The London small fry
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It “is not who is being charged, but who isn’t”. That’s Stephen Gandel’s assessment of the most interesting part of the US government’s case against two JP Morgan employees connected to the bank’s $6.2 billion London Whale loss. Reuters’s Emily Flitter and David Henry write that while the government is charging Javier Martin-Artajo and Julien Grout with fraud, “the complaints make only passing reference to their former bosses”. Conspicuously unmentioned are Ina Drew, who ran the Chief Investment Office, and Achilles Macris, who oversaw the now infamous derivative position.
David Benoit’s who’s who in the whole saga does give Martin-Artajo and Grout top billing, but it’s unlikely that would have been the case before the charges were filed. CEO Jamie Dimon, Drew, and Bruno Iksil — nicknamed the “London Whale” for his role in accumulating those outsized derivative positions — have been far more prominent figures in l’affaire baleine. Iksil has negotiated a non-prosecution agreement with authorities and will be testifying against his former colleagues.
Peter Eavis thinks the government’s case shows that “on Wall Street, bets worth hundreds of billions of dollars are valued using a considerable amount of guesswork”. The problem, Eavis writes, is that Martin-Artajo and Grout chose to value their derivative holdings using what are known as “indicative quotes”, which a bank can advertise without having to trade on, rather than the prices of completed trades.
Deus Ex Macchiato disagrees. Reviewing the nitty gritty of valuation methods, he concludes “there is no platonic ideal of the right price out there waiting to be discovered, especially not for any really big position whether in securities or derivatives”.
Matt Levine looks at the specifics of Grout’s valuations and thinks JP Morgan’s policy required completed trades to be the starting point in valuing derivatives “because trades are just, like, trades, man”. Indicative quotes might, under certain circumstances, be more accurate. Under other circumstances, completed trades might be more accurate. Opacity and complexity at financial institutions, he notes, aren’t exactly limited to banks’ derivatives holdings.
For Levine, the issue isn’t how the derivatives were valued, but why. Intent, in other words, will end up being much more important than the process in and of itself. — Ben Walsh
On to today’s links: