As reporters keep digging into the “London Whale” story, the picture that emerges about the caliber of risk controls and management supervision at JP Morgan only look worse and worse.
The latest revelations comes via the Wall Street Journal. First, that there was no treasurer during the period when the CIO entered into the loss-making trades. The idea that a bank of any size, let alone one as big as JP Morgan, would go for months (five in this case) without a treasurer in place is stunning. JP Morgan contends this is not germane, since (allegedly) the CIO did not report to the treasurer. Then pray tell, why was it housed in the treasury at all? And the bank’s efforts to make this all sound normal are undermined by this part of the story:
Joseph Bonocore, who left the treasurer’s post last October before the trading losses ballooned, reviewed weekly the positions being taken by the office and had raised general concerns about risks being taken by the London office that placed many of the questionable trades, according to a person familiar with the situation. Mr. Bonocore knew the investment unit well; he previously was its chief financial officer for roughly 11 years.
So the former treasurer was looking over the positions, even if he was not part of the reporting line (or was he?).
But worse, the risk manager tasked to the oversight of the unit appears underqualified for the job, and that might not be unrelated to the fact that he is the brother-in-law of a JP Morgan executive. The Key extracts:
J.P. Morgan Chase JPM -4.31% & Co. didn’t have a treasurer in place during a five-month period when the bank’s Chief Investment Office placed trades that led to more than $2 billion in losses.
In addition, the executive put in charge of risk management for the Chief Investment Office in February, Irvin Goldman, was a former trader, not a risk manager. He is also the brother-in-law of another top J.P. Morgan executive, Barry Zubrow. JP Morgan argued that many risk professionals come from trading (true) but his background does not look logical for oversight of a business dealing in complex “hedges”:
Mr. Goldman had little risk-management experience before taking the chief risk officer post at the Chief Investment Office. He spent most of his career as a trader, starting at Salomon Brothers in the 1980s. He oversaw interest-rate product sales and trading at Credit Suisse First Boston and in 2003 joined Cantor Fitzgerald, where he was president of its debt capital markets and asset management divisions. Mr. Goldman ultimately left Cantor in October 2007 after his unit piled on trading losses during the previous summer.
Even though his role at Credit Suisse might sound relevant, he left that position nearly 10 years ago, and I would anticipate practice has changed quite a bit. Cantor is known primarily as an inter-dealer broker in Treasuries. Readers are welcome to correct me, but I am not aware of Cantor being a significant player in complex derivatives, and they would not seem to be positioned to play that role (you need a large balance sheet and good market share in the related cash products to be competitive).
An article at CNBC yesterday raised another troubling issue, that the CIO had a more permissive value at risk model than the rest of the bank. This is consistent with the idea raised by Michael Crimmins earlier today, that the “whoops we allowed that model to put on a lot of risk, didn’t we?” was not an accident, but a way to allow a unit that was expected to take risk to put it on, and/or put less capital against those positions. From CNBC:
The JPMorgan Chase unit that lost more than $2 billion through a failed hedging strategy had looser risk controls than the rest of the bank, according to people familiar with the situation.
The risk of losses is tallied by the bank using a so-called value at risk (VaR) calculation. However, the Chief Investment Office, the unit responsible for the high-profile loss that JPMorgan disclosed last Thursday, had a separate VaR system.
It used a less stringent calculation that gave a lower risk assessment of its trades, according to people who previously worked at the bank. The unit also reported directly to CEO Jamie Dimon, a factor which allowed it to maintain a separate risk monitoring set-up to other parts of the investment bank, these people said.
Despite repeated warnings from executives inside the firm as long ago as 2005, the CIO unit remained notably free from oversight. A source with knowledge of the situation said that these warnings included the size of the CIO, the fact that its risk reporting was not transparent and the scope for the unit to get “bigger and bigger” because it had a lower cost of funding than the rest of the investment bank.
Until April, the CIO unit’s unusual autonomy allowed it to build up risky positions without triggering alarms.
Sports fans, letting a unit run with lower VaR and is completely inconsistent with the JP Morgan party line, that the CIO was in the business of hedging. And this part is therefore no surprise:
Indeed, the unit was encouraged to be a profit center, as well as hedging against risk…
The facts in the public domain about this unit are damning. And if Jamie Dimon survives, as expected, it will serve as yet another bit of proof of how deeply the Obama Administration is in bed with major banks.
