Easy Street

JP Morgan’s Terrible, No Good, Very Bad Trading Loss

Marketplace Contributor Jul 13, 2012

Let’s start with best quotes from today’s JP Morgan earnings call.

The main players are Jamie Dimon, JP Morgan’s CEO; Doug Braunstein, the chief financial officer; and Mike Cavanagh, the executive who ran the internal investigation. Cavanagh said his team went through “thousands of voice tapes, some of them in foreign languages.”


Jamie Dimon: We don’t take this lightly….This is what the SEC chairwoman herself would have done….if we find out more, we’ll try to do the right thing, which we always try to do.

Dimon: We’ve suspended synthetic credit trading in [the chief investment office] CIO…we’re no longer doing it, with the exception of one short position.

We do believe these events are limited to the CIO.

We’ve had hundreds of people working around the clock now for three months….hopefully after this is over we will be a stronger company when this is over.

Doug Braunstein: JP Morgan has had $40 billion in loan growth.

Dimon: The “accident” …. has “shaken our company to the core.”


Mike Cavanagh, the executive in charge of investigating the Whale: CIO judgement, execution…were poor in the first quarter…the designated risk management team supporting CIO were ineffective…

Cavanagh: The CIO was breakeven or positive between 2007 and 2011. Generated $2 billion in gains during that time.

Cavanagh: [The London Whale team decided that a total winddown of the trade] would have been more expensive than the approach they chose, [ie, increase the size and complexity of the bet in the first quarter] – which was wrong….It was a very risky approach they took, that should have been…vetted at senior levels. But it was not.

Cavanagh provides a “tick-tock” of the bank’s discovery of the scale of the trade: he says all the bets were on the books by March 23. Losses piled up in late March, early April. Press reports on April 6 created worries in the markets. Dimon and Ina Drew asked for more details a few details later.

The initial review was done by Ina Drew, who relied on the managers and traders responsible for the CIO investments. April 13, the earnings release. In late April, the losses picked up.

A senior team from the corporate risk department started analyzing the losses as the firm waited for new managers to come into the CIO. The senior team discovered problems with the old ‘model’ for evaluating the losses. On May 14, Zames comes in to head CIO and the management review is launched.

Cavanagh on the CIO team’s incompetence: there were “numerous embedded risks that this team did not understand and were not equipped to manage.” The trade stayed within a small group within CIO instead of being examined by peers and other managers. “The level of scrutiny that the CIO faced did not increase” with the size and the level of complexity of the trade. The risk management team “failed to meet reasonable expectations.” They didn’t “establish adequate risk limits.” The risk management team did not do enough to challenge the traders who put on the London Whale trades.

Cavanagh admits that the new mathematical model that JP Morgan used to evaluate its losses was “sloppy and incompetent.” The best reporting on this flawed model came from Eric Schatzker and Dawn Kopecki at Bloomberg, whose coverage was consistently critical of JP Morgan’s mathematical model.

Cavanagh says all the executives related to the CIO trade have been “separated from the firm,” and they will lose two years of bonuses – including stock and options – and get no severance payments. That is, to use Dimon’s term, Old Testament. It’s probably the biggest clawback we’ve seen in the wake of a financial scandal and a very good response by JP Morgan.

Dimon, in a silver-lining moment: “This is a bad outcome. This is not the worst outcome.” He says it could have been worse if the euro unraveled and there was more of a crisis.


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