UPDATE May 11, 2012 JPM’s long-term issuer default rating was cut by Fitch to A+ from AA-.
JPMorgan Chase & Co. (JPM) said it lost about $2 billion tied to synthetic credit securities after positions taken by its chief investment office were riskier than expected.
“This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the New York-based company said today in a quarterly securities filing. JPMorgan declined 5.5 percent to $38.50 in extended trading at 4:51 p.m. in New York.
From its 10-Q filing:
Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.
The Firm is currently repositioning CIO’s synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm’s overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.
Synthetic credit securities are bets on hypothetical credit instruments with credit default insurance. This is a credit derivative, and “synthetic” usually means there is no real asset in the instrument, but is a bet made on the performance of another instrument.
You thought they ended this stuff after the bailout?