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‘To eliminate corruption, promulgate clear rules, institute a reporting mechanism for ordinary citizens/deadbeats, and constantly attend to the forms of action that the people themselves regard as corrupt. ‘
Obama is in the protection racket
protecting any crime commited by zombie bankers
My bet is on Jamie surviving. He’s too much of a money-maker for the Obamney team to be thrown under the bus. I hope my bet fails, but I doubt it will.
The Conomy Game- The Legend of Bennie The Beard and the Gangbankster Dealers http://is.gd/RjPELJ
Lee Adler: re ‘conomy game” and SOMA. Was Huxley alluding to this “soma” in Brave New World, do ya think?
According to Dimon’s biography he is a micromanager who was scandalized that the London office was paying too much for telephones. So if he was worried that the company was paying too much to buy telephones, the handsets not the calls, then how can he be absolved from the lack of oversight of the CIO unit.? Short answer is that he can’t.
You cannot have a reputation as a detail orientated manager and then claim lack of knowledge. Dimon should be hoisted by his own petard, or, in this case, his own PR image.
And more specifically on Dimon’s role, CNBC: “[A]ccording to people who previously worked at the bank, [t]he [CIO] unit also reported directly to CEO Jamie Dimon . . . .” Now in his earlier statements, Dimon is reported to have said that ‘he didn’t know this trade was even on’ until a Bloomburg reporter queried him on it directly earlier this year as the trade was going bad. So, it’s know that the unit reported to him directly, but—howzaboutdat—he ‘knew nothing’ of a major risk position. Despite that this unit and its trades were clearly _well known_ to others at senior levels in JippyMo since they reportedly had been complaining upchannel about the size to the positions for years.
It doesn’t wash clean that Dimon didn’t know these trades were on; it’s inconceivable that he didn’t know. In short, these ARE Jamie Dimon’s trades. Oh, somebody else placed them, and someone else may even have conceived of them, but since 2005 he has personally signed off on them whether or not that’s recorded by pixels or paper. This was, effectively, Dimon’s personal hedge. Why, does one suppose, that Dimon would operated an in-house hedge fund to function in what was, putatively, the hedge shop for JPM’s own proprietary book? CNBC: “. . . [B]ecause it had a lower cost of funding than the rest of the investment bank.”
This last is where the coppers and regulators should be swarming. Dimon allowed/supervised an undisclosed in-house hedge fund to be operated out of what was supposed to be a quiet, unexciting offset shop—and which announced itself to regulators and the board as just such a dusty, musty nowhere by its inoccuous published VaRs and opaque windows—BECAUSE by not announcing what he was up to cheaper funding could be raised/rooked in for the play.
_Proving_ fraud on that will be complicated, but the stink of a dead whale in the cubicle is being overwhelmed by the toxic stench of a rat big enough to devour Cleveland in two bites or less.
if Murdoch can say to Parliament “he didnt know anything” yet always reading and directing traffic daily for each of the UK papers then why cant dimon?
it is SOP response to say: im stupid or didnt know or cant figure it out or too complicated – Greenspan while at the fed with all the data in the world to be requisitioned at his fingertips?? / rubin while citi chairman?? – they didnt know???
it’s all about enabling stealing until it doesnt work anymore – that is the skill set brought to the table – there is nothing real – no one has any expectations of truth
Pirates – when enabled by the Crown become bucaneers – charged with the responsibility of raiding spanish galleons, raping and pillaging when they come ashore
now lets get on with it and stop complaining !
if Murdoch can say to Parliament “he didnt know anything” yet always reading and directing traffic daily for each of the UK papers then why cant dimon?
it is SOP response to say: im stupid or didnt know or cant figure it out or too complicated or a mistake by those guys over there – Greenspan while at the fed with all the data in the world to be requisitioned at his fingertips?? / rubin while citi chairman?? – they didnt know???
it’s all about enabling stealing until it doesnt work anymore – that is the skill set brought to the table – there is nothing real – no one has any expectations of truth
Pirates – when enabled by the Crown become bucaneers – charged with the responsibility of raiding spanish galleons, raping and pillaging when they come ashore
now lets get on with it and stop complaining !
No Treasurer, no “oversight.” Top Dogs don’t believe in oversight. Crimes are “finessed” better this way. Top Dogs are “birds of a feather” above the Earth, above the Law, immune, “getting away with murder.” Connect Dimon: NY Fed, with Dudley: NY Fed; Dudley: BP-Shell-Crown colonizer of “resource-cursed” Louisiana. “The horror, the horror” never stops. See:
“Horrific Injuries Linked to BP Dispersant Corexit” by Cameron Langford, Courthouse News Service — http://readersupportednews.org — posted on 14 May 2012, revealing two diver suicides in addition to the lead horror story of a diver disintegrating/dying by the hour, thanks to BP.
http://readersupportednews.org/news-section2/344-208/11417-horrific-injuries-linked-to-bp-dispersant-corexit
Discover “Dudley” connection to power and privilege going back to Elizabeth I in Wikipedia: see “Inner Temple” (Note history: Knights Templar, City of London, James I, Charles I, Hospitallers, “Robert Dudley as the Temple’s ‘Christmas Prince;” also “in 1576 the Inner Temple Parliament referred to Dudley as the ‘chief governor of this House;” connect “Dudley” with “Baker,” de-construct “Notable Names” for How It Works.
