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.

This post originally appeared at naked capitalism and is posted with permission.