Discuss the dollar amounts of the losses at J.P. Morgan Chase?
The London whale trading scandal has cost J.P. Morgan $ 6.2 billion in trading losses last year. But losses have increased more rapidly as compared to the predication of the experts. After the announcement by Jamie Dimom, the bank’s chief executive, the bank had lost $2 billion in a bet on credit derivatives; he estimated that losses could double within the next few quarters. After this, the bank losses have reached $ 9 billion. The losses occurred due to the bullish trading by Chief investment officer Ina Drew. The profit for the three months to 30 June was down 8.7% from the same period last year but was much higher than analysts' expectations. At the beginning, JP Morgan announced the loss of $ 2 billion because of the London whale scandal. J. P. Morgan has also lost 15% of its market value since the losses are announced.
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Prior to the report card, the Federal Reserve report and the “London whale” episode, what was the perception and reputation of the bank and its CEO, Jamie Dimon?
J.P Morgan is the largest bank in the United States in regards of assets as compared to the other banks. Its assets are $ 2 trillion, and it is one of the largest providers of the financial services also. There was this believe that J.P Morgan posses more power in the market than the money it posses. J.P Morgan had a very strong and trustworthy reputation for investment in the market. It was perceived that J.P Morgan does not investment its money in a bullish trend and does not invest in the stocks, which will prove bad stocks in the future. J.P Morgan holds a good reputation in the white house was also rated as AAA bank by the credit rating companies in America which is the highest ranking any bank can have, the ranking also shows that the company has enough tier I and tier II capital in case of any loss the company has to face in their investments in stocks and bonds. The ranking of the bank is one of the most important factor which an investor have in mind before they invest their money in an investment firm, so the AAA ranking gave J.P Morgan edge over the other banks as investor consider AAA ranked bank a safe place to make an investment. The other important edge, which played an important role in building a good reputation and perception about J.P Morgan, was that it was managing large investment portfolios which were handled by the best qualified chief investment officers, and these portfolios also showed a great return in the past. Also the CEO, Jamie Dimon had a good reputation in the market, as he was listed as the most influential personality by the time magazine for five years. The reason of good reputation was that he had a strong background, which was related to banking and investing industry and also he had managed huge portfolios with great returns.
Evaluate all the bad news about the company this week.
The worst news for the J.P Morgan this week is that J.P Morgan management has been downgraded to level 3 (5 is rated as worst, and 1 is rated as the best). This rating shows that the J.P Morgan risks practice management is less than satisfactory. This news will affect J.P Morgan in a way that it will lose the trust of their investor as they will think that the bank is taking more risk to earn more return, which will also have the possibility to have more loss, and the investor will always prefer to invest in a place where it will have less chance of loss. The rating also shows that the management of the bank also requires improvements. The other bad news for the J.P Morgan is that the committee that is looking over the case of London whale has found out that J.P Morgan ignored risks and misleads their investor while making the investment before the London whale scandals. Which will have an impact on their investors in future as they might think that the bank is misleading us again by showing us more returns on our investment and by hiding the risk which they will be facing on their investment?
How did the "London whale" manage to place trades and rack up losses without internal controls or oversight?
The “London Whale” managed to place trades and rack up losses by ignoring the internal controls and by manipulating the internal documents, which means basically they crossed their limits of investment which a bank set that in a certain portfolio, they will spend a certain amount of money. The bank determines the amount of money which can be invested in a certain area after calculating its tier I capital and tier II capital which is a cushion against the risk which they are taking. The banks have to take calculated risk to earn profit on certain investment if they won’t take any risk the return will be very low and it will not attract many investors towards them. Against these risks, the bank keeps a certain level of capital which can be used to pay back their investors in case of a big loss. So, in the “London Whale” scandal CIO of London office did not follow the rule of the company and she bought credit default swaps on high yield bonds in which the bank would make money if high yield went down as there was a recession in the overall economy of the world the CIO of London office thought that high yield will go down which certainly do in the recession time and she invested more money than the limit of her portfolio and that went against the CIO and the economy should improvement. This caused the loss faced by the bank portfolio.
