The London Whale transactions were massive bets on U.S. corporate bonds that went wrong. The trades were supposed to be a hedge against risk, but their size and nature have raised the suspicion that the traders involved were betting to make big profits.
According to an update from an internal task force, the bank reviewed “emails, voice tapes and other documents, supplemented by interviews” that suggested that the traders did not report their positions honestly. “The Firm is no longer confident that the trader marks used to prepare the Firm’s reported first quarter results . . . reflect good faith estimates of fair value at quarter end,” the bank concluded in its filing.
As a result, JPMorgan revised its estimate of the trade losses up from the original $2 billion to $5.8 billion, with $4.4 billion of that hit coming in the second quarter. Revenue for the second quarter was $22.9 billion, down 16 percent from the same quarter in 2011. The bank also said that earnings per share fell to $1.21, compared with $1.27 during last year’s second quarter.
JPMorgan chief executive Jamie Dimon, who once described the uproar over the London Whale bets as a “tempest in a teapot,” said during a Friday conference call that the disastrous trades had “shaken our company to the core.” But he stressed that it was an “isolated” incident and that JPMorgan had already cleaned house by replacing the senior executives in charge of the unit and transferring the assets at the heart of the trade to its better-equipped investment banking unit.
“Hopefully, after this is over, we will be a stronger business because of it,” Dimon said.
The Wall Street Journal reported Thursday that three London-based traders at the heart of the debacle — Achilles Macris, Javier Martin-Artajo and Bruno Iksil — have left the bank. Former chief investment officer Ina Drew, who left JPMorgan after the losses were revealed in May, has offered to give back two years of pay, Dimon said Friday.
To prevent traders from hiding potential losses in the future, JPMorgan said it would use an external market benchmark to improve internal controls over financial reporting. The bank made assurances that the lack of oversight had been “substantially remediated” by June 30. “We have put most of this problem behind us and we can now focus our full energy on what we do best,” Dimon said in a news release.
On Friday, JPMorgan’s stock closed up 6 percent at $36.07, helping to rally the rest of the Dow Jones industrial average.
The bank is under scrutiny from the SEC, Justice Department, the Commodity Futures Trading Commission and other agencies, which have subpoenaed internal documents from the bank on the London Whale trades and other activities. Congress has also raised questions, and last month Dimon testified before the Senate Banking Committee and the House Committee on Financial Services.