"Mr. Martin-Artajo thought that the market was irrational."
Permanent Subcommittee on Investigations, US Senate, Report on JPM Whale Trades: A Case History of Derivatives Risks and Abuses, p. 104
Just like Breaking Bad, the most exciting trading drama of 2012 is coming to an end.
But while the man at the center of the biggest prop trading fiasco to ever take place at JPMorgan, the "London Whale" himself Bruno Iksil, is set to walk, if not on water this time, as is JPMorgan (although with the SEC demanding the firm admit guilt - a first in its break from the "neither admit nor deny" settlement tradition - something Saint Jamie will hardly agree with), two of Bruno's London-based peers are likely going to jail.
As the WSJ reports, two former CIO traders are set to be arrested and charged criminally. Which makes all the scapegoating sense in the world: just like Goldman's CDO crimes were dumped squarely on Fab Tourre's shoulders (yes, he was implicated, and yes, he was merely a 28-year old pawn at the time) so JPMorgan's prop trading transgressions, in which the firm used excess deposits to corner the HY and IG bond markets in the world's greatest prop trading gambit gone horribly wrong, are about to be the fault of two mid-level traders, Bruno's supervisor, Spaniard Javier Martin-Artajo who was the head of credit and equity trading at the CIO London office as well as a middle-office P&L marker, Julien Grout.
Further from the WSJ "the U.S. Attorney's Office in Manhattan has been conducting a criminal investigation of the trades. Both men are believed to be in the U.K., so U.S. and U.K. officials likely would coordinate with each other on any arrest triggered by the criminal charges. That could spark a lengthy extradition process before the formal charges are unsealed in the U.S." And since unlike Russia, the UK is far more malleable to US extradition requests, perhaps it is time to keep an eye on all airplanes departing Heathrow in direction Sheremetyevo for a rather shifty Hispanic passenger?
For those who forget the hierarchy of JPM's "London Whale" office, we have a handy primer: the March 2013 report released by the Permanent Subcommittee on Investigations, titled "JPMorgan Chase Whale Trades: A Case History of Derivatives Risks And Abuses", in which Carl Levin's Kangaroo Court found ""Too Big To Regulate" JP Morgan "Lied" And "Deceived" Regulators, Investors And Public." Here's what we know:
The International Chief Investment Officer was Achilles Macris, who joined the CIO in 2006, rose quickly to management, and served as Ms. Drew’s top deputy in the CIO’s London office. He oversaw management of the Synthetic Credit Portfolio. Prior to working at the CIO, Mr. Macris worked for Dresdner Kleinwort Wasserstein, a British investment bank, as a proprietary trader. Mr. Macris is a Greek national and U.S. citizen.
Javier Martin-Artajo joined the CIO in 2007, as the head of Credit and Equity Trading. He worked in the CIO’s London office, reported to Mr. Macris, and directly oversaw the
Synthetic Credit Portfolio. He had earlier worked for Mr. Macris at Dresdner Kleinwort Wasserstein.78 Mr. Martin-Artajo is a Spanish national living in London.
Bruno Iksil was a trader in the CIO’s London office and reported to Mr. Martin-Artajo. Mr. Iksil joined the CIO in 2005, and served as the head trader managing the Synthetic Credit Portfolio from January 2007 until April 2012. Prior to joining JPMorgan, Mr. Iksil worked as a proprietary trader at Banque Populaire and later as head of Credit Derivatives at Natixis, a French investment bank. Mr. Iksil is a French national who lived outside of Paris and commuted to his job in London.83 In April 2012, the media reported that Mr. Iksil, trading on behalf of JPMorgan Chase, had been dubbed the “London Whale” by industry insiders because of the CIO’s large trades in the credit markets. He oversaw several other CIO traders including Julien Grout.
In July 2012, JPMorgan fired Messrs. Macris, Martin-Artajo, and Iksil, and suspended Mr. Grout... Mr. Grout subsequently resigned from the bank on December 20, 2012....
