London Whale Trade Explodes, Current Estimate of JP Morgan Losses as High as $9 Billion

So again, what did Dimon know when? Under the hot lights at the House Financial Services Committee, he repeatedly brushed off the losses on the failed Chief Investment Office trades as no biggie. Let us remind readers that the size of the CIO’s balance sheet would make it the 8th largest bank in the US and it was running half of JPM’s total risk exposures, so it’s hard to see the failure of oversight as something to be waived off. And now it turns out the losses are going to clock in at a much higher number than the $2 billion that Dimon kept repeating in the hearings. Recall he refused to update that number, maintaining the public would have to wait for the bank’s second quarter earnings release (admittedly, he did signal the final result could come in much higher). Funny that they’ve now leaked out well in advance of that date. Per the New York Times’ Dealbook (hat tip Richard Smith):

Losses on JPMorgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation…..

The bank’s exit from its money-losing trade is happening faster than many expected. JPMorgan previously said it hoped to clear its position by early next year; now it is already out of more than half of the trade and may be completely free this year.

As JPMorgan has moved rapidly to unwind the position — its most volatile assets in particular — internal models at the bank have recently projected losses of as much as $9 billion. In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.

With much of the most volatile slice of the position sold, however, regulators are unsure how deep the reported losses will eventually be. Some expect that the red ink will not exceed $6 billion to $7 billion…

JPMorgan plans to disclose part of the total losses on the soured bet on July 13, when it reports second-quarter earnings. Despite the loss, the bank has said it will be solidly profitable for the quarter — no small achievement given that nervous markets and weak economies have sapped Wall Street’s main businesses.

Recall, as we indicated, that JP Morgan can and apparently has been playing accounting games with this portfolio. The CIO’s positions get special accounting treatment. Because this book is supposedly a liquidity buffer, and not a profit-making vehicle, banks get to treat these investments as “available for sale,” which means they can trade in and out of them (like a trading book) but account for them on a “hold to maturity basis” which means they don’t have to recognize gains or losses until they actually sell them. This is the perfect place to house an income smoothing operation, provided you can generate hidden gains that you then take when needed by selling the positions. It appears that the CIO had enough in the way of gains to allow for it to cover the CIO’s losses now, and Dimon decided to raid this piggy bank to allow him to close out that position and try to put the CIO mess behind him. And sadly, given the way the House and Senate hearings failed to probe the questionable accounting and only one mentioned the questionable Sarbanes Oxley certification, the odds are high (as they always were) that Dimon will be able to carry on as before.

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    1. Yves Smith Post author

      1. This is no way contradicts the content of the post.

      2. Mr. Market did not take your report seriously, sadly. It was the NYT account that tanked the stock.

  1. LeonovaBalletRusse

    Yves, considering John Kay’s topic at the INET conference, wouldn’t it be fun to see his post to NC on what’s really going on here? A NC “exclusive?”

  2. pathman

    No worries, it’s socialism for the corporations and super-rich. It’s capitalism for the rest of us. Bailouts to the rescue!!!!

      1. rotter

        “Mr. Market” is a Sadistic Killer. He’s a sociopaththic child molester and a remorseless, recidivist criminal who shouldnt be permitted to wander around unwatched and unrestrained.

        1. KFritz

          Methinks Mr. Market is a natural phenomenon–like growing crops and iron ore deposits.

          Also, like earthquakes and hurricanes

      2. freedomny

        “Correction: It’s capitalism without capital for the rest of us”

        Now, that’s a great truth.

        Dimon knew what was going down. He knew it would get worse, which is why he chose to hold a press conference when the loss was only a mere 2 billion. As a master of PR manipulation, he was hoping that the story would get old, and as losses mounted…the 2 billion would be the figure stuck in folks brains.

        And on another note, NYPost announced a sighting of Bloomberg and girlfriend with Dimon and wife chowing down at the Striphouse. Nothing like a eating some pricey aged beef with friends to discuss how to keep the masses in line…

        1. LeonovaBalletRusse

          f, and what does this say about their female “partners?” Compliant? Dead?

