TOPICS > Economy

Staggering Losses at JPMorgan; Banking Scandal in Britain

July 13, 2012 at 12:00 AM EDT
Jeffrey Brown talks to Bloomberg's Dawn Kopecki about the losses at JPMorgan Chase and the role of government regulators in monitoring the banking industry. Plus, they discuss the scandal over the manipulation of the Libor.
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JEFFREY BROWN: The continuing questions surrounding the behavior of big banks, and the regulators who watch over them was at the center of financial news again today. The fallout arrived quickly on two fronts this morning.

JPMorgan Chase’s latest report put losses from a failed trading strategy at $5.8 billion, nearly three times the original estimate. In a conference call this morning, CEO Jamie Dimon voiced hope that the problem is now contained.

JAMIE DIMON, Chairman, JPMorgan Chase: Obviously, with this one, we shot ourselves in the foot, but that is one of the things you hold capital for — for things you’re surprised about. We learned a lot. I can tell you this has shaken our company to the core.

JEFFREY BROWN: At the same time, the bank also reported a profit of $5 billion for the second quarter.

Meanwhile, new questions arose about the Federal Reserve and a banking scandal in Britain. Barclays has acknowledged it under-reported borrowing costs in 2007 and 2008 to manipulate the so-called LIBOR, an international benchmark lending rate that affects everything from mortgages to student loans to credit cards.

Today, the Federal Reserve’s New York branch said that, in 2008, its then-president, Timothy Geithner, now the treasury secretary, warned Britain’s Central Bank that there were signs of trouble. A Fed summary read: “Suggestions that some banks could be under-reporting their LIBOR in order to avoid appearing weak were present in anecdotal reports and mass- distribution e-mails, including from Barclays.”

More than a dozen other banks, including Citigroup and J.P. Morgan Chase, are also under investigation in the LIBOR scandal.

Much more information about both of these banking stories was released today.

Dawn Kopecki has been poring through it for Bloomberg News, and joins me now.

Dawn, let’s start with J.P. Morgan Chase. We already knew about some of these losses. What did we learn today about how they were actually even bigger, much bigger, than first reported?

DAWN KOPECKI, Bloomberg News: Well, we learned today that Jamie Dimon knew that the bank had already amassed close to $800 million in loss from this position in the first quarter, when he called this a tempest in a teapot.

He knew at that time that they had already had $800 million in losses and that the position could grow by another 250 million or so at that time, something the bank never disclosed to investors, something they totally downplayed at the time.

We also learned that the loss in this quarter, the company worked really hard to try to close it out. They want to put it behind them. They want to say that this is no longer a problem. So they try to really close out that position. And, as a result, they reported a much higher loss than originally estimated.

Dimon had said in May that the loss this quarter, in the second quarter, which ended June 30, could grow to $3 billion or more in the second quarter. It was about 500 — or $5 billion. They pushed $500 million of that back into the first quarter and restated their earnings, which made the loss reported today actually look less than what it was.

They also said. . .

 

JEFFREY BROWN: And — yes, go ahead.

DAWN KOPECKI: Oh.

Well, they also said that the loss could grow, ultimately, to a total of $7.7 billion, $6 billion or $7 billion in the future total when everything is said and done. And so this loss could still grow, could still cause pain.

And even though JPMorgan did say that they made a lot of progress in closing this down, there’s still a lot more pain to come for them in terms of investigations, lawsuits, everything you could imagine that would come as of a result of something, a mistake this large.

JEFFREY BROWN: And in trying to put this behind them, he did also say that they were clearing house to some degree, losing a lot of the key figures in this.

DAWN KOPECKI: Yes. Yes, he did.

They already have — Ina Drew had retired. She was the head of the chief investment office responsible for this loss. And she had voluntarily offered to give back up to two years of compensation in what the company calls clawbacks.

The company didn’t say exactly how much that is, but we know for the last two years she earned $29 million. So if that is the sum, it is not a small chunk of change.

They also ended the employment of the three managers in London responsible, Bruno Iksil, who is known as the London Whale, his boss and the boss above him, Achilles Macris. They were all announced today or it was confirmed today that the individuals responsible for the loss in London were let go and those three individuals are the three that I had mentioned.

So they let go of them. Another person resigned. His name was Irv Goldman. He was the chief risk officer for a short period of time, and he voluntarily resigned.

JEFFREY BROWN: All right, now, Dawn, I want to just turn to the other big financial story today. This is still developing, but the scandal over the manipulation of the LIBOR.

DAWN KOPECKI: Yes.

JEFFREY BROWN: Now, it can get complicated, but today we learned that Timothy Geithner had sent out some warnings and the New York Fed had sent out some early warnings.

What did we learn? What did they see in 2008 and what did they say?

DAWN KOPECKI: Well, we learned that the Fed knew that banks were manipulating LIBOR back in 2007.

And in 2008, the Federal Reserve had a conversation. You have to imagine this is about a month after Bear Stearns almost went under. The credit markets are going crazy. Bank stocks are being driven down. And one of the things that was being used to try to decide which banks, you know, people, investors would sell is what their LIBOR rate posting was.

The Fed had a very nervous — or a conversation with a very nervous person at Barclays, who had admitted that they were fixing the rate. They said that they weren’t posting an honest LIBOR, and that the reason they were doing that was because they didn’t want to drive down the price of their stock.

And so this happened in April of 2008. A couple of weeks later, in May, Tim sent the Bank of England an email, along with some suggestions on how to prevent manipulation of LIBOR.

JEFFREY BROWN: Yes.

DAWN KOPECKI: So that’s — that’s some of the new information that came out today.

JEFFREY BROWN: Well, we know this investigation is ongoing, and I know Geithner and Ben Bernanke are both coming before Congress at some point.

But one of the things they’re clearly going to have to look at is what happened then. There didn’t seem to be any follow-up in England and here.

DAWN KOPECKI: No.

JEFFREY BROWN: No.

DAWN KOPECKI: That’s the big question.

Nobody really knows. And the Fed didn’t release everything that it has. It released selected documents today. And so we don’t know what happened. We — the only thing we do know is that the Bank of England, which is their central bank, kind of like the Federal Reserve here, sent those suggestions on to the banking association, the banking group that sets LIBOR in Europe and in London.

And so we know that the suggestions were passed on, but we don’t know if there was an investigation that was begun then. We don’t know if the Bank of England insisted upon these reforms. There are a lot of questions that weren’t answered today. And I think that’s something will you see come out hopefully in the next couple of weeks.

JEFFREY BROWN: All right, clearly more to come on this.

Dawn Kopecki of Bloomberg, thanks so much.

DAWN KOPECKI: Thank you.