Top executives and directors at JPMorgan Chase & Co. (JPM) were alerted to risky practices by a group of London-based traders two years before that group's bad bets cost the bank trading losses of more than $2 billion, the Wall Street Journal reported Monday, citing people familiar with the matter.
In early May this year, shares of JPMorgan slid after the company disclosed hefty losses in its synthetic credit portfolio. The bank said that since March 31, 2012, its Chief Investment Office or CIO had hefty mark-to-market losses in its synthetic credit portfolio that has proved to be more riskier than expected.
JPMorgan, through the CIO, makes broad bets to hedge portfolios of individual holdings. The bank has said it it will reposition the CIO's synthetic credit portfolio.
Following disclosures of the trading losses, JPMorgan CEO Jamie Dimon had swiftly convened a conference call in which he termed the losses as "egregious" and "self inflicted". He also said that the synthetic hedge, using contracts known as credit default swaps, was shoddily executed.
The massive trading losses claimed its first casualty in mid-May when JPMorgan said Chief Investment Officer Ina Drew will retire, with Co-Head of Global Fixed Income Matt Zames named to replace her.
Bruno Michel Iksil, a London-based JPMorgan trade is also believed to have been involved in the trading losses. Iksil is known as the "London Whale" for the big positions he took in credit markets on behalf of the CIO.
According to the WSJ report, certain directors at JPMorgan were informed about foreign-exchange-options bet that went bad, and were told that the trader responsible would not be allowed to go overboard in the future. Last year, top CIO executives had set a plan to roll back a separate set of large London trades, but came to know later that the plan was not followed correctly.
Dimon is expected to testify before the Senate Banking Committee on Wednesday. He is prepared to give committee members a detailed review of what went wrong.
The WSJ report noted that JPMorgan's investigation is expected to reveal a series of missteps. They include trading-risk limits that were too broad, a new trading model adopted this January that masked mounting dangers, and the failure of top executives to sufficiently probe the huge positions at the CIO.
According to the report, when Dimon asked then-CIO head Ina Drew about the trades in early April, she did not fly to London to visit the trading group.
Dimon was reportedly aware of several trades and sometimes spoke with the traders involved. In addition, he was also said to be aware of losses of about $1 billion caused by traders in New York on holdings of Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) preferred securities when the companies were taken over by the government.
JPM closed Monday's trading at $32.82, down $0.86 or 2.55 percent on a volume of 46.40 million shares.
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