JPMorgan Chase & Co. trader Bruno Iksil, known as the LondonWhale because his bets this year were so large, has been aleviathan of a risk-taker since at least 2010, a person withknowledge of the matter said.

Iksil's value-at-risk, a measure of how much a trader might losein one day, was typically $30 million to $40 million even beforethis year's buildup, said the person, who wasn't authorized todiscuss the trades. Sometimes the figure, known as VaR, couldsurpass $60 million, the person said. That's about as high as thelevel for the firm's entire investment bank, which employs 26,000people.

Investigators are examining how long senior executives knewabout Iksil's swelling bets at the chief investment office beforelosses approached $2 billion. One focal point is why the formulaused to calculate Iksil's VaR was altered early this year, cuttingthe reported risk by half. The change followed an internal analysisin late 2011 and was approved by top risk executives, said a personclose to the bank. About the same time, half a dozen managerstypically involved in such decisions moved to new jobs.

“If it was something that had that large an impact, it wouldhave to be agreed to at the very-most-senior level within riskmanagement,” probably including the bank's chief risk officer, saidSteve Allen, a former head of risk methodology for JPMorgan whoretired in 2004. “You're not going to make a change of thatmagnitude on the basis of one risk manager.”

JPMorgan hasn't detailed how or why the New York-based lenderaltered the VaR formula. The changes — and the timing of the firm'sdisclosures about them — are the focus of an inquiry by the U.S.Securities and Exchange Commission, Chairman Mary Schapiro told acongressional panel on May 22. Shares of the bank, the biggest inthe U.S., have tumbled 25 percent since April 5, when BloombergNews first reported on Iksil's trades.

Chief Executive Officer Jamie Dimon, 56, has since suspended thebank's $15 billion share buyback program and replaced executiveswho oversaw the errant trades. Dimon has said the losses could growand that it might take the rest of the year to liquidate trades atthe unit, which is charged with managing the bank's idle cash toearn a profit while minimizing the company's risk.

Iksil, who joined JPMorgan in 2005 according to U.K. regulatoryrecords, was given more leeway than many traders because heproduced outsized gains during previous years — including more than$100 million in 2011, said a person close to the bank.

Whale Watching

His bosses may not have understood the complexity of his trades,said the person, who asked for anonymity because the informationhasn't been released publicly. Executives and risk managers in thechief investment office were aware of Iksil's positions becausethey met every Thursday morning to discuss the unit's trades, theperson said.

Iksil was assigned to devise hedges and make trades to counterthe risk that a faltering economy might lead to a surge in losseson corporate loans or bonds. By 2010, the VaR on his trading bookwas about half of that for JPMorgan's entire chief investmentoffice, which at the time also oversaw more than $300 billion ofsecurities, according to a person with direct knowledge of theCIO's operations.

VaR represents the maximum JPMorgan traders would expect to loseon 95 out of 100 trading days, according to quarterly filings withregulators. It is calculated daily, and the average for a quarteris reported in regulatory filings.

While there's no estimate of what the losses might be on theworst days, a string of daily losses exceeding the VaR can be awarning that the formulas are flawed or that markets have turnedunusually volatile. Dimon had encouraged the once-conservative CIOoperation, run by Ina Drew, to boost profit by buyinghigher-yielding assets such as structured credit, equities andderivatives, Bloomberg News reported on April 13.

Banks and their traders have multiple computer models toestimate potential swings in profits and losses. Value-at-risk isamong the most crucial because it's reported to investors infilings that are reviewed by the SEC. Any changes to the model'scharacteristics are supposed to be disclosed, Schapiro said.

The bank produces more than half a dozen VaR barometers fordifferent parts of the firm, and the chief investment office getsone of its own. Toward the beginning of this year, the bank changedthe mathematical formulas used to calculate VaR for that unit,Dimon said on May 10, without elaborating on the reasons.

Quarterly Rise

The new formula showed average VaR for the chief investmentoffice stood at $67 million, according to a regulatory filing onApril 13, the day JPMorgan reported first-quarter results. WhenJPMorgan reverted to the old model, it showed the average VaR was$129 million, and that the figure ballooned to $186 million at theend of the period, a May filing showed.

