SEC to Review J.P. Morgan Chase $2 Billion Trading Loss
SEC officials are looking at accounting and disclosure issues related to the trading loss, according to The Wall Street Journal. Early Wall Street Journal reports in early April noted that a trader at J.P. Morgan known in the market as the “London Whale” made large bets on credit derivatives, supposedly to “hedge structural risks.”
Formal news of the loss came in the form of a disclosure in J.P. Morgan’s first quarter 10Q filed with the SEC on May 10, 2012. The following excerpt is taken from page 9:
“In Corporate, within the Corporate/Private Equity segment, net income (excluding Private Equity results and litigation expense) for the second quarter is currently estimated to be a loss of approximately $800 million. (Prior guidance for Corporate quarterly net income (excluding Private Equity results, litigation expense and nonrecurring significant items) was approximately $200 million.) Actual second quarter results could be substantially different from the current estimate and will depend on market levels and portfolio actions related to investments held by the Chief Investment Office (CIO), as well as other activities in Corporate during the remainder of the quarter.
Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed.
The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
The Firm is currently repositioning CIO’s synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm’s overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.
Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past.”
Florida Securities Litigation and FINRA Arbitration
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