As Chief Investment Officer, what role would you expect Ina Drew to have played overseeing traders? What actually happened?
What actually happened was that Chief Investment officer Ina Drew did not analyze the economy performance as she should have done. At that time, the overall economy of England and all over the world was in recession. So, keeping this in mind what Ina Drew did that she purchased credit defaults swaps (CDS) on high yield bonds in which the bank would have made money if the high yield bond went down which in case of recessions normally goes down. So, considering it a good opportunity to earn more return Ina Drew invested more money than the limit set by her bank. But this all went against her and the economy showed some improvement rather than going down.
So, as a Chief investment officer the Ina Drew should have the detail analysis of the future trends of the economy before investing its money in high yield bonds. CIO should have followed the asset allocation levels aimed at creating a balanced portfolio of investment which is the duty of CIO to develop. CIO should have helped her peers in conducting the investment research as well as technical analysis in order to make the right decision as where to invest as she blames her juniors for not giving her correct research and analysis about the future trend of the economy. She should have followed the designing and implementing investment process which is the responsibility of CIO to develop
What happened and why did the company seem to ignore or dismiss its own risk metrics?
Risk metrics is in which the company makes a daily report showing and measuring and explaining the risk of the firm. J.P Morgan had risk metrics in its company since 1992 so that they can know the risk company is facing and can also inform the investor that what kind of risk they will be facing by investing in a certain area. What happened was that in greed of earning more return the CIO of London office suggested investing more in the High yield bonds by looking the trends of the economy in the past which has been declining not only in England but all the big economies of the world was also declining. The firm and CEO of the firm was very well aware of the investment the CIO of London office was going to make as she was crossing the limit of her portfolio. But if they had followed their own risk metrics then it would not have allowed them to invest so much at one area and on just previous trends of the economy. So, the reason why they dismissed their own risk metrics was that in greed to earn more returns they wanted to invest more in high yield bonds.
When the CEO calls a problem "a tempest in a teapot" and dismisses its seriousness, how might that affect the company's ability to acknowledge and solve its problems?
Because of the “London Whale” J.P Morgan had to face loss of around $9 billion dollars, and when its CEO calls the problem “a tempest in a teapot” and ignores it seriousness, it will have a mighty affect on the company’s ability to solve the problem which they are facing. As the head CEO of the company is not considering the problem serious the company will not take appropriate steps to solve the problems. In the greed, to earn more return the company went against it risk metrics and faced such problem. Now the decision has been taken, and they cannot undo the decision which they made in the past so they should take the problem seriously specially the CEO of the company and should take the maximum steps to overcome the problem as soon as possible as it will help them to regain the trust of their investor that even if the bank made a bad decision in the past, but after that they are taking steps to overcome the problem and to pay back their investment. But if they will not take the problem seriously than the bank will start losing the trust of its investor and the other potential investor who might be willing to invest with them. As they will think that if in future, the bank make another bad decision and they face loss again, they will again not take that seriously, and it will cause problems for the investors also. So the CEO should take the problem seriously and try to overcome it as soon as possible.
Did Jamie Dimon know and understand the extent of the risks and losses? Did Ina Drew? If your answer is yes, did they do the right things to stem the losses? If your answer is no, does this too represent a problem?
Jamie Dimon the CEO of J.P Morgan was very well aware of the fact that where the CIO of London office is going to invest and what will be the risks and losses of it. But in greed of earning more money, CEO was ready to take the risk and so do Ina Drew; she also knew what will be the risks and losses of the investment. When the economy showed improvement rather than going more down, I think the things which they did to stem the was right. What they did was that after recognizing that CDS was performing poorly as the economy was going down, they invested in the package B which was possibly intended to act as a hedge on package A which were CDS. Writing CDS on investment grade bonds is intend to take advantage of the improving economy, but unfortunately the economy did not improve that much to cover the losses of high yield bonds. But they could have taken more precaution before investing the money in that area, they should have researched the future trend of the economy more carefully rather than going with their intuition that the overall economies in the world is going through the recession, so on this basis the economy will go more down, which went against them.
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