“We implemented a new VaR model, which we now deemedinadequate,” Dimon said. “We went back to the old one, which hadbeen used for the prior several years, which we deemed to be moreadequate.”

Iksil alone may have amassed a $100 billion position this yearin contracts on one credit-derivative index, counterparts at hedgefunds and rival banks said in April. The holdings amounted to tensof billions of dollars under the firm's own math, a person familiarwith JPMorgan's view has said.

The VaR changes may have allowed or encouraged Iksil or othertraders in the chief investment office to take bigger positions,said David Hendler, an analyst at CreditSights Inc.

“It's possible that when the new model said, 'Hey, we can put onmore risk,' they did,” he said. “And then when they went back tothe old model, they saw, 'Oh my God, our risk is much higher thanwe thought.'”

The bank is conducting its own probe into the CIO's losses andplans to report on the findings, said Kristin Lemkau, a bankspokeswoman. Dimon is scheduled to testify June 13 before theSenate Banking Committee, and will be asked to appear June 19 atthe House Financial Services Committee, a person familiar with theplans has said.

Dimon didn't mention Iksil by name on May 10, when the CEO firstdisclosed the losses and the decision to revert to the old versionof VaR. “There are constant changes and updates to models, alwaystrying to get them better than they were before,” Dimon said.

In practice, such updates typically occur no more than once ayear, said a former JPMorgan risk manager who asked not to beidentified to avoid alienating the bank. Lesley Daniels Webster, aformer head of market and fiduciary risk management at JPMorgan,said that new models are usually tested “in parallel” with oldmodels for about three months to make sure they're working properlybefore being used.

Signing Off

“There's a formal approval process for the adoption of a newmodel,” said Daniels Webster, who retired in 2005 and runs her ownrisk-management firm, Daniels Webster Capital Advisors, based inNaples, Florida. “Somebody has to sign off.”

Allen, the other former JPMorgan risk manager, said that a modelchange big enough to reduce the VaR by half probably would needapproval from the chief risk officer, especially if a trading bookis unusually large.

Dimon said in April 2009 that he doesn't pay much attention toVaR and has criticized the gauge when analysts questioned him inpast years about its levels. VaR is “a very imperfect number” that“bounces around all the time,” he said on a Jan. 18, 2006,conference call.

U.S. banks were warned last year by the Office of theComptroller of the Currency to closely scrutinize the possibilitythat computer models used to calculate VaR might not be properlydesigned or calibrated.

“The use of models invariably presents model risk, which is thepotential for adverse consequences from decisions based onincorrect or misused model outputs and reports,” according to theApril 4, 2011, document from the OCC, which supervises JPMorgan'sprimary banking subsidiary. “Model risk can lead to financial loss,poor business and strategic decision-making or damage to a bank'sreputation.”

JPMorgan's team that handled such matters was on the verge of ashakeup that involved at least six management changes in late 2011or early this year within the chief risk office, chief investmentoffice and treasury. The personnel changes may have contributed tolapses in risk management, said the person close to thecompany.

Barry Zubrow, 59, a Goldman Sachs Group Inc. veteran who washired by JPMorgan in November 2007, served as chief risk officerthrough Jan. 12, when Dimon shifted him to oversee regulatory,public relations and lobbying strategy. His replacement was JohnHogan, 45, who oversaw risks within JPMorgan's investment bankduring the U.S. subprime mortgage crisis in 2008 and 2009.

People in Motion

Hogan, after being named chief risk officer in mid-January,didn't announce his new management team — including his ownsuccessor — until Feb. 13, so he was doing both the new job and theold job for about a month, according to the person close to thebank. A chief risk officer signed off on the VaR change, which tookeffect in January, the person said. It couldn't be determinedwhether Zubrow or Hogan signed off, and neither responded to phonecalls seeking comment.

The new team included Irvin Goldman, 51, who had been overseeingstrategy at the chief investment office, as the unit's chief riskofficer. He replaced Peter Weiland, who remained with the bank ashead of market risk for the investment office, reporting toGoldman.

