London Whale

I didn’t really understand this morning’s Journal headline – “Regulatory ‘Whale’ Hunt Advances” – since the whale in question, JPMorgan’s Bruno Iksil, has been caught, harpooned, killed, flensed, picked clean by sharks, and his skeleton mounted in the American Museum of Unfortunate Trades. So the OCC’s hunt is … somewhat late no?

The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators.

The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.

I submit to you that:

  • JPMorgan has at the very least talked a good game about remedying the lapses in risk controls that led to the Whale’s losses, insofar as it’s wound down the trade, fired everyone involved, appointed new risk managers, changed the models, moved the relevant portfolio out of the division that used to house it, and otherwise done everything in its power to make its chief investment office a no-cetaceans zone, and
  • If the OCC disagrees, and thinks that JPMorgan hasn’t taken commercially reasonable risk-management steps to remedy the lapses that led it whaleward, then there may be bigger problems than can be fixed by a notice saying “oh hey you might want to look into that.”

Anyway. Yesterday the OCC also released its Semiannual Risk Perspective for Fall 2012; December 20 is technically fall but the document has data through June 30 so that too seems a bit behind the times. The OCC: your time-shifted banking overseer.

But it’s an interesting, and broadly encouraging, read in a circle-of-life way. Things are, or were in June, pretty good, or at least improving, credit-wise:1 Read more »

I enjoyed Bloomberg’s story about how the SEC was pestering JPMorgan to better disclose its proprietary trading activities well in advance of the London Whale fiasco. If you just read the headline you’d be all “oh look how prescient the SEC was,” but if you read the actual letters, not so much. Here is my favorite exchange:

SEC: Identify the trading desks and other related business units that participate in activities you believe meet the definition of proprietary trading. Identify where these activities are located in terms of your segment breakdowns. Quantify the gross revenues and operating margin from each of these units. We note your disclosure on page 59 of your Form 10-K for the year ended December 31, 2010 that you have liquidated your positions within Principal Strategies in your former Equities operating segment. It is not clear if this was the extent of your proprietary trading business. Please clarify if there are other proprietary trading businesses. If there are, please clearly identify the extent to which such activities or business units have been terminated or disposed of as well as the steps you plan to take to terminate or dispose of the rest of these components.

JPMorgan:1 … The Firm believes that the Staff’s comment regarding the disclosure on page 59 relates to the Form 10-K filed by a registrant other than JPMorgan Chase.

Hahahahaha true, it’s Goldman Sachs. Read more »

  • 12 Oct 2012 at 5:05 PM
  • Banks

London Whale Swims Off Into The Sunset

Hi Whale! I told you you were not forgotten. Not understood, either, but not forgotten.

The London Whale now goes by the less adorable name “synthetic credit portfolio,” since all mammalian representatives of that portfolio have left for non-extradition countries. That is descriptive enough, or so I would have thought; my rough model of the London Whale position was a combination of basically long IG index synthetic credit by selling protection on 10-year CDX.NA.IG.9, untranched or senior tranches, and short higher-beta synthetic credit bits by buying protection on high-yield indices, junior tranches, something like that.

But it’s also possible that the London Whale position is basically a blob of green glowing radioactive material that just deals indiscriminate pain everywhere it goes. So, for instance, this quarter, after causing massive and time-traveling losses last quarter and being mostly unwound and/or moved from the Chief Investment Office to the investment bank, it still managed to lose money in not one but two places – the investment bank, where the bulk of its ominously pulsing self “experienced a modest loss,”1 but also the CIO, where its mangled remnants lost $449 million on about a $12bn notional remaining position, or about 3.75% of quarter-initial notional.2

You can think a range of cynical things here. The most supportable, perhaps, is that CIO’s daily VaR was $54mm last quarter3, meaning that the CIO’s loss this quarter was a little over 8x its daily VaR, which is, um, high? A quarter is 65ish trading days; if you assume VaR goes with the square root of time then CIO’s quarterly 95%-confidence-interval VaR was about, oh call it $449 million, meaning roughly that 95% of the time it would have lost less than it did, yet here we are. Of course there’s the other 5% of the time, where the whale seems to live, but … I mean, that is an odd number and might make you quietly ponder JPMorgan’s new VaR model.4 BONUS FOOTNOTE!5 Read more »

Drew was something of an unusual figure on Wall Street and not easily categorized. She was known for her small, girlish voice but could let loose with profanity when angered. She was the daughter of a Newark lawyer and had a reputation as a tough adversary but practically blushed whenever she spoke about her husband, a periodontist who was her high-school sweetheart and played on the Johns Hopkins basketball team. Tall, with expensive blond hair, she dressed impeccably for the office, favoring classic Chanel suits and Manolo Blahnik shoes, as well as a blinding emerald-cut diamond ring; but she and her husband never left the affluent but unremarkable suburban neighborhood in Short Hills, N.J., where they settled more than 20 years ago. [NYT]

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]

“And I want you to know the London Whale issue is dead,” Jamie Dimon recently told a bunch of school children. “The Whale has been harpooned. Dessicated. Cremated…I am going to bury its ashes all over.” [NYM]

  • 09 Aug 2012 at 6:25 PM

JPMorgan Still Reaping What Whale Boy Hath Sown

JPMorgan can’t outrun the ripples from its multibillion-dollar “London Whale” trading blunder. The largest U.S. bank admitted Thursday in a federal filing that it pushed back a plan to resume share buybacks, scaled back several key measures of capital at the request of regulators and lost money on 28 trading days in the second quarter. The developments came as the New York company tried to unwind a series of problematic positions taken by a trader in the bank’s Chief Investment Office nicknamed the “London Whale” for his outsize market bets. [WSJ]