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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?