  3. Richard

    As we try to guess just how bad the loss may be, it highlights the simple fact that JPM’s disclosure is inadequate. In fact, the Bank of England’s Andrew Haldane might say that JPM’s disclosure leaves it resembling a ‘black box’.

    Until JPM is required to provide enough disclosure to make it a ‘clear’ box, it will undoubtedly keep taking risky positions.

  4. Eric377

    What are the chances that too high a number gets leaked simply to make the result beat expectations?

  5. MichaelC

    Well there goes JPMS $8 billion cookie jar of unrealized gains sitting in the Investment portfolio.

    Let’s see how the story that his CIO portfolio contains a nice dull mix of highly rated assets changes. If he sells the profitable ones to cover the 9 billion, as he’s repeatedly indicated he will in his ‘nothing to worry about, we can cover these losses’ spin then that investment portfolio is going to look a bit shabby.

    The reporting indicates that the total looks like its 9b so far, but thats only after selling half the position. It will be interesting to see the residual risk on the remainder.

    It looks like Sorkin got the go ahead from the JPM team to confirm the rumors 3 weeks before the earnings release and 2 days before the books are closed. He’s a stenographer, not an investigative reporter, so the timing of the report is interesting.

  6. timotheus

    Who was it who said that his worry was not the $2, erm $3, erm $8 billion JPM loss but its $18 billion profit?

  7. Jackrabbit

    ZH thinks that the leaked $9B number may be exaggerated so that JPM looks good when the actual number comes in at something less.

    ZH theory sounds like a plausible PR strategy – especially if JPM is sitting on still more losses.

    Didn’t JPM previouly say that some positions would be moved to other books (for long term workout)? Was that announcement just a headfake to the market while JPM tried to exit the positions or, were positions actually transfered to other JPM portfolios?

    1. monday1929

      Jim Willie sounds like a madman.
      Jim Willie has been exactly Correct on near Everything for the past 7+ years.

      JPM is the National Security State Finance arm.

      The System is finished.

      Note that T-bond interest rates spiked higher during the Deflationary 1930’s than they were during the Inflationary
      WWI era. Jamie’s role is to prevent this using his trillions in Interest Rate derivatives. There will be no “netting” of exposure. Jamie will fail.

    2. enouf

      I’ve followed somethings he’s written in the past – i like his writing style too..

      I see newer articles here;
      (maybe not as pertinent to this specific blogpost … and i thought the url is his main home?)


      p.s. What does the appended CB mean? ..and doesn’t his bio (self-image) ‘headshot’ look doctored?

    3. financial matters

      from the Jim Willie article..

      “”They are disgusted that the US bankers make unilateral decisions on central bank monetary policy, like setting the 0% rate, like monetizing another $1 trillion in USTBonds or USAgency Mortgage Bonds, like consenting to lavish executive bonuses to those responsible for fracturing the global financial ramparts, all done without consulting foreign creditors.””

      “”The hidden tool to maintain the 0% interest rate when supply grows by $1.5 trillion annually, and when dependence on the USFed for bond monetization picks up the slack, is the Interest Rate Swap contract. JPMorgan would prefer that the public not learn about it. Back in December 2010, Morgan Stanley added $8 trillion to its Interest Rate Swap book in a single quarter.””

      “”What the Interest Rate Swap does is to create artificial demand for the end product USTBond, no real buyer, in a magnificent display of 50:1 leverage, sometimes as much as 100:1 leverage””

      “”In reality, the USFed was paying the big US banks to place their Loan Loss Reserves at the USFed in order to conceal the insolvency of the USFed balance sheet. The big US banks compounded the flagrancy of the action by removing loss reserves later, calling them profit, in order to conceal their own business decline and deep deterioration. They did so because they became dangerously illiquid.””

      “”However, the USFed is stuck at 0% forever, due also to a very different hidden market force. Any rise, even a moderate rise, in the USTBond yield would result in multi-$trillion losses from the derivatives hidden at work.””

    4. LeonovaBalletRusse

      When is the Great Derivatives Blow-out to Equity Equilibrium? Sooner the better.

      As the Franciscans know, “God will sort out” the justice of the consequences.

  8. Maju

    It’s nominally still less than the Bankia hole (€13.6 billion as of the latest reports) but if we can extrapolate, I am with Teejay more or less and imagining a giant black hole at the center of this galaxy – oops, did you say it’s a bank?

