Mr. Hagan had never previously designed a VaR model. According to JP Morgan Chase, having an employee from a business unit design the unit’s risk model was somewhat unusual, but it did not violate bank policy…
Mr. Hagan told the Subcommittee that he was told the objective of his research was to design VaR models that, when fed into the RWA model, would produce lower RWA results for the CIO, since both he and the CIO traders viewed the bank’s standard RWA model as overstating CIO risk.948
Apologies for all the jargon there. The above is from the Senate Permanent Subcommittee on Investigations staff report on the JPMorgan “Whale trades” that lost the bank over $6bn in 2012.
While the portfolio that lost all those billions was comprised of outsized credit derivatives trades, building up such positions wouldn’t have been possible without a significant change in a key risk model that the bank was using — the Value-at-Risk (VaR) that predicts possible losses over a given time horizon. Read more
FT Alphaville is (still) poring over (and enjoying) the staff report from the Senate Permanent Subcommittee on Investigations on the JPMorgan “whale” trades in its Chief Investment Office that lost the bank over $6bn. It takes
a lot of coffee awhile to get through all 597 pages of exhibits along with the 307-page report, and all the glorious footnotes, so please kindly bear with us.
As it stands, the more we read, the more dirt we turn up. And the uglier we realise this whole episode was, the more we become concerned: if this happened at JPMorgan, where else could it happen?
The below on risk limits serves as a case in point. The tl;dr version in graphs below, but first from the staff report (emphasis ours): Read more
By now, it should be well understood that the credit derivatives book in JPMorgan’s chief investment office was woefully mismarked. Worryingly, the practice of marking at the extremes of the bid-offer, giving the most favourable result, was rubber-stamped as acceptable practice by both the bank’s controller and the outside auditor.
The restatement of first quarter earnings in July 2012 only happened as a result of investigators from JPMorgan’s special Task Force discovering that the traders hadn’t supplied the marks “in good faith”. We’re not sure what place “faith” has in decent account practice. The whole Street seemingly disagreed with the marks, as demonstrated by large collateral disputes. In any case, let us examine this lack of good faith by reviewing some of the things the traders said about their marks. Read more
There were some pretty massive collateral disputes with counterparties that should have set alarm bells ringing around JPMorgan’s chief investment office.
The biggest disputes in absolute dollar terms were with a Morgan Stanley entity (MSCS) and Bank of America (BOA), with several other counterparties out by tens of millions. Read more
Time to start tackling the big question: how were such huge credit derivatives positions allowed to be put on by JPMorgan’s chief investment office (CIO) in a matter of mere months back at the start of 2012? Someone, or several someones, should have noticed that the synthetic credit portfolio (SCP) was headed for a disaster of epic proportions.
Weren’t there risk limits? Despite being a top of the range tool for crisis aversion, and being breached several times, the warning signs around these weren’t effectively responded to. Even worse, they were simply accommodated for. We’ll discuss that in future posts. Here, we want to talk about another tool that could have averted disaster: the marks on the book. The marks should have shown increasingly frightening losses, leading people to ask what the hell was going on. Read more
06:19:55 BRUNO says: u will feel less alone very soon
06:20:06 BRUNO says: but like u
06:20:09 BRUNO says: i did not fail
06:20:16 BRUNO says: this is not what i will be told
06:20:25 BRUNO says: unlike you Read more
As we wrote in our last post, the structured credit portfolio (SCP) that ended up costing JPMorgan some $6.2bn was probably meant to hedge something somewhere. But seeing as we can’t be sure of exactly what that was, maybe we should all stop pretending it was anything other than a prop trade. Hedges do not spring forth from good intentions alone, after all.
What seems more likely is that the portfolio had done quite nicely over time, especially in relation to the relatively low headcount needed to run it, so it wasn’t policed as hard as it should have been. Read more
Once upon a time, there waz a big, big bank called Jay Pee Morgan. Also there waz a crysis! Everywon was wery scard. Som of the otha big banks got in trobel. Dis made Jay Pee Morgan ewen biger. So big that is Chwef Inwestment Ofwice hade $350bn dolars. Dis means it waz da sventh bigst bank in the countree if it was all on is own! Al so Jay Pee Morgan was big caus had got a big Bear and also took all the piggybanks dat Washtown Mootowel had. Meanie.
Some da $350bn dollarz froom all da piggybanks was inwested in kredit derivativs. But the stwange ting waz, none of the grown-ups seem to no why… or wha phor. Silly grown-ups!
* * * * *
Seriously, it’s that awkward trying to figure out what the structured credit portfolio (SCP) of JPMorgan’s chief investment office (CIO) — that lost the bank some $6.2bn — was meant to be doing or hedging. Read more
It’s going to take awhile to go over the report of the Senate Permanent Subcommittee for Investigations. There are 1,654 footnotes and we wouldn’t want to miss a single one.
