June 13 - U.S. Senate testimony today by JPMorgan Chase & Co.'s (JPM) chief executive officer Jamie Dimon highlights that while the magnitude of losses incurred by the firm's Chief Investment Office (CIO) appear manageable relative to capital and liquidity resources, risk management shortfalls were present within the CIO, and more broadly, at the firm-wide oversight level, according to Fitch Ratings. This information further supports the concerns expressed by Fitch in its rating downgrade of JPM to 'A+/F1', Rating Watch Negative from 'AA-/F1+' on May 11, 2012. Fitch's on-going analysis of JPM, including resolution of the current Rating Watch Negative status on the long-term rating, will be focused on any further realized losses associated with the CIO positions, improvements made to JPM's risk management resources and framework, more clarity on the firm's changes to its value at risk (VaR) calculation methodology, and the extent to which, if at all, JPM experiences permanent and material reputational damage as a result of these events. For more information on Fitch's recent downgrade of JPM, please see the rating action commentary titled 'Fitch Downgrades JPMorgan to 'A+/F1'; L-T IDR on Watch Negative', dated May 11, 2012. Details of the CIO's strategy and execution depict a complex set of synthetic transactions that were poorly understood and inadequately monitored within the CIO group, and more broadly at the firm. Given the size of the trades undertaken by the CIO, as well as the inherent complexities of the global trading and universal bank business model, such activities warrant significantly more risk management attention and scrutiny than were applied in this instance. JPM's testimony did not specifically address recent changes in the firm's approach to calculating VaR with respect to its CIO operations - something which Fitch views as a material component of JPM's evolving risk management framework. JPM earned $5.4 billion in the first quarter of 2012, supported by $189.7 billion of equity or $113.8 billion of Fitch Core Capital at quarter end. Earnings capacity and available capital appear to be sufficient to manage potential losses associated with the on-going unwind of the CIO positions. Beyond the financial impact, however, JPM remains exposed to potential regulatory and reputational risks which need to be managed. Clearly, regulatory scrutiny of JPM and other peers is heightened, as evidenced by today's Senate hearings. This could result in more conservative regulatory guidelines, with impacts on banks' business activities and profitability. Reputational damage appears more muted at this stage, as JPM's business activities and funding costs have shown no material negative effects relative to peers. For example, CDS spreads for JPM, while moderately widened since the announced CIO losses on May 10, 2012, still remain tighter than the majority of other global trading and universal banks. Furthermore, after an initial drop in the company's stock price, it appears to have stabilized within a narrow trading range. JPM's ratingscontinue to reflect its dominant domestic franchise as well as its solid and growing international franchise in investment banking and commercial banking. Capital remains sound and compares well with global peers, providing the bank with sufficient cushion to absorb a material idiosyncratic loss event. Fitch believes JPM continues to be well prepared to meet the minimum standards under Basel III.
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