Goldman, Zubrow's brother-in-law, had been fired in 2007 byCantor Fitzgerald LP for money-losing bets that led to a regulatorysanction of the firm, Bloomberg reported on May 20. Regulatorsdidn't accuse Goldman of wrongdoing.

Evan Kalimtgis, 42, who co-headed risk management for the $355.6billion book of securities in the investment office, quit in Marchafter learning that Goldman would become his new boss, people withknowledge of the move said. Kalimtgis, who until mid-2011 wasoverseeing market risks in the London CIO office where Iksilworked, said he couldn't comment. Keith Stephan succeeded Kalimtgisas head of market risk in the London office, two people withknowledge of the matter said.

Andrew Abrahams, who had been head of quantitative research andmodel oversight at JPMorgan, reporting to the chief risk officer,retired in May, according to his profile on the website LinkedIn.He's now an instructor at Stanford University near Palo Alto,California, where in January he taught a seminar on “model risks,safeguards and new directions,” according to the school'swebsite.

Leaving the Bank

“My departure from JPMorgan was planned from the middle of lastfall, and had nothing to do with the current news story,” Abrahamssaid in an interview. He said that while his official retirementdate was in May, he wasn't physically present after the end of2011. Abrahams was succeeded by C.S. “Venkat” Venkatakrishnan,according to a Feb. 13 memo from Hogan.

Joseph Bonocore, 44, a former finance chief in the CIO who waspromoted in November 2010 to become the bank's treasurer, quit inOctober to join Citigroup Inc. The job stood open for five monthsuntil prime-brokerage and futures chief Sandie O'Connor, 45, waspromoted to the post in March. The treasurer shares responsibilitywith the chief investment officer for managing “capital, liquidityand structural risks of the firm,” according to JPMorgan's annualreport.

Drew, 55, who as chief investment officer oversaw Iksil'strades, resigned on May 14 and was replaced by Matthew Zames, 41,who had headed fixed-income trading. Goldman was stripped of hisduties in May, though he remains at the firm, according to a personfamiliar with the situation.

After Dimon held the May 10 conference call to announce thederivatives-trading losses, Hogan sent an internal memo urging hisemployees in the risk department to “remain vigilant.”

“Our focus is no surprises,” Hogan wrote. “Remember, as anindependent oversight function, it's our responsibility to escalateearly and often.”

That oversight extends to JPMorgan's chief investment office,which in 2008 and 2009 started expanding its use of creditderivatives to hedge its holdings against an economic slump. Theshift was led by Drew's top deputy in London, Achilles Macris, whoin turn oversaw Iksil's boss, Javier Martin-Artajo, people withknowledge of the matter said.

Iksil was assigned to design those hedges and execute trades.Last year, Iksil made a bearish bet on an index of creditderivatives, speculating that one or more companies included in theindex would default before trading contracts expired in December,according to market participants at hedge funds and banks. Somehedge funds were taking the opposite view.

Winning Bet

Iksil's bet won out, and the hedge funds faced losses of 25percent, when American Airlines parent AMR Corp. filed forbankruptcy less than a month before the insurance-like swapsmatured, the market participants said. The trades were made inso-called tranches of the index, which concentrates risks on themember companies.

Traders sometimes complain about VaR models that “have adverseeffects on the business,” and they're “less likely to challenge anoutcome that results in an advantage for them,” according to theOCC supervisory guidance.

The agency said May 14 that it was examining the losses atJPMorgan, including “details related to the specific transactionsas well as the surrounding risk-management processes that resultedin this unexpected loss.”

The Federal Reserve, as JPMorgan's holding-company supervisor,is studying organizational issues around the trading loss to assurethat they aren't repeated in other areas of the firm, BarbaraHagenbaugh, a spokeswoman for the central bank, said on May 15.

The most common reasons for altering a VaR model include changesin the range of historical pricing data used to estimate thepotential swings and revisions in the amount of hedging activitythat's allowed as an offset, said Daniels Webster, the ex-JPMorganrisk manager.

Some of the toughest questions about the VaR changes may bereserved for the executives who approved them, she said.

“There is no one VaR model out there that is recognized as thesine qua non,” Daniels Webster said, invoking the Latin forsomething indispensable or essential. “So we're dealing withjudgment.”

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