In October 2014, the Whale case received new attention when the U.S. Federal Reserve’s Inspector General issued a report saying that regulators had botched oversight of the JPMorgan unit where the losses took place. The report said that examiners in the New York Fed had spotted risks in the unit’s trading as early as 2008 but never followed up, and that there was poor coordination with other regulatory agencies. On the criminal front, neither the Whale himself, Bruno Iksil, nor any senior managers were charged. (Iksil is cooperating with prosecutors.) Iksil’s former boss and a junior trader were indicted in 2013, but the charges weren’t about the trades themselves — U.S. prosecutors say the pair committed securities fraud by hiding the true extent of losses from bank management. Lawyers for both men, who remain in Europe, say they’re innocent. A trial is on hold while prosecutors seek to have them extradited. Dimon was criticized in the Senate report, which said the bank misled investors and dodged regulators as losses mounted. In October 2013, the bank reported the first quarterly loss of his tenure, with results weighed down by $7.2 billion in legal costs. The bank agreed to a $100 million settlement with the Commodity Futures Trading Commission, which found that it had deployed a reckless trading strategy.
In a sense, what Iksil and his colleagues did was the same old story — doubling down after a loss with bigger and bigger bets. But plenty more was wrong. They worked in a part of the bank, the Chief Investment Office, whose job was to hold down the bank’s risk level. Instead, the CIO used the $350 billion it had to invest (much of it from federally insured deposits) to become a moneymaker, with its London office focused on complex derivative trades that had less and less to do with hedging. In 2011, for example, one trade by Iskil brought in $400 million. The trouble came in early 2012, when the bank decided to reduce the risk in the London swaps portfolio by making more offsetting bets. As the strategy unraveled, Iksil’s positions grew so big that they disrupted the thinly traded markets he worked in — earning him nicknames of Whale and Voldemort, and making his group’s hard-to-unwind trades a target for hedge funds. After the trades collapsed, regulators found that Iksil’s colleagues had been keeping two sets of books to minimize the projected size of the losses — a discovery that triggered investigations in the U.S. and U.K.
When the Whale’s trading first came to light, Dimon dismissed it as “a tempest in a teapot.” Later he was more contrite, calling the trades “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” The Senate report, however, depicted not the work of a rogue trader but a broader systemic failure: Risk limits, for instance, were breached more than 300 times before the bank switched to a more lenient risk-evaluation formula — one that underestimated risk by half because of a spreadsheet error. The report by the Fed’s inspector general also supported the view that deeper issues were involved here, as it showed failures in prioritization, loss of institutional knowledge through turnover and poor coordination among agencies. To critics of Wall Street, the real lesson of the London Whale is that megabanks such as JPMorgan are not only too big to fail — they may also be too big to manage and too big to regulate.
The Reference Shelf
- The March 2013 Senate report.
- JPMorgan’s internal report on the CIO losses.
- Bloomberg news timeline of biggest trading losses.
- The New Yorker asks, “Would Better Regulation Have Prevented the London Whale Trades?“