Another Wall Street investigation. Another trove of e-mails, instant messages and telephone conversations capturing executives, bankers and traders discussing their compromising positions.
First, it was the evidence that depicted questionable behavior at Barclays, UBS and the Royal Bank of Scotland, where traders discussed their rate-rigging activities. Then it was the Justice Department’s complaint against Standard & Poor’s over toxic mortgage securities, which included an employee’s subprime version of the Talking Heads song, “Burning Down the House.”
Now, JPMorgan Chase finds its communications in the cross hairs, as a Senate subcommittee released its finding on the bank’s multibillion-dollar trading loss last year. Buried with the 300-plus document are choice e-mails, instant messages and phone recordings that demonstrate how traders hid “substantial losses for months at a time,” according to the report by the Permanent Subcommittee on Investigations.
The bulk of the evidence centers on a little-known unit, the chief investment office, at the center of the trading blowup. After initially brushing aside media reports about the troubled bets in the London-based group, JPMorgan disclosed a multibillion-dollar loss in May 2012. The losses swelled to more than $6 billion.
In the report, the Congressional committee details the last-ditch efforts by the group to salvage the bets and the increasing concerns that the losses were insurmountable.
Months before JPMorgan disclosed the trading blowup, one of the top traders in the group, Bruno Iksil, worried about the mounting losses on the positions, and the strategy to essentially double down on the bet rather than pare back. In an e-mail on Jan. 30, 2012, Mr. Iksil, who earned the nickname the London Whale for his outsize bets, wrote to his manger, Javier Martin-Artajo, that the strategy had “become scary” and the “upside is limited unless we have really unexpected scenarios.”
Achilles Macris, the executive in charge of the international chief investment office, wrote the same day to Mr. Martin-Artajo, expressing similar doubts. “The current strategy doesn’t seem to work-out. The intention was to be more bullish, but the book doesn’t behave as intended,” Mr. Macris wrote in an e-mail. “The financial [p]erformance is worrisome.”
While Mr. Iksil and others continued to trade in the weeks that followed, the doubts persisted. On Feb. 28, Mr. Iksil commented on a document that there was “more bleeding.” A few days later, Mr. Macris wrote in an e-mail to Mr. Martin-Artajo that he was “worried” that the strategy was “too aggressive,” adding that “if we need to [a]ctually reduce the book, we will not [be] able to defend our positions.”
With the size of the bet increasing dramatically, Ina Drew, the head of the chief investment office, said in an e-mail on March 22 that she “was confused” by the strategy. The comments prompted one risk manager in the group to e-mail another, saying “Ina is freaking — really! Call me.” A day later, Ms. Drew told the traders to “put phones down” and stop trading, according to the report.
Despite the problems, the losses — at least on paper — still didn’t look that bad. All along, the traders were able to mask the losses by pricing the derivatives in favorable manner, according to the report.
In mid-March, a low-level trader, Julien Grout, who worked for Mr. Iksil and was responsible for marking the trading book, started tracking on a spreadsheet the difference between the bank’s favorable valuations on the derivatives and the midpoint prices.
In doing so, the traders, according to the subcommittee, were able to hide losses. On March 16, Mr. Iksil told Mr. Martin-Artajo via instant message that the “divergence” between the midpoint and the bank’s valuations “has increased to 300 now,” meaning $300 million.
Mr. Iksil later added that it could grow to “1000″ or $1 billion by the end of the month.” One colleague responded “ouch,” to which Mr. Iksil replied “well that is the pace.”
The reported losses didn’t appear all that bad. On March 19, Mr. Iksil discussed that the portfolio had millions of dollars of losses. That day, though, the chief investment office only reported a daily loss of $3 million, according to the report.
The traders quickly started to realize the losses — and the mismarking of the book — were unsustainable. “I can’t keep this going,” Mr. Iksil told Mr. Grout over the phone. “I think what he’s expecting is a remarking at the end of the month,” Mr. Iksil said, referring to his boss Mr. Martin-Artajo. “I don’t know where he wants to stop, but it’s getting.”
“Now it’s worse than before…there’s nothing that can be done, absolutely nothing that can be done, there’s no hope…The book continues to grow, more and more monstrous.”
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