By Michael J. Moore - May 12, 2012 11:00 AM GMT+0700
JPMorgan Chase & Co. (JPM), the largest and most profitable U.S. bank, had its credit grade lowered one level by Fitch Ratings and Standard & Poor’s said it may follow after the bank revealed a $2 billion trading loss.
The lender’s long-term issuer default rating was cut to A+ from AA-, and the short-term grade was lowered to F1 from F1+, Fitch said yesterday in a statement. Fitch placed all parent and subsidiary long-term ratings on rating watch negative.
Signage stands outside JP Morgan Chase & Co. headquarters in New York. Photographer: Peter Foley/Bloomberg
May 11 (Bloomberg) -- Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bloomberg's Dawn Kopecki and Christine Harper talk about JPMorgan's $2 billion trading loss after what Dimon said was an "egregious" failure in the firm's chief investment office. This report also includes comments from Bloomberg Television contributing editors William Cohan, Thomas Brown and Neil Barofsky, Portales Partners' Charles Peabody, Aegis Capital's Stanley Crouch, Fifth Third Asset Management's Keith Wirtz and Rochdale Securities' Richard Bove. (Source: Bloomberg)
Standard & Poor’s cited the possibility of broader problems with JPMorgan’s hedging strategies, which the credit rater said isn’t “consistent with what we have viewed as the company’s sound risk-management practices.” A downgrade might result if the missteps prove to be wider, or if management “is pursuing a more aggressive investment strategy than we originally believed” and misses financial targets, according to an S&P statement. S&P affirmed JPMorgan’s A rating.
JPMorgan announced the loss linked to synthetic credit securities on May 10. Chief Executive Officer Jamie Dimon told analysts that the New York-based firm’s chief investment office took flawed positions tied to the investments that may cost an additional $1 billion this quarter or next.
“The magnitude of the loss and ongoing nature of these positions implies a lack of liquidity,” Fitch said. “It also raises questions regarding JPM’s risk appetite, risk management framework, practices and oversight.”
JPMorgan is under review by Moody’s Investors Service for a possible two-level downgrade. The credit rater said in February it was examining 17 lenders and securities firms with global capital-market operations.
Downgrade’s Consequences
A downgrade could raise borrowing costs and oblige the firms to put up more cash for collateral calls and termination payments tied to derivatives contracts. Collateral calls were blamed in the 2008 credit crisis for draining cash and driving firms toward failure.
Morgan Stanley, Credit Suisse Group AG and UBS AG may be reduced three levels, Moody’s said. Analysts said before Dimon spoke that the industry-wide cuts could push more business to JPMorgan, Credit Suisse, Goldman Sachs Group Inc. and Deutsche Bank AG because they’d be left with some of the highest grades if Moody’s goes through with all its maximum reductions.
Joe Evangelisti, a spokesman for JPMorgan, didn’t immediately return a message requesting comment.
To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net
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