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:
- Well, for the whale, yes.1
- For, like, the human race, nah.2
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 »
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 »
When JPMorgan’s whale drowned a lot of people asked “where were the regulators?” and that was a silly question, because the people with the most incentive and ability to keep the whale afloat were, in descending order, (1) the whale, (2) the whale’s bosses, (3) the whale’s bosses bosses, (4) the regulators, and (5) the people asking “where were the regulators?,” so if categories 1-3 missed the problem then there’s no reason to get all mad at category 4. “If X’s could do Y they wouldn’t be X’s” is an important tool to keep in your mental toolkit, and if regulators could distinguish good from bad trades they’d be at least risk managers and probably, like, Warren Buffett.
What regulators are supposed to do, ideally, is not pick trades but rather set up systems to prevent bad trades from having ruinous systemic effects, and a major method of doing so is capital regulation. JPMorgan lost $5.8 billion on whale-failing, and if you or I lost $5.8 billion we would probably be scaling back our vacation plans, but Jamie Dimon isn’t because JPMorgan had lots and lots more money where that came from. Capital!, in both senses of that exclamation.
This is a pleasing use of regulatory intelligence: Read more »
This is shaping up to be CFA week for me, and with my impending triumph/humiliation I’ve pretty much stopped thinking about much else. I’ve also stopped reading about much else, putting aside Trotsky temporarily to focus on those six stupid books. Yesterday was corporate finance – I can now unlever and relever betas like a champ – and portfolio management, which I got about halfway through before falling asleep. Today is equity and fixed income. The end is in sight!
But there’s still occasionally time to think about blast-from-the-past favorite topics, like the slow-motion disaster that is the US regulatory effort to end official reliance on ratings agencies. The latest is the OCC, which released a proposed rule today that will change the definition of “investment grade” securities, which banks can invest in, from “rated in one of the four highest rating categories by two or more NRSROs” to this: Read more »