"Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO - whether measured by notional amounts, stress testing or other statistical methods," said Dimon of the CIO unit's size in a statement. "Importantly, we have put most of this problem behind us and we can now focus our full energy on what we do best - serving our clients and communities around the world."
"[It] is a sign that the situation is under control and they believe that they can manage the business through the ordinary course of business," says Peter Tchir, founder of TF Market Advisors and a former credit derivative trader for Deutsche Bank, UBS and RBS.
On a call with the media, Mike Cavanagh -- an executive charged with leading an investigation of the CIO unit as its losses were recognized by JPMorgan in May -- said that the bank has investigated tens of thousands of hours of voice records and millions of emails regarding the CIO's operations. After that review, Cavanagh said, "we decided to take a conservative step and restate earnings," although he said trader marks were within bid/ask spreads.
Cavanagh said the restatement was an accounting decision and not one based on revelations of fraud.
Part of the losses in the bank's CIO unit also were a result from traders and executives dismissing risk limits as a position in illiquid credit products soured, Cavanagh noted in his review.
After taking a large long position in investment grade credit, JPMorgan said that its risk management failures stemmed from a subsequent short trade in structured credit tranches -- now known as the 'London Whale.' As the position soured, the CIO unit changed its risk assesment models and underestimated potential losses, JPMorgan said.
An April review made by the CIO unit on its position ahead of JPMorgan first quarter earnings showed quarterly loss expectations of just $250 million and actually a 'bias' toward a $350 million gain, said Cavanagh. Actual losses that JPMorgan says may reach $7.5 billion show that the assesment was misleading. After losses escalated in April, JPMorgan launched a 'bottom-up' review of the position, which uncovered flawed risk models and precipitated the banks' disclosure of a loss in May.
The accounting review, "left us with questions regarding the traders' intent,' said CFO Braunstein a the media call, of JPMorgan's decision to restate earnings. Braunstein noted that JPMorgan's restatement does not impact year-to-date revenue, net income or capital.
JPMorgan shares rallied over 5% in early trading to $36.04, stemming a 15% plus share loss since the bank first disclosed its CIO loss in May.
-- Written by Antoine Gara in New York