JPMorgan says bad trade has ballooned to $5.8B

JPMorgan also reported net income for the second quarter, which ended June 30, of $5 billion, far higher than the $3.2 billion that Wall Street analysts were expecting. The bank credited stronger mortgage lending and credit card business.

JPMorgan has said the trade in question was designed to offset potential losses made by its chief investment office. Dimon told Congress last month that it was meant to protect the bank in case “things got really bad” in the global economy.

JPMorgan has more than $1 trillion in customer deposits and more than $700 billion in loans. The chief investment office invests the excess cash in a variety of securities, including government and corporate debt and mortgage-backed securities.

Banks typically build hedging strategies to limit their losses if a trade turns against them. Hedges often involve credit default swaps, essentially insurance contracts that pay out if a given corporate bond goes into default.

In JPMorgan’s case, instead of offsetting losses, the trade backfired and added to them. While the bank hasn’t provided too many specifics on the trade, it appears that the bank believed it had bought too much protection against possible bond defaults, so it hedged its hedge by increasing its risk.

In other words, instead of buying insurance, it was selling insurance. The bank found itself with a pool of investments that were difficult to sell quickly. The drawn-out process of unwinding that portfolio caused JPMorgan’s losses to grow.

Dimon stressed the bank’s overall health. Speaking broadly about the trading loss, Dimon he told analysts: “We’re not making light of this error, but we do think it’s an isolated event.”

JPMorgan stock gained $2.03 to $36.07. That still left it 11 percent below its closing price of $40.74 on May 10, the day Dimon surprised reporters and stock analysts by holding a conference call to disclose the loss.

Investors were cheered to hear that the bank might resume its plan to buy back its own stock. Dimon said the bank was in discussions with the Federal Reserve and would submit a plan in hopes of buying back stock starting late this year.

The company suspended an earlier plan to buy back $15 billion of its stock after reporting the trading loss.

Dimon said Friday that Ina Drew, the bank’s former chief investment officer, who left after the loss came to light, had volunteered to return as much of her pay as was allowed under the so-called clawback provision in her contract.

Drew made more than $30 million combined in 2010 and 2011, according to an Associated Press analysis of regulatory filings. It was not clear how much Drew was voluntarily paying back to the bank. When she resigned under pressure in May after more than 30 years at the bank, she left unvested stock and stock options worth close to $14 million from the last two years.

In addition, the bank said Friday that it would revoke two years’ worth of pay from three other senior managers in the division of the bank where the trade occurred. The bank would not say how much money it expected to recover.

Those three senior managers have left the bank, and four others are expected to leave soon. The Wall Street Journal reported Friday that the trader known as the “London whale,” for the size of the bets he placed, was among those who had left.

The bank said managers tied to the bad trade had been dismissed without severance pay.

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