JPMorgan Chase & Co. could have spotted trouble at its chief investment office long before traders there racked up at least $2 billion in losses. One reason it didn’t: Chief Executive Officer Jamie Dimon.
Dimon treated the CIO differently from other JPMorgan departments, exempting it from the rigorous scrutiny he applied to risk management in the investment bank, according to two people who have worked at the highest executive levels of the firm and have direct knowledge of the matter. When some of his most senior advisers, including the heads of the investment bank, raised concerns about the lack of transparency and quality of internal controls in the CIO, Dimon brushed them off, said one of the people, who asked not to be identified because the discussions were private.
As Dimon encouraged the CIO to take more risk in search of profits, the unit raised limits on positions and sometimes ignored them, the former executives said.
In 2006, Drew hired Achilles Macris, 50, a former co-head of capital markets at Dresdner Kleinwort Wasserstein, to oversee trading in London and carry out Dimon’s mandate to generate greater profits, three former employees said. When JPMorgan acquired Bear Stearns Cos. and Washington Mutual Inc. at fire-sale prices in 2008 and with government support, the CIO’s portfolio more than doubled to $166.7 billion from $76.2 billion the previous year.
The question of CIO oversight arose in the months after the crisis, when top JPMorgan executives heard what Macris and his fellow traders in the London office were doing and raised concerns to Dimon that the unit’s risk management was inadequate, according to the two executives familiar with the conversations.
Among the explanations offered for Drew’s autonomy: There was a so-called Chinese wall between the CIO and investment bank because Drew’s unit was also a client, according to one current and two former executives. The CIO used the investment bank to place and process trades. Drew didn’t trust that division to refrain from using the data to its advantage by offering non-competitive prices or by trading against her, according to a former executive who participated in those talks.
Dimon and what he called his “fortress balance sheet” meanwhile were being lauded by politicians and the media. He steered JPMorgan through the 2008 financial crisis without a single quarterly loss. New York magazine dubbed him “Good King Jamie,” while a biography by Duff McDonald was titled “Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.”
Weiland became concerned that Bruno Iksil, the trader in Macris’s office now known as the London Whale, had amassed a complex and illiquid position, according to two former executives. Weiland, who declined to comment, warned Macris and Drew about the trades on numerous occasions beginning in 2010, the people said. It was a topic of frequent discussions in the CIO’s global weekly meetings, they said.
Early this year, as the size and volatility of its trades were growing, the bank changed the computer-based mathematical formulas for calculating the chief investment office’s VaR. The new model had the effect of understating the risk of losses from Iksil’s trades: It showed an average daily VaR within the CIO of $67 million, about where it stood in the fourth quarter of 2011.
He has said former Fed Chairman Paul Volcker, for whom the rule is named, doesn’t understand capital markets. He quipped that bankers will need psychiatrists to evaluate whether their trades qualify as hedges. Last year he took on Fed Chairman Ben S. Bernanke in a public forum, blaming excessive regulation for slowing a U.S. economic recovery and asking whether anyone has “bothered to study the cumulative effect of all these things.”