JPMorgan ordered by Fed, OCC to fix risk controls on whale loss

JPMorgan Chase & Co. was ordered by U.S. regulators to strengthen risk and auditing controls after the company lost more than $6.2 billion on botched derivatives trades last year. The firm also promised to bolster systems to prevent money laundering.

The Federal Reserve faulted the bank’s management and modeling of risks, as well as its financial auditing and process for communicating problems to the board of directors. The central bank and the Office of the Comptroller of the Currency both issued cease-and-desist orders focusing on the lender’s chief investment office, as well as broader anti-money- laundering controls.

The announcements mark the first regulatory sanctions against JPMorgan in response to its botched trades, which Chief Executive Officer Jamie Dimon, 56, said in May stemmed from “egregious” lapses. Bruno Iksil, the U.K. trader nicknamed the London Whale because his positions were big enough to move markets, made wrong-way bets on credit derivatives that fueled the losses. At one point, as much as $51 billion in shareholder value was erased.

The Fed gave JPMorgan’s board 60 days to submit a plan to enhance oversight of risk management, internal-audit and finance functions. The panel also must overhaul its system for compensating top executives, accounting for “adverse risk outcomes and control deficiencies,” according to a Fed order.

The bank’s board is considering releasing an internal report that faults Dimon’s oversight of the chief investment office when the company announces fourth-quarter earnings Jan. 16, two people with direct knowledge of the matter have said.

Final Report

That report, which builds on a preliminary analysis released in July, is critical of senior managers including Dimon, former Chief Financial Officer Doug Braunstein, 51, and ex-Chief Investment Officer Ina Drew, 56, for inadequately supervising traders in the U.K. unit, according to the people.

The report will be presented to the board when it meets tomorrow. The directors will then vote on whether to disclose it when the bank announces fourth-quarter results the following day, said the people, who asked not to be named because the report isn’t yet public.

JPMorgan didn’t admit or deny wrongdoing in consenting to regulatory orders issued today, and no fines were imposed.

“We’ve been working hard to fully remediate the issues identified in the consent order” on the trading losses, a JPMorgan spokesman, Joe Evangelisti, said in a statement.

The OCC’s order found that the bank also “has an inadequate system of internal controls and independent testing” for anti-money-laundering compliance.

Meeting those “responsibilities -- and going above and beyond -- is a top priority for us,” Evangelisti said. “We have already made progress addressing the issues cited in the consent orders, which contain no allegations of intentional misconduct by the firm or any of its employees.”

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