Under “Robert Dudley, 1st Earl of Leicester, connect “Dudley,” with names “Drake,” and “Baker” from then to now in “adventures” for profit: O&G in New World and globally. Note: Dudley’s “contacts with the London city fathers were intense;” he invested in the Muscovy Company, the Merchant Adventurers, Morocco; a “principal backer of Drake’s circumnavigation of the world;” and “Robert and Ambrose Dudley were also the principal patrons of Martin Frobisher’s 1576 search for the Northwest Passage.” Also: “the Inner Temple admitted Dudley as their most privileged member, their ‘Lord and Governor.” He was “Chancellor of Oxford.” His “circle of scholars and men of letters included, among others, his nephew, Philip Sidney, the astrologer and Hermeticist John Dee.”
Do the DNA lines of Elizabeth’s “Dudley” still live, still at it? Follow the money and the Agents of The Crown by name. The “maternal” DNA lines are covert; the “paternal” lines are overt and brazen: conniving in crimes for power and profit since the 16th century. The roots of “Nobility” crime are deep.
“Plus ca change, plus c’est la meme chose.” STOP THEM. Bust their system.
Privateering at its finest. The modern phrase seems to be “proprietary trade.” How convenient that the invocation of the concept of a proprietary action protects their adventures. I don’t think there is a place for proprietary trading in a public company or any company big enough to affect the larger market and therefore social structures.
“… JP Morgan argued that many risk professionals come from trading (true) but his background does not look logical for oversight of a business dealing in complex “hedges”:…”
“… [mr. goldman] oversaw interest-rate product sales and trading at Credit Suisse First Boston and in 2003 joined Cantor Fitzgerald, where he was president of its debt capital markets and asset management divisions. Mr. Goldman ultimately left Cantor in October 2007 after his unit piled on trading losses during the previous summer…”
let me offer a personal translation:
mr. goldman was chosen as a man who would do what you asked him, or implied to him, you would like him to do. further, mr. goldman had a track record and reputation for being a savvy “i’ll do what you ask me to do” guy.
Hence, he is always “employed” with FatCat remuneration. Likely not only him, but also his DNA in perpetuity: his “heirs and assigns forever.” Like the CIA.
“Like the CIA” — e.g. “Dunham,” “Obama'” — “all in the Family” with a Ford on the side. Yes, it’s all about oil. Recall: “Exxon is a sovereign nation” — a foreign power calling the shots since even before the U.S. Navy protected her interests in transportation to China and back. The Commander in Chief commands our “armed forces” to serve Big Oil. “You got a problem with that?”
Key Void at Top for J.P. Morgan – That’s the headline of the WSJ Yves is referencing. That headline is so deep that it can not be inadvertant.
Also, Politico did a very good piece on “Obama”s Wall Street Problem” in which he covers the prez’s “worst of both worlds” Obama, Geithner, Summers, Holder having delivered the heads of the American people to Wall Street are now somwwhat flummoxed that the Lords of the Universe are no longer giving him money and have switches their wire transfers to Romney. Obama got paid for a job well done – too well, and sadly, no longer useful to the Street.
And the American Sheeple missing their heads, are a little slow to hold him accountable, but making pilgrim’s progess to that end. I’m afraid to no avail. President Obama seems incapable of getting on the winning side of this equation: pulling an old FDR “I welcome the hatred of the banks,” barnburner. He really does love that bank money. Stockholm syndrom perhaps.
“Uncle Tom” in the Mansion, man! He had his day as Massah in the “White House” with the commanding presence in the heart of the Old Plantation Country for which “our Fathers died.” Now he’s expecting a do-over opportunity from White Folk? He thought he could play with “their kind” forever in the “Nobility” sphere? Shouldn’t he just be grateful for the lucre and the Secret Service protection to come, and for privilege in perpetuity–perhaps–for him, his nuclear family, and his “heirs and assigns forever?” Has he gone and gotten a “Big Head” over his term in office? His superiors won’t like that. The People of No Mercy might just “teach him a lesson.”
