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On Thursday, May 10th, after the market's close, JPMorgan Chase (JPMFree JPMorgan Stock Report) disclosed that a division that manages the company's credit risk had incurred a loss of about $2 billion related to a trading strategy meant to hedge the banking giant's overall credit exposure, but that, instead went awry. Management admits that the strategy was flawed, poorly reviewed, and poorly monitored and is launching an extensive review of the situation.

The $2 billion trading loss is expected to be offset by about $1 billion of securities gains, and management expects to report a profit of about $4 billion in the June quarter, or some $0.90 a share. Moreover, management cautions that the portfolio in question is still risky and could cost the company an additional $1 billion over the next two quarters. After JPMorgan's good March-quarter earnings report, we had raised our share-net estimate for 2012 to about $5.00, but including the trading loss, we are now lowering our call to about $4.40. Absent any further setbacks, we still expect results to bounce back in 2013, to about $5.25 a share.

Until the company sorts the trading problem out, the stock may be more volatile than usual, and conservative investors may want to exercise caution, despite the issue's good total return potential to mid-decade and healthy dividend yield.

About The Company: JPMorgan Chase & Co. is a global financial services company offering a variety of services with operations in over 60 nations. At the end of 2011, JPMorgan held $2.3 trillion in assets and operations. Operational divisions include investment banking, treasury & securities services, asset management, commercial banking, retail financial services, card services, and private equity investment. The company had previously merged with Washington Mutual in September, 2008, Bank One in July, 2004, and Chase Manhattan in the final month of 2000.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.