Who is to blame for Ina Drew’s downfall?
Susan Dominus has a big 7,500-word NYT Magazine feature on the rise and fall of Ina Drew, featuring a couple of bland quotes from Jamie Dimon but nothing — nothing on the record, at least — from Drew herself. (We’re told explicitly about four different people who declined to comment when approached by Dominus, including “London Whale” Bruno Iksil and his boss Achilles Macris; Drew is not one of the four.)
The story, as Dominus presents it, is a tragic one. Drew was a highly competent and highly successful trader, who used her deep knowledge of the markets to stay one step ahead of the quants and the rocket scientists who coveted her job. But then she decided that she needed a group of quants and rocket scientists herself, and after she came back from her year-long battle with Lyme disease, which kept her out of the office for most of 2010, she never really regained full control or understanding of what the London office was getting up to.
Dominus actually puts forward two subtly different narratives of what went wrong. The first is that the quants ultimately managed to snow her — that in her final months at JP Morgan, Drew basically didn’t know what was going on in London, and was out of her depth:
At some point in December of last year, a former executive from the group says, Drew checked in with Macris and Martin-Artajo about the position while the two men were in New York. They answered, but the executive, who understood the trade, remembers thinking that they did not give as full an answer as they could have. “I think they glossed over details to the point where Ina knew the product, the size they were trading, but she did not know what the true P.& L.” — profit and loss — “impact could possibly be in a stressful scenario,” he said. She was asking the right questions, he said, but did not seem to be picking up on what was not being said…
By the second week in May, the stress had taken a toll. A colleague saw Drew walking around the executive floor, her mascara smeared. A slight tremor in her hand left over from her illness seemed worse, a physical symbol of her emotional state. Although she still came to work dressed impeccably, she had lost weight and looked somber, almost shut down. The week that the bank decided to make a public disclosure, 20 senior people gathered in a meeting room on the 47th floor. Everyone went around the room and spoke about what they had found out and what still needed to be learned. After about 45 minutes, with the meeting drawing to a close, Drew, uncharacteristically, still had not said a word. Finally, John Hogan, the chief risk officer for the bank, asked: “Does anyone need anything? Need some help?” Drew raised her hand. “I need help,” she said. It was a white flag.
But there’s a second narrative, too — which is that the trades were actually not completely stupid, that they could actually have worked out OK in the end, and that it wasn’t the markets so much as “complicated, interlocking human dynamics” which ultimately did Drew in:
Maybe Drew still believes — as Macris does, according to people at the bank — that the position could have worked out given enough time. Maybe if she had asked the right questions sooner, her traders would have been forced to clarify or she would have sensed danger before it went out of control. Many systems failed and perhaps, too, her judgment.
Drew was someone known for her grasp of the big picture, for internalizing historical trends and economic cycles to the point where her gut instincts were almost always right. She was also someone known for having a personal touch. But in this instance, she seemed incapable of grasping the complicated, interlocking human dynamics that can’t be measured by reassuring models — the idea that a position could be leaked, that the press might bear down, that the regulatory environment could compound all those problems.
This narrative is much less believable. For one thing, pretty much all positions work out “given enough time”. But markets are all about timing. This argument sounds suspiciously similar to the testimony of Joe Cassano to the Financial Crisis Inquiry Commission: hey, if you hadn’t forced me to unwind my positions, my positions would have ended up making money! It’s a pretty silly argument from anybody who’s been in the market for more than about five minutes, and it’s especially silly were it to come from someone like Drew who has been a trader for decades.
And more generally, the whole point of being a trader with gut instincts, rather than a quant staring at computer models, is that you’re reacting to the whole world — the real, messy world, where hedge funds will leak your positions to the WSJ and Bloomberg, and where regulators don’t like nasty surprises — rather than just to the easily-tractable numbers in a VaR model.
With hindsight, it’s clear that Ina Drew was in some ways a human version of one of those clever financial strategies which works until it doesn’t. She was by all accounts an excellent manager with incredibly loyal staff — except when she set up the London office of the CIO, which managed the lion’s share of her billions, and which didn’t respect her at all. As a trader, Drew was extremely attuned to the vicissitudes of the markets — at least until she took her leave of absence, after which her fabled spidey-sense seems to have deserted her.
What’s missing from Dominus’s story is any indication of whether or how Drew was actually managed. Over her years at Chemical Bank, as it slowly transformed and grew into today’s JPMorgan Chase, Drew amassed ever-increasing quantities of money and power. Eventually, as Dominus says, she “had direct control over more money than most players on Wall Street — on the level of the top asset managers in the country, including BlackRock and Pimco”. The trader had become an asset manager, and in a very real sense she was competing with the rest of the bank: before anybody at JPMorgan could lend out a single dollar, they essentially had to persuade Jamie Dimon that the risk-adjusted returns from doing so would exceed the returns which he could get by just giving that dollar to Ina.
Drew was very good at managing and investing the money she was given, and the reward for that skill was that she got given ever-greater amounts of money — over $350 billion, in the end. But at that point, her job had changed both qualitatively and quantitatively from the job she had proven herself good at. Qualitatively, much less of her job involved trading rates in New York, and much more of it involved highly-complex derivatives trades in London, something she was never particularly comfortable with. And quantitatively, running $350 billion is both a blessing and a curse. On the one hand, you can “whale” on the market and push your counterparties around, much like a poker player with a monster stack. On the other hand, if you ever do get forced to unwind your position, you’re toast.
The big difference between Drew and pretty much everybody else on Wall Street is that she never needed to unwind anything: during the crisis, when everybody else was panicking and deleveraging, her positions only grew. In many ways, she was one of the biggest recipients of everybody else’s forced unwinds. But then, when the tables were turned, she proved to be just as human as everybody else.
One man, more than anybody else, had the job of looking at that $350 billion pot of money and wondering whether it was simply too big. And there’s no indication that Jamie Dimon ever did that. Bank clients, borrowers: they had position limits. But Ina Drew never did: she would happily accept all the money Dimon funneled her way. In a weird way, she wasn’t just Dimon’s employee, she was also his counterparty: she was the person with whom he would entrust JP Morgan’s balance sheet when he had nothing better to do with it. And it doesn’t seem that anybody at JP Morgan was worried about that particular counterparty risk — not even when Drew was out of the office for a year, and especially not when she returned to increasingly fractious internal politics.
If there’s a villain in this story, then, it’s not Iksil or Macris or anybody in London: it’s Dimon. The buck stops with him, and yet he’s somehow emerged largely unscathed, with a stock price back in pre-Whale territory and a glossy double-page Annie Leibovitz portrait in Vanity Fair. Dimon’s ego has only grown since the whale crisis: “Honestly, I don’t care what second-guessers say in life,” he tells Dominus. “If anyone in the company knew, they should have said something.”
The question, of course, is whether Dimon would have listened. Dimon needed his own spidey-sense: he needed to be able to tell the difference between vicious internal politics and back-stabbing, on the one hand, and genuine reports of risk-management failures, on the other. When it came to the CIO, he couldn’t do that. And it’s far from clear that he’s learned his lesson.