  9. KCJones

    Am I the only one who read this sentence:
    “In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.”

    1. DP

      So called “worst case conditions” are probably based on a VAR model using the VIX for the last 6 months or so. What would JPM losses look like with a replay of fall 2008?

  10. kevinearick

    Teenagers, Maladaptation, & Community Failure

    Babies observe everything you do, and then everything others do. As they learn language, they compare what you say to what you have been doing, and interject their own language in an experimental feedback loop. Naturally, robots desperate to avoid change at any cost do exactly the wrong thing, at the wrong time, at the wrong place, saying one thing and doing another, pretending to adapt with increasingly anxious busy work, bribing the baby to go along, exemplifying empire profit in extortion.

    New family formation adjusts the rate of change recognition, which legacy seeks to avoid. The longer the individual fails to employ the subconscious, the more powerful the disruptive voice of empire TV becomes, and the robots don’t want to admit that they are listening to voices in their head, soothed by the status quo talking heads on empire TV, urging them to continue consuming the poison.

    You deal with teenagers by allowing them to f- themselves, until they are tired of f-ing themselves. The empire is run by and for teenagers, determined to avoid decision trade-offs, seeking all of the advantages and none of the disadvantages, as modeled on TV, practical socialism, corporate profit at private loss masquerading as public good. Keep your distance, and accelerate to the extent the empire adds to its edifice, which it continues to do.

    If you treat the empire accordingly, as the example for your children, they will slide right through their teenage years. You have until age two. Teenage difficulties arise from the inability to adapt combined with sudden onset of highly variable chemical input, in a feedback loop, which is positive with maladaptive character, and negative with adaptive character.

    Go ahead Statey; do what your boss pays you to do, exercise authority in a police state. Your municipality is bankrupt, your pension promise is the creditor, and the Fed has placed the full faith and credit of the empire behind its digitation.

    Municipal bankruptcies continue in slow motion, as empire assets are moved in the computer to prevent them, until they don’t, and the gloves come off. The teenagers do everything back assward, expecting a different result each and every time. The empire labels debt as an asset accordingly, to simulate an economy. Stupid is as stupid does and all politics is local, aggregated. Did you put that in your model Quant?

    God helps those who help themselves, on both sides of the looking glass. Parents extend the pry bar, incrementally moving the relative fulcrum, until threshold to quantum reversion. Adopt timeless behaviors that eliminate time in your calculations. Over time, quality wins, every time.

    From the perspective of the empire, it’s a game of solitaire with 4 bridges of stepping stones. From your perspective, you are placing stones to build a bridge across the bridges to your exit. What happens upon exit, from the increasingly complex regulatory brake / black hole of income event horizons? If the teenagers don’t “think” you are stupid, you’re doing something wrong.

    Quantum physics is all about faith in the ability to remove time as a variable, that God guarantees empirical placement of the next stepping stone when and where you need it, if you seek it. When accounts zero out and the emperor’s clothes vanish, who will you look to for guidance? Judge not…Funny how corporate officers always proffer ignorance, which Court disallows to the private individual.

    Your algorithm REFLECTS, to the extent you choose, those with whom you socialize, relative to distance, aggregated. Seek the counsel of effective parents, beyond the empire, if you want to become one. If you want an effective community, discount out the explicit empire currency feedback, by implicitly backing your parents. Democracy is quantum, by nature, new empire same as the old empire. The a-holes have a bad outcome and that is their excuse for being a bigger a-hole in the next iteration.

    The more bridges to nowhere the teenagers build, the easier your job as a parent, if you are genuine. It’s summer, economic activity is increasing, and core debt implodes again, partially written off as peripheral losses to simulate a liquidity problem. Imagine that; the empire rewards stupidity in a Ponzi format.

    What does a federally subsidized pension get you at your community bank? An independent business check? Why doesn’t it take personal checks with the same float? What does that say about your community value system?

    1. Fiver

      You’re clearly very bright, and I always enjoy puzzling through as much as I can get from your posts. Look forward to one from you that lays out what you think with a little less subtlety.

