JPMorgan Chase & Co. reported Friday that its trading loss has more than doubled from initial estimates to US$4.4 billion, but the firm still managed to report second quarter net income of US$5.0 billion, down from US$5.4 billion in the same quarter last year.
The US$4.4 billion loss on its chief investment office’s (CIO) synthetic credit portfolio, was offset by US$1.0 billion of securities gains in the CIO; a US$545 million gain on a Bear Stearns-related note; US$755 million of gains reflecting adjustments for widening credit spreads; and, it reduced loan loss reserves by US$2.1 billion, mostly for the mortgage and credit card portfolios.
“Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO — whether measured by notional amounts, stress testing or other statistical methods,” said Jamie Dimon, chairman and CEO of JPMorgan. “The reduction in risk has brought the portfolio to a scale that allowed us to transfer substantially all remaining synthetic credit positions to the investment bank. The investment bank has the expertise, capacity, trading platforms and market franchise to effectively manage these positions and maximize economic value.”
From now on, the CIO will no longer be trading a synthetic credit portfolio and will focus on its core mandate of investing excess deposits to generate a return, he noted.
Dimon added that it has been conducting an extensive review of what happened in the CIO. “We have already completely overhauled CIO management and enhanced the governance standards within CIO. We believe these events to be isolated to CIO, but have taken the opportunity to apply lessons learned across the firm,” he said.
JPMorgan also said that it will have to restate its first quarter results, reducing the firm’s previously-reported net income by US$459 million due to revised valuations on the CIO’s synthetic credit portfolio.
The firm indicates that it has reason to doubt the mark-to-market valuations that it initially relied upon. “The firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter,” it says.
As a result, the firm says it’s no longer confident that the trader marks reflected good faith estimates of fair value at quarter end and it has decided to remark the positions utilizing external ‘mid-market’ benchmarks.
The firm notes that its previously filed financial statements for the first quarter should no longer be relied upon. It expects to file restated financial statements for the first quarter as soon as practical.
It also says that there was a material weakness in its internal control over financial reporting related to the CIO’s internal controls over valuation. The control deficiencies have now been “substantially remediated” it says.