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JPMorgan Reveals $2 Billion Derivatives Loss (Update 1)

Updated with comments from CEO Jamie Dimon

NEW YORK ( TheStreet) -- JPMorgan Chase (JPM - Get Report) has suffered "significant" mark-to-market losses in its synthetic credit portfolio since the end of the first quarter, the bank revealed after the bell on Thursday.

In an highly unusual, unscheduled conference call, CEO Jamie Dimon revealed that the bank's Chief Investment Office has suffered a trading loss of $2 billion in its synthetic credit portfolio, offset by a $1 billion securities gain, as a strategy to re-hedge its portfolio backfired.

Shares of the bank were down 6% in after-market trading.
JPMorgan Chase CEO Jamie Dimon

A notably livid Dimon said in an analyst conference call that the strategy was "flawed, poorly reviewed, poorly executed" and reflected "sloppiness" and " bad judgment."

As a result of the "egregious" trading mistake, the bank's corporate division could post a $800 million loss after tax, compared to its earlier guidance of plus or minus $200 million.

"We hold a fortress balance sheet to handle surprises," Dimon said but acknowledged that the recent errors was "not how we want to run our business."

The losses were unlikely to affect the bank's stress test results or its capital return plans. The proforma Basel Tier 3 capital ratio at the end of the first quarter will fall to 8.2% from 8.4% previously stated. JPMorgan should continue to meet its capital targets for 2012 and 2013, the CEO said.

JPMorgan had the synthetic credit portfolio in place as a hedge against a stressed credit environment, Dimon said. But the repositioning of the portfolio was poorly monitored and poorly executed, resulting in the losses. He also said the environment played a role in the losses but said he did not want to use that as an excuse.

In response to an analyst's question on whether other firms may also be suffering similar losses, he said "Just because we were stupid, does not mean others were."

The bank will continue to reposition its portfolio and there could be more volatility from the repositioning that could result in losses of upto $1 billion in the current quarter.

"This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed," the bank said in its 10-Q. "The Firm is currently repositioning CIO's synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm's overall credit 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."

As of March 31, 2012, the value of total Available-for-Sale (AFS) securities portfolio exceeded its cost by approximately $8 billion.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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