WSJ: JPMorgan Knew of Risky Trades Two Years Ago

Tuesday, 12 Jun 2012 10:39 AM

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JPMorgan Chase executives knew a London risk-management unit was making risky trades two years ago, long before the unit botched a trading strategy that led to an initial $2 billion loss, The Wall Street Journal reports.

"Interviews with more than a dozen current and former members of the bank's Chief Investment Office, the unit responsible for the losses, indicate that discussions about reining in London traders started as early as 2010," the Journal reports.

"Certain directors were briefed then on a foreign-exchange-options bet that went bad, and were told that the trader responsible wouldn't be allowed to go overboard in the future."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Bruno Iksil, the London-based JPMorgan trader, known as the "whale," has been cited as responsible for the company's $2 billion loss in derivatives.

JPMorgan CEO Jamie Dimon, who has admitted sloppiness and embarrassment but has stopped short of admitting wrongdoing, will appear before a Senate Banking Committee hearing to discuss the loss.

Don't expect Dimon to be too coy before a congressional inquiry, says Mark Calabria, a former Republican aide on the Banking Committee and now with the libertarian Cato Institute.

"He's got to relay that ‘I've got control of the company, I've got some sense of what's going on and there are not a whole lot of little bombs in the company that I'm not aware of,'" says Calabria, according to Reuters.

Expect the Volcker Rule to grab the spotlight as well.

The Volcker Rule prevents banks from making trades in capital markets for profits with their own money.

The law has been approved but not implemented.

Dimon has voiced opposition to the Volcker Rule in the past, yet the verdict is still out on whether the botched trade at JPMorgan would have violated the rule since it was technically a hedging operation and not one whose primary purpose was financial gain.

Federal Reserve Governor Daniel Tarullo told the Senate Banking Committee recently that if the Volcker Rule were in effect, regulators and senior-level company executives would have likely caught on to the risky trading activity going on inside of JPMorgan.

"If a firm said, 'We are doing this as a hedge,' they would be required to explain to themselves internally as well as to the primary supervisor, what the hedging strategy was... and how they would make sure it didn't give rise to new exposures," Tarullo told the Senate Banking Committee, according to Reuters.

"I suspect we're going to find in this case that there was an absence of documentation both within the firm and in reporting to supervisors."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.



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