      1. enouf

        I’m afraid you’ve been taken ..the amount of jibberish supersedes tangible thought (IMNSHO). What i glean is; interspersment of some truthful cultural realizations with some parent/child psych III class or something — perhaps i wasn’t paying close enough attention, sigh.


        p.s. I hope i can be humble when/if i am mistaken

      2. kevinearick

        experience says that no one wants to know what I really think…that we are each responsible for the world we choose to see around us, that we choose it at a much earlier age than most are willing to admit to themselves, and everything, everything else is a symptom.

        1. kevinearick

          …child in spirit, scientist in mind, and warrior in body…is the path through the Valley.

          1. kevinearick

            You cross the Valley of Death, and string up a skeleton bridge, for what is largely going to be an army of robots, all seeking to be your boss and pay you minimum wage to work in a prison cell, so they can collect entitlements while playing golf.

          2. kevinearick

            like their mechanical counter-parts, human failure to adapt to the environment is increasing to threshold sunk cost…bubble babies just don’t get the job done.

    2. enouf

      There are atleast 2 scientifically proven facts i know about teens/puberty (IINM);

      – lifetime homeostatis ‘weight’ is set during these years
      – physical brain growth (and neurotransmitter/connect) occurs as the last of 2 major periods in life (the 1st being from infancy-toddler yrs)

      there likely exists many many more that can be attibutable to just being a ‘teen’ (during puberty).


      1. kevinearick

        ironic. what else can I say?

        you just reiterated what I said, after arguing against it.

        SCOTUS just said the President can unilaterally tax oxygen, whether you use it or not, in a case that denies a mandate is a tax for jurisdiction purposes and that it is a tax for the purpose of judgment, with a SCOTUS lawyer brought in specifically to set it up…

        how f-ed up does this system have to get?

          1. kevinearick

            they know they have a giant hole spewing economic leakage, but they have no clue where it is, so they draft a patch-all, making it worse.

            By edict:


            your all powerful leaders
            aka Marvin the Martian

            P.S. and yes, we know where you are, what you are doing, and what you are thinking…so don’t try anything. Put your hands up and surrender peacefully.

  11. Robinsh

    How big these firms are, if their losses touch to the $9 billion. Anyway these losses should be temporary or the entire sector will get affected.

    1. Cujo359

      In theory, if JPM has more than $9 billion in assets somewhere, assuming that’s the loss, then they’re still solvent. If they don’t, then they’re not. How it seems to work nowadays is if the government can still underwrite the losses, they’re solvent.

      I’m sure someone who knows what he’s talking about can explain what’s really true, but what I think is interesting is that what used to be true clearly hasn’t been for these guys for a while now.

  12. kris

    I don’t know why one even bothers.
    JPM is a Government owned bank under public/private management.
    The Fed knew, anybody who should have known anything, knew.
    JPM and the other big 5 gov owned banks under public/private management are allowed to do anything they want with their accounting books.

    Mr. Dimon is ultimately a government employee. Anybody noticed that will all the idiocies occurring, nothing happens to him?

  13. Cujo359

    Can anyone explain the math here?

    Some expect that the red ink will not exceed $6 billion to $7 billion…

    This tells me that the red ink will not exceed $7 billion, at least according to “some”. Why mention $6 billion? Why not say, if in fact it is the case, that the loss could be anywhere from $6 billion to $7 billion.

    It would be a lot easier to follow financial reporting if it weren’t written in such a way as to maximize the chance of confusion.

    1. enouf

      Know this; all the TBTF banks are utterly Insolvent ; that’s all one really needs to know — all else is a side-show


      1. monday1929

        This important truth is not said often enough.
        Not one in one thousand Americans understand that this is so.
        So, I will say it too: ALL of the top 5 banks are insolvent.

  14. nah

    If you tell a big enough lie and tell it frequently enough, it will be believed… and if not you can pay some one to help you lie some more
    that helps too

  15. KFritz

    Losses to the American taxpayers fr/ Solyndra: approx 500 million

    So, JD loses a cool 9 BILLION. Of course, that’s nothing compared to the the costs of backstopping the banks, but the reactionary publicity/propaganda apparatus gets more attention w/ its Solyndra propaganda than the black hole that is American Finance.

