A few more questions on JP Morgan and the London Whale

 “In this world, shipmates, sin that pays its way can travel freely, and without a passport; whereas Virtue, if a pauper, is stopped at all frontiers.”


-- MOBY DICK, Chapter IX

Herman Melville

Updated | Back in mid-May, I wrote a comment on The Institutional Risk Analytics web site, “Questions for the Fed on JP Morgan; Walker Todd on Bernanke, Ed Kane on TARP, asking a couple of basic questions about the situation at JPMorgan Chase (“JPM”). 
In the past many weeks since we got that funny email from JPM IR about an unscheduled conference call, media have focused on the past several months as the crucial period in the trades made by the office of the CIO.  But I have some more questions.

First, the notion that the trades which caused the losses by JPM were put on in the last six months or so seems to have been widely accepted in the media.  But is this really the case?  It has been suggested to me that the positions taken by Bruno Iksil (aka the “London whale”) go back several years. Years. 

Indeed, several JPM counterparties have told me that they believe that the initial trades that created the excessive exposures go back more than two years due to the size and other factors.  This is why the size of the positions today is so remarkable.  Today JPM is a subset of these illiquid, derivative indices, an achievement that took years to accomplish.  Years. 

Second, to the public statements made by JPM CEO Jaime Dimon that the losses were caused by a hedge strategy gone bad this year, in the past several months, is this really true? 

The traders who worked around the long book in the office of the CIO each had an allocation separate from the bank’s treasury positions.  The separate positions by Iksil were far larger than those of the other traders in the group. 
While JPM maintains that the positions of Iksil were a “hedge” designed to offset risk on the bank’s long book, just the opposite story is heard from people directly in the know.  Indeed, was the London credit book run by Iksil essentially a rogue operation inside the bank?  And not a hedge?     

The third question related to the first two involves the alleged hedging. Rumor has it that officials at JPM held internal discussions more than two years ago focused on whether the positions taken by Iksil should be hedged and/or reserved.  Reserved.

Specifically, I am told that the bank’s managers actually discussed taking a $2-4 billion reserve against the positions more than two years ago because of concerns about the liquidity of the OTC contracts. 

The fact is that JPM has such a large position in these OTC derivatives that in cannot unwind the position.  Thus the idea that Iksil was hedging the bank’s long book seems to be in direct conflict with reports that Iksil’s trades were seen by JPM management as a separate risk exposure that required mitigation and even a formal reserve charge.

The last issue, again, goes to the bad joke called regulation.  Is it really possible that JPM management told the Fed and Office of the Comptroller supervisory personnel not to inspect or monitor the activities of the office of the CIO?  Simply based upon the assets of the business unit, the JPM treasury operation required surveillance. 

Add in the growth in the London Whale Iksil’s trades over a period of years and it seems fair to ask why the examiners failed to see the increase in the reported exposure.  Was it reported?  Did the examiner in charge for the OCC see the growth in the CIO risk exposures?

Over five years the office of the CIO went from a Treasury and agency portfolio to one that included every flavor of corporate exposure and a growing derivatives book.  The OCC has said publicly that 90% of the CIO trades were booked in the lead bank subsidiary of JPM.  Where were the examiners??  Hello? 

And during that period Iksil put on a risk trade that has now come back to haunt JPM.  But don’t you ever believe the corporate spin that this was well intended hedging gone awry over a period of months.  If anything, the tale of Iksil and his sponsors at JPM London seems to be yet another rogue hedge fund run amok and over a period of years.  Years.  Hold that thought fellow scribes. 

That is to say, there is nothing new here save the staggering credulity of many analysts who accept the version of reality currently coming from JPM IR.  But were I working for the FBI and other federal agencies looking into the CIO area of this bank holding company, the 2010-2011 period emails related to possible reserve charges related to the liquidity of the London Whale’s trading book would be top of the want list. 

Then we ask Jamie Dimon the question, again: “When did you first know that the risk exposures of Bruno Iksil and the London credit desk were a problem?”

Final thought: Goldman Sachs was the prime broker for the CIO office.  Have a great day.