JPMorgan To Clawback Bonuses, Will Announce CIO Loss Just Over $5 Billion
Many were stunned when Ina Drew left JPM with millions in bonuses a few short days after Jamie Dimon told Senate and Congress those responsible for the multi-billions CIO loss would see compensation clawbacks. They can be unstunned now, following a report from the WSJ that in a few days JPM will announces millions in clawbacks from disgraced CIO executives. As for the final loss on the CIO? Recall what Zero Hedge calculated (not speculated, not surmised, not made up) in the hours literally after the JPM announcement of a $2 billion loss? We said: "Is JPM Staring At Another $3 Billion Loss?" and elaborated that "this is where we find ourselves now - the net notionals remain huge (and implicitly on JPM's shoulders), his lack of selling has left the credit index maybe 20bps rich to where it might trade given its rough correlation with the S&P 500 and this would imply at least $3bn of losses already in addition at fair-value." We were again spot on: from the WSJ: "J.P. Morgan is expected to announce Friday that the trading blunders will cost the company just over $5 billion in the second quarter, in which the bank is expected to show a profit, according to people familiar with the situation." Math: it's fundamental (Ph.D. economists - take note).
From the WSJ:
J.P. Morgan Chase JPM +0.85% & Co. plans to reclaim millions of dollars in stock from executives at the center of the trading blunder that shocked Wall Street and tarnished the reputation of Chief Executive James Dimon.
The nation's biggest bank is expected to claw back compensation from individuals including Ina Drew, who ran the company's Chief Investment Office, or CIO, according to people familiar with the bank's plans. Ms. Drew was a top lieutenant of Mr. Dimon's before she resigned this spring following the disclosure of the trading losses.
The bank could disclose the plans as early as Friday when it announces earnings, these people said. The clawback amounts were still being determined this week because of the complicated formulas and conditions for imposition, according to one person familiar with the situation.
J.P. Morgan's plan is the most prominent instance of a major U.S. bank seeking to recover pay from a high-ranking executive since the financial crisis. Other members of the CIO, including Bruno Iksil, the London-based trader known as the "London whale" for his outsize bets on certain corporate credit indexes, and his bosses Achilles Macris and Javier Martin-Artajo also are expected to face clawbacks, the people said.
As for the loss, which we calculated precisely two months ago, the WSJ says:
J.P. Morgan is expected to announce Friday that the trading blunders will cost the company just over $5 billion in the second quarter, in which the bank is expected to show a profit, according to people familiar with the situation. The company's future losses on the trade are projected to stay below $1 billion, the people said, and could result in profits of that much if the market turns in the company's favor.
J.P. Morgan is confident that the losses have been capped because 80% to 90% of the botched bets already have been closed out, these people said. The bank also is expected to report that its internal investigation found that the risk failures were isolated to the CIO unit.
Of course, the final loss is irrelevant, even if it is indeed $5 billion, instead of the NYT's attempt to high ball the number to $9 billion just so JPM can "beat expectations" (as we further expected). The biggest problem is that now that every move by the CIO unit will be under the microscope, the group which single-handedly was responsible for up to 25% of JPM's net income as nothing but a prop trading hedge fund within the bigger firm, will have no choice but to truly hedge exposures, in effect reducing the firm's ROI and ROE. In other words, the $25 billion loss in JPM market cap is actually very low compared to how much future earnings the firm has given up as a result of being caught red-handed.