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JPM Loss, Once Feared to Be $9 Billion, Likely to Be Less

Late in May, facing a wrongheaded internal credit-derivatives trade that had already generated $2 billion in losses, senior managers at JPMorgan found themselves staring at a worst-case scenario that pegged the ultimate losses related to unwinding the trade put on by a U.K. trader — now nicknamed “the London Whale” — at as much as $9 billion, says someone familiar with the matter.

Whale Tail
Masa Ushioda | Age Fotostock | Getty Images
Whale Tail

But since then, the picture has grown somewhat rosier, and the managers are now confident that they can contain the trading losses at considerably less, says this person and another person familiar with the matter — at somewhere between about $4 billion and $6 billion.

JP Morgan executives have refused to benchmark the exact size of the losses, with chief executive Jamie Dimon saying only that the bank’s second quarter, which ends Saturday, will be “solidly profitable.” Given that the bank has generated between about $3.5 billion and $5 billion in recent quarters, he likely meant that results would be in line with those, said someone familiar with his thinking.

Analysts estimate that the bank will generate $22.4 billion in revenue for this quarter and about $3.5 billion in net income, assuming trading losses that Dimon has publicly pegged at more than $2 billion, according to figures compiled by Thomson. Thursday morning, in the wake of a New York Times story suggesting that the losses could still reach $9 billion, JP Morgan shares slid 4 percent to about $35 per share.

Dimon has suggested that the $2 billion-plus Whale losses, generated by a London trader named Bruno Iksil, could double for the second quarter, mushrooming the total three-month loss to more than $4 billion. But the bank is also likely to be helped by improvements in the housing market which have resulted in loss-reserve reductions and debt-valuation adjustments (an accounting move through which banks can post paper profits when their credit-quality declines).

Since May 10, when JP Morgan’s losing trades and the $2 billion loss they had generated was first made public, CEO Jamie Dimon has replaced the leadership in the chief investment office, where Iksil worked, and the bank has scrambled to unwind them. But in the initial aftermath of the revelations, when the cost of insuring against corporate defaults for the companies represented in the obscure CDX IG-9 index — where the CIO office had amassed a long position — was soaring, things were looking potentially quite dark.

Toward the end of May, as part of an ongoing and frequent assessment of risk, JP Morgan traders and risk officers at one point prepared a worst-case scenario analysis that pegged the CIO losses at as high as $9 billion, if the credit index positions were slow and expensive to exit. But since then, say multiple people familiar with the process, JP Morgan has successfully sold about 70 percent of its CDX IG-9 exposure, taking advantage of spikes in the trading volume in the index in the first and third weeks of June, among other opportunities, that allowed it to pare down its exposure.

In light of that progress, JP Morgan executives are feeling more optimistic about the unwind process, say the people familiar with it. But at the same time, the bank is very likely to take billions more in losses before the process is complete, add two of these people, who believe the total hit, spread out over more than one quarter, could reach as high as $6 billion. Still, a loss of between $4 billion and $6 billion, these people say, is nothing to be happy about.

-By CNBC's Kate Kelly
@KateKellyCNBC