Drew failed to “ensure that CIO management properly understood and vetted the flawed trading strategy,” according to the management report. She also didn’t grasp changes to the synthetic credit portfolio in the first quarter of 2012 as its size, risk and complexity ballooned, the firm said.
The report also highlighted blunders tied to measuring risk. Dimon had previously said switching models understated the chance of losses.
Drew’s office evaluated risk by copying and pasting data into spreadsheets in Microsoft Corp.’s Excel software, making the process prone to errors, according to the management report.
“Spreadsheet-based calculations were conducted with insufficient controls and frequent formula and code changes were made,” according to the report.
The risk model was developed by a London-based quantitative expert who had not previously created or implemented such a model and wasn’t given sufficient support, JPMorgan said. The firm’s review of the model wasn’t “as rigorous as it should have been,” JPMorgan said.
In a review of the model, JPMorgan found that the spreadsheet used the sum of two numbers, rather than their average, as part of a risk calculation.
“This error likely had the effect of muting volatility by a factor of two,” according to the report.
The Federal Reserve and Office of the Comptroller of the Currency on Jan. 14 took the first regulatory actions stemming from the trade, ordering the bank to strengthen risk and auditing controls. The board of directors also was told to consider control weaknesses and “adverse risk outcomes” while awarding compensation for Dimon and other top managers.
JPMorgan avoided fines and maintained Dimon’s dual role of chairman of the board and CEO.
“I don’t know why the Fed and OCC didn’t at least require JPMorgan to study whether or not an independent chairman would better supervise management’s oversight of the company’s risk,” said Josh Rosner, an analyst at New York-based Graham Fisher & Co., before the bank’s reports were released.
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