By David Henry and Jed Horowitz
REUTERS - JPMorgan Chase & Co, the biggest U.S. bank, said it had lost $5.8 billion in 2012 from disastrous credit bets and that traders might have tried to conceal the extent of the losses earlier this year.
Of the trading losses, $4.4 billion came in the second quarter. But the bank still generated nearly $5 billion of overall profit for the period.
JPMorgan's disclosure about traders misstating the value of their positions was the first indication that the problems with the company's bad trades may have extended beyond bad judgment about markets.
JPMorgan said it had cleaned up its Chief Investment Office, which made the bad trades, and that any problems were isolated to the group. The trades may lose another $700 million to $1.7 billion, Chief Executive Officer Jamie Dimon said on a conference call with investors.
The CIO became infamous in May when JPMorgan said bad derivatives bets on portfolios of corporate bonds had triggered about $2 billion of paper losses, a figure that turned into $4.4 billion of actual losses in the second quarter.
One trader in the CIO, Bruno Iksil, took big enough positions in the credit derivatives markets to earn the nickname "The London Whale." Iksil has left the bank, a source said on Friday.
Ina Drew, who headed the CIO, has also left, and offered to give back her pay for two years, said Dimon, whose pay is subject to being taken back as well.
The bank said it had moved the bad trades from the CIO, which invests some of the company's excess funds, to its investment bank. JPMorgan was one of the key inventors of credit derivatives, and its investment bank is one of the biggest traders of the product on Wall Street.
The CIO will now focus on conservative investments, JPMorgan said.
"We have put most of this problem behind us and we can now focus our full energy on what we do best," Dimon said in a statement.
The company's shares rose 3.4 percent to $35.20 in early trading.
JPMorgan said misvaluations for the first quarter had overstated the CIO's net income for the period by $459 million.
The trading losses have been a black eye for a CEO who was respected for keeping his bank consistently profitable during the financial crisis.
JPMorgan posted second-quarter net income of $4.96 billion, or $1.21 a share, compared with $5.43 billion, or $1.27 a share a year earlier.
The derivative loss after taxes reduced earnings per share by 69 cents, the company said.
JPMorgan made more mortgage loans, which helped results. Because it is experiencing fewer defaults and delinquencies than it expected, the bank reduced the amount of money it had previously set aside to cover bad loans. That reduction boosted profit by $2.1 billion, before taxes.
JPMorgan expects to file new, restated first quarter results in the coming weeks. The bank found material problems with its financial controls during the period.
Friday's financial report came three months to the day after Dimon, 56, told stock analysts that news reports about Iksil and looming losses in London were a "tempest in a teapot."
That remark, which Dimon told Congress last month was "dead wrong," added to the damage the loss has done to his reputation and his argument that his bank is not too big to be managed safely.
A host of international regulators and agencies are already probing the trading mishap. They include the U.S. Securities and Exchange Commission, the UK's Financial Services Authority, the FBI, the Federal Deposit Insurance Corp, the U.S. Commodity Futures Trading Commission, the U.S. Treasury's Office for the Comptroller of the Currency, the Federal Reserve Board and the Federal Reserve Bank of New York.