JPMorgan’s Iksil said to take major risks years before loss

Losses approached $2 billion

JP Morgan JP Morgan

June 1 (Bloomberg) -- JPMorgan Chase & Co. trader Bruno Iksil, known as the London Whale because his bets this year were so large, has been a leviathan of a risk-taker since at least 2010, a person with knowledge of the matter said.

Iksil’s value-at-risk, a measure of how much a trader might lose in one day, was typically $30 million to $40 million even before this year’s buildup, said the person, who wasn’t authorized to discuss the trades. Sometimes the figure, known as VaR, could surpass $60 million, the person said. That’s about as high as the level for the firm’s entire investment bank, which employs 26,000 people.

Investigators are examining how long senior executives knew about Iksil’s swelling bets at the chief investment office before losses approached $2 billion. One focal point is why the formula used to calculate Iksil’s VaR was altered early this year, cutting the reported risk by half. The change followed an internal analysis in late 2011 and was approved by top risk executives, said a person close to the bank. About the same time, half a dozen managers typically involved in such decisions moved to new jobs.

“If it was something that had that large an impact, it would have to be agreed to at the very-most-senior level within risk management,” probably including the bank’s chief risk officer, said Steve Allen, a former head of risk methodology for JPMorgan who retired in 2004. “You’re not going to make a change of that magnitude on the basis of one risk manager.”

Unexplained Change

JPMorgan hasn’t detailed how or why the New York-based lender altered the VaR formula. The changes -- and the timing of the firm’s disclosures about them -- are the focus of an inquiry by the U.S. Securities and Exchange Commission, Chairman Mary Schapiro told a congressional panel on May 22. Shares of the bank, the biggest in the U.S., have tumbled 25 percent since April 5, when Bloomberg News first reported on Iksil’s trades.

Chief Executive Officer Jamie Dimon, 56, has since suspended the bank’s $15 billion share buyback program and replaced executives who oversaw the errant trades. Dimon has said the losses could grow and that it might take the rest of the year to liquidate trades at the unit, which is charged with managing the bank’s idle cash to earn a profit while minimizing the company’s risk.

Iksil, who joined JPMorgan in 2005 according to U.K. regulatory records, was given more leeway than many traders because he produced outsized gains during previous years -- including more than $100 million in 2011, said a person close to the bank.

Whale Watching

His bosses may not have understood the complexity of his trades, said the person, who asked for anonymity because the information hasn’t been released publicly. Executives and risk managers in the chief investment office were aware of Iksil’s positions because they met every Thursday morning to discuss the unit’s trades, the person said.

Iksil was assigned to devise hedges and make trades to counter the risk that a faltering economy might lead to a surge in losses on corporate loans or bonds. By 2010, the VaR on his trading book was about half of that for JPMorgan’s entire chief investment office, which at the time also oversaw more than $300 billion of securities, according to a person with direct knowledge of the CIO’s operations.

VaR represents the maximum JPMorgan traders would expect to lose on 95 out of 100 trading days, according to quarterly filings with regulators. It is calculated daily, and the average for a quarter is reported in regulatory filings.

Flawed Formulas

While there’s no estimate of what the losses might be on the worst days, a string of daily losses exceeding the VaR can be a warning that the formulas are flawed or that markets have turned unusually volatile. Dimon had encouraged the once- conservative CIO operation, run by Ina Drew, to boost profit by buying higher-yielding assets such as structured credit, equities and derivatives, Bloomberg News reported on April 13.

Banks and their traders have multiple computer models to estimate potential swings in profits and losses. Value-at-risk is among the most crucial because it’s reported to investors in filings that are reviewed by the SEC. Any changes to the model’s characteristics are supposed to be disclosed, Schapiro said.

The bank produces more than half a dozen VaR barometers for different parts of the firm, and the chief investment office gets one of its own. Toward the beginning of this year, the bank changed the mathematical formulas used to calculate VaR for that unit, Dimon said on May 10, without elaborating on the reasons.

Next page: Quarterly rise

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