JPMorgan Chase & Co lost $5.8 billion in 2012 from disastrous credit bets, and traders might have tried to conceal the extent of the losses earlier this year, the biggest U.S. bank said on Friday.
The bank still managed to earn nearly $5 billion in overall profit in the second quarter and said it had fixed the problems in the Chief Investment Office, which was responsible for the trading losses. In the worst-case scenario, JPMorgan will lose another $1.7 billion on the trades, it said.
But JPMorgan's disclosure that traders may have deliberately lied about their positions could bring even more intense regulatory scrutiny to the bank, analysts said. It is already under investigation by everyone from the FBI to the UK's Financial Services Authority.
The trading losses and possible deception from traders are a black eye for JPMorgan Chief Executive Officer Jamie Dimon, who was respected for keeping his bank consistently profitable during the financial crisis.
"(Dimon) has a lot of explaining to do about how this could happen," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
The Chief Investment Office became infamous in May when JPMorgan said bad derivatives bets on portfolios of corporate bonds had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.
One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname "The London Whale." Iksil has left the bank, a source said on Friday.
Ina Drew, who headed the CIO, has also left, and offered to give back her pay for two years, said Dimon, whose pay is subject to being taken back as well. A spokesman for the bank said JPMorgan had accepted her offer.
The bank said it had moved the bad trades from the CIO, which invests some of the company's excess funds, to its investment bank. JPMorgan was one of the inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street.
The CIO will now focus on conservative investments, JPMorgan said.
"We have put most of this problem behind us and we can now focus our full energy on what we do best," Dimon said in a statement.
The company's shares rose 4.9 percent to $35.72 in morning trading.
JPMorgan said misvaluations for the first quarter had overstated the CIO's net income for the period by $459 million.
The bank posted second-quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share, a year earlier.
The derivative loss after taxes reduced earnings per share by 69 cents, the company said.
Mortgage lending was strong during the quarter, which helped results. Because it is experiencing fewer defaults and delinquencies than it expected in areas like mortgages, the bank reduced the amount of money it had previously set aside to cover bad loans. That reduction boosted profit by $2.1 billion before taxes.
JPMorgan said it expected to file new, restated first-quarter results in the coming weeks, reflecting a $459 million reduction of income because of bad valuations on some of its trading positions. The bank found material problems with its financial controls during the period.
Friday's financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a "tempest in a teapot."
That remark, which Dimon told Congress last month was "dead wrong," added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.
A host of international regulators and agencies are probing the trading mishap. Besides the FBI and FSA, they include the U.S. Securities and Exchange Commission, the Federal Deposit Insurance Corp, the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, and the Federal Reserve Bank of New York.
(Reporting by David Henry and Jed Horowitz in New York, additional reporting by Chuck Mikolajczak; Editing by Lisa Von Ahn)