Page 57 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

how to RoB A BANK
e London Whale and Losing a Seat at the Negotiating Table
In May of 2012, JP Morgan announced losses in excess of USD 2 billion relating to derivative trading positions. is was soon revised to losses that could exceed USD 9 billion under worst-case scenarios. As it happens, the actual loss that JP Morgan incurred in what is known as the “London Whale” trade is somewhat intractable to calculate, owing to the egregious fact that certain of the trading positions that they held in di erent units within the bank actually cancel out portions of their losses. It is estimated that the total loss was of the order of USD 6 billion.
e notion of losing money through complex derivative trading positions was at the time not necessarily worthy of regulatory attention. It was rather the size of the losses on positions taken in complex credit default swaps (CDS), as well as the sources of the positions that drew regulatory attention.
A trader by the name of Bruno Iksil, who later earned the illustrious nickname “ e London Whale”, had taken the initial oversized CDS positions. What was most disturbing about the trades is that they were not taken by a Nick Leeson-type rogue trader, sitting in an o ce in Singapore. ey were enormous risky bets taken by a trader reporting directly into the Chief Investment O ce (CIO), which itself reported directly into Jamie Dimon, the CEO of the bank. e mandate of the CIO unit included “faithfully executing strategies demanded by the bank’s risk management model”.
To fully understand the extent to which this unit traded positions that did not enhance risk management within the bank to any degree at all, one needs to look at the trades themselves. Iksil had basically taken an enormous market-moving bet that the spread between LIBOR (London Interbank O ered Rate) and the implied yield of investment-grade corporate debt – based on the price at which listed corporate debt traded on the market – would narrow.
LIBOR is the rate at which banks will lend to each other within the interbank market, and it is generally a rate that does not take cognisance of any credit risk spread. Corporate debt – even corporate debt of the highest investment-grade standards – usually has embedded in its rate
“In May of 2012, JP Morgan announced losses in excess of USD 2 billion relating to derivative trading positions. is was soon revised to losses that could exceed USD 9 billion under worst-case scenarios.”
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