The trader known as the London Whale lost more than $6.2 billion for JPMorgan Chase & Co. last year. That’s a lot of money until you remember that it didn’t stop the bank from earning a record profit of $21.3 billion. The pain came elsewhere: Two former traders face criminal charges, the bank admitted violating securities laws and agreed to pay fines of more than $1 billion, a U.S. Senate subcommittee wrote a scathing report and the bank’s chief executive, Jamie Dimon, took a pay cut. The London Whale case has drawn a bigger reaction than other missteps by banks since the 2008 financial crisis, partly because of Dimon’s previous rock-star status. More importantly, it raised a worrisome question: What if the banks are still addicted to risk?
Neither the Whale himself, Bruno Iksil, nor any senior managers were charged. (Iksil is cooperating with prosecutors.) The August indictments were against Iksil’s former boss and a junior trader, and the charges weren’t about the trades themselves — U.S. prosecutors say the pair committed securities fraud by hiding the true extent of losses from bank management. Lawyers for both men, who remain in Europe, say they’re innocent. A trial is on hold while prosecutors seek to have them extradited to New York. For his part, Dimon was criticized in the Senate report, which said the bank misled investors and dodged regulators as losses mounted. The adulation he had earned for steering the biggest U.S. lender through the financial crisis gave way for a time to questions about his management. But aside from the pay cut he emerged unscathed, as a shareholder effort to strip him of his chairman’s title fell short. In October 2013, however, the bank reported the first quarterly loss of his tenure, with results weighed down by $7.2 billion in legal costs. The bank agreed to a $100 million settlement with the Commodity Futures Trading Commission, which found that it had deployed a reckless trading strategy.
In a sense, what Iksil and his colleagues did was the same old story — doubling down after a loss with bigger and bigger bets. But plenty more was wrong. They worked in a part of the bank, the Chief Investment Office, whose job was to hold down the bank’s risk level. Instead, the CIO used the $350 billion it had to invest (much of it from federally insured deposits) to become a moneymaker, with its London office focused on complex derivative trades that had less and less to do with hedging. In 2011, for example, one trade by Iskil brought in $400 million. The trouble came in early 2012, when the bank decided to reduce the risk in the London swaps portfolio by making more offsetting bets. As the strategy unraveled, Iksil’s positions grew so big that they disrupted the thinly traded markets he worked in — earning him nicknames of Whale and Voldemort, and making his group’s hard-to-unwind trades a target for hedge funds. After the trades collapsed, regulators found that Iksil’s colleagues had been keeping two sets of books to minimize the projected size of the losses — a discovery that triggered investigations in the U.S. and U.K.
When the Whale’s trading first came to light, Dimon dismissed it as “a tempest in a teapot.” Later he was more contrite, calling the trades “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” When the U.S. Securities and Exchange Commission settlement was announced, the bank said it would spend $1 billion to improve internal controls, but clearly was ready to “fix it and move on,” as Dimon had earlier put it. But many in Washington were not. The Senate report had showed systemic failures: Risk limits, for instance, were breached more than 300 times before the bank switched to a more lenient risk-evaluation formula — one that proved to underestimate risk by half because of a spreadsheet error. Bank critics hoped that the episode would add momentum to efforts like the bill pushed by Senators John McCain, an Arizona Republican, and Elizabeth Warren, a Massachusetts Democrat, to reimpose the old separation between commercial and investment banking. Another bipartisan bill would raise capital levels in a way that might force the biggest banks to split up. To critics of Wall Street, the real lesson of the London Whale is that megabanks such as JPMorgan are not only too big to fail — they’re too big to manage.
The Reference Shelf
- The March 2013 Senate report.
- JPMorgan’s internal report on the CIO losses.
- Bloomberg news timeline of biggest trading losses.
- The New Yorker asks, “Would Better Regulation Have Prevented the London Whale Trades?“