‘London Whale’ Sounded an Alarm on Risky Bets

| March 5, 2013 | 0 Comments

The J.P. Morgan Chase JPM +0.79%& Co. trader known as the “London whale” tried to alert others at the bank to mounting risks months before his bets ballooned into more than $6 billion in losses, according to people familiar with emails reviewed by J.P. Morgan and a U.S. Senate panel.

The apparent reservations of Bruno Iksil, who earned the nickname after making outsize wagers in debt markets, are among the details being examined by the Senate Permanent Subcommittee on Investigations, according to people familiar with the probe.

In one instance, Mr. Iksil told another trader that the size of his bets was getting “scary,” according to emails in a Jan. 16 report by J.P. Morgan and to the people familiar with the emails.

Mr. Iksil’s emails, according to people familiar with them, show there was concern within J.P. Morgan’s chief investment office before Chief Executive James Dimon dismissed as a “tempest in a teapot” reports on the whale trades, including an April 6 article in The Wall Street Journal. The New York company first disclosed the trading losses in May, and Mr. Dimon subsequently said he was wrong to have played down concerns raised by the news report.

The panel, led by Sen. Carl Levin, D-Mich., also is looking into whether J.P. Morgan failed to disclose crucial information to its primary bank regulator, the Office of the Comptroller of the Currency, and whether the OCC failed to press the bank for details about how it managed its risks. The bank acknowledged previously that its information was wrong early in 2012.

The OCC prepared an assessment of its performance and shared it with the subcommittee, said people familiar with the OCC report. It isn’t known if the subcommittee intends to release the OCC document. The subcommittee declined to comment.

Mr. Iksil kept trading early in 2012 even as he expressed doubts to his bosses, and managers didn’t stop his trading until late March, the emails show, according to the people familiar with them.

Even Mr. Iksil didn’t seem prepared for how heavy the losses eventually would become, according to the emails, suggesting that he, too, was surprised by the deep and sudden trading losses.

The Senate report is expected to offer details about the skepticism of Mr. Iksil, whose trades ultimately led to the losses and the departure of several executives and traders.

A J.P. Morgan spokesman said the company already has commented extensively on the matters in prior reports, one of which highlighted a trader’s worries without naming the trader.

Emails reviewed by the subcommittee and J.P. Morgan show Mr. Iksil was worried about the trades as early as January 2012, according to the people familiar with them.

Mr. Iksil and another London trader, Javier Martin-Artajo, also suspected in early 2012 that other traders in a different part of J.P. Morgan leaked their positions to outside hedge funds and took opposing positions to those held by Mr. Iksil’s group; both later communicated these suspicions to internal investigators, said people familiar with the case. News of the alleged leaks was reported this week by Reuters. Those concerns were conveyed to the U.S. Securities and Exchange Commission and the U.S. attorney’s office for Southern District of New York, one of these people said.

J.P. Morgan, the U.S. attorney’s office and the SEC declined to comment on those allegations.

J.P. Morgan’s report following its own investigation, which included interviews with Mr. Iksil, showed traders raising questions early in 2012. The bank redacted the names of London traders in its 129-page report released in January after a British regulator asked J.P. Morgan to keep the names out.

Messrs. Iksil and Martin-Artajo were key members of the London team that built a complicated, bearish position in an index that tracks the health of a group of investment-grade companies. Last year, the bets morphed into a not-easily-liquidated position on corporate credit. The wagers accumulated losses when the traders added to their positions instead of unwinding them and the market went the other way.

On Jan. 30, 2012, according to emails in J.P. Morgan’s report and the people familiar with the emails, Mr. Iksil said to Mr. Martin-Artajo that the size of the positions was becoming “scary” and suggested that the bank’s chief investment office should take losses, or “full pain,” immediately. Mr. Iksil then asked for a Feb. 3 meeting with his managers, including Chief Investment Officer Ina Drew.

Mr. Iksil told Ms. Drew the portfolio could lose an additional $100 million and that it was possible J.P. Morgan didn’t have the right positions in place. To Mr. Iksil, Ms. Drew didn’t appear overly concerned by this potential $100 million loss. Ms. Drew, who left the bank following the disclosure of the losses, didn’t respond to a call seeking comment.

One week later, Mr. Iksil told those who attended the Feb. 3 meeting aside from Ms. Drew that he would need to expand his positions. He was told to proceed, while concentrating on managing profits and losses. He and the other traders added to their trades in February. Losses reached $169 million by the end of that month.

At one point, Mr. Iksil told a trader to stop trading a certain credit index because he wanted to observe its behavior. He told Mr. Martin-Artajo about his plans, but Mr. Martin-Artajo, who was Mr. Iksil’s direct superior, told him to keep trading.

In March, traders overseeing the positions began to discuss whether they should place higher estimates for the values of certain trading positions of the CIO group, a step crucial in how they viewed the positions and reported them to investors and other outsiders. On the last day of the first quarter, Mr. Martin-Artajo asked Mr. Iksil to reduce an estimate of losses that day to $200 million from $250 million and encouraged him to keep trading despite orders from Ms. Drew to stop. The loss reported at the end of that day was $138 million.

After the Journal reported on April 6 that Mr. Iksil’s trades were roiling debt markets, Ms. Drew told the bank’s operating committee that losses were manageable. On April 8, Mr. Iksil sent a draft presentation to Mr. Martin-Artajo saying additional losses could hit $500 million but were more likely to be $150 million to $250 million.

But on April 10, losses mounted again, and traders were at odds over how bad it could get. The estimates for that day ranged from $5 million to $700 million; the final number landed at roughly $400 million.

After Mr. Dimon told analysts on April 13 that concerns were a “tempest in a teapot,” losses ballooned by $117 million the following week. Then, on six trading days between April 23 and April 30, losses went up by nearly $800 million more. The losses caused Mr. Dimon and other top executives to question whether the traders “adequately” understood the trading portfolio “or had the ability to properly manage it,” J.P. Morgan said in its Jan. 16 report.

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