretary Timothy Geithner said that the rules required by the 2010 Dodd-Frank financial oversight law would strengthen the ability of banks to absorb losses like those disclosed by JPMorgan last week.

President Barack Obama said this week the huge loss showed the need for Wall Street reform and warned that the same kind of error at a less stable bank may have required government intervention.

At the same his rival in the presidential campaign, Republican Mitt Romney, said Wednesday that he believes a big bank should be allowed to fail if it runs into financial difficulty.

Romney commented on JPMorgan Chase’s loss. “I would not rush to pass new legislation or new regulation,” Romney said. “This is in the normal course of business a large loss but certainly not one which is crippling or threatening to the institution.”

“My own view is that if a large bank gets in difficulty, why it can fail,” a would-be Republican candidate said in an interview with conservative blogger Ed Morrissey.

“There’s no reason why the shareholders or bondholders of a bank can’t lose their funds if a bank were to get in trouble,” Romney said.

“What happened in 2008 was different on that, it was that mortgages held by virtually all of the banks were now in real trouble and it was the prospect of not just one or two banks failing, but all of the major banks failing and a complete collapse of our economic or our currency system,” he said.

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