Bad transactions at London investment department of JPMorgan Chase, the largest U.S. bank, made under pressure from the management for profit improvement and overlooked by internal controls, could cause losses of $7.5 billion. To date, the bank already accounted for $5.8 billion losses from these transactions, and the figure could rise, in the worst case, with $1.7 billion, according to Jamie Dimon, chairman of the board and Chief Executive Officer of JPMorgan Chase, quoted by Bloomberg.
Net profit fell by 9% to $4.96 billion in the second quarter, during which the bank had losses of $4.4 billion due to bad financial derivatives transactions by traders at the London investment office, namely Iksil Bruno, nicknamed “The London Whale” due to the huge positions taken on behalf of the bank. Bank reviewed the profit for the first quarter, down by $459 million, after an internal investigation at the London office has shown that employees might be guilty of cover-up of transactions with damaging results.
Before the scandal broke, Dimon was considered one of the best managers in the banking industry, particularly because of its reputation in the area of risk management and internal supervision. Dimon has disregarded concerns raised by several close employees within the bank’s office in London, who were concerned in recent years by the lack of transparency and poor internal controls of the department. Bank shares rose 6% Friday, as the investors were relieved investors after finding out that the losses are not bigger.
However, the bank capitalization fell by $32 billion dollars – 19%, since April 5, when first data were announced on the credit derivative transactions by the London office. The unit in London has been transformed in recent years by Dimon to improve profits by targeting assets with greater risk and greater potential for gain, such as structured credit products, stock and financial derivatives, according to former employees of the department, quoted by Bloomberg.
After the publication of the information in the press, in April, Dimon rejected the possibility of significant problems, minimizing the situation in London. Less than four weeks later, he announced a loss of at least $2 billion caused by London traders. The bank fired several managers and supervisors responsible for the transactions and will try to recover their wages, based on the findings of the internal investigation. JPMorgan has accepted an offer from the former chief executive office in London, Ina Drew, who proposed to the bank to return her financial compensation for the last two years, totaling $29 million. Drew resigned in May, with a retirement package of $57.5 million, consisting of shares, pension and other compensation. The bank could claw back unvested stocks or cash bonuses for senior people even in the case of bad judgment.
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