Two months after JPMorgan Chase (JPM) was rocked by multibillion-dollar trading losses in its chief investment office, the bank made a compelling case that the failures were not widespread and do not signal that the bank has grown too complex to manage.
But as Jamie Dimon testily reminded multiple skeptical analysts on Friday morning, one "can't prove a negative."
"We haven't done a great job for shareholders recently, but there are huge strengths in this company that the units get from each other," Dimon said during a conference call. "Our job is to do a great job servicing clients and growing the business, and eventually the stock will reflect it."
Setting aside those doubts and the losses, JPMorgan had a strong quarter. The bank logged an additional $4.4 billion in losses for the quarter (for a total loss of $5.8 billion) as it closed out most of the CIO's ill-advised synthetic credit derivative positions and transferred the rest to the company's investment bank. But it still earned just under $5 billion for the second quarter.
While investment banking revenue was weak — down 7% to $6.8 billion, in part due to a drop in advisory and issuance fees — the bank showed robust, double-digit growth in its credit card and commercial lending books. A strong environment for mortgage lending led to a 62% increase in production, to $1.6 billion, and JPMorgan forecast that it did not anticipate needing to increase its repurchase reserves for several quarters.
"If current trends continue, we'd expect to see further reductions in mortgage reserves," Dimon said. Overall the bank earned a 1.6% return on its risk-weighted assets, a result "we think will compare very favorably with our peers."
Dimon asserted that the company expected to maintain that return on assets even if interest rates remained depressed for years to come. But the bank's actual earnings were relegated to sideshow status on Friday, as questions about the bank's response to the CIO losses dominated both executives' talks and analyst questions.
"I can tell you this has shaken our company to the core," Dimon said.
JPMorgan has reviewed a million emails and more than 30,000 phone calls relating to the chief investment office's activities, and decided to restate its first-quarter results Thursday after concluding that the traders responsible for the decision may have marked their positions in a way that hid their losses.
"As a result, we question the integrity of the traders," said Mike Cavanagh, head of treasury and security services, who is overseeing the bank's review of the CIO and a larger but related risk management review. The risk management division inside the chief investment office had insufficient resources but still failed to use what it had well, he said. The failures amounted to a material weakness, though "we believe we've substantially remediated that weakness in the third quarter," Cavanagh said.
The leadership of the CIO has largely been revamped. The bank is seeking to claw back two years of pay for at least three former employees of the office, and the former head of the group voluntarily agreed to give back an equivalent amount of her pay.
More broadly, the bank denied that the risk management failures in the investment office reflected a troubled risk management culture at JPMorgan.
"This would not have happened in the investment bank," Cavanagh said.
Many analysts on the call were skeptical of that position. Dimon and JPMorgan management laughed at the suggestion by Michael Mayo, a Credit Agricole analyst who has frequently criticized the economic rationale for giant banks' models, that Dimon might no longer be able to adequately supervise an institution of JPMorgan's size.
Another caller rattled off a lengthy list of scandals and reputational hits JPMorgan has absorbed over the last few years and asked the bank to consider splitting up the company because, "even if there are economies of scale, the market refuses to acknowledge it."
"I beg to differ," Dimon responded, calling the valuation advantages of spinning off businesses "very short-term stuff."
Libor also loomed large on the call. With the market wakening to the strong possibility that Barclays will not be the only bank accused of manipulating one of the world's most basic interest rates, analysts asked for assurances that JPMorgan derivatives traders had not influenced the staff that reported its borrowing costs.
JPMorgan declined to comment beyond a cryptic reassurance.
"We are totally open with regulators and investigators," Dimon said. "I'd be patient if I were you; it's going to take a little while, and not everyone's in the same position."