Time-tested wisdom on Wall Street is that when a trade you made is losing money, you should swallow hard and get out of the position before things get even worse. Cut your losses. But when JPMorgan Chase started losing big on its London Whale trade last year, traders and executives all the way up to the chief executive officer seemingly had trouble facing the painful reality.
For evidence, consider this weird passage from the 301-page report released Thursday by the Senate’s Permanent Subcommittee on Investigations. With losses mounting by the day in late January 2012, Bruno Iksil, the head trader in charge of the troubled portfolio, sent a note to his boss, Javier Martin-Artajo, “advising that they should just ‘take the pain fast’ and ‘let it go,’” the report says. “But according to Mr. Iksil, his supervisor Mr. Martin-Artajo disagreed and explicitly instructed him to stop losing money.”
Right. “Stop losing money.” And while you’re at it, stop the tide from coming in.
JPMorgan’s decision to ride out the storm and actually increase the size of its portfolio made the losses much bigger. The month after Martin-Artajo’s command, in February 2012, a risk executive named Peter Weiland dismissed an internal estimate showing the portfolio could lose $6.3 billion, calling it “garbage.” At the time the loss was in the neighborhood of $1 billion. The latest tally of the loss: At least $6.2 billion.
The problem went to the very top of JPMorgan, which is the nation’s largest bank and has the world’s biggest derivatives portfolio. CEO Jamie Dimon, who frequently bragged of the bank’s “fortress balance sheet,” is fingered by the Senate panel for sharing in the delusion that losses could be made to go away. All five of the risk gauges JPMorgan monitored to prevent catastrophic losses were flashing red at one point. Rather than adjust the portfolio to reality, the bank attempted to adjust the reality itself, temporarily raising the threshold on one key risk gauge so that the portfolio was no longer out of compliance. Dimon wrote in a short but quotable e-mail: “I approve.”
That wasn’t the only instance when Dimon seemed to have trouble confronting how bad things were getting. At one point the bank stopped providing profit-and-loss reports on its position to its regulator, the Office of the Comptroller of the Currency. The subcommittee report says Dimon thought “it was too much information to provide” and “reportedly raised his voice in anger” when Chief Financial Officer Douglas Braunstein resumed sending the reports. In April, of course, Dimon dismissed reports by Bloomberg News and other news media of big losses as “a tempest in a teapot.”
JPMorgan spokesman Mark Kornblau, responding to the investigation, told Bloomberg News that the bank has “repeatedly acknowledged mistakes” in handling the loss. “Our senior management acted in good faith and never had any intent to mislead anyone,” he wrote in an e-mail. The bank cooperated with the investigation and has “already identified many of the issues cited in the report,” he said. “We have taken significant steps to remediate these issues and to learn from them.”
That’s undoubtedly true. Still, the report raises questions about whether it will ever be possible to keep a big bank from committing foolish mistakes as long as the people working for the bank—starting with the CEO—are determined to do things their way. The panel makes six serious accusations against JPMorgan, saying it increased risk without notice to regulators, mischaracterized high-risk trading as hedging, hid massive losses, disregarded risk, dodged OCC oversight, and mischaracterized the portfolio.
By comparison, the panel’s recommendations feel worthy but technical: “Require Contemporaneous Hedge Documentation,” for example, and “Strengthen Credit Derivative Valuations.” The question is whether any rule will be able to constrain a bank where aversion to losses is distorting perceptions of reality.