When JPMorgan announced a big trading loss last week, chairman and CEO Jamie Dimon said (among other things): "We'll admit it, we'll learn from it, we'll fix it and we'll move on."
But JPMorgan can't move on because fixing the problem is proving extremely difficult -- and the losses are mounting, now reportedly approaching $3 billion.
"Things are getting worse for them," says Greg Zuckerman, senior writer at The Wall Street Journal. "I wouldn't say [the loss] is growing by billions a day but it's taking on water."
The losses are growing in part because corporate credit is weakening due to the ongoing crisis in Europe. In its simplest form, the trade in question was a bullish bet on an index of investment grade corporate bonds offset by a bearish trade on junk bonds.
But JPMorgan also finds itself in the cross hairs of other hedge funds, who know it's trying to unwind a really big bet in a somewhat illiquid market. Compounding the problems, Zuckerman notes JPMorgan is "much bigger than everybody else out there" in the derivatives underlying the trade, the CDX Investment Grade 9 and CDX High Yield 11.
Indeed, it was the dominant nature of the trade that earned JPMorgan trader Bruno Michel Iksil the nickname "the London Whale."
Zuckerman, who first reported on these trades in early April, today details how Iksil made some similarly outsized bets last year, which paid off to the tune of $450 million when Dynegy and American Airlines filed for bankruptcy.
"I think some of the success in the past did contribute to the problem" they're having today, he says. "JPMorgan and top executives got overconfident because Bruno and whole group did so well for so long."
At the same time, Iksil's success "left all kinds of hedge funds on the other side frustrated an angry," he continues. Now those firms smell blood in the water and are nibbling away at 'the London Whale'.
At this point, Zuckerman says it's difficult to gauge how big JPMorgan's potential liability is, in part because of the complex nature of the trade, in part because it depends on movements in the credit markets and in part because everybody knows their position.
"A lot of times when there's a trading fiasco the company, or the bank, owns up only after they're out of the position," he observes. "In this case they're still stuck so it's hard to tell how bad things get."
But for the moment at least, it's fair to say things are getting 'worse' at JPMorgan.
Given the nature of the trade and the highly politicized atmosphere surrounding it, Zuckerman declined to speculate on how various investigations -- including by the SEC and FBI -- will play out.
"The focus is going to be on how they missed it [and] was there some attempt somewhere to hide the positions," he says. "I'm sure they will be a lot of finger pointing. People will ask the question: 'What did Jamie know and when?'" (Update: Dimon will be called to testify before the Senate Banking Committee in the coming weeks, Politico.com reports.)
To his credit, it appears Dimon disclosed the losses as soon as he realized the scope of the problem. But doing the "right" thing has only complicated JPMorgan's efforts to "fix it" and "move on."
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