DealBook: JPMorgan Report on Trading Loss Takes Aim at Top Executives

Jin Lee/Associated PressJamie Dimon, chief of JPMorgan Chase, at the bank’s headquarters in New York.

The bad bet that cost JPMorgan Chase more than $6 billion has already provoked scrutiny from regulators and federal agents.

Now it is JPMorgan’s turn to assess the actions of its executives.

In a 129-page report attached to its quarterly earnings on Wednesday, the bank dissected the multibillion-dollar trading loss at the chief investment office, outlining a breakdown at the highest levels of management and detailing the “remedial” steps it has taken to heal a rare black eye.

Few surprises emerged from the report, which noted that the bank had overhauled its oversight of the chief investment office and fired the executives responsible for the trade. It was widely expected that the task force would issue a broad critique of the bank’s trading strategy and management.

Still, it is not often that a bank pulls the curtain back on its own executive fiasco. Some within JPMorgan were wary of releasing the report, worried that it would provide a road map for plaintiffs’ lawyers seeking to sue the bank. The chief executive, Jamie Dimon, reportedly supported a broad release of the document, however.

Related Links

• Document: JPMorgan’s Report on Trading Loss
• Graphic: A Complex Strategy That Backfired
• JPMorgan Cuts Dimon’s Pay, Even as Profit Surges

The report, written by a JPMorgan management “task force,” spread the blame widely. Not even Mr. Dimon, long celebrated for his risk management prowess, was spared. The bank announced on Wednesday that Mr. Dimon, portrayed in the report as somewhat complacent, had his compensation halved to $11.5 million in response to the trading loss.

While the task force report acknowledged that Mr. Dimon could “appropriately rely upon” senior managers who oversaw the trading strategy, it concluded that he “could have better tested his reliance on what he was told.” Mr. Dimon has conceded as much in the past.

The task force, led by Michael J. Cavanagh, the bank’s co-head of corporate and investment banking, hinted at Mr. Dimon’s docked compensation. “Mr. Dimon bears some responsibility,” it said, adding that “Mr. Dimon reports to the board, and the board will weigh the extent of Mr. Dimon’s responsibility.”

Mr. Dimon is one of the best-paid executives on Wall Street. And the former leader of the chief investment office, Ina R. Drew, was one of the highest-paid people at the firm.

Yet the report did not take to task JPMorgan’s lavish compensation policies. “The firm’s compensation system did not unduly incentivize the trading activity that led to the losses,” the report stated.

The bank’s board also received a pass. In a separate 18-page report released on Wednesday, the board aimed to clear itself of any wrongdoing, claiming that directors “discharged their duties with respect to the oversight of the firm.” The board’s report noted that problems were “not timely elevated” to its attention.

The main report from Mr. Cavanagh, while somewhat critical of Mr. Dimon, leveled some of its harshest attacks on the executives who oversaw the trade, a complex credit derivatives bet. “Responsibility for the flaws that allowed the losses to occur lies primarily with C.I.O. management,” the report said.

Ms. Drew, a once-lauded leader of the chief investment office who helped steer the bank through the financial crisis, received the brunt of the blame.

“Ina Drew failed in three critical areas,” the report said, pointing to lax controls, her underestimate of the “magnitude” of the problem and her breakdown in ensuring that her team “understood and vetted the flawed trading strategy and appropriately monitored its execution.”

The management missteps also ensnared Barry L. Zubrow, a former chief risk officer, and Douglas L. Braunstein, formerly the bank’s chief financial officer who is now a vice chairman at the bank.

The Task Force also believes that Barry Zubrow, as head of the Firm-wide Risk organization before he left the position in January 2012, bears significant responsibility for failures of the CIO Risk organization, including its infrastructure and personnel shortcomings, and inadequacies of its limits and controls on the Synthetic Credit Portfolio. The CIO Risk organization was not equipped to properly risk-manage the portfolio during the first quarter of 2012, and it performed ineffectively as the portfolio grew in size, complexity and riskiness during that period.

As the Firm’s Chief Financial Officer, Douglas Braunstein bears responsibility, in the Task Force’s view, for weaknesses in financial controls applicable to the Synthetic Credit Portfolio, as well as for the CIO Finance organization’s failure to have asked more questions or to have sought additional information about the evolution of the portfolio during the first quarter
of 2012.

While the task force takes aim at the top rungs of the firm in New York, the report largely centers on a breakdown at the chief investment office in London. The group was created to invest JPMorgan’s own money and offset potential losses across the bank’s disparate businesses. But a group of traders and executives in the group lost their way early last year.

In response to adverse moves in the markets and regulatory changes, the group made a series of aggressive derivatives trades. As these bets began to sour, the London team doubled down rather than exit the trade, according to the bank.

“The trading strategies that were designed in an effort to achieve the various priorities were poorly conceived and not fully understood” by Ms. Drew and others. The chief investment office, the report added, was “excessively optimistic” when discussing the positions with the firm’s senior management in New York.

The report portrays traders intent on “defending their positions,” even as those positions spun out of control.

Yet the architects of the trade are conspicuously absent from the report. Javier Martin-Artajo, a manager who oversaw the trading strategy from the bank’s London offices; Bruno Iksil, the trader known as the London Whale for placing the outsize bet; and Achilles Macris, the executive in charge of the international chief investment office; were not mentioned by name. The bank said British privacy laws prevented it from naming certain people in the London office.

The report did, however, reiterate earlier concerns about this group’s motivations.

“In the course of the task force’s ensuing work, it became aware of evidence – primarily in the form of electronic communications and taped conversations – that raised questions about the integrity of the marks,” the report said, adding that the bank restated its first-quarter results to reflect that the traders may have underestimated their losses by $459 million.

The Federal Bureau of Investigation is now examining whether the traders falsified records to hide the problems from executives in New York. The investigation is continuing.

This post has been revised to reflect the following correction:

Correction: January 16, 2013

Article source: http://dealbook.nytimes.com/2013/01/16/jpmorgan-report-on-trading-loss-takes-aim-at-top-executives/?partner=rss&emc=rss