On July 13, 2012, the bank announced that “all CIO managers based in London with responsibility for [the] Synthetic Credit Portfolio have been separated from the Firm,” that JPMorgan Chase would withhold all severance payments and 2012 incentive compensation from them, and that it would “claw back compensation from each individual.” The bank told the Subcommittee that it had obtained the maximum recovery permitted under its employment policies from Ms. Drew and Messrs. Marcis, Martin-Artajo, Iksil, and Grout, through a combination of canceling outstanding incentive awards and obtaining repayment of awards previously paid. The bank indicated the recovered amounts were roughly equal to two years’ worth of the person’s total compensation.89 At the time of her departure, Ms. Drew forfeited approximately $21.5 million.
In other words, a Greek, a Spaniard (both formerly working for Dresdner) and a Greek walked into a JPM CIO office and a criminal profit bonanza ensued... however while the top two walked away with merely a bonus clawback, those in the middle and the bottom the Totem Pole are about to be arrested. Iksil avoids prosecution due to his "collaboration" with the authorities, and in the process throws his boss under the bus.
The fact that JPM was preparing to scapegoat its gross negligence to supervise what was an epically profitable group for long time and then epically lost an even greater amount of money in a very short time, was telegraphed well in advance. as WSJ reminds us, "The largest U.S. bank didn't name any traders involved in the matter when releasing the results of its examination last year. But in a July 12, 2012, termination letter sent to Mr. Martin-Artajo, the bank said when the trades began to show significant losses: "you directed Bruno Iksil and/or Julien Grout to show modest daily losses in the marking of the book rather than marking the book in a manner consistent with the standard policies and procedures of JP Morgan Chase & Co," according to a document cited by the U.S. Senate Permanent Subcommittee on Investigations." All the while Jamie Dimon was flashing his White House cuff links and professing his innocence of all the evil at JPM, while taking credit of all the good, and of course, profits.
Obviously, the Spaniard who probably should be on that plane to Moscow right now as JPM will have absolutely zero qualms when blaming him for everything that went wrong, pleads his innocence: "Mr. Martin-Artajo's lawyer declined to comment Friday but said last year that his client "unequivocally denies any wrongdoing on his part and is confident that he will be completely exonerated when the investigations into these events have been completed." Alas, that is not too likely.
What follows are some intercepts from the Subcommittee report between Artajo and his co-workers which show that the Spaniard systematically advised his inferiors to bend, and break, the rules when the news became unpalatable, to the point where what he did ended up being allegedly criminal.
The data indicates that the CIO began using more favorable valuations in late January and accelerated that practice over the next two months. By March 15, 2012, two key participants, Julien Grout, a junior trader charged with marking the SCP’s positions on a daily basis, and his supervisor, Bruno Iksil, head trader in charge of the SCP book, were explicit about what they were doing. As Mr. Grout told Mr. Iksil in an instant message conversation: “[I] am not marking at mids as per a previous conversation.” The next day, Mr. Iksil expressed to Mr. Grout his concerns about the growing discrepancy between the marks they were reporting versus those called for by marking at the midpoint prices: “I can’t keep this going …. I think what he’s [their supervisor, Javier Martin-Artajo] expecting is a re-marking at the end of the month …. I don’t know where he wants to stop, but it’s getting idiotic.
According to one trader, Bruno Iksil, when his supervisor, Javier Martin-Artajo, asked him how much it would cost to reduce the SCP book to achieve the $25 billion RWA reduction, Mr. Iksil estimated a cost of $400 million. Mr. Martin Artajo later told the JPMorgan Chase Task Force investigation that the CIO had not been given any budget to cover that cost to reduce the SCP.392 When Ms. Drew requested an estimate of the costs to unwind the entire SCP, the traders gave her a presentation estimating that the “cost to execute the unwinding” of about 35% of the SCP would be $516 million.393 Ms. Drew told the Subcommittee that she then asked the traders to see if it was possible to reduce RWA without holding a “fire sale" In response, the traders undertook an analysis of how they could reduce the SCP and the CIO’s RWA at a lower cost. When asked whether bank management had provided any instruction to the CIO about how to proceed, Mr. Dimon told the Subcommittee that he did not provide specific instructions or had a specific expectation as to how the RWA would be reduced – that is, by unwinding the book or adopting another course of action – his only expectation had been that the reduction be done “wisely.”
