JP Morgan CIO 'London Whale' Trading Loss Could be $9bn

JPMorgan's loss from the 'London Whale' event that saw employee Bruno Iksil lose billions in a bad hedging bet, could be more than quadruple original estimates and reach $9bn in total.

According to interviews with anonymous current and former traders and executives at the bank cited by the New York Times, JPMorgan (JPM) has moved rapidly to unwind the hedging position but internal models at the bank have recently projected losses of as much as $9bn.

In May this year, JPM confirmed that the bank has lost billions of dollars, after an employee at its Chief Investment Office (CIO) unit made a series of enormous bad hedging bets.

In one of the largest legal losses for a bank in recent history, Bruno Iksil, who reportedly deals in huge volumes, earned himself the nickname "the London whale" - which echoes gambling terminology that refers to a "whale" being a leviathan gambler who frequently bets monumental amounts of money.

In the aftermath, the bank's CEO, Jamie Dimon said that the CIO has $7bn in unrealised gains that may be used to offset the damage testified in front of the US Senate Banking Committee in order to defend the banks practices.

The bank's supervising body Office of the Comptroller of the Currency (OCC) Thomas Curry agreed that the amount lost in the 'London Whale' event will not create a solvency issue for the investment bank or threaten the broader financial system.

JPM declined to comment when the IBTimes UK sought comment on Thursday.

Largest Legal Loss in Recent History

The $9bn estimated total trading loss illustrates the lack of exact knowledge to how huge the loss could be.

In the immediate aftermath of the loss in April and May, Dimon said "I am not sitting here worried about the ultimate loss on this thing" and that there was plenty of profit at the CIO to offset losses.

Since then there have been various reports, albeit all citing unnamed source around the industry, that have speculated or losses at the London operation of one of the world's largest investment banks, could be more than double original estimates, reaching £4.4bn.

According to anonymous rival traders, cited by the London Evening Standard said JPM JP Morgan could face more than double the original estimated loss of £2bn.

While JPM declined to comment on amount speculation, more unnamed sources close to JPM and cited by the NYT, say that in April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8bn to $9bn.

The number is still way above what regulators have predicted. Regulators have estimated that the losses would not exceed $6bn to $7bn.

Risky Business

One of the key criticisms Dimon, JPM and its CIO face is the flawed, inadequate or misuse of Value-At-Risk (VaR), which is a broad calculation model, used by trading firms and investment banks to measure the potential losses of a portfolio.

Virtually all investment banks use this as part of their risk management practices in order to prevent substantial swings in profits and losses. However, implementing such a measure is only an indicator of risk and does not necessarily dictate trading actions.

Dimon has infamously dismissed the use of VaR in 2006, he said it was "a very bad number if you think it actually represents risk". A few years later, in 2009, he said he didn't "pay that much attention to VaR."

Given the whale-like losses at the London CIO, it may seem like a clear cut case in terms of "dismissing VaR at your peril." However, the case is not black or white.

JPMorgan changed its some of the calculations and measurements in its VaR model this year, and indicated that the average Value-at-risk figure by $2m to $67m for JP Morgan's CIO unit.

However, reports suggested in April that the CIO's portfolio was so large that is was distorting market prices. Dimon shrugged-off the suggestion as a "tempest in a teapot". The following month, he said the CIO loss of at least $2bn and announced a return to the previous VaR formula, which revealed that average figure had in fact almost doubled to $129bn.

Despite, JPM pledging to improve its CIO risk management practices after the 'London Whale' incident, a report in the Wall Street Journal this month, said the unit is actually looking to increase its portfolio of other risky derivatives instruments that in many ways resemble a portfolio that plunged the banks into a credit crisis in 2007.

JPM's strategy will apparently remain unchanged when it comes to permitting a wide variety of other, potentially risky investments, including instruments that were widely blamed for the creation of the credit crisis five years ago.

While asset back securities and troubled corporate debt make up a minority of the CIO's portfolio, WSJ's sources say that the unit is expected to increase these holding, due to the instruments' generation of big gains in the past.

According to JPM and WSJ data, its CIO's mortgage- back securities holdings reached $187.4bn this year, up from 4.45 percent in 2011. Meanwhile, asset backed securities holdings also increased this year to $38.1bn.