He might want to re-read “Song of Solomon” for re-orientation to reality. Does he really believe that Rahm Emanuel, Larry Summers, Timothy Geitner, and the Emperors of Money give a damn about Barack Obama? Did he forget that this is America?
He might want to re-read “Song of Solomon” for re-orientation to reality. LeonovaBalletRusse
And what does that mean? Solomon had the hots for the dark lass, didn’t he?
“I am dark, but I am comelly oh you daughters of Jerusalem”
Beautiful.
“…Joseph Bonocore, who left the treasurer’s post last October before the trading losses ballooned…”
well, a curious prosecutorial team might wonder why mr. bonocore left when he did, if in fact he left, as opposed to merely putting organizational distance between himself and his “recent professional activities” on behalf of jpmorgan in order to camoflage his continuing involvement.
” And if Jamie Dimon survives, as expected, it will serve as yet another bit of proof of how deeply the Obama Administration is in bed with major banks”
But the president gave a speech where he said we need to reign in the banks! Isn’t that more important than his actions!
PS: Mitt Romney has a Swiss bank account!!!
CONTROL FRAUD!!!
James Bond has a license to kill. Wall Street (courtesy of the last few US presidents including the present one) has a license to steal. Sarbanes Oxley is DEAD! People really should be outraged at Obama and his DOJ. Holder’s failure to investigate, arrest, indict, and prosecute Corzine and now the Dimon/JP Morgan syndicate has effectively killed SOX regulations as it is clear that the government is not going to enforce SOX and Section 302 if the offending party has the right political connections. The amount of damage Obama’s DOJ is inflicting on the rule of law in America is scandalous because his justice department is pretty much signaling a green light to the rich and the well-connected that they can steal and commit accounting and securities fraud without fear of prosecution or ever seeing the inside of a jail cell.
I’ll add that it is surprising (well, actually it is not all that surprising given the current pathetic economic and political environment) that JP Morgan’s external auditor has not raised red flags regarding that bank’s internal controls. After all, JP Morgan was only effectively broke 4 years ago during the height of thw Wall Street financial crisis even though JP Morgan had previously been declaring record profits just a few quarters earlier. Is it not a shock to Morgan’s external auditors that history is seemingly repeating itself just a few years later? I can already hear Bernanke banging keystrokes at the Fed.
There is a reason that both AIG FP was and JPM CIO is domiciled in London, and that is the lack of regulatory control. Think about that for a moment. These corps needed a place to run their scams with even weaker controls than those found in our country with its lapdog regulators. JPM CIO was set up as a cowboy operation. It should come as a surprise to no one that it was run like one. Sullivan at AIG and Dimon at JPM gladly signed off on all this. They knew what was going on but didn’t care as long as the profits kept rolling in. That is until the profits stopped, and things went kerblooey. Then like Inspector Renault in Casablanca, they expressed surprise, surprise that there was gambling going on in the casino they were gambling at.
‘There is a reason that both AIG FP was and JPM CIO is domiciled in London, and that is the lack of regulatory control.’
Yes.
Yup, you got it!
Can a Tea Party person speak about being under the London thumb again?
Sox sox sox sox. Throw socks on them until they choke.
I’d say this should be a big chance for OWS, as all they need is someone who owned JPM stock at some time from 2005 to a few weeks back – they should able to start a civil sox suit. As it stands, the admin can pretend they can’t do anything. But if someone files serious suit, it has not only JPM implications but much more systematic ones (as in questions get asked why JPM and not other banks).
Of course, the lawsuit can fail, be torpedoed etc. – but if it does, one has an irrefutable proof that the system cannot be changed from within.
We will win some lawsuits and lose most. A few scraps from the table to keep the system going . . .
LMAO at this.
Sox sox sox sox. Throw socks on them until they choke
Mind if I use it as a headline in a followup post?
If this boondoggle was a “hedge” , how come hey didn’t make money on the original position?
I sometimes think that Obama would have gotten more Wall Street support if he had prosecuted some of those guys. If he HAD exercised and shown some power, they’d think it worth their trouble to appease him. But he did not. Consequently they do not think they have much more to gain from him. Water under the bridge.
Agreed, in principle, but it can be really hard to prosecute these guys since they push the limits of the law with the best lawyers money can buy.
What they do need is adult supervision. That primarily should come from the Congress as laws limiting what these guys can do. I know that’s a joke considering the campaign finance laws, but it’s where the rubber meets the road, really. There is only so much the administration, whether Obama or anyone else, can do except enforce existing laws and regs.
