Chase trader loses $130 M on bad coal trade
Well isn’t this just precious. Looks like the bloom is off the rose. JP Morgan Chase, while they obviously are a huge retail bank, are an investment bank at their core and trading derivatives on their own account has made up a huge part of their income, especially the last year or so as they have access to easy money from the Fed. But it looks as if they might want to pay a little more attention to their bastard stepchild retail banking arm when they start making big trading mistakes like this.
Coal-Trade Losses Sting J.P. Morgan
Loss of $130 million is setback for commodities business; bank expected to report healthy second-quarter profit
J.P. Morgan Chase & Co. is expected to report a healthy second-quarter profit on Thursday. But one result the bank won’t likely talk about is its bad trade on coal.
Commodities trader Chan Bhima lost $130 million in revenue while wagering on a decline of European coal prices, according to people familiar with the matter. The trade was up in April. But a jump in coal prices later that month began to wipe out all gains, said one of these people. By mid-June, it had become one of the biggest losing positions at the bank’s commodities desk so far this year, this person added. It is expected that Mr. Bhima will leave the firm and has been working on a transition, said another person familiar with the matter.
J.P. Morgan and Mr. Bhima declined to comment.
The bad trade is a setback for J.P. Morgan’s fledgling commodities business, which still lags behind those of Goldman Sachs Group and Morgan Stanley, both of which have been in that business longer. The company began ramping up its investments in commodities several years ago, and its business grew with the acquisition of Bear Stearns Cos. Earlier this month, the bank completed its $1.6 billion purchase of assets from RBS Sempra Commodities which, only weeks before the transaction closed, was the victim of a heist of copper and nickel it stored for customers.
The coal-trading loss represents a small fraction of J.P. Morgan’s fixed-income revenue, which in the first quarter amounted to $5.4 billion as its investment bank posted a profit of $2.47 billion. But Mr. Bhima, who joined the bank last year to run J.P. Morgan’s global coal business, was part of the bank’s expansion of the company’s commodities operations. He previously worked for Merrill Lynch & Co., and brought other members of his team with him.
Mr. Bhima bet on a decline of European coal prices because of high coal inventories and slow economic growth there. He was shorting the contracts for delivery in 2010 and 2011, while hedging part of his position with bets prices would rise after that. The trade served him well in the first quarter—prices of coal were down 10% in Europe—helping net a revenue gain of about $50 million for the bank, said a person familiar with the trade.
By late-April, Mr. Bhima’s short positions on European coal were near $1 billion in notional contract prices, the people familiar with the trade said.
But the markets started to turn against them. In a move that surprised many, coal prices in Europe moved up in April despite the worries surrounding the sovereign-debt crisis there. By mid-June, the prices had rallied 31%, wiping out all the gains and flipping the trade into one of the commodities desk’s biggest losses.
Ineptitude | admin August 9, 2010