On January 10, 2012, Javier Martin-Artajo, head of CIO equity and credit trading, sent an email to Ms. Drew informing her that initial efforts to unwind the SCP were proving costly:
“Bruno has been unwi[n]ding some of these pos[i]tions opportunistic[al]ly. The other side of the P/L [profit and loss] is that it has been somewhat costly to unwind too so net net we have actually lost a little bit of money to unwind.”
Ms. Drew responded: “Let’s review the unwind plan to maximize p l [profit/loss]. We may have a tad more room on rwa.” ... Her comments also underscored her reluctance to incur the costs associated with unwinding the SCP
It was while these losses were piling up that critical decisions were made that ultimately resulted in the much more massive SCP losses JPMorgan experienced. According to Javier Martin-Artajo, head of the CIO’s equity and credit trading operation, it was then that the head of the CIO’s International Office, Achilles Macris, told him that the SCP book was no longer needed to hedge tail risk at the bank and should be reshaped, primarily to put a stop to the losses it was experiencing.... Mr. Martin-Artajo later told the JPMorgan Chase Task Force investigation that, despite Mr. Macris’s comment, he still viewed the SCP book as a hedge. In any event, the issue in late January was whether to sell off the short positions; take no action when positions naturally expired; purchase long positions; or take some other action to reshape the SCP.
The evidence indicates that CIO management gave only cursory attention to the option of leaving the SCP book as-is, since the book would have continued to lose value during the credit market rally, as was the case for hedges and short positions generally. According to Mr. Martin-Artajo, Mr. Macris did not want to lose money and, in fact, would be “angry” to lose money. At one point at the end of January, Mr. Iksil sent Mr. Martin-Artajo an email advising that they should just “take the pain fast” and “let it go.”428 But according to Mr. Iksil, his supervisor Mr. Martin-Artajo disagreed and explicitly instructed him to stop losing money.... According to Mr. Martin-Artajo, “Achilles told me every day every minute that he would be angry with P&L loss.”
In other words, the Greek told the Spaniard not to lose money and everything followed from there. It only got better.
In the same January 30 email, Mr. Iksil expressed concern about the danger of taking on ever-increasing positions under the new trading strategy:
“[T]he control of the drawdown [loss] now is generating issues that make the book only bigger in notionals …. [T]he notionals become scary and [the] upside is limited unless we have really unexpected scenarios. In the meantime, we face larger and larger drawdown pressure versus the risk due to notional increase. Please let me know the course of action I should take here.”
The Subcommittee was unable to locate any written record of any guidance provided by Mr. Martin-Artajo in response.
Perhaps because there simply wasn't one: you see, the Spaniard was good at giving blank, generic instructions ("don's lose money") but when it came to actual advise on how to achieve that, he had zero input. In the meantime Artajo was supervising what by then had become a true "whale":
Mr. Iksil warned his supervisor that the SCP was a very visible player in a small market:
“[T]here is a trap that is building: if we limit the Mark-to-Market we risk increasing the notionals further and weaken our position versus the rest of the market.” Later, Mr. Iksil wrote to a colleague:
“[I]t had to happen. [I]t started back in 2008 you see. [I] survived pretty well until [I] was alone to be the target. [Y]es [I] mean the guys know my position because [I] am too big for the market. … [B]ut here is the loss and it becomes too large and this is it. [W]e realize that [I] am too visible.”
