Traders at JP Morgan’s London office racked up huge losses in derivatives trades in 2012. Two of the traders involved are facing criminal charges in the US and are denying downplaying the size of their trades to conceal escalating losses.
(The London Whale was the name bestowed to derivatives trader Bruno Iksil, the man thought to be behind the losses.)
US and UK authorities have accused JP Morgan’s upper echelons of having ‘deprived its board of critical information’ relating to the trades, which led to a $6.2bn loss for the bank.
The Securities and Exchange Commission (SEC) said the bank has admitted to certain charges and has pointed to failings in its internal controls.
‘JP Morgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses,’ said George Canellos, co-director of the SEC's division of enforcement.
The fines being lobbed at JP Morgan represent the third biggest banking fine by US regulators and the second largest in the UK. JP Morgan is paying $300m to the US Office of the Comptroller of the Currency (OCC), $200m to the SEC and to the US Federal Reserve, and a tidy £138m ($222m) to the UK’s Financial Conduct Authority (FCA).
‘This is yet another example of a firm failing to get a proper grip on the risks its business poses to the market,’ said Tracey McDermott, the FCA's director of enforcement and financial crime.
‘As things began to go wrong, the firm didn't wake up quickly enough to the size and the scale of the problems. What is worse, they compounded this by failing to be open and co-operative with us as their regulator.’
Chief executive Jamie Dimon emerged from the financial crisis relatively unscathed by scandal, making this one all the more pertinent. With his leadership now under scrutiny, no doubt he’s hoping his acknowledgement of mistakes will put the ugly mess behind him.
‘We have learned from [our mistakes] and worked to fix them. We will continue to strive towards being considered the best bank - across all measures - not only by our shareholders and customers, but also by our regulators,’ he said yesterday.
‘Since these losses occurred, we have made numerous changes that have made us a stronger, smarter, better company.’
Coming out worst in the end are the JP Morgan shareholders who, having seen $6.2bn losses already at the bank, will have to bear the weight of the further loss of $920m. Some have criticised the outcome for not penalising more senior individuals, who ‘must’ have known something about the losing trades. The London Whale may be beached, but any senior managers involved have yet to be caught in the net.