JPMorgan Chase & Co.'s second quarter earnings results may be "substantially different" than it initially announced because of what appears to have been a serious risk management failing in the bank's Chief Investment Office, JPMorgan announced late Thursday afternoon.
The problem appears to stem from "significant mark-to-market losses" in the bank's synthetic credit portfolio, which "has proven to be riskier, more volatile, and less effective as a hedge than the firm previously believed."
The bank provided no immediate numerical support for the size of the position, but sought to reassure investors that the damage would be partially offset by gains in its available-for-sale securities portfolio.
The bank also suggested that it may not be able to exit these positions easily, and thus may retain the exposure.
"As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term," the bank's Securities and Exchange Commission filing states. "Accordingly, net income in Corporate likely will be more volatile in future periods than it has been in the past."
The company scheduled a conference call for 5 p.m. Eastern time to discuss the disclosure, giving investors and analysts about 30 minutes lead time.
According to press reports last month, the chief investment office took a large bullish position in credit default swaps — large enough to move the market, forcing hedge funds that had made bearish bets on the same corporate credits to make margin calls. The trader in the office was nicknamed "the London Whale" for the impact he had.