Once-mighty JP Morgan plunges on $2bn London trading crisis

'Heads will roll' at Wall Street giant long seen as a safe operator as investigation begins

Shares in JP Morgan nosedived last night, dragging rival US and British banks with them in the midst of a mounting scandal over vast losses in its London derivative trading.

The US bank lost as much as 9 per cent of its value at one stage as investors headed for the exits amid fears that it will face a brutal crackdown from watchdogs after admitting that it had lost $2bn through the activities of the trader Bruno Iksil, with the possibility of worse to come.

Iksil built up huge positions in credit default swaps, which hedge funds then attacked.

The assault on banking shares on both sides of the Atlantic saw shares in Morgan Stanley, Goldman Sachs and Bank of America all lose ground. Barclays led the decline in UK banks, losing 3 per cent of its value.

Watchdogs in London and New York have been poring over JP Morgan's trading positions as well as its systems and controls to ascertain what went wrong and whether it should face enforcement action.

JP Morgan has taken the lead in the industry's fight back against new rules seeking to ban them from what has been described as "casino" banking. Chief executive Jamie Dimon has repeatedly railed against watchdogs, claiming their new rules will damage the banking industry and harm economic growth.

A flurry of hurriedly convened meetings were held yesterday at JP's London headquarters, which only recently lost its most senior dealmaker, Ian Hannam, who quit to fight the Financial Services Authority's bid to fine him £400,000 for alleged market abuse.

One banker said: "Heads will roll. This comes as a huge embarrassment to Jamie Dimon and one thing is certain: there will be blood."

A sombre atmosphere pervaded the City of London and Canary Wharf. Said one banker: "This is just the worst possible thing that could have happened for the industry. Had it been a UBS or a SocGen, it wouldn't have mattered. But JP is the bank where this sort of thing just doesn't happen. Except it has."

The Financial Services Authority, which has been working closely with the US Federal Reserve, refused to comment, but it is understood that it has not ruled out demanding that the bank calls in one of the Big Four accountancy firms to compile a blow-by-blow account of the bank's actions leading up to the trading loss. Such reports can cost up to £1m, and while they are not considered part of enforcement actions, they are crucial sources of evidence. The FSA could order such a report at any time within the next few weeks.

Profile: Jamie Dimon, JP Morgan chief executive

Until Thursday Jamie Dimon, 56, was the banker who walked on water. JP Morgan emerged from the financial crisis as the biggest bank in the world, and the tough-talking New Yorker, paid $23m last year, as the industry's crown prince. That might come to an end now.

Mr Dimon has been willing to trade blows with regulators, politicians and the media at a time when colleagues have shied from a fight – in particular with Paul Volcker, the former head of the Fed who has crafted rules that seek to ban banks from taking bets with their own cash, or proprietary trading. "Paul Volcker by his own admission has said he doesn't understand capital markets. He has proven that to me," Mr Dimon told Fox Business. After recent events Mr Volcker could be forgiven for asking the same of Mr Dimon.