Jamie Dimon Misrepresented “London Whale” Risks, Admits to $2+ Billion Loss Plus Risk Management Black Eye

Jamie Dimon Misrepresented “London Whale” Risks, Admits to $2+ Billion Loss Plus Risk Management Black Eye

Jamie Dimon Misrepresented “London Whale” Risks, Admits to $2+ Billion Loss Plus Risk Management Black Eye

As readers likely know by now, Jamie Dimon hastily arranged an after hours conference call today, in which he admitted to $2 billion in losses in the last six weeks from a trade by the “London Whale”, Bruno Michel Iksil in the bank’s Chief Investment Office, with as much as another potential $1 billion in losses in the offing. The position was a hedge involving credit default swaps, a product in which the firm has touted its expertise (a recent display occurring in a Frontline program we shredded).
Bloomberg reported on the story in early April, noting that Iskil’s postions were so large that he was driving prices. This is generally a sign of a basic failure in risk management. You never want to take a bet too large in a market if you might want or need to exit quickly, and highly leveraged firms in general are not in a great position to ride out adverse price moves, even if they believe the trade will work out in the end. This same mistake felled LTCM and Amaranth. Even more telling, Dimon made clear this trade was not a hot idea to begin with, repeatedly calling it poorly conceived, poorly executed, and not sufficiently monitored (update: Felix Salmon says he believe the trade was a cash-basis trade).
So much for JP Morgan’s vaunted risk acumen. As we’ve noted, one of the big reasons it wasn’t as badly hit in the crisis was that it took big CDS losses in 2005 on the Delphi bankruptcy (yes this is a rumor, but it is as pretty widespread rumor, and the sources are credible). The bank got cautious just as the subprime market was entering its toxic phase. So JP Morgan may have dodged the bullet at least in part by getting a wake-up call earlier than its peers.
But other issues seems even more important. First is that Dimon consistently misrepresented the seriousness of the exposures as soon as the press was onto it. Both Bloomberg and the Wall Street Journal were digging, and Dimon was dismissive, calling the concerns a “tempest in a teapot”. JPM shares are down over 5% in aftermarket trading. The CEO misled investors, but no one seems to care much about niceties like accurate and timely disclosure these days. This is the disclosure in the first quarter 10Q: