JPMorgan Chase & Co. (JPM), the largest and most profitable U.S. bank, had its credit grade lowered one level by Fitch Ratings and Standard & Poor’s said it may follow after the bank revealed a $2 billion trading loss.
The lender’s long-term issuer default rating was cut to A+ from AA-, and the short-term grade was lowered to F1 from F1+, Fitch said yesterday in a statement. Fitch placed all parent and subsidiary long-term ratings on rating watch negative.
Standard & Poor’s cited the possibility of broader problems with JPMorgan’s hedging strategies, which the credit rater said isn’t “consistent with what we have viewed as the company’s sound risk-management practices.” A downgrade might result if the missteps prove to be wider, or if management “is pursuing a more aggressive investment strategy than we originally believed” and misses financial targets, according to an S&P statement. S&P affirmed JPMorgan’s A rating.
JPMorgan announced the loss linked to synthetic credit securities on May 10. Chief Executive Officer Jamie Dimon told analysts that the New York-based firm’s chief investment office took flawed positions tied to the investments that may cost an additional $1 billion this quarter or next.
“The magnitude of the loss and ongoing nature of these positions implies a lack of liquidity,” Fitch said. “It also raises questions regarding JPM’s risk appetite, risk management framework, practices and oversight.”
JPMorgan is under review by Moody’s Investors Service for a possible two-level downgrade. The credit rater said in February it was examining 17 lenders and securities firms with global capital-market operations.
A downgrade could raise borrowing costs and oblige the firms to put up more cash for collateral calls and termination payments tied to derivatives contracts. Collateral calls were blamed in the 2008 credit crisis for draining cash and driving firms toward failure.
Morgan Stanley, Credit Suisse Group AG and UBS AG may be reduced three levels, Moody’s said. Analysts said before Dimon spoke that the industry-wide cuts could push more business to JPMorgan, Credit Suisse, Goldman Sachs Group Inc. and Deutsche Bank AG because they’d be left with some of the highest grades if Moody’s goes through with all its maximum reductions, Bloomberg reported.
