JPMorgan Chase reports $2 billion loss on derivatives

05/10/2012 7:00 pm EST


Jim Jubak

Founder and Editor,

This isn’t good news for global financial markets tomorrow.

After the close in New York today JPMorgan Chase (JMP) announced that it had lost about $2 billion on synthetic credit securities (derivatives) in its chief investment office. “This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the bank said in a filing with the Securities & Exchange Commission.

The bank’s shares are down 6.6% in afterhours trading.

At JPMorgan Chase the chief investment office is a unit that makes bets—often very speculative bets—with the bank’s own money. Synthetic credit securities are derivatives that are tied to the credit performance of individual companies. They were supposed to hedge against the bank’s own credit exposure. “In hindsight the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored, said JPMorgan Chase CEO Jamie Dimon. So far this quarter it looks like offsetting gains from the bank’s credit portfolio have resulted in a net loss of $800 million after taxes. The loss could widen or narrow in the rest of the quarter.

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