The report that JPMorgan Chase & Co. released last week about its London Whale trading losses has some amazing omissions. It contains no mention of the Whale’s actual name, Bruno Iksil, or the names of almost anyone else who worked in the bank’s London-based chief investment office, which generated the $6 billion loss.
The report said the names were excluded “in order to comply with United Kingdom data privacy laws,” which was an awfully handy excuse. Reading the 129-page report at times seemed like watching a movie where the characters are screaming and throwing office supplies at each other, except they are wearing brown paper bags over their heads and their voices have been electronically altered so you can’t tell who anybody is.
There are several current and former executives who are named, including Jamie Dimon, the company’s chairman and chief executive officer, and Ina Drew, the former head of JPMorgan’s chief investment office, who left last year. Much blame is cast, especially on Drew. Fall guys are delivered. Remedies are unveiled. And sufficient criticism is directed at Dimon (along with a 50 percent pay cut for 2012) so the report has the veneer of credibility. But as is usually the case with corporate investigations, the most interesting stuff is what the company chose to overlook.
For instance, how did JPMorgan’s chief investment office, which manages deposits that the bank hasn’t lent, go from being a conservatively run risk manager to a profit center speculating on higher-yielding assets such as credit derivatives? The company’s report, conveniently, said this pivotal question was outside the inquiry’s scope. It’s worth noting that it was Dimon who pushed for the transformation several years ago, as Bloomberg News reported last spring.
“Although the task force has reviewed certain general background information on the origin of the synthetic credit portfolio and its development over time, the task force’s focus was on the events at the end of 2011 and the first several months of 2012 when the losses occurred,” the report said.
The head of the task force that produced the report, Michael Cavanagh, is the co-CEO of JPMorgan’s corporate and investment bank. So it isn’t as if there was a pretense that this was some sort of independent review. The company didn’t disclose the task force’s other members.
The report dodged important disclosure issues. The facts in the report suggest there were serious shortcomings before 2012 in the internal controls over JPMorgan’s valuation processes. Some employees manipulated the numbers to make the trading losses look smaller. And when JPMorgan restated its first-quarter 2012 results last summer, the company acknowledged it had a material weakness in its controls as of March 31. Yet the bank hasn’t amended past disclosures to show control weaknesses in any earlier periods. Why not? Last week’s report didn’t address the question.
Another example: During an April 13 call with analysts, about a month before JPMorgan began acknowledging the magnitude of its losses, Douglas Braunstein, JPMorgan’s since-demoted chief financial officer, said “those positions are fully transparent to the regulators” and that the bank’s regulators “get the information on those positions on a regular and recurring basis as part of our normalized reporting.” The statement wasn’t credible then. There’s no reason to believe he had any basis for the remark. Yet the task force’s report didn’t touch it.
The report also included this bizarre disclaimer: “This report sets out the facts that the task force believes are most relevant to understanding the causes of the losses. It reflects the task force’s view of the facts. Others (including regulators conducting their own investigations) may have a different view of the facts, or may focus on facts not described in this report, and may also draw different conclusions regarding the facts and issues.” In other words, we haven’t been told the whole story.
Sure, there were colorful anecdotes, like this: “April 10 was the first trading day in London after the ‘London Whale’ articles were published. When U.S. markets opened (i.e., towards the middle of the London trading day), one of the traders informed another that he was estimating a loss of approximately $700 million for the day. The latter reported this information to a more senior team member, who became angry and accused the third trader of undermining his credibility at JPMorgan.
“At 7:02 p.m. GMT on April 10, the trader with responsibility for the P&L Predict circulated a P&L Predict indicating a $5 million loss for the day; according to one of the traders, the trader who circulated this P&L Predict did so at the direction of another trader. After a confrontation between the other two traders, the same trader sent an updated P&L Predict at 8:30 p.m. GMT the same day, this time showing an estimated loss of approximately $400 million. He explained to one of the other traders that the market had improved and that the $400 million figure was an accurate reflection.”
Who were those masked traders? How could JPMorgan employees be so willing to manipulate their numbers to achieve an outcome at odds with the facts? And how does a day’s loss go from $5 million to $400 million? Nothing is very clear, which seems to have been by design.
We may get a full accounting yet. Staff members of the Senate Permanent Subcommittee on Investigations, led by Democrat Carl Levin of Michigan, have been conducting a probe of the trading losses. The panel could hold hearings and release its findings, as it did for its investigation of Goldman Sachs Group Inc. in 2010, which produced some of the most informative financial theater in recent memory. This probably wouldn’t be necessary if JPMorgan’s report had been thorough, but it wasn’t.
U.K. data-privacy laws wouldn’t apply.
Weil is a Bloomberg View columnist.