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J.P. Morgan Unit Made Risky Bets on Firms

Wall Street Journal

The J.P. Morgan Chase JPM -0.68% & Co. unit whose wrong-way bets on corporate credit cost the bank more than $2 billion includes a group that has invested in financially challenged companies, including LightSquared Inc., the wireless broadband provider that this month filed for Chapter 11 bankruptcy protection.

The investments raise new questions about the risks being taken by the bank's Chief Investment Office, or CIO, which J.P. Morgan has said is tasked primarily with investing excess cash and managing risks for the New York company.
The investing in distressed companies isn't related to the loss-making trading connected to a London employee known as "the London Whale," and there is no evidence it contributed to the big losses J.P. Morgan recently disclosed.
The group within the CIO doing the distressed equity investing is known as the Special Investments Group. Whether it should be part of the CIO in the future is something that Matt Zames, who was put in charge of the CIO this month after the losses were disclosed, is evaluating, according to a person familiar with the bank. He is also examining whether the bank should keep some of these investments, the person said.
The investments underscore the kinds of questions banks will be wrestling with when the so-called Volcker rule takes effect later this year. The provision will restrict the investments and trades federally insured banks can undertake with their own money.
A J.P. Morgan spokeswoman said the Special Investments Group is funded by J.P. Morgan's holding company and not by bank deposits insured by the Federal Deposit Insurance Corp. The activities "are funded with company-issued debt and equity," the spokeswoman said.
The Volcker rule "doesn't care where the money came from," said Wallace Turbeville, a former Goldman Sachs banker who has testified about financial regulations before Congress.