“It is not down in any map; true places never are.”
News studies that prosecutors have dropped their case towards Bruno Iksil, the previous JPMorgan (NYSE:JPM) dealer many know because the “London Whale,” comes as no shock to readers of The IRA. Iksil, who resurfaced earlier this year, has been dwelling in relative seclusion in France for the previous few years.
In earlier feedback posted on Zero Hedge, we distributed with the notion that the funding actions of Iksil and the workplace of the JPM Chief Investment Officer have been both unlawful or hid from the financial institution’s senior administration. The reality is that Iksil and his colleagues at JPM have been doing their jobs, specifically producing funding positive factors for the financial institution.
The outsized bets made by the “whale” in credit score derivatives contracts resulted in a loss in 2012, however the operation generated vital income for JPM in earlier years. As veteran danger supervisor Nom de Plumber told us in Zero Hedge in 2012:
“This JPM loss, whether $2BLN or even $5BLN, is modest in both absolute and relative terms, versus its overall profitability and capital base, and especially against the far greater losses at other institutions. In practical current terms, the hit resembles a rounding error, not a stomach punch. As either taxpayers or long-term JPM investors, we should be more grateful than sorry about the JPM CIO Ina Drew. If only other institutions could also do so ‘poorly’………”
When JPM and different giant banks started to implement the Volcker Rule after the passage of the 2010 Dodd-Frank regulation, the actions of Iksil and his colleagues in New York started to return to mild. Principal buying and selling, which is now outlawed by the Volcker Rule, creates monumental alternatives – and conflicts — for banks that act each as merchants and lenders. We wrote in ZH in 2012:
“[D]ear friends in the Big Media, it is time to get a collective clue. The real problem with CDS trading by large banks such as JPM is not the speculative positions taken by traders like Bruno Iksil, but instead the vast conflict of interest between the lending side of the house and the trading side, whether the trader is on the arb desk or, in the case of Iksil, working for the CIO trading for the bank’s treasury.”
When caught within the act, the financial institution naturally forged Iksil’s actions as being by some means illicit and towards firm coverage. But in reality his buying and selling actions had been understood, blessed and even directed by the JPM’s senior administration going again years. Far from being a hedge for different exposures of the financial institution, in reality the technique of the CIO’s workplace was to generate returns because the financial institution’s inner hedge fund.
When as early as 2010 discussions reportedly occurred about “hedging” Iksil’s illiquid credit score by-product positions, presumably these concerned understood that this was a danger place taken as a part of a deliberate funding technique. That Iksil apparently believed that he couldn’t be bullied by different counterparties due to the very fact of buying and selling for JPM speaks to how he seen his actions, which have been totally seen to different market members.
The JPM CIO’s workplace beneath Ina Drew ran an lively buying and selling technique, making markets round positions on a steady foundation to offer reside valuations and generate short-term returns. The undeniable fact that massive banks not commerce their funding books illustrates the diminution of liquidity that has occurred because the adoption of the Volcker Rule. But for the banks, the legacy of the London Whale and the bigger implementation of Dodd-Frank has left a deep mark on danger managers and people involved with sustaining inner techniques and controls at giant banks.
But now Iksil has accused JPM’s Chief Executive James Dimon of laying the bottom for what was ultimately a $6.2 billion loss, Reuters reports. In an account on his website, Iksil additionally blames senior executives on the financial institution for the funding methods that led to these losses. Iksil’s account now sounds an terrible lot like what we heard from his former colleagues in New York some six years in the past.
At the time, JPM’s counsel had already mandated the elimination of the managers and merchants within the CIO’s space as a part of implementing the Volcker Rule, resulting in a variety of redundancies in New York. We know concerning the Whale due to the implementation of the Volcker Rule. But the important thing occasion that broke the scandal open was the general public assertion by Dimon, this in response to persistent press queries from The Wall Street Journal and Bloomberg News, that the rumors of losses within the CIO’s workplace have been “a tempest in a teapot.”
But for the general public assertion by Dimon, which required further clarification and disclosure, the actions of the CIO which may in any other case have been handled within the positive print of JPM’s earnings launch. Instead, JPM was pressured to not solely improve disclosure of the CIO’s buying and selling outcomes, however then went by way of a firestorm of congressional hearings, regulatory questions and litigation that continues to this present day. We recall sitting within the analyst presentation at JPM’s HQ coping with the London Whale as Ken Langone glared on the assembled viewers of Sell Side analysts.
In his congressional testimony, Dimon attributes the financial institution’s loss to a modeling error, however in truth the publicity was merely ignored. Notice that at no level has the monetary media or regulators questioned the corporate line about what truly occurred and when. Iksil’s statements appear to take us again down that street and, particularly, to recommend that senior administration at JPM was actively conscious of the methods taken by the CIOs workplace years earlier than the large losses occurred. Our previous pal Nom de Plumber commented over the weekend:
“In the end, the London Whale disaster reflected the mis-marking of generic Index CDS trades, which then-CFO Doug Braunstein ignored. The problem was not complex risk modeling or market risk measurement. The quants tried to re-jigger VaR measurement of the trades, to avoid breaching risk limits—–for CIO trades which Jamie specifically demanded of Ina Drew……regardless of preceding protests from risk managers like John Hogan and Robert Rupp.”
Nom de Plumber tells The IRA that Ina Drew was primarily operating a hedge fund directed by Dimon and different senior managers, a fund that was largely stored outdoors of the financial institution’s danger administration and reporting procedures. Consider the weird state of affairs in 2011-2012 when counterparties of Iksil dealing with the JPM business financial institution have been unable to make margin calls, however the JPM funding financial institution was making margin calls on these similar counterparties for positions in the exact same listed credit score derivatives.
Bruno Iksil has waited for the proverbial concrete to harden over the previous few years earlier than coming ahead together with his newest accusations. This makes it troublesome or unimaginable for Dimon and his lieutenants to vary their story now. It might be very fascinating certainly to see if anybody from the monetary media and even the regulatory group picks up the brand new path illuminated by Iksil’s statements.
The episode involving the London Whale illustrates how troublesome it’s to study the reality concerning the inside working of huge banks. Big banks revenue by exploiting info and conflicts discovered between the world of credit score and the world of securities. Indeed, the CIO’s workplace generated huge returns for JPM over the last decade or in order that Iksil was with the financial institution.
But the London Whale episode additionally exhibits in graphic phrases why the Volcker Rule prohibitions towards banks buying and selling for their very own account have to be preserved and strengthened. There is a elementary battle between a financial institution appearing as a lender and buying and selling credit score derivatives.
More, if the CEO of a financial institution – any financial institution – can brief circuit the interior controls of his establishment in an effort to improve returns with a guess on the credit score by-product roulette desk, then by definition that financial institution can’t be protected and sound.
SOURCE: – Read whole story here.