Thirteen Ways Of Looking At a Whale

The following post is from Jennifer Taub. It can be found at The ParetoCommons.

Wallace Stevens’ Thirteen Ways of Looking at a Blackbird came to mind Friday while watching bankers and regulators testify before the Senator Levin-lead bipartisan subcommittee hearing on “JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses.”

I was prepared to take notes and tweet (no pun intended), having carefully reviewed the subcommittee’s 301-page report released the night before.  That report provided many new details regarding the  JP Morgan Chase 2012 tempest-in-a-teapot-turned-$6.2 billion trading loss. A regulator from the Office of the Comptroller of the Currency (OCC) who testified in the afternoon admitted finding new information in its pages that he thought they still needed to “digest.”

In the spirit of the Stevens’ poem, there are at least thirteen things I learned from the report and hearing:

  1. They Saw it Coming: A potential $6.3 billion loss within the synthetic credit portfolio (SCP) at the Chief Investment Office (CIO) was predicted through the banks own comprehensive risk measure. However, market risk executive Peter Weiland dismissed the prediction as “garbage.”
  2. Building up Risk: The portfolio did not reduce risk, but added risk: The SCP trades violated internal risk limits, yet more risk was added. The OCC saw the risk breach reports but did not act.
  3. Not a Rogue Trader or Rogue Desk– CEO Jamie Dimon Knew: According to Ina Drew, the head of the CIO, who “resigned” last year, Dimon was aware of the CIO trading. In addition the report also details he was informed of the risk limit breaches.
  4. The Cover Up:  The bank CIO unit changed its pricing practices to make losses on portfolio positions look smaller. This phantom pricing continued even after the story of the whale broke and even after it was clear another part of the bank priced the same positions like the CIO had in the past — at the midpoint between the bid/ask spread.
  5. The Potential Fraud: Levin said that the bank agreed that “books were cooked.” The bank arguably made false statements to the public, policymakers and regulators about many things. Levin focused on the statements made by CFO Braunstein in April of 2012.
  6. Gambling with Federally-Insured Deposits, Not Hedging Positions: The bank could not point to specific assets it was hedging, and appeared to be engaging in proprietary trading, using insured deposits to do so.
  7. Positions Not Transparent: The bank claimed to investors in April of 2012, that it had disclosed trading positions to regulators when it had not.Levin called this and other statements made by CFO Braunstein an attempt to “calm the seas.”
  8. Minimized Losses to Regulators: The bank may have told regulators losses were just $580 billion at a time when they had grown to $1.2 billion.
  9. Regulator in the Dark: Scott Waterhouse, the lead OCC examiner for the bank said he did not find out about the London Whale risky trades until the Wall Street Journal broke the story in April of 2012. He said the whale “did not surface to our attention” until that time.
  10. Yet Bright Red Flags: The OCC failed to investigate the trading activity even after learning of the multiple risk limit breaches. In addition when the bank applied a new value at risk (VaR) model and the VaR dropped by 50% using that model, the OCC did not inquire as to why. Did not look at the portfolio. Levin called this a “pretty bright red flag.”
  11.  The Bully: CEO Jamie Dimon apparently yelled at bank examiners and called them “stupid” if he did not like their recommendations. Dimon apparently also instructed the bank to withhold daily profit & loss reports from the OCC regarding the whale trades. When Doug Braunstein the former CEO revealed that he had resumed providing reports to the OCC, Dimon raised his voice and said it was up to him whether reports resumed. Dimon previously had told OCC “you don’t need that level of information.”
  12. Penny wise, pound foolish: The bank did not want to pay to automate the new VaR model, so an employee regularly worked late into the night manually entering data into a spreadsheet (and making errors) for the $350 billion portfolio. OCC did not know about this manual process.
  13. The Volcker Rule: Comptroller Curry did not provide a date by which he though the Volcker Rule would be implemented, however, he did indicate that the London Whale experience with the CIO would affect the rulemaking. Curry who was sworn-in last April just days before the news broke seemed to imply that this so-called “portfolio” hedging that JP Morgan Chase claimed to have engaged in would be banned under the rule, as many argue the Dodd-Frank statute already prohibits.

When the hearing adjourned after six hours, a mental escape was welcome. I turned to Stevens’ poem, in particular the third stanza:

The blackbird whirled in the autumn winds./It was a small part of the pantomime.

The blackbird connection? Bruno Iksil, the former JP Morgan Chase trader dubbed “The London Whale” never appeared at the hearing. Residing in France, outside the reach of the Senate’s subpoena authority, Iksil himself was not in the building. Indeed, if one took a close look, even his trading was a really small part of the investigation, the hearing, and its broader implications.

This is a point made by Josh Rosner, co-author with Gretchen Morgensen of Reckless Endangerment.  On Barry Ritholtz’s Big Picture blog, Rosner contends that internal control problems at the bank “appear to be pervasive.” The whale problem may just be the tip of the iceberg, so to speak. He also notes that the whale loss itself is less than related litigation expenses — the bank has already paid out more than $8.5 billion in settlements since 2009 related to matters covered in the Levin report.

The hearing also raises again the question of whether banks are still “too big to fail.” Ina Drew did not help the camp that argues the status quo is fine. She headed up the CIO, earning $14 million in 2011 alone, but claimed that she was unaware they were 1,000% over their risk limit. And, when Levin asked her how big the hedge was and she said she not know the answer, she defended this by pointing out, that the bank had a $2.2 trillion balance sheet, implying it was either too trivial or perhaps impossible to track.

Senator Levin also attempted to create a larger frame for the hearing. In his opening remarks, he asserted that:

The Whale trades exposed problems that reach far beyond one London trading desk or one Wall Street office tower. The American people have already suffered one devastating economic assault, rooted largely in Wall Street excess. They cannot afford another. When Wall Street plays with fire, American families get burned. The task of federal regulators and this Congress is to take away the matches. The Whale trades demonstrated that this task is far from complete.

And, also incomplete is accountability. One can hope that the next time a banker is cross-examined about  arguably materially misleading statements, it is in a court of law, not a Senate hearing room, and one can hope that the prosecutor has carefully reviewed at least thirteen ways of looking at a white collar crime. But I won’t hold my breath. The statute of limitations will probably run before that happens. “The river is moving/The blackbird must be flying.”


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