JPMorgan earnings solid but trading loss balloons to $5.8B

ByABC News
July 13, 2012, 9:44 AM

— -- In an eagerly awaited quarterly profit update two months after JPMorgan Chase blindsided investors with news of a multi-billion-dollar trading loss, the nation's largest bank posted better-than-expected earnings but said the loss has ballooned from $2 billion to $5.8 billion.

In addition to a $4.4 billion second-quarter loss from the botched trades, the bank said it had to restate first-quarter earnings by $459 million in additional losses, bringing the total lost so far on those transactions to about $5.8 billion.

And for the first time, the bank announced that it is forcing executives and traders responsible for the massive loss to give back substantial chunks of their pay from bonuses and stock grants, a punishment known as "clawbacks." Clawback provisions were introduced in 2002 in the Sarbanes-Oxley Act following the accounting scandal at energy-trading firm Enron.

The bank clawed back the maximum permitted, said Michael Cavanagh, a long-time Dimon lieutenant brought in to clean up the mess.

While the bank would not identify employees who were forced to give back pay, the clawback amounted to two years of compensation from stock and options, Cavanagh said.

Dimon, however, in lauding the service of Ina Drew, who headed the CIO office at the time of the loss before stepping down this spring, did say that Drew stepped forward to give up the maximum clawback she faced. Drew earned more than $15 million in 2011. Dimon said Drew "acted with integrity."

"The trading loss was right in line with what we expected,"says Marty Mosby, an analyst that follows JPMorgan for Guggenheim Securities. "And the actual report on earnings was much stronger than we expected. What we didn't expect was the restatement. It raises furthur uncertainty and could lead to reviews from the Securites and Exchange Commisison" and other regulators.

Despite the massive loss caused by a poorly executed trade using complex financial instruments called derivatives, the bank was able to post second-quarter results that topped analyst expectations.

The bank reported earnings of $1.21 per share, well above the 70 cents analysts had expected. Revenue came in at $22.9 billion, which was more than $1 billion above estimates.

Second-quarter 2012 net income was $5 billion, compared with net income of $5.4 billion in the second quarter of 2011. Earnings per share were $1.21, compared with $1.27 in the second quarter of 2011.

Jamie Dimon, chairman and chief executive officer, commented on financial results: "Importantly, all of our client-driven businesses had solid performance. However, there were several significant items that affected the quarter's results - some positively; some negatively. These included $4.4 billion of losses on CIO's synthetic credit portfolio, $1 billion of securities gains in CIO…"