JPMorgan’s “Flawed” Strategy Led to Huge Loss

JPMorgan Chase (NYSE:JPM) said on Thursday it had taken losses of $2 billion in a portfolio of credit investments as positions taken by its chief investment office turned out to be riskier than expected. “These were egregious mistakes,” chief executive Jamie Dimon said in a conference call. “They were self-inflicted and this is not how we want to run a business.”

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The corporate and private equity group, which includes the chief investment office, is now expecting losses of $800 million during the second quarter.  The investment bank had previously predicted that the unit would report a net income of roughly $200 million. The chief investment office makes trades to balance the bank’s assets and liabilities. The trading group had been under the spotlight recently for its big bets in credit default swaps.

“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,” JPMorgan said in a securities filing. “This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the company added.

Dimon said the bank could be facing a total of $1 billion in additional second-quarter losses on this, and called its strategy “flawed.” Dimon said execution was riddled with “errors, sloppiness, and bad judgment.”

At the end of March, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. “We have egg on our face,” Dimon said.

Shares of the company were down 5.5 percent in after-hours trading. Stocks of other banks, including Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) also fell.

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