This, however, is one of our favourite exhibits thus far. Not that it’s shocking. More that it’s kinda like a famous artifact that we never thought we’d get to see: Read more
A lot of people think you can just throw a bunch of chaos into a situation and walk away. That is not the case. The most you’re going to get outta that is mayhem. Good disaster, like really muah [kisses fingers], should be catastrophic and that, my friends, takes preparation and patience.
In the case of the synthetic credit portfolio of JPMorgan’s CIO, they had a good three months to build positions that would subsequently cause billions of dollars of losses. Our previous post outlined how, according to the bank’s Task Force Report, the CIO was going to unwind profitable high yield shorts at the beginning of 2012. Instead, the unit ended up building those positions further, along with long positions in the Markit CDX.NA.IG.9 index that were meant to hedge and finance them. Read more
If it’s alright by you, FT Alphaville has a confession to make. This whole London Whale thing, the billions that JPMorgan lost as a result of the actions of its Chief Investment Office primarily in the first quarter of 2012… we kinda made a cottage industry of trying to figure out what the trades were. Not that it was just us, mind you.
Naturally, we had been hoping that we’d finally get some answers when the Task Force Report came out last week. The report has revealed in painful detail how a large, well-respected bank can get so much wrong. There were bad risk management practices, model deficiencies, spreadsheet errors, complacent management and more. But trade details? That’s left for us to piece together from various scraps. Read more
Spreadsheet errors sure are a fun, but serious, topic. The last time FT Alphaville dove into JPMorgan’s Task Force Report on its losses in synthetic credit thanks to the bank’s Chief Investment Office, we took you through the blunders around their shiny new VaR model (that didn’t work). This time we want to introduce you to the spreadsheets with valuation errors. Read more
Oh, my, my, my. From JPMorgan’s Task Force Report into the London Whale with its billions of losses in synthetic credit, this footnote:
74 Late on April 6, [JPMorgan CFO] Mr. Braunstein also received an e-mail from Mr. Venkatakrishnan, via [JPMorgan CRO] Mr. Hogan, stating that Mr. Venkatakrishnan had noticed that the notional exposures at CIO were very large, totaling about $10 trillion in each direction.
The Task Force Report into the billions of dollars of losses racked up by JPMorgan’s Chief Investment Office has revealed a number of things, not least of which are some impressive spreadsheet errors.
Impressive enough, perhaps, to be worthy of inclusion in the European Spreadsheet Risks Interest Group’s list of Horror Stories.
(Yes, there is such a group and a massive H/T to reader Justin Cormack for informing us of it. Justin, we hope you don’t want to work for JPMorgan.) Read more
This one paragraph, describing the nature of the curve trade that JPMorgan’s Chief Investment Office had in the Markit CDX.NA.IG.9 index by the end of January, fills us with mixed emotions. There’s a bit of “oh, they did think they were doing that?” and a bit more of “‘but why?? WHY?”. Read more
JPMorgan’s Whale report just keeps on giving: from the blow by blow account of internal P&L swings after the first articles were published about the CIO’s trades, to discussion on how achieve the firm-wide goal of reducing risk-weighted assets.
Let’s start with the former, shall we? Read more
JPMorgan’s Chief Investment Office was given an edict to try to reduce risk-weighted assets, as part of a firm-wide initiative in the face of regulatory changes, and also to shift the synthetic credit portfolio to be more in keeping with the more bullish view of the economy that senior management held. All confirmed by the bank’s own Task Force Report out on Wednesday.
It appears there was a key moment, when the bank was caught off guard by the default of a “significant corporate issuer” in mid-January. Did it change the course that the portfolio otherwise would have taken? Read more
It’s history, JPMorgan Task Force Report style. Or rather, it’s a mostly oral history, lacking in technical detail, and it’s not all independently verified. Oh, and heavily reliant on one guy. All of which is prominently outlined in this footnote… Read more
JP Morgan’s second-quarter 10-Q is out – and so is its restated filing for the first quarter.
Of course, the bank has already opened the kimono (as Jamie Dimon might say) on the unwinding – and transfer to its investment bank – of the synthetic credit trades built up by its Chief Investment Office. Read more
Or, “More power to the cupcake police”. (Bear with us)
How is pricing within banks, and in markets more generally, policed? Read more
It’s JPM’s CIO Task Force update and it’s a fun read. Click through the pic for the full document and then get on to ML:
Thanks to Tom Braithwaite, the FT’s ace US banking editor, for letting us know about this.
JPMorgan Chase will hold a rare face-to-face earnings meeting with analysts in a post mortem of the trading fiasco at its chief investment office. Read more