    Yes, Solyndra is a direct loss to taxpayers, but its failure is part wishful thinking and part ruthless cost competiton fr/ govt backed PRC enterprises. No complex thievery.

    1. enouf

      heh — and what pray tell shall we call it when the DoD / Pentagon loses 2.3 TRILLION Dollars! .. and guess when … yep, on September 10, 2001!

      “Donald Rumsfeld 2.3 Trillion Dollars Just Gone”


      p.s. I really really like that particular audio (and the timing with the visuals) ;-)

      1. LeonovaBalletRusse

        enouf, “Aaaaaand it’s Gone!” What fun! the T-bird still not taken away.

  16. Fiver

    This is too long, as many of my comments are, and I very much appreciate Yves’ indulgence in that respect. Indeed, the indulgence of most who post here, as I’m well aware few agree with my views and perhaps fewer still much appreciate my occasionally unwarranted bursts of aggression, for which I apologize to one and all. I aim to improve in that area. That said,

    As I believe we should always try to look at important events from as many angles as possible, which at times means employing imagination as a tool for inquiry:

    There has from the start been something about this particular affair and the generally accepted “oops” resulting from too big a greed-on as explanation that just doesn’t work for me – not when it’s the man with one ass cheek at the New York Fed and fingerprints all over the world.

    The positions involved were enormous, big enough to move/shape/support/distort a market, particularly in an exceptionally volatile period when market moves have instant, serious geopolitical global consequences – hardly one would think a time for Dimon as purported chief “oopster” to bring in a known gambler (Goldman the brother-in-law) whose relatively recent huge loss served as sole claim to fame, hand him the VAR model labeled “Dice” and head him into the mammoth mix reportedly created by Achilles Marcis and Bruno Iksil, some of it apparently amassed over the course of years.

    When one considers that neither JPM nor Dimon was exactly desperate for profit, and that Dimon himself had incredible power beyond his merely outrageous personal wealth as King of Banking I get this great big cognitive disconnect triggered by inability to imagine Dimon’s presumed calculus of potential gains vs losses being worth the risk, especially since September. He is just suddenly seized by an irresistible desire to fornicate with Stupid and haves at it?

    I’ve seen differing claims/descriptions that the derivatives in question were, simultaneously or variously, used to manipulate US interest rates, that they involved Greek and other EZ sovereign debt, and that the soured bets keyed on spreads in corporate debt. I’ve not seen any sort of methodical breakdown of these assets’ trails from the perspective of impact outside of JPM, be it on EZ sovereigns or banks (DB particularly), other markets or any collateral political impact in the EZ. I’m curious as to whether that corporate debt had become encumbered in the EZ because it was now collateral. Also, whether at JPM the reporting or some other feature of these holdings had any impact on Libor, and for how long.

    What would make it worthwhile for Dimon to take this risk not only of a loss, but of a major reputational and career downgrade? Are we certain it really was a risk, or that the risk he took was the one we think it was? If JPM loses $9 billion, who hit the jackpot on the other side? We know 1 of the winners was hedgie Weinstein, formerly of DB. What about the rest? How many of these people on both sides had access to material knowledge critical to aspects of the situation that made for the loss? How many knew each other? Did any of the winning counterparties have any connection with EZ entities needing support? Why, if for some personal share from a $1 billion profit you intend to deliberately toss any sense of caution out the window, why not for part of a $9 billion payout from a TBTF?

    If it was an “oops” for sake of greed, then I actually think Dimon himself thinks his “King” days at JPM the TBTF are numbered and he will be moving on not so far down the road, so didn’t have forever to take advantage of being top man global Campus. And if Dimon’s days are numbered, it’s apt to be part of a move so JPM (then others) can free itself by being “broken up” with much hoopla and genuflecting to the Great And Only Obama while the public eats uncharted seas of crap and the good entity bounds out the door and into position for another round of Sack The World.

    Or were Jamie Dimon and JPM subjected to a very sophisticated attack or even “revenge hit” of some kind?

    Yep. There’s something about this one that rings sideways.

    1. proximity1

      720 words, 50 lines.

      If that constitutes “too long” per se, then I think, again, it’s another sign of how we are in trouble, of how we allow this technology to reduce us, to accustom us to taking less and less time, less and less thought, less concentration.

