(Bloomberg) -- JPMorgan Chase & Co., the largest U.S. bank, reported a $4.4 billion trading loss in its chief investment office, bigger than analysts estimated, that helped drive second-quarter profit down 9%.

Net income fell to $4.96 billion, or $1.21 a share, from $5.43 billion, or $1.27, in the same period a year earlier, the New York-based company said today in a statement. Six analysts surveyed by Bloomberg estimated the CIO trading loss at $4 billion. The company also restated first-quarter earnings, reducing net income by $459 million, and used securities gains and an $800 million accounting benefit to help boost profit.

The trading loss may complicate efforts by Chief Executive Officer Jamie Dimon, 56, to restore investor confidence after losing $39.7 billion in market value since April 5, when Bloomberg News first reported that the company had amassed an illiquid book of credit derivatives at the London unit. The firm also is being probed over the possible gaming of U.S. energy markets and was subpoenaed in global investigations of interest- rate fixing in London.

“The restatement is not good, and at first glance, the numbers are so-so,” said Paul Miller, a former examiner for the Philadelphia Federal Reserve Bank and analyst at FBR Capital Markets Corp. in Arlington, Virginia.

JPMorgan rose to $34.79 in New York trading at 7:36 a.m. from $34.04 yesterday. The shares were down 2.4% this year through yesterday.

Analysts’ Estimates

Second-quarter net income excluding the effect of accounting adjustments known as DVA was $1.09 a share. Excluding DVA, loan-loss reserve reductions and a Bear Stearns-related recovery, profit was 67 cents. Analysts surveyed by Bloomberg had estimated adjusted earnings per share of 76 cents.

In a departure from his customary earnings-day conference call, Dimon is meeting analysts in person for two hours starting at 7:30 a.m. today at the bank’s New York headquarters to field questions about the loss and what he’s doing to contain the damage.

Dimon dismissed reports about the London operation as a “tempest in a teapot” when the bank reported first-quarter earnings on April 13. He reversed course less than four weeks later, disclosing a $2 billion loss that he said could grow to $3 billion or more during the quarter.

Securities Sales

JPMorgan said May 10 that it had taken $1 billion in profits from securities sales in the CIO to mitigate the trading loss and planned more asset sales if needed to offset the damages, which was caused by a wrong-way bet on credit derivatives by London trader Bruno Iksil. Dimon hired Iksil’s boss, London CIO chief Achilles Macris, in 2006 with a mandate to generate profits. Macris and Iksil eventually built up a position in credit derivatives that was so large it couldn’t be unwound without roiling markets.

JPMorgan said today that it recently discovered information that suggests some individuals at the company may have been trying to avoid showing the full amount of the losses. All employees working on synthetic credit derivatives in the CIO have left the bank, the company said today.

“We have already completely overhauled CIO management and enhanced the governance standards within CIO,” Dimon said in the statement. “We believe these events to be isolated to CIO, but have taken the opportunity to apply lessons learned across the firm.”

The company said the CIO loss may increase by $800 million to as much as $1.6 billion in an extreme scenario.

Ina Drew

Chief Investment Officer Ina Drew, 55, retired four days after the loss was disclosed with about $57.5 million in stock, pension and other pay, according to regulatory filings and estimates from consulting firm Meridian Compensation Partners LLC. About $21.5 million of that money, based on the May 14 closing price, would have been automatically forfeited if she had been fired for cause.

JPMorgan said today it will claw back compensation from individuals responsible for the losses on a case-by-case basis.

Dimon is also grappling with historically low interest rates that have compressed profit margins on lending as well as yields on investments. Moshe Orenbuch, of Credit Suisse Group AG, was among analysts who lowered earnings projections for banks amid weak trading revenue and market turmoil caused by Europe’s sovereign debt crisis.

Corporate bond issuance dropped almost 19% in the second quarter from $927 billion a year earlier as companies backed away from plans to raise capital.

Europe Damper

“Europe continues to put a damper on just about everything,” said Nancy Bush, an analyst and contributing editor at SNL Financial LC, a research firm based in Charlottesville, Virginia.

Consumer credit is one bright spot for the industry as delinquency rates decline. Fewer borrowers fell behind on their credit-card payments in May, 2.35%, from 3.09% a year earlier, according to data compiled by Bloomberg. Government programs and mortgage rates near record lows have also helped fuel higher volume and bigger profits on home loans.

JPMorgan set aside $335 million more toward its litigation costs during the second quarter. Dimon previously told shareholders that the company would be making as much as $24 billion in annual profit if it weren’t for all of its mortgage losses.

Revenue fell 16% to $22.9 billion from $27.4 billion during the second quarter of last year. Revenue at the investment-banking unit fell 7% to $6.77 billion from $7.31 billion last year.

Fixed Income

Fixed-income and equity-markets revenue excluding accounting adjustments dropped to $4.54 billion from $5.36 billion a year earlier, the company said.

U.S. banks are in the middle of the industry’s worst two years of revenue growth since the Great Depression, according to Mike Mayo, an analyst with independent research firm CLSA Ltd. in New York.

Retail banking, which includes home loans and checking accounts, earned $2.27 billion, up from $383 million a year earlier. The bank’s net interest margin, a measure of lending profitability, declined to 2.47% from 2.72% a year earlier.

JPMorgan benefited from gains in mortgage lending as low interest rates and federal incentive programs encouraged homeowners to refinance. Mortgage fees and related revenue totaled $2.27 billion, up from $1.1 billion a year earlier.

Unemployment Rate

Demand for loans rose as the unemployment rate fell to 8.2% from 9.1% in the same period of 2011. Mortgage originations industrywide probably climbed 28% to $372 billion in the second quarter from the same period last year, driven by refinancings spurred by federal programs, according to the Mortgage Bankers Association.

Fewer consumers fell behind on their credit-card payments in the second quarter compared with the same period in 2011. Loans at least 30 days overdue, a signal of future write-offs, fell to 2.14% from 2.98% in 2011. Write-offs dropped to 4.35% from 5.82% the prior year.

Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access