For JPMorgan Chase, the writing was on the wall this morning—and some of it had to be rewritten.
In today’s second-quarter earnings call, the bank revealed that multiple traders had disguised their losses earlier this year, as its London office lost billions on a botched hedge. First-quarter earnings were revised downwards by $459 million. Wounds left from “London Whale,” a rogue trader in the company’s London office, shot up to $5.8 billion, and still bleeding. The portfolio could lose as much as $1.6 billion more in the next quarter, the bank said.
When CEO Jamie Dimon first announced the loss in April, he pegged it at just $2 billion, and called it “a tempest in a teapot.” Today, he swung back and forth between optimism and contrition: “We are not proud of this moment … We are not making light of this.” Then again, asked how long the bank expects to feel the pain from its losses and rewrites, Dimon seemed dismissive. "Eventually it will be gone," he said. "I am not sitting here worried about the ultimate loss on this thing."
Still, Dimon had a much better morning than many expected. Even while revealing “questions about the integrity of the trader marks” —basically, that employees lied—the bank’s shares rose 3 percent. And analysts on the call didn’t hold Dimon’s feet to the fire. “Have you lost a step?” joked CLSA’s Mike Mayo. Another jibed, “Are you too old?”
Talk of the economy at large—yes, bankers are interested in that too—also seemed jocular. Remember Obama’s “the private sector is doing fine” line? Jamie Dimon agrees. “The economy isn't that bad for corporate America,” he said. “Middle market companies and small business are OK. There's a lot of liquidity.”
Closer to home, the bank hopes to contain the damage to its ailing Chief Investment Office by shutting down its “synthetic credit portfolio,” which was responsible for the London losses.
The next step: burn bonuses. Since last year, the bank has cut “noninterest expense” —essentially compensation—by 12 percent: that is, $518 million out of employees’ pockets.
Managers involved in the London Whale shenanigans will get no compensation at all in 2012, and no severance if they’re let go. The bank even plans to “claw back” two years’ worth of their compensation, starting with three London executives. Ina Drew, who headed the CIO, will give up “a significant portion of her compensation,” Dimon said. The clawed back wages will barely dent the $5.8 billion loss—but they send a message.
With Dimon’s hangdog “we are sorry” and tough guy back-clawing, the market seems reassured. Although JPMorgan will suspend its stock repurchase program until board review, it promised to pay its dividend, which Dimon called “sacrosanct.” Seventeen of 26 analysts surveyed by FactSet Research Systems still rate the bank a “buy,” expecting the clouds to clear.
The upshot: On paper, the bank’s financials look stronger than the bulls feared. But for all the Dimon wizardry, questions remain. The admission that traders fudged numbers to conceal losses is a big one—but the CEO announced no plans to investigate the balance-sheet shenanigans. When JPMorgan admits that its reported numbers didn’t “reflect good faith estimates,” it casts doubt on the numbers going into next quarter.
Shady, trader-end misreporting sound familiar? Asked about LIBOR manipulation—for which JPMorgan is currently under investigation—Dimon said, “We’ll be totally open to investigators…Not all companies are in the same position.”
But given that the CIO group went off the rails in London (LIBOR central), and that traders have already copped to fudging numbers, it’s likely that watchdogs will have reason to take a closer look.