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2013-08-15 09:33:19
Aug 15th 2013, 5:25 by T.E. | NEW YORK
THE charges filed on August 14th by federal prosecutors in Manhattan against
two employees at JPMorgan Chase over the infamous whale trade may fail in
trial. But the step-by-step description in the complaint will probably take on
a life of its own: it is a compelling story of how panicked employees scrambled
to avoid providing daily dollops of increasingly dire news to increasingly
worried supervisors.
The case is a result of actions taken in March, April and May of 2012. Trades
made by JPMorgan to mitigate risk in its lending portfolio backfired,
ultimately leading to more than $6 billion in losses. Early on, as news that
JPMorgan was on the wrong-end of a massive bet began to circulate, the bank s
chief executive, Jamie Dimon, labeled the issue a tempest in a teapot only to
have the comment stuffed in his face as the true scope of the problem was
revealed. Predictably, Preet Bharara, the federal prosecutor for the southern
district of New York, took the opportunity in a crowded press conference at
which he announced the charges to say, This was not a tempest in a teapot.
Two employees face criminal and civil charges: Javier Martin-Artajo, the
supervisor in the area where the disastrous trades were made, and Julien Grout,
who was responsible for valuing positions. Not just one bank, but one trader
within one bank can do catastrophic economic harm , Mr Bharara said at the
press conference. Ironically, this one trader, Bruno Michel Iksil, co-operated
with the investigation and negotiated a non-prosecution agreement.
At the heart of the case is a small group of employees and how they reacted
when faced with growing losses. Mr Bharara faulted JPMorgan for lack of
controls, but whatever the bank s flaws, the problems did not go unnoticed. As
the losses continued to mount, the complaint states, Javier Martin-Artajo,
the defendant was subject to continued and increasing scrutiny and pressure
from executives senior to him. Mr Martin-Artajo, in turn, began pressuring
[others] to mark positions in such a way as to show smaller losses.
Adding to the losses, efforts were also made to defend the positions ,
presumably by doubling down. The most damning element of the prosecution s case
is that the defendants were clear about the misleading nature of what they
reported: for themselves they recorded a more accurate picture.
Notwithstanding the alarming picture of several employees caught in a market
vortex, and notwithstanding what it says about the ability of just a few people
to cause staggering losses, many of the higher ups at JPMorgan will find much
in the indictment that is reassuring. Doubtless controls will be tightened, but
there is nothing in the complaint to suggest the bank was not paying attention.
More nuances may emerge if the case comes to trial. A defense will surely be
that the pricing of complex securities is never precise, and it is plausible to
have a wide range of valuations. Indeed, it would not be inconceivable if the
defendants argued that they had been successful in the past in part because of
a willingness to challenge market prices in their trades.
This touches on perhaps the most interesting aspect of the case: as the
documents accompanying the charges make clear, the division involved in the
trades had been successful in the past. Why did their approach go wrong this
time around? Why were they suddenly in a position where deviating from the
truth was even a temptation?