JPMorgan Chase's much anticipated second quarter earnings report is turning out to be even more interesting than anyone anticipated.
Shortly before reporting its second quarter earnings, JPMorgan Chase filed a statement with the Securities and Exchange Commission saying to it was restating its first-quarter earnings because of concerns that traders it its Chief Investment Office had misstated the value of credit derivatives positions in an effort to avoid showing the full amount of losses the unit had taken. The CIO is the group that housed Bruno Iksil, the so-called London Whale.
The restatement reduces JPMorgan’s first quarter net income by $459 million.
JP Morgan reported a second quarter profit of $5 billion, down 9 percent.
We'll be liveblogging the conference call right here (you can listen to it on JP Morgan's page here ). Refresh this page for update.
9:33 a.m.: The call is done. We'll have more analysis at NetNet once we've refreshed our supply of coffee. Plenty of more coverage on the CNBC.com mainpage and, of course, on your cable network viewing devices.
I'll likely be on Power Lunch today, beginning at 1:00 p.m.
9:25 a.m.: A money manager who describes himself as "a long suffering shareholder" asks whether "inexcusable CIO debacle" indicates that company is too big to manage. Would a better structure better serve shareholders?
Dimon is less flip now than he was with Mayo. He says, "I beg to disagree." Says splitting up company would be "very short term stuff."
If the board ever thought there were better strategies, that would be considered at the time. Dimon says.
"Hundreds of small banks have gone bankrupt," Dimon says. "You could argue it the other way, that [our size] is a huge source of strength."
9:21 a.m.: How long has it been since Jamie Dimon had an earnings call where no one said, "Congratulations Jamie?"
9:18 a.m.: A question about the incentive structure of CIO compensation. Did it contribute to the problem.
"We looked at things around are compensation schemes and found no particular issues."
9:17 a.m.: Lorcan Roche Kelly answers our question about the echo on the call via Twitter.
"yes, I hear it on the call then I see it on twitter 20x times," he tweets .
9:15 a.m.: We're now at the one hour, forty-five minute mark for this call. Has there been a bank earnings call this long since the financial crisis subsided? We tried to see if anyone keeps records of this stuff. Response: Errr. No.
9:08 a.m.: Is it just our connection or is the sound really terrible on this call? Lots of bad echoing happening.
9:03 a.m.: Dimon comments on buybacks in fourth quarter.
"I've said we're hopeful but I've been wrong before."
In short, there's no guarantee of regulatory approval.
8:58 a.m.: First moment of laughter on the call.
Mike Mayo asks if JP Morgan is too big to succeed. "Has the firm reached a tipping point in terms of bigness or complexity where it is too difficult to manage?"
Dimon is terse: "No."
Laughter follows. How many people are in the room with Dimon?
Mayo's question is essentially unanswered however. Dimon seems resistant to even engage in this line of thought. But it's probably the most important thing to ask: how do we know this won't happen again (or isn't happening elsewhere at the bank)? Can a bank that is as large as JPM really be run effectively? Certainly, we have no evidence that it can.
8:49 a.m.: Libor has come up (we missed who is asking the question). Phew! With all this talk of the London Whale we'd almost forgotten about the Libor scandal for a few moments.
“We’ll be totally open to investigators…Not all companies are in the same position,” Dimon says.
Morgan Stanley analysts follows up with question that is on our minds as well. If controls of London based CIO office were so bad, should we be concerned about controls over London-based Libor reporting.
Dimon's answer is a bit odd. He says he cannot prove a negative about the lack of control problems in other areas of the company. Says that controls in Europe, apart from CIO, are strong.
8:46 a.m.: We’ve moved on to the Q&A portion of the call.
First question comes from Glenn Schorr of Nomura. Asks about effect of CIO changes on earnings.
“This does not effect the earnings power of the company at all,” Dimon answers.
Asks about European exposures. Has situation in Europe got any better?
“We still think they are going to muddle through,” Dimon says.
8:41 a.m.: All CIO managers connected to London Whale trade (aka "the Synthetic Credit Portfolio") will receive no severance, no 2012 compensation, clawbacks will represent approximately 2 years of total annual compensation for each individual.
8:31 a.m.: The report is now focussed on how JPM management failed with CIO.
Here's the summary from the task force:
1. CIO judgment, execution and escalation in 1Q12 were poor
2. Level of scrutiny did not evolve commensurate with increasing complexity of CIO activities
3. CIO Risk Management was ineffective in dealing with Synthetic Credit Portfolio
4. Risk limits for CIO were not sufficiently granular
5. Approval and implementation of Synthetic Credit VaR model were inadequate.
JP Morgan is saying that this is not typical for the company and problems are "isolated" to CIO office. The implication is that if standard controls and risk management in place for other areas of the company were applied to CIO, trades would have been reined in and losses less serious.
8: 26 a.m.: Going through almost week by week detail about how JPM learned and dealt with the London Whale losses.
8:19 a.m.: The call is now focussing on the report of JPM's "CIO Task Force." You can download the presentation here . Explaining the history and purpose of the misbegotten trade.
From the presentation:
Principal objective of Synthetic Credit Portfolio was to provide benefit in a stressed credit environment
? Intended to provide a partial hedge to credit exposures
? Included long positions to reduce costs of credit protection
? Adjusted over time to reflect changes in macro views
8:14 a.m.: Goldman Sachs issued a note on JPM's Whale report. Says the losses of $4.4 billion were "in line with market expectations."
"New disclosures imply that the CIO unit has historically contributed 3% of earnings from 2007-11, being profitable every year. This should remove some concerns around a larger bottom-line contribution," Goldman's note says.
8:08 a.m.: Going forward JPM earnings supplements will include a specific line about Treasury and CIO earnings. You can find these on pages 13 and 14 of its current supplement. Bank currently expects CIO losses to be $200 million in next quarter.
8:03 a.m.: Bronstein talking about credit trends. Continue to see positive trends. Charges off down in mortgages and credit cards. Delinquencies are down.
Loan loss reserves annualized have stayed flat. Bronstein describes this as being "appropriately and conservatively" reserved but adds that reserves will come down if trends toward credit improvement continue.
7:58 a.m.: Doug Bronstein, JP Morgan CFO, is now running through the standard financial presentation (download pdf here ). Reserves for repurchases of mortgages are declining. Expect net repurchase number to be zero for next few quarters.
7: 51 a.m.: "We are not proud of this moment but we are proud of this company," Dimon says in his concluding remarks. "This has shaken our company to the core."
7:47 a.m.: Dimon says that resuming buy back program will have to wait until after board review. Company has discussed buybacks with Federal Reserve and will submit new capital plan to Fed. Expects to resume buybacks in fourth quarter.
7: 40 a.m.: Dimon talking about a mile a minute right now, faster even than is normal for the JP Morgan Chase CEO. It's either lots of adrenaline or lots of coffee. It will be necessary to go back and review all his comments afterwards. Here's a link to the presentation accompanying his comments .
7:36 a.m.: Dimon says the losses from CIO in the first quarter were about $1.6 billion, including today's restatement. $4.4 billion this quarter.
7:30 a.m.: The call has begun. Jamie Dimon speaking right off the bat. Explaining that trades have been moved out of CIO and into investment bank. Synthetic credit trading in the CIO unit shut down.