      If one is making a useful, interesting, point, then 720 might be enough, just right or far, far too few depending on the matter under discussion.

      1. enouf

        @ both you and @Fiver;

        Reminds me of a quote, heh;

        “I have made this letter longer than usual because I lack the time to make it shorter.” -Blaise Pascal


    2. Jackrabbit

      Tried and true investigative techniques:

      – cherchez la femme

      – follow the money

    3. monday1929

      “The man with one ass cheek at the New York Fed and fingerprints all over the world”- with lines like that we will put up with you.

      1. monday1929

        And the aggression comes from frustration at the evil unfairness of it all- as Yves pointed out on Moyers, people are dying from this greed.

        1. enouf

          Oh, it’s much much worse than that! Birth Defects, Multiple Sclerosis, Alzheimers, …DOC (Diseases of Civilizations) anyone?

          “Monte, Woodrow. While Science Sleeps: A Sweetener Kills” (Aspertame)

          The US F.D.A. and the C.D.C. (along with Rummy’s ‘shock-and-awe’ G.B. Searle) and others are true co-conspirators, traitors, treasonous, and treacherous.!

          — and THIS IS JUST ONE INSTANCE — this kind of shit goes on all the time! Wherever and Whenever BIG $$$ is involved — The above started as far back as the 1970s

          (visit the Top Level Domain (TLD) there first to see what it’s all about).


          p.s. Hrm .. maybe we can fit in a new entry of;

          [x] Formaldehyde Containment Insurance ®

          into Lambert’s Revised IRS 1040 Form
          *awe snap .. wrong thread*

    4. LeonovaBalletRusse

      Fiver, it’s said that the Morgue is Fed Laundry for whatever.

      So Jamie is Untouchable?

    5. LeonovaBalletRusse

      Fiver, why do I see a replay of the Last Helicopter leaving the roof of the American Embassy in Saigon?

      Ah, the 99% are “Left Behind.” The Killing Fields have been seeded with suckers.

  17. DP

    Reuters quickly came to the aid of JPM yesterday afternoon in the wake of the NYT report, acting as a stenographer for an unnamed source (obviously from JPM) who pegged the losses at $4-$6 billion and noted that JPM would still be “solidly profitable” for the quarter based on gimmicks (booking profits from the sale of other securities) and accounting fraud (reducing provisions for loan losses and lawsuits, which of course should have nothing to do with trading losses). The Reuters reporter who took dictation apparently didn’t even blink at somebody from JPM saying that earnings would be whatever they wanted them to be.

    “JPMorgan Chase & Co’s losses from disastrous derivatives trades will likely amount to $4 billion to $6 billion in the second quarter, far more than the original estimate of at least $2 billion, according to a person familiar with the matter.”

    “Despite the loss, JPMorgan is still expected to deliver the “solidly profitable” results that CEO Jamie Dimon predicted last week in congressional testimony, the source said.

    The bank declined to comment.

    The company has a variety of tactics it can use to offset the derivatives trading losses and boost its quarterly results, including selling securities at a profit to book one-time gains and drawing down its provisions for bad loans and lawsuits.”

    1. LeonovaBalletRusse

      The Reuters obfuscation almost tops that of the Dragon Family Fed Gold Saga.

  18. LeonovaBalletRusse

    Just hearing on Sci Fri how the House of Lords nixed any redemption for Turing.

    Just what is the justification for the House of .01% Lords in 2012?

  19. Tom

    I would say that some nut could come to believe that: James Dimon is a friend of the common people. Why would he be a friend? Haven’t your heard, Dimon is conspiring with the government to showcase the financial destruction his band of psychopath banks/with their stupid speech gurgling out of there speculating, gambling, defrauding asses can do.
    The tragedy raining down upon main street is now so well known that the congress will have to enact legislation to prevent these losses from occurring again. The conspiracy is designed to undermine the 1st amendment by passing laws to tell the banks to shut the hell up.
    Wait, wait, sorry…I was thinking about the conspiracy theory nuts who contend, operation fast and furious was designed to subvert the second amendment under an Obama Scheme.
    Sorry about that.

Comments are closed.