U.S. stock dutures drop as JPMorgan reveals $2 Billion in losses

U.S. stock-index futures fell as JPMorgan Chase & Co., the nation’s biggest bank by assets, said it had a $2 billion trading loss after positions in credit securities proved riskier than expected.

JPMorgan tumbled 6.7 percent in pre-market New York trading as Chief Executive Officer Jamie Dimon said the bank made egregious mistakes and that trading losses were “self inflicted.” Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley lost at least 1.8 percent.

Standard & Poor’s 500 Index futures expiring in June dropped 0.7 percent to 1,348.3 at 7:09 a.m. in New York. Financial companies in the S&P 500 have had the biggest gain among 10 groups in 2012, surging 15 percent, or almost double the benchmark measure’s advance. Dow Jones Industrial Average futures dropped 71 points, or 0.6 percent, to 12,763.

“JPMorgan has held to a higher standard among the banks,” Walter Todd, who oversees about $950 million as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. “If this happens to them, it raises the question: if they have these issues, who else does?”

JPMorgan led a slump in financial shares. The group comprises 15 percent of the S&P 500 for the second-biggest weighting among 10 industries. The bank’s shares retreated 6.7 percent to $38 in early trading.

Bank of America

Bank of America shares lost 1.8 percent to $7.56 in pre- market New York trading. Citigroup retreated 1.9 percent to $30.08 in Germany and Goldman Sachs slipped 2.4 percent to $103.77. Morgan Stanley slumped 2.8 percent to $15.16 in early U.S. trading. The Financial Select Sector SPDR Fund fell 1.6 percent to $14.74.

U.S. lawmakers and interest groups favoring tighter restrictions on proprietary trading said JPMorgan’s loss bolsters their case. Senator Carl Levin, the co-author of the so-called Volcker rule and chairman of the Permanent Subcommittee on Investigations, said the disclosure served as a “stark reminder” to regulators drafting the proprietary- trading ban required by the 2010 Dodd-Frank Act.

“The regulatory and political environment is already a headwind and clearly this doesn’t help,” wrote Deutsche Bank AG New York-based analysts, including Matt O’Connor, in a report. Bank of America analyst Guy Moszkowski wrote separately that JPMorgan’s losses are “very poorly timed for the industry” and will be taken by those seeking stricter regulation as “an example of prop trading dangers.”

Default swaps climb

The cost of insuring debt of JPMorgan from default rose to the highest level in four months. Credit-default swaps on the bank climbed to 132.5 basis points as of 8:32 a.m. in Hong Kong, according to prices from data provider CMA, which is owned by CME Group Inc. The contracts were at about 111 basis points before the announcement yesterday.

Dimon said JPMorgan lost about $2 billion after a failure in its chief investment office, which the bank says focuses on hedging. The office has been transformed in recent years under Dimon into a unit that makes bigger and riskier speculative bets with the bank’s money, according to five former employees, Bloomberg News reported April 13.

“We’re accountable, and what happened violates our own standards and principles about how we want to operate the company,” Dimon said in a conference call yesterday. “This is not how we want to run a business.”

JPMorgan’s results

On April 13, JPMorgan reported a 3.1 percent drop in earnings, a smaller decline than analysts estimated as mortgage revenue surged and trading almost doubled from the fourth quarter. The bank benefited from gains in mortgage lending as low interest rates and federal incentive programs encouraged homeowners to refinance.

Earnings at financial companies in the S&P 500 grew 12 percent in the first quarter, for the second-biggest increase among 10 industries, according to data compiled by Bloomberg. That’s almost double the growth of profits of S&P 500 companies in the period. On average, 66 percent of financial companies in the benchmark gauge beat analysts’ estimates in the period.

Warren Buffett, whose Berkshire Hathaway Inc. has more than $20 billion invested in U.S. banks, said on May 5 the nation’s lenders have “liquidity coming out of their ears” and are in better shape than European rivals.

‘Fine shape’

“I would put European banks and American banks in two very different categories,” Buffett, Berkshire’s chief executive officer, said at the firm’s annual meeting in Omaha, Nebraska. “The American banking system is in fine shape. The European system was gasping for air a few months back” until getting assistance from the European Central Bank, he said.

Banks had the biggest gain in the S&P 500 among 24 groups in regular trading yesterday, adding 1.5 percent, as European lenders rallied. Federal Reserve Chairman Ben S. Bernanke said the U.S. banking system is stronger and more resilient while still facing challenges on credit quality and liquidity.

“Banks still have more to do to restore their health and adapt to the post-crisis regulatory and economic environment,” Bernanke said yesterday in a speech at the Chicago Fed’s annual conference on banks.

The S&P 500 rebounded in regular trading, closing 0.3 percent higher, as Greece attempted to form a new government and a decline in American jobless claims helped allay concern of a labor market setback.

Confidence data

A report today may show confidence among U.S. consumers declined in May from the highest level in a year. The Thomson Reuters/University of Michigan’s preliminary index of sentiment fell to 76 from 76.4 last month, according to the median of 68 forecasts in a Bloomberg survey of economists.

Arena Pharmaceuticals Inc. jumped 95 percent to $7.15 in early New York trading. The company’s weight-loss pill gained the backing of an advisory panel, putting two obesity drugs in line for U.S. approval almost two years after regulators rejected them as too risky.

Nordstrom Inc. dropped 5.1 percent to $50.81 in after-hours U.S. trading yesterday. The chain with more than 100 namesake department stores posted first-quarter profit that trailed analysts’ estimates as expenses for e-commerce investments increased. The shares didn’t trade in Europe.