Also what we are seeing is one of the hazards of global capitalism. Because big multinational firms like JPM have offices anywhere they want, they can locate in jurisdications like London where there is much less regulation on their activities.
That probably means that the only way a firm of that structure could be prosecuted would be at the holding company level on their reporting to investors if there was fraud involved. That’s still really hard to prove, especially if they are within the law of the locality where they were doing business and if it’s not material to their earnings.
From another perspective, aren’t these financial firms getting too big to manage? Another approach, whether you bring back Glass-Steagall or not, is to limit their size and impose healthy capital requirements.
I do think that size brings its own problems. Diversification is great, but at some point size creates its own systemic risk. If a handful of big institutions, for example, hold all the credit basket derivatives, in size [as we hear JPM did] then that brings in market distortions and additional risk to capital.
Somehow we need to end the craziness. Certainly a few well-placed prosecutions would help, but more, and smaller, institutions would diversify away the systemic risk. I”m open to other arguments also as to remedies.
I miss the ‘old days’ of the partnerships when each firm has an eminence grise, or two, or more, who had their own capital at risk. Now that was risk, and risk management!
What can you except from the “Manchurian Candidate” President who skipped the Nobel Prize lunch with the Norweigian King and Queen, but bowed to the Saudi King but to not know on which side his bread was being buttered?
Great post! But a key question is what about regulatory oversight?
See http://www.chicagobusiness.com/article/20120518/NEWS01/120519817/j-p-morgan-chase-still-another-regulatory-failure.
Yves,
I am longtime reader, so kudos for staying on this story. I am also a active market participant, for quite a few years now and I would ENCOURAGE you and other bloggers (Felix, Cassandra and Waldman) to look not at the “risk manageemnt” element of this story- that’s the red herring.
The real story and the very prosecutable fraud that took place here is in the ACCOUNTING. Take a careful look at how JP accounted for the CIO’s p&l over the last 3 years, then look at the transcript of Dimon’s conference call. The smoking gun is the AFS vs HTM treatements of “income” flowing through to “net income”. Ask yourself this question, if this CIO unit is “hedging” positions for the “bank” then WHY are its trades AFS treated and not HTM treated??? That my dear Yves is waht this whole fiasco is REALLY about. Dimon is not an idiot, he found a dark corner in which to goose his net income line and he leaped at it whithout abandon. Realize, by classifying this as “poor risk management” it completely shifts the onus to poor monitoring (not a crime) from fraudulent accounting (an actual and very prosecutable crime).
Cheers,
Mont Blanc
This is AIGFP all over again. The money quote:
” the scope for the unit to get “bigger and bigger” because it had a lower cost of funding than the rest of the investment bank.”
Lower cost of capital is sine qua non for running high leverage financial shenanigans. Compare the situation with AIGFP’s founders, who approached AIG because its AAA credit rating meant it had the lowest costs of capital of any major player on the Street, and their scheme required huge leverage to make big bucks. But not to worry, they assured Hank Greenberg, their mathematical models proved they couldn’t lose money. And so the music started playing until Chuck PRince couldn’t dance no more.
BTW, I suspect strongly that the real impact of the JPM CIO losses will not be in the money lost directly but rather in the hundreds of billions (trillions) of dollars of derivative contracts in which they are a counterparty, specifically those having JPM’s credit rating, stock price, etc, as de jure triggers for additional collateral. JPM could be sitting on a colossal liquidity crisis if these collateral triggers get tripped.
We’ve seen this movie before and it didn’t end well the first time (except for that AIGFP stooge Cassano – working out of London, no less. Sounds like the setup to a Poirot mystery).
Sigh.
Phichibe
Yves – I hope you continue to be All Over Jon Corzine…how is he allowed to walk away scot-free? what he did was far worse than Dimon, he cost 1100 employees their jobs and blew up CLIENT money !
But then all that malfeasance notwithstanding, this is the essence of proprietary in that the executives appear to be appropriating the bank. So at least definitionally it could be accurate. Who can know whether their proprietary use of the word proprietary isn’t just their private word for a simple ransacking of the coffers to hide their embezzlements….
The reason JP Morgan does not have to worry too much about losing money is because they are a currency issuer (i.e., issuer of credit money).
And if they need cash money (reserves) for some reason to settle interbank liabilities there is always the FED ready to deliver the cash to save the world.
A really huge bank like JPM can create an enormous amount of money without worry and then “invest” it themselves if they cannot find borrowers.
For more read:
http://aquinums-razor.blogspot.com/2011/11/here-is-how-bankers-game-works.html
mansoor h. khan