Opinion

Felix Salmon

Counterparties: Ina the belly of the whale

By Ben Walsh
March 15, 2013

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Last night, the Senate Permanent Subcommittee on Investigations released its 307-page report (plus a 598-page appendix) on JP Morgan’s disastrous London Whale trades. The report comes 11 months after trades were first reported, and, as DealBook notes, it details how JP Morgan “ignored internal controls and manipulated documents”, all while withholding information from regulators.

FT Alphaville’s Cardiff Garcia pulls some of the most damning excerpts. For instance, the report says that JP Morgan’s assertion that they had been fully transparent with regulators had “no basis in fact”. Or take then-CFO Douglas Braunstein’s comments on an earnings call that the CIO’s trades were a hedge against rising rates. On page 283, the report says that “none of the scenarios that Mr. Braunstein himself said he relied on indicated that the book functioned as a hedge”. Matt Philips writes that JP Morgan has lost that battle: “JP Morgan now freely admits—including Braunstein under oath this afternoon—that the CIO’s problematic position didn’t act as a hedge” and that the Senate report calls them out as proprietary trades.

When JP Morgan abruptly shifted the way it valued these trades, their internal controller described them as “consistent with industry practices”. But what the controller didn’t say was that JP Morgan’s investment bank valued the exact same securities differently. This may be why regulators described the trade as a “make believe voodoo magic ‘composite hedge.’”

Regulators at the Office of the Comptroller of the Currency don’t come off looking great either. As Matt Levine writes, the report makes it “clear that no one at the OCC had any idea what was going on at JP Morgan, and never asked”. The OCC also didn’t bother to look at publicly available information that could have helped them understand what JP Morgan was withholding.

Jamie Dimon picked the right Congressional hearing to skip. Chairman Carl Levin’s questioning was pointed and specific; the answers he got from the current and former JP Morgan executives present were not. Braunstein repeatedly used the “I don’t recall” trope, sometimes to an absurd extent. Ina Drew, the former head of the Chief Investment Office, largely blamed London-based subordinates — who didn’t testify. In her prepared testimony, Drew says she “did not, and do not, believe I bore personal responsibility for the losses.”

Dimon may have a tougher time dodging the scandal: an email (see page 293 of the report) suggests he approved an increase in the CIO’s risk limits. And when the OCC requested detailed information on the bank’s positions, he replied “you don’t need that level of information”. — Ben Walsh

On to today’s links:

EU Mess
Mario Draghi is now lecturing Europe about its labor practices – Reuters
The sad reality of doing business in Spain – Testosterone Pit

Comparisons
The stock market and the economy are basically “two staggering drunks connected by a long rope” – Peter Coy

Apple
Samsung is doing at least one thing much better than Apple – Christopher Mims

Alpha
Steve Cohen’s SAC will pay more than $600 million to settle insider trading allegations – Reuters
SEC’s full release for the “largest-ever settlement for insider trading case” – SEC

Oxpeckers
Infinite Supply: Ad rates are sinking in web media’s big growth sector – WSJ
The many flavors of native content – Felix

Remuneration
“Women who marry later make more money per year than women who marry young” – Atlantic

Primary Sources
The Council of Economic Advisers 2013 report to the President – White House
The Fed’s full report on bank capital plans – Federal Reserve

Terrifying
Grapefruit juice can cause deadly drug interactions – CBC

Alpha
John Paulson is not moving to Puerto Rico – Market Watch

Wonks
There’s no reason to freak out about high bond yields - Market Monetarist

New Normal
Young Americans are way broker than their parents – NYT

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