Pay close attention to the timings in JPMorgan’s internal report

February 1, 2013

By late January last year, not even the London Whale himself thought the massive derivatives bets that eventually cost the bank $6.2 billion were such a good idea.

The Wall Street Journal reported today that Bruno Iksil, the credit trader nicknamed ‘the London Whale’ for the outsized positions he took in the small market for the CDX Index, warned his bosses a year ago that the size of his desk’s positions had gotten “scary.”

JPMorgan admitted as much in the internal report it released to the public on Jan. 16, but kept Iksil’s name out of emails quoted in the report, supposedly to protect UK privacy laws. The Journal got confirmation that Iksil was indeed the author of the emails, and that he made a presentation expressing his worries to the bank’s chief investment officer, Ina Drew, on Feb. 3, 2012.

According to JPMorgan’s report, Drew “appeared not to be overly concerned” when Iksil told her that the portfolio with the CDX positions could lose up to $100 million.

Could that be the key to why JPMorgan had to restate its first quarter earnings report after admitting in July that the losses the chief investment office incurred on the CDX trades were bigger than it expected? If Drew had listened to Iksil, she would perhaps have been able to warn her bosses before then-CFO Doug Braunstein signed off on the first-quarter earnings report released in April.

As the Journal has demonstrated, JPMorgan’s report is richer with news than it may first have appeared to be. Specifically, the timing of the first alarms CIO employees raised about the CDX positions deserves some closer scrutiny. How was buzz of fear inside the CIO able to be contained, when other aspects of the losses, such as Iksil’s complaint to JPMorgan’s compliance department that the CIO was being squeezed by the investment bank, were not?

If JPMorgan’s top managers knew sooner than April about the CIO’s enormous CDX positions and the storm they were causing in the CDX market, the bank could have a harder time fending off shareholder claims and smoothing things over in Washington. Iksil’s alert also makes it hard to believe he would have tried to cover up losses by marking the CDX positions at a higher value than they deserved, as a JPMorgan report last summer suggested he and others might have done. The U.S. criminal investigation into that matter is still underway. Anyone looking for culpability would have to admit that in this case, timing is everything.

And maybe the traders in the London CIO office weren’t as much the reckless cowboys the bank has made them out to be.

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