By Adam Shell, USA TODAY
Has the "London Whale" tempest finally been harpooned by JPMorgan Chase?
Gauging from the reaction of Wall Street investors, it sure looks that way.
Shares of the nation's biggest bank jumped nearly 6% to $36.07 Friday even though JPMorgan CEO Jamie Dimon disclosed some rather downbeat news: a loss of $4.4 billion caused by botched trades in the second quarter involving a London-based trader nicknamed the "whale" for his outsized bets. Bruno Iksil is no longer with the firm. The firm's losses now total $5.8 billiion.
Dimon created some of his own problems back in April by downplaying the severity of the trading loss, when he responded to media reports of the problems within the bank's Chief Investment Office, as a "tempest in a teapot."
Those remarks caused a crisis of confidence at the bank and its stock to lose as much as $25 billion in market value. Friday's gains came despite the bank's need to restate first-quarter losses related to the losing trades by $459 million (on top of an earlier reported loss of $800 million).
The writedown came amid suspicions that traders at the London-based unit at the center of the controversy misled top executives about the extent of the losses.
Investors seem more than willing to look past the bad news and focus on the positives -- and the future. Since they had been fearing a loss as high as $9 billion related to the soured trades, they found comfort in learning that the loss was much smaller and closer to the middle of the expected range.
JPMorgan took an aggressive public relations approach Friday in attempt to put the crisis, which has given the firm and its CEO a reputational black eye, behind them. They spent almost two hours on a conference call with analysts and investors explaining what went wrong with the trade, why they didn't catch it earlier, and what steps they have taken to close out the position to limit the losses and to ensure such a trading lapse and risk control breakdown would not happen again.
"We have put most of this problem behind us and we can now focus our full energy on what we do best - serving our clients and communities around the world," Dimon said. He also said the bank has already overhauled CIO management and enhanced the governance standards within the unit.
Wall Street analysts remain upbeat on JPMorgan's stock. Analysts contacted by USA Today Friday gave price targets ranging from $37 a share to $52 per share, well above the current price at the upper end of the range.
"JPMorgan is on the fast-track to restoring its credibility," said Anthony Polini, an analyst at Raymond James.
Friday's rally in the beleaguered bank's stock, which was also helped by second-quarter profits that came in much better than expected, suggests that investors are betting that the worst of the fallout from the shocking loss, shoddy risk controls and damage to the bank's reputation is in the rear-view mirror, banking analysts say.
Investors' mood brightened further when Dimon estimated that future losses related to the complex credit derivatives portfolio would be in a range of $800 million to $1.6 billion. Capping the losses was viewed as a positive by traders looking to close the page on this negative chapter in JPMorgan's history. Analysts estimate that 80% or more of the large and risky trading position has been closed out.
Marty Mosby, an analyst at Guggenheim Securities, said the CIO scandal was little more than an "attention-grabber" that has now cleared the way for investors to again view JPMorgan stock through the prism of basic business fundamentals, rather than fear of unknown losses.
"The market reaction is telling us that JPMorgan successufly communicated that they have been able to addresss the CIO (loss) issue, which was an overhang that had dropped the price of the stock well below franchise value," Mosby said. "Once they alleviated that pressure, mainly by spending so much time on the conference call with analysts and limiting future loss exposure to $1.6 billion, that provides comfort for the market to look past the issues and focus on what core earnings are."
Thomas Alonso, an analyst at Macquarie Securities Group, said the bank's strong earnings - it posted earnings of 1.21 a share vs. analysts' estimates of 70 cents - also shows that JPMorgan's businesses are strong and that its earnings power remains strong.
"The bank's underlying fundamentals are good," says Alonso. "Investment banking was weaker but better than expectations. Loan growth was solid. Credit conditions continue to improve," as does its commercial banking business.
The bank's aggressive steps to fix the problem "will ensure that the largest losses stemming from the 'London Whale' trades are behind the firm," says Jim Sinegal, an analyst at Morningstar.
The fact that the big loss occurrred, however, won't be forgotten easily. "In the past, Wall Street placed trust in Dimon, but now people can see that things can still get out of control. The speculative trade is behind them but these kinds of fears will be in the backs of peoples' minds for awhile."
Sinegal stresses that Dimon bears "considerable responsibility" for the firm's "ineffective" risk management. Still, he does not think the controversy will forever taint Dimon's credibility.
Guggenheim's Mosby also said JPMorgan sent a strong message to other risk managers at the bank and throughout the industry by clawing back the maximum amount of pay, totaling tens of millions of dollars, from the traders closely involved with the botched trades that led to the massive losses.
"It sent a signal," says Mosby, "to money managers across the industry that this is not just the companies money I am playing with, it is my money."