JPMorgan Chase & Co. (NYSE: JPM) London Whale controversy continue sto take ttoll on the bank’s goodwill and news is the bank had been pursued by the U.S. securities and Exchange Commission to check it’s different classes of trades respectively. The regulator had been pushing the bank to improve disclosures of proprietary trading for investors at least a year before the bank suffered a gigantic loss on excessively risky wagers of its ex-golden goose, a Bruno Iksil.
Iksil’s wagers in the credit derivatives cost his bank billions of dollars besides putting a question mark o the company’s ability to maintain the financial and operational risk for it’s client. The loss accruing on account of his wagers are being investigated by the U.S. Senate’s Permanent Subcommittee on Investigations.
Carl Levin a Michigan Democrat, who is also Chairman at the investigator agency termed the Whale losses as a “textbook” example why regulators should intervene the accounting practices of brokerage firms to implement the Volcker rule. Under law, Proprietary trading, making banks bet with their own money are restricted through a provision in The Dodd- Frank Act commonly referred to as the Volcker rule. The SEC had been suspicious of the banks way of disclosing it’s trades to stakeholders especially the investors.
In a series of letters addressed to the company The Securities and Exchange Commission, had asked Douglas Braunstein ,JPMorgan Chase & Co. (NYSE: JPM)’s CFO to disclose revenues bifurcated between principal revenue generating transactions and proprietary trading. Transcripts of the written communication between June ’11 and Feburary’12 were released for the general public yesterday.
Demanding further disclosure of information regarding the banks revenues disclosed in a filing with the regulating agency, Suzanne Hayes, assistant director of corporation finance wrote that the disclosure was insufficient in nature. The filing also did not show how much was generated from “proprietary-trading business, hedge-fund activity” and what was the proportion of private-equity funds “that would be affected by the Volcker rule,” Hayes wrote in the initial letter.
The JPMorgan Chase & Co. (NYSE: JPM) filing that was being questioned by the regulator disclosed only that the bank had been liquidating proprietary funds in its equities unit; a practice that Suzanne said did not clarify the extent of the bank’s “proprietary-trading business,”.
Subsequent to this response the bank asserted through a later in May this year, that a credit derivatives portfolio, which speculates against creditworthiness of established U.S. companies like Wal-Mart Stores Inc. (NYSE:WMT), were different than proprietary transactions because the former hedged against economic recession.
JPMorgan Chase & Co. (NYSE: JPM), the biggest American bank by assets, said the trades were made through its chief investment officer. According to CEO Jamie Dimon, 56losses accruing on account during the first nine months could surpass initial estimates of $6.2 billion.
Many pension funds including The Ohio Public Employees Retirement System are suing JPMorgan Chase & Co. (NYSE: JPM) for using the Chief Investment Office as a “secret hedge fund” claiming it was being used to mitigate risk.
In a confidential letter to the regulator Braunstein disclosed that his bank held a “de minimis” of its earnings in propriety trades. He also went to great lengths to explain that Proprietary trades are short term investments from out of the bank’s own earnings in the securities transactions on ready market, derivatives and futures. These are used to skim “gains from short-term movements in prices”. On the other hand, hedging against foreign currency and interest rate risks to minimize structural risk, and “preserve the firm’s longer-term capital value” through economic cycles of recession and boom, is very different from short term propriety trades.
Mark Kornblau, spokesman for JPMorgan Chase & Co. (NYSE: JPM), declined commenting on his company’s correspondence with the regulator.
The shares of JPMorgan Chase & Co. (NYSE: JPM) were up 0.30% to $42.77. Shares of Wal-Mart Stores Inc. (NYSE:WMT) were down 2.75% to $68.94.
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