JP Morgan Whale

Risky or Frisky?
Introduction

Case Overview

Actual concern

Risky Behaviour or Frisky Misbehavior?

Jamie’s Position
Jamie Dimon admitted -
“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and
poorly monitored. The portfolio has proven to be riskier, more volatile, and less effective as
an economic hedge than we thought.”

● The company’s own management tools were not effective enough

● VaR was expected to be far behind their expectations
○ Company showed average VaR at 67 but now, it would be at 129
● Sudden shutdown of the strategy -> sudden change in the market profile of
those instruments -> increased losses
● Stock prices fell over a period of 11 days
 Aftermath of the event
Growth of Synthetic Credit ● News of good U.S. home sales - Minor effect
Portfolio (in $ billions)
● The net notional value of the SCP book had
more than tripled during the first quarter, from
$51 billion at the end of December 2011 to
$157 billion by the end of March 2012.

● As the trading book grew, losses also

mounted. Acc. to Iksil the possibility of losses
from the new trading strategy totaling $500
million in a worst-case scenario, SCP losses
were $550 million for the month of March
alone, with year to-date losses reported at
$719 million.
● On September 19, 2013, banking regulators in the US and the United Kingdom (UK)
announced a global settlement with JPM.
● JPM was penalised a total of $920 million by the Federal Reserve and a penalty of
$100 million by the Commodity Futures Trading Commission.
● Impact on Volcker Rule implementation
○ The Volcker Rule, part of the Dodd–Frank Wall Street Reform and Consumer
Protection Act, bans high-risk trading inside commercial banking and lending
institutions.
○ The Volcker rule is sometimes referred to as "a modern Glass-Steagall firewall that
separates core banking system from higher-risk, hedge fund-style proprietary
trading".
Observations from the Company Report
● They were following error prone risk modelling system
● Other CIO's judgement, Execution and escalation issues were:
○ Standard management for inconsistent priorities
○ Various strategies performed were not fully understood by the CIO management and other
CIO personnel.
○ Failed to obtain detailed continuous report - Lack of Control System
○ Not able to resolve the escalation raised.
○ Less transparency of losses.
○ Highly inflated future performance of the synthetic credit portfolio was shown
FIRST & ORX Reports
● IBM Algo FIRST and ORX News Service were two external data providers
● ORX selected unauthorized trading as the risk category for the company with
the causes being;
1. Unauthorized Trading
2. Inadequate Policy/Procedure
3. Management/Control of Staff
● On the other hand, FIRST selected execution,delivery and process
management as the risk category
● Some of various contributing factors were corporate governance, human
errors and excessive risk taking.
Conclusion

● JPMorgan executives ignored a series of

alarms that went off as the bank's Chief
Investment Officer breached one risk limit
after another.
● On January 2012, the bank told the Office of
the Comptroller of the Currency (OCC),
inaccurately, that the portfolio was
decreasing in size, when it was not.
● A massive derivatives portfolio riddled with
risk; a runaway train of derivatives trading
blowing through risk limits; hidden losses;
bank executives downplaying the bad bets;
regulators who failed to act.
Conclusion

● Bloomberg and the Wall Street Journal published the first news stories about the
“London Whale.” April 10 SCP recorded a single-day loss of $415 million on the first
trading day after the news story broke, the largest daily loss to date. December 31
Year-to-date SCP losses = $6.2 billion.
● JPM reported $1.128 trillion of deposits at December 31, 2011, but only $724 billion
of loan balances receivable.

Summary of the Primary Trading Strategy

Thank you
Done by -
GROUP 1
K Sunny Kumar (26065)
Krishna Chanchal (26076)
Mammen Thomas K (26080)
Nirmal G (26099)
Nitya B (26100)
Sankara Narayanan M (26139)