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JPMorgan profit drops on 'Whale' of a loss

The lobby of JPMorgan's headquarters in New York is shown.
The lobby of JPMorgan's headquarters in New York is shown.Eduardo Munoz / REUTERS

It was a whopping loss from a whale of a trade, but it barely dinged JPMorgan Chase’s profit in the second quarter.

The largest U.S. bank by assets, JPMorgan reported lower profit in the second quarter Friday after recording a trading loss of $4.4 billion because of a failed hedging strategy undertaken by a trader in its London office nicknamed “The London Whale” because of the size of the trading positions he took.

Doug Braunstein, JPMorgan’s chief financial officer, told analysts on a conference call Friday morning that the year-to-date losses from the botched trade amount to $5.8 billion. The losses could increase by another $1.7 billion in the worst case scenario, the bank said.

The bank lost money on bad derivatives trades made by its Chief Investment Office in London, which manages risk for the overall bank and invests excess deposits. The losses were isolated to the CIO group and it is no longer betting on credit derivatives, JPMorgan said. Another group will manage what is left of the trades.

Executive Mike Cavanagh, appointed to oversee the bank’s response to the multi-billion dollar trading loss, said two years’ worth of compensation has been taken back from managers in London with direct responsibility for the botched trade.

Some individuals have left the firm, while others have been reassigned, he added. Three traders involved in the disastrous trade, including Bruno Iksil, the “London Whale,” have left the bank, The Wall Street Journal reported Friday.

JPMorgan’s CEO Jamie Dimon said Ina Drew, the now-retired chief investment officer who oversaw the London office where the bank's failed trade originated, has offered to give up a significant amount of her compensation, equivalent to the maximum amount that the firm can “claw back” from an individual -- two years’ worth of total compensation, stock and options.

Claw backs are efforts to recover compensation paid to employees whose performance was later found to have harmed the company and shareholders.

The trading losses in London have been a black eye for Dimon, who won praise and respect for keeping his bank consistently profitable during the financial crisis.

JPMorgan's disclosure about traders misstating the value of their positions was the first indication that the problems with the company's bad trades may have extended beyond bad judgment about markets.

“We are not proud of this moment, but we are proud of this company,” Dimon said on the conference call, calling the big losses from the trade “an isolated event” that had “rocked the company to the core” and from which JPMorgan has “learned a lot.”

Still, Dimon also defended the bank, reminding analysts that it has continued to grow in the financial crisis.

“We’ll never say we’ll never make a mistake […] we operate in a risk business,” he said.

Related:JPMorgan's CEO Jamie Dimon: I'm not over the hill!

Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm, said Dimon has demonstrated incompetence in his role as CEO and should be removed.

“I am making an enemy here when I say something like this, but the Fed should replace Jaime Dimon,” she said. “They should replace him for utter failure of corporate governance and telling the truth too slowly.”

On the call, JPMorgan executives fielded questions about a rate-fixing scandal that saw the U.K.’s Barclays Bank pay $453 million to regulators in the U.K and the U.S. in late June.

Barclays was accused of trying to influence LIBOR, or the London interbank offered rate -- a benchmark interest rate that affects the price at which consumers and companies across the world borrow funds.

A handful of other banks are said to be under scrutiny, including JPMorgan, Citigroup, HSBC, Deutsche Bank and the Royal Bank of Scotland.

Dimon refused to get into specifics about the investigation, but said the bank is “totally open with regulators,” and added that he has “no special insight” into how the scandal may change risks in the banking sector.

Economists and analysts predict the LIBOR scandal could be one of the most expensive to hit the banking sector since the financial crisis, engulfing more multinational banks with fines that dwarf the one handed to Barclays and further eroding investor confidence in the banking sector.

JPMorgan's overall net income was $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.

Results for both periods included special items. Analysts surveyed by financial data provider Factset expected 76 cents per share.

The derivative loss after taxes reduced earnings per share by 69 cents, the company said.

JPMorgan made more mortgage loans in the second quarter, which helped results. Because it is experiencing fewer defaults and delinquencies than it expected, the bank reduced the amount of money it had previously set aside to cover bad loans. That reduction boosted profit by $2.1 billion, before taxes.

JPMorgan expects to file new, restated first quarter results in the coming weeks. The bank found material problems with its financial controls during the period.

Friday's financial report came three months to the day after Dimon told stock analysts that news reports about Iksil and looming losses in London were a “tempest in a teapot.”

That remark, which Dimon told Congress last month was “dead wrong,” added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.

A host of international regulators and agencies are already probing the trading mishap.

The Associated Press and Reuters contributed to this report.

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