Indeed, from the moment the trading scandal broke, in the spring of last year, the bank has tried to downplay it. Dimon’s first public reaction was to describe it as a “tempest in a teapot.” When the scale of the losses—more than six billion dollars—became clear, he changed his language. But the bank continued to portray the calamity as the latest case of a lone trader gone rogue. Eventually, it conceded that Iksil’s trading strategy hadn’t been supervised effectively, and a senior executive resigned—Ina Drew, who headed the chief investment office, for which Iksil, Grout, and Martin-Artajo all worked. But, even then, she stuck with the story that the disaster had occurred outside the purview of her and her colleagues in New York, telling a Congressional committee, “Since my departure I have learned of the deceptive conduct by members of the London team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the Company, down.”
At first glance, the charges against Grout and Martin-Artajo appear to support the Dimon-Drew line. Grout and Martin-Artajo stand accused of deliberately understating the losses on Iksil’s trades. Nobody in New York has been charged, or even directly implicated. But the closer you look at the indictments and the other information we have gleaned about the scandal, the less complete the bank’s version of events seems.
In unveiling the charges on Wednesday, Preet Bharara, the U.S. Attorney for the Southern District of New York, rightly said, “This was not a tempest in a teapot but, rather, a perfect storm of individual misconduct and inadequate internal controls.” April Brooks, a senior Federal Bureau of Investigation official who helped oversee the London Whale investigation, described the bank’s process for monitoring traders like Iksil as “little more than a rubber stamp.” In that case, who was responsible for these failures? Surely it can’t all be pinned on Grout and Martin-Artajo, who were both pretty low on the totem pole. Drew, who ran the chief investment office, which was supposed to be hedging the bank’s risks rather than amplifying them, bears some responsibility. But isn’t a bank’s chairman and chief executive ultimately in charge of how it manages the risks that it takes?
Dimon is hardly known as a hands-off manager. To the contrary, his lofty reputation is based on the idea that he craftily navigated J.P. Morgan around the financial crisis of 2007-09. From internal communications published earlier this year by the U.S. Senate’s Permanent Subcommittee on Investigations, we know that he personally signed off on some of the risky maneuvers that the chief investment office applied. In January, 2012, months before Iksil’s huge losses started accumulating, the trading book of the chief investment office grew so large that it breached a risk limit established for the entire bank. Rather than reducing its exposure, the chief investment office requested an increase in the risk limit and tweaked the mathematical model that it used to measure risk, making it appear to be much less exposed. In an e-mail, Dimon approved the changes.
The Congressional inquiry also turned up evidence that Dimon had instructed the bank’s chief financial officer to restrict the amount of information that he was turning over to government regulators, and that, once Iksil’s losses were revealed, he persisted in describing the losing trades as hedges, even though they appear to have been one-way wagers on the direction of bond prices.
None of this is to suggest that Dimon or Drew or anybody else at the very top of the bank was aware of the details of Iksil’s disastrous trading strategy, or of the efforts to cover up his losses. At a huge bank like J.P. Morgan, there are many layers of authority, and nobody knows everything that is going on. But the evidence that the Congressional committee turns up does illuminate the limits of the lone-trader story. And it also points to another theory of the case, which is that the bank’s chief investment office, far from merely hedging risks taken elsewhere in the bank, actually functioned as something like an internal hedge fund, placing huge bets on the markets and evading risk limits with which traders elsewhere in the firm had to conform.
According to the Committee’s report, the notional value of the chief-investment-office portfolio of credit-default swaps went from four billion dollars to more than fifty billion dollars in the course of 2011, and in the first quarter of 2012 shot up to a hundred and fifty-seven billion. Why the huge increase? We still don’t have a convincing answer. In a public hearing in March, Senator Carl Levin, who headed the inquiry, noted, “Internal bank documents failed to identify the assets being hedged, how they lowered risk, or why the supposed credit derivative hedges were treated differently from other hedges in the chief investment office. If these trades were, as J.P. Morgan maintains, hedges gone astray, it remains a mystery how the bank determined the nature, size, or effectiveness of the so-called hedges, and how, if at all, they reduced risk.”
Perhaps the coming criminal cases will shed some new light on these matters, and on the question that comes up in all such scandals: Who knew what when? According to information contained in the complaints, when Martin-Artajo instructed Grout to record Iksil’s losses in a certain way, he said the orders had come from New York—a claim that the bank contests. The two defendants, who face the prospect of being extradited to the United States, may well follow Iksil’s lead and coöperate with the authorities, offering to tattle on their higher-ups. (Iksil, in agreeing to testify against Grout and Martin-Artajo, appears to have made his best trade yet.)
For now, the two Frenchmen and the Spaniard have conveniently filled the roles of the villains in this saga, taking some pressure off of Dimon and the bank’s other top honchos. But the larger lessons of the case shouldn’t be forgotten. As Senator Levin put it back in March: “Firing a few traders and their bosses won’t be enough to staunch Wall Street’s insatiable appetite for risky derivative bets or stop the excesses. More control is needed.”
Original Article
Source: newyorker.com
Author: John Cassidy
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