JPMorgan Chase's shares were pummeled and politicians blasted its CEO Jamie Dimon after the bank reported a shock $2 billion derivatives loss that even the pugnacious chief executive called "egregious."
The huge New York-based bank sent shivers through the markets with the loss, after having convinced many that a well-managed bank could manage the risks of complex derivatives that lay behind the 2008 financial crisis.
Politicians called for tightening bank regulation and tough controls on hedging activities, and a Republican senator requested a hearing into the case.
"Are we confident that taxpayers are fully protected from losses at major financial institutions?" asked Senator Bob Corker in a letter to the Senate Banking Committee head.
Dimon revealed the losses late Thursday in an unscheduled call to analysts, saying they were incurred in the last six weeks by the New York bank's risk management unit, the Chief Investment Office.
They involved trading in credit default swaps usually meant to offset other risks in the bank's investments, but Dimon said the strategy "morphed" into trading that was overly complex, poorly executed and badly overseen.
"These were egregious mistakes," Dimon said. "They were self-inflicted and... this is not how we want to run a business."
Although he said the bank was still very profitable, Dimon also acknowledged the positions could possibly lead to another $1 billion in trading losses by the end of this quarter.
"Hopefully by the end of the year... this won't be a significant item for us," he said.
Investors made their displeasure brazenly apparent, savaging the bank's shares from the start of Friday's trading.
The firm's stock closed down 9.3 percent at $36.96, wiping around $14 billion off the market value of the country's largest bank.
There was little new information about what happened at the bank. Attention focused on the role of a London-based JPMorgan trader, French-born Bruno Michel Iksil, nicknamed "The London Whale" and "Voldemort," after the villain in the Harry Potter books.
A source close to the matter told AFP that the loss was "related, but not exclusively" attributable to Iksil's activities, which had been reported out of London in April by The Wall Street Journal.
"Everyone is talking about this, because once again it shows the power that a handful of people can have on the market," a London trader said.
But others said such a large loss could not have occurred without the knowledge of Iksil's superiors.
"A trading loss can happen -- the problem is that chief executive Jamie Dimon and his bank are considered the best risk manager," said Gregori Volokhine, a financial strategist at Meeschaert.
"It's worrying that this wasn't an accident: the breakdown came in the surveillance system... the mistake goes high up."
Erik Oja, a banking analyst at Standard & Poor's, condemned the "major embarrassment for the bank" after it survived the 2008 financial crisis relatively unscathed.
"This looks like exotic hedging that went the wrong way. Instead of lowering volatility, it made it worse," he said.
JPMorgan was also hit with a downgrade by the rating agency Fitch, and S&P cut its outlook to "negative." US media said the Securities and Exchange Commission was investigating what happened at the bank.
But quickly, the focus turned to whether regulators need to tighten controls on banks' complex risk-hedging activities and actively trading their own funds.
Dimon has led US banks in fighting the application of the new Volcker Rule, which would ban such proprietary trade. Banks also do not want to see curbs on their hedging activities.
JPMorgan's loss was "just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making," said Senator Carl Levin, a Democrat.
"We were forced not too long ago to bail out banks which had made these kind of risky bets. We never want to do that again."
Rick Gorka, spokesman for presumptive Republican presidential nominee Mitt Romney, said the loss "demonstrates the importance of oversight and transparency in the derivatives market."
If elected Romney "will push for common-sense regulation that gives regulators tools to do their jobs, and that gives investors more clarity," Gorka added.
Others questioned whether the largest banks could be adequately supervised at all.
"When you have the supposedly best-managed bank of the country making a mistake of this magnitude, it raises the question if anybody is able to manage a bank of this size," said Rochdale Securities banking analyst Dick Bove.© ANP/AFP