Today U.S. prosecutors charged former JPMorgan CIO traders Javier Martin-Artajo and Julien Grout with various crimes for mis-marking the London Whale structured credit portfolio positions. The complaints are here and here and reading them you get the strong sense that Bruno Iksil, the Whale himself, was the hero of the whole saga. Oh, sure, he built a colossal portfolio of what turned out to be massively money-losing speculative trades, and yes, he did sit by and watch as his boss Martin-Artajo and his underling Grout conspired to mis-mark that portfolio to disguise hundreds of millions of dollars of losses, but: it made him angry.1 So that’s something? Anyway, he is not being charged and is cooperating with authorities, and I guess one benefit of cooperating, in addition to the not prison, is that you come across pretty well in the complaints.
Meanwhile Martin-Artajo and Grout were not pure of heart, per the complaints; they conspired to mis-mark the book to, in Martin-Artajo’s case, make sure that their bosses didn’t take it away from him,2 and in Grout’s case, I dunno, to do what Martin-Artajo told him to do I guess. The dynamics of this terrible terrible team are a bit unclear. From the emails and recorded calls Martin-Artajo seems like the sort of guy you would not want to work with if you were law-abiding and massively money-losing; he spent a lot of time yelling at Iksil for his conscience.3Read more »
Here’s a good Sonic Charmer post about how JPMorgan could have prevented the London Whale loss by imposing a liquidity provision on the Whale’s desk:
Liquidity provision means: ‘the more illiquid the stuff you’re trading, the more rainy-day buffer we’re going to withhold from your P&L’. And since one way a thing becomes illiquid is ‘you’re dominating the market already’, you inevitably make it nonlinear, like a progressive income tax: No (extra) liquidity provision on the first (say) 100mm you own, half a point on the next (say) 400mm, a point on the next 500mm, 2 points on the next 1000mm, etc etc. (specific #s depend on the product). Problem solved. In fact, it’s genuinely weird and dumb if they didn’t have such a thing.
The London Whale’s problem (one of them) was that he traded so much of a particular thing that he basically became the market in it. That means among other things that even if on paper “The Price” of what he owned was X there would have been no way for him to sell the position for X. A liquidity provision is a rough and dirty way of acknowledging this fact.
This suggestion isn’t a matter of GAAP accounting: JPMorgan wouldn’t report its asset values, or its revenues, net of this liquidity provision. It’s just an internal bookkeeping mechanism: his bosses informing the Whale that, for purposes of calculating his P&L and, thus, his comp, they would take the GAAP value of the things he had and subtract a semi-arbitrary number for their own protection.
It is weird and dumb that they didn’t do this although you can sort of guess why: the Whale portfolio started very small, and by the time it got big the Whale was both profitable and a (mostly imaginary) tail risk hedge, so it would have been hard for a risk manager to take a semi-punitive step to rein in his risk-taking. “Just tell the Whale to take less risk” does in hindsight seem like a sensible suggestion, but I suppose if he’d made $6 billion it wouldn’t.
Something else though. Here you can read about an exchange between the SEC and JPMorgan about the Whale newly released yesterday. Read more »
When I got the Senate Permanent Subcommittee on Investigations report on the London Whale last night, I did what any sensible human would do: I ctrl-F’ed for my name and the names of my friends and enemies, gloated briefly, and then set to work rationalizing not reading the rest of it. After all, it’s ridiculous for the Senate to investigate a basically legitimate trade that, though it lost some money, did nothing to destabilize JPMorgan or the financial system as a whole. And we’ve heard all the important Whale stuff before, including in JPMorgan’s own Whale autopsy, and even then it was old news.
But then I started skimming the executive summary and after underlining every sentence in the first ten pages I figured I’d have to give it a closer look. It’s an amazing, horrifying read.
