If you are a risk manager at a U.S. bank, you will be faced with
difficult decisions. You've probably already run into one or more
of what I think of as the three major problems for risk managers.
The first is the lip service paid to risk management by people in
leadership positions who are unfit to lead; the second is ignoring
or covering up oversized risky positions; and the third is not
effectively managing short positions.
Jamie Dimon, chairman and CEO of JPMorgan Chase, is still lauded
as the best bank manager in America. That's a leading indicator of
how difficult your job will be if you actually try to perform your
role in the way it should be done. Yet, if you
go-along-to-get-along, you will probably be safe only
Dimon was a busy man at the end of 2011 and the beginning of
2012. Apparently, he was so busy courting the media in his campaign
against the Volcker Rule (which would prevent taxpayer-insured
banks from engaging in proprietary trading) that he didn't do his
job overseeing the proprietary trading in the Chief Investment
Office (CIO) unit that reported directly to him.
|Janet Tavakoli is the president
Tavakoli Structured Finance in
Despite concrete evidence to the contrary -- including a massive
wrong-way coal short for JPMorgan's own book -- Dimon's PR spin was
that JPMorgan Chase didn't engage in proprietary trading. Similar
to Goldman Sachs' ludicrous claim before Congress, Dimon claimed
the bank only traded on behalf of customers.
Meanwhile, Dimon's CIO unit was in serious trouble. In March
2012, the Wall Street Journal and Bloomberg News
reported a huge position in credit default swaps taken by
JPMorgan's London-based Bruno Iksil. His positions were so huge
that other traders called him the London Whale.
Dimon reportedly was a hands-on risk manager capable of handling
the enormous responsibility of managing the largest and most
systemically dangerous bank in the United States. If that were
true, he should have known about the oversized risky derivatives
position in the unit that actually reported directly to him.
The trade was so large and risky that before it was done
bleeding, it would wipe out years of the unit's earnings.
Oswald Gruebel resigned as CEO of UBS in September 2011, after
"rogue trader" Kweku Adoboli lost $2.3 billion. Dimon claimed he
took responsibility, yet, unlike Gruebel, he didn't step down. Even
reportedly exempted the CIO unit from rigorous scrutiny, and
brushed off concerns about the unit's lack of transparency.
The CIO unit was a poster child for rotten risk management and
disclosure practices. By May 2012, losses were $2.2 billion and
rising rapidly. The Wall Street Journal reported that
losses could be as high as $5 billion, more than 25% of JPMorgan's
total profits in 2011. Losses ultimately rose to more than $6
billion -- at least, that is the official number.
All of JPMorgan Chase's problems came to a head on Sept. 19,
when, in an effort to resolve regulatory investigations into its
$6.2 billion trading loss, the bank
admitted to violating federal securities laws. As part of a
settlement, it agreed to pay a $920 million fine to resolve claims
by the Federal Reserve, the Securities and Exchange Commission
(SEC), the U.S. Comptroller of the Currency (OCC) and the U.K.
Financial Conduct Authority (FCA, which gets a $220 million
payout). But the Justice Department and the Commodity Futures
Trading Commission (CFTC) are still on the case. The CFTC informed
JPMorgan that it recommends enforcement action.
In April 2012, senior management already knew the CIO unit used
aggressive valuations that obscured $750 million in losses. The
SEC, in its
Sept. 19 statement, said that JPMorgan admitted that those
losses occurred "against a backdrop of woefully deficient
accounting controls" (including spreadsheet miscalculations that
caused large violation errors) in Dimon's CIO unit. Moreover, the
commission said that the bank was also guilty of "misstating" its
financial results in its public filings for the first quarter of
"JPMorgan failed to keep watch over its traders as they
overvalued a very complex portfolio to hide massive losses," George
S. Canellos, co-director of the SEC's Division of Enforcement, said
in the statement. "While grappling with how to fix its internal
control breakdowns, JPMorgan's senior management broke a cardinal
rule of corporate governance and deprived its board of critical
information it needed to fully assess the company's problems and
determine whether accurate and reliable information was being
disclosed to investors and regulators."
Though the SEC did not name individuals in its release, it did
state that "senior management" applies to the people who held the
titles of CEO, CFO, CRO, Controller and General Auditor at JPMorgan
as of May 10, 2012.
Dimon Compounded His Credibility Problem
On April 13, 2012, Dimon had knowledge that losses were already
as high as $1 billion. That was not publicly disclosed. Instead,
Dimon told shareholders it was "a complete tempest in a teapot." He
said it was the bank's job to invest "wisely and
It was Dimon's job to understand the risks that unit was taking,
and by now the time to do his job has long passed. When Dimon
misled the public and his shareholders about the magnitude of the
problem, he should have known otherwise.
As rumors of the actual position circulated, losses soared, and
loss reports were estimated at $100 million or more per day by
outsiders. Dimon delayed the 10-Q's scheduled April 27 release.
"Sources" at JPMorgan sounded suspiciously like PR flacks. They
told the Wall Street Journal that Dimon didn't ask to see
the positions until April 30. Even though the 10-Q was delayed,
first quarter earnings had to be restated later.
Shareholders got some of the bad news on Thursday, May 10 --
only five days before the shareholders' annual meeting. Since there
was a weekend wedged between, they barely had three days' notice.
Dimon admitted: "In hindsight, the new strategy was flawed,
complex, poorly reviewed, poorly executed and poorly
I'll add that, with foresight, it was fully knowable too.
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