Why Investigators Need to Look Into Jamie Dimon’s Role in the London Whale Case
Posted by Wallace Turbeville on August 12, 2013
The London Whale has surfaced again. The lingering question is whether the investigations will prove that whales, like fish, rot from the head.
In the early months of 2012, JP Morgan Chase’s Chief Investment Office in London racked up $6.2 billion or so in losses as a complex strategy for trading credit default swaps spun out of control. The CIO was originally tasked with investing excess deposit funds and reducing bank risk by hedging, but along the way it started making profits and management allowed it to morph into a trading operation. An investigation by the Senate Permanent Subcommittee on Investigations found, among many other things, that employees changed the procedure for valuing holdings so as to to mask losses. It has been widely reported that the US authorities are seeking the arrest of two employees involved in the valuation change, Javier Martin-Artajo and Julien Grout, in London. Bruno Iskil, the London Whale himself, may be assisting the investigation.
Far more importantly, the report says that JP Morgan Chase may be negotiating a settlement with the SEC that admits its fault in the episode. The admission of fault by a major Wall Street bank in such a proceeding would be a breakthrough in the post financial crisis world.
The question is how far the fault admission goes. The London Whale caper is remarkable because motive is somewhat elusive. The losses were significant, but in no way materially threatened the underlying health of JP Morgan Chase. That lower level employees, like Iskil, Martin-Artajo and Grout, would fiddle the numbers to hide losses to attempt to protect themselves is an understandable narrative. But if the fault is limited to failure in oversight of these employees, the process would fall far short of its potential.
The news reports speak of a third government process, a possible investigation by the FBI and federal prosecutors of misrepresentations to investors by JP Morgan Chase in a 2012 teleconference meeting, during the period that Jamie Dimon was referring to the London Whale as a “tempest in a teapot.” This is potentially the most important thread of the investigation, but it is also the most complex. The participants in the call included Dimon and then-CFO Douglas Braunstein. The language used in the teleconference was studied, with clear input from the legal team. The question is what the JP Morgan Chase leadership team knew of the effort to minimize the consequences of the London Whale in the months prior and why would they have risked so much for a problem that could be solved by writing a check from available funds.
The Senate Permanent Subcommittee on Investigation’s report clearly depicts a senior management that had contempt for regulators and rules. I have suggested in previouspostings that this culture of contempt was the real reason for the recent shareholder initiative to strip Dimon of one of his two titles, Chairman and CEO. And the flood of government investigations of the bank, everything from electricity market price manipulation to mortgage practices, underscores this terrible flaw.