What was the Whale up to? I don’t think you’ll get a better explanation than this, from a January 2012 presentation by the Whale himself, Bruno Iksil (page 74):
Mr. Iksil’s presentation then proposed executing “the trades that make sense.” Specifically, it proposed:
The executive who led the J.P. Morgan Chase Co. cash-management unit at the center of the “London Whale” debacle is scheduled to testify Friday before a Senate panel probing the $6 billion trading loss at the nation’s largest bank by assets. Former Chief Investment Officer Ina Drew, who resigned as head of the unit last May, will make her first public appearance since the New York company disclosed the trading losses last spring. [WSJ]
There are a lot of things that, if you wanted to, you could legitimately blame on former JP Morgan employee London P. Whale. The $6.2 billion trading loss the bank incurred over the summer. Ina Drew getting fired. This awkward phone call. Some stuff you can’t pin on him, though many have tried: male pattern baldness, the bombing of Pearl Harbor, Apple Maps, Lehman Brothers’ bankruptcy, tempting as it may be.Read more »
How should one read JPMorgan’s Whale Report? I suppose “not” is an acceptable answer; the Whale’s credit derivatives losses at JPMorgan’s Chief Investment Office are old news by now, though perhaps his bones point us to the future. One way to read it is as a depressing story about measurement. There were some people and whales, and there was a pot of stuff, and the people and whales sat around looking at the stuff and asking themselves, and each other, “what is up with that stuff?” The stuff was in some important ways unknowable: you could list what the stuff was, if you had a big enough piece of paper, but it was hard to get a handle on what it would do. But that was their job. And the way you normally get such a handle, at a bank, is with a number, or numbers, and so everyone grasped at a number.
The problems were (1) the numbers sort of sucked and (2) everyone used a different number. Here I drew you a picture:1
Everyone tried to understand the pool of stuff through one or two or three numbers, and everyone failed dismally through some combination of myopia and the fact that each of those numbers was sort of horrible or tampered or both, each in its own special way. Starting with:
VaR: Value-at-risk is the #1 thing that people talk about when they want to talk about measuring risk. To the point that, if you want to be all “don’t look at one number to measure risk, you jerks,” VaR is the one number you tell the jerks not to look at. Read more »
Once upon a time there was a whale, and he had a synthetic credit portfolio, and one day he did terrible terrible things with that synthetic credit portfolio, and the next day he woke up and realized he had lost $5.8 billion, and he was sad. The question for you is: was that a disaster? I think a sensible answer is:
Having a sense of proportionality here is a good idea. For one trader, losing six billion dollars, give or take, really is in the far left tail of Worst Things You Can Do, and so the whale himself was fired in infamy, though an infamy mixed with a certain envy. For his direct manager and that manager’s manager, it is probably even worse, since failing to prevent your direct report’s $6 billion loss lacks the “wow-that-takes-balls” element of actually going out there and losing six billion dollars like a whale. So they were fired too. For the bank … meh. For the Second Bank of North-Central Indiana, I’m sure losing six billion dollars would be the sort of existential disaster that would require firing the CEO, tearing down the building, and salting the earth on which it stood, but there’s a reason this didn’t happen at the Second Bank of North-Central Indiana. It happened at JPMorgan. For which it wasn’t all that much of a disaster.3
What about for JPMorgan’s regulators? I go with, like, our financial system is still here, not really any the worse for wear, but others disagree, and regulators don’t have the same “well we were profitable for the quarter” defense that JPM had.4 And so today the Fed and OCC engaged in a well-lawyered barn-door-closing exercise, issuing consent orders to JPMorgan that basically say (1) you done fucked up, but (2) you fixed it, so (3) keep doing what you’re doing. Here is the Fed: Read more »
A fourth London-based JPMorgan Chase trader is under scrutiny in the investigation by U.S. authorities into the bank’s nearly $6 billion trading loss, according to sources familiar with the situation. Julien Grout, a trader who joined JPMorgan Chase in 2009, is drawing attention because he worked in the bank’s Chief Investment Office and reported to Bruno Iksil, the French credit trader who is a central figure in the federal probe, said the two sources. U.S. authorities are trying to determine whether traders in the bank’s London office, including Iksil, took steps to try and hide some of the losses the bank was incurring on a series of complex derivatives trades. In the trading community in London, Iksil became known as the London Whale because of the large positions he and his colleagues were taking on. Grout, who is also French, is still working for JPMorgan, according to a bank spokeswoman. [Reuters]
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