On March 20, 2012, CIO head Ina Drew and CIO Chief Risk Officer Irvin Goldman participated in a meeting with the bankwide Directors Risk Policy Committee regarding the CIO, and gave a presentation on the CIO’s investment portfolios and risk profile, but according to the bank, did not disclose the SCP’s ongoing losses, risk limit breaches, increased portfolio size, or increased RWA. On that same day, two CIO traders, Mr. Iksil and Mr. Grout, circulated the daily profit-loss email for the SCP, estimating a daily loss of $43 million which was the largest daily loss yet for the SCP, and also describing a $600 million to $800 million “lag” in the SCP book. Ms. Drew told the Subcommittee that she never read that email, and even though it was sent to multiple CIO recipients, no action was taken by any CIO manager to investigate the enormous “lag” it described.
The "lag" is simply the accrued losses that JPM, with the complict actions of everyone: from Ina Drew to Macris to Artajo to Iksil to Grout, had allowed to accumulate over the months. And while Jamie Dimon was supposedly unaware of. A lag on positions of absolutely epic size:
When asked for more detail, JPMorgan Chase told the Subcommittee that, at the end of March, the SCP included $62 billion in IG index holdings, $71 billion in iTraxx index holdings, $22 billion in High Yield index holdings, and a variety of other synthetic credit derivatives.542 Other contemporaneous internal bank documents provide even larger figures. For example, an April 2012 analysis stated that, at the end of March, the SCP held an $82 billion long position in the IG9 index alone, which comprised over half the market in that index.
Of course, it all ended when on "March 23, 2012, Ms. Drew ordered the CIO traders to “put phones down” and stop trading." At that point the "career preservation" damage control began:
About a week later, on March 30, 2012, Achilles Macris sent an email to the bank’s Chief Risk Officer John Hogan stating that he had “lost confidence” in his team and requesting “help with the synthetic credit book.” Mr. Macris reported:
“Just spoke to Ashley [Bacon] regarding the issue and he has agreed to dedicate Olivier to help us with RWA targeting for Q2. … [T]he objective is to determine what is the best course of action to insure that the book is and remains balanced in risk and P+L terms. … [C]learly, we are in crisis mode on this.”
In a May 2012 internal email, one OCC examiner referred to the SCP as a “make believe voodoo magic ‘composite hedge.’”
Yet it was not until July 2012 that the bank came clean. One OCC examiner told the Subcommittee that by withholding information about how the CIO traders had mismarked SCP assets, the bank had “lied to” and “deceived” its regulator.
The OCC told the Subcommittee that, after reviewing the SCP’s swollen portfolio and trading activities, it was clear that the CIO traders had made trades that violated the CIO’s risk limits with “aggressive positions” in a way that was “unsafe and unsound.” One OCC regulator said that the trades had so many dimensions of risk that “no matter what happened, they would lose money."
What was it that Jamie Dimon called it... "a fortress balance sheet?" Ah yes - supposedly in a fortress one loses money "no matter what happens."
And so on.
The bottom line - as long as the good times rolled, everyone was happy. So happy in fact, that Artajo earned millions, more even that the highest comp on the 2011 market:
Mr. Martin-Artajo’s compensation exceeded his reference group in 2011 and was at the top end of the range in 2010; and Mr. Iksil was at the top end of the range for 2011 (the only year available) . The compensation data for both Mr. Macris and Mr. Martin-Artajo, which shows them receiving incentive pay worth millions of dollars each year, indicates that their compensation moved in tandem with and reflected SCP profits, which peaked in 2009 with $1 billion in revenues, and then diminished in 2010 and 2011. Mr. Iksil’s pay did not follow the same pattern, however, peaking instead in 2010. All three employees also received positive performance reviews in those years.
Less than two years later, he is about to be arrested...
Which, of course, is Wall Street's most purest in a nutshell: do anything to make money, lie, cheat, commit crimes, just don't get caught and you will make millions. But the second things turn against you, the second you get caught, don't expect your firm, or anyone for that matter, to stand up for you. In fact, the same firm will just as eagerly scapegoat you and have you thrown in jail.
Source: Subcommittee report on JPM CIO