The JPMorgan Chase & Co unit responsible for at least US$2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter.
The discrepancy between prices used by the chief investment office (CIO) and JPMorgan's credit-swaps dealer may have obscured by hundreds of millions of dollars the size of the loss before it was disclosed last month, said one person, who asked not to be identified, because they are not authorised to discuss the matter.
"I've never run into anything like that," said Sanford C. Bernstein & Co's Brad Hintz in New York.
"That's why you have a centralised accounting group that's comparing marks" between different parts of the bank "to make sure you don't have any outliers," said the former chief financial officer of Lehman Brothers.
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The biggest US bank by assets is facing regulatory scrutiny and criminal probes over losses in the CIO, which chief executive Jamie Dimon pushed in recent years to make bigger and riskier bets with the bank's money.
The loss, which Dimon said stemmed from positions that were "poorly monitored," prompted calls from Congress for tighter bank regulation and triggered criminal investigations by the Department of Justice and the FBI.
The trades in question, made by a CIO group that included Bruno Iksil, nicknamed the London Whale because his positions grew so large, were on so-called tranches of credit-swap indexes, the people said.
Tranches allow investors to wager on varying degrees of risk among a pool of companies. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Because JPMorgan had amassed such large positions, even a small change in how the prices were marked may have generated a big difference in the value of the trades, one of the people said.
"It would not be normal to book it at levels that were better than the dealer desk," said Peter Tchir, founder of New York-based hedge fund TF Market Advisers. "That would strike me as a very big issue."