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Nearly $6 billion, what happened?

By Sheyna Steiner ·
Friday, July 13, 2012
Posted: 4 pm ET

News broke on Friday that JPMorgan's investing losses steming from the derivatives bets made by Bruno "London whale" Iksil are approaching the $6 billion mark.

Why don't they know how much they've lost right away?

Initial reports in May put the loss around $2 billion, but it was acknowledged that as much as an extra $1 or $2 billion could be lost.

A Reuters story from May 17, "JPMorgan's future losses at the mercy of an obscure index," reported that the bank hadn't sold the entire position when the scandal broke, just a small portion of it.

The losses will grow, some traders say, because it appears JPMorgan has only sold a small portion of its position, leaving it vulnerable to price swings in a thinly traded market.

The market in which the trades were placed is highly illiquid, thus they've been forced to unwind the trade gradually. By June 20, CNBC reported that the bank had sold up to 70 percent of the position, in the story "JPMorgan has sold off majority of losing position."

It is now reported that the worst-case scenario could see JPMorgan losing another $1.7 billion before all is said done, Reuters reported July 13 in the story, "JPMorgan traders may have hidden derivatives losses."

How did it happen?

The bank released a report on Friday examining the circumstances around the loss, the Wall Street Journal reported in the blog post, "The change to J.P. Morgan's risk measurement tool."

Among the causes, the Journal reports, was poor risk management and fatally flawed judgment on the part of the chief investment office.

The risk management team was unprepared or unable to adequately monitor the risk of the derivatives trades. The problem was compounded by a poorly designed change to the way risk was measured.

In particular, investors have questioned the way the bank handled the CIO's "value-at-risk," or VaR, a way of measuring potential trading losses. The chief investment office changed the way it calculated VaR in January, but the new method downplayed the true level of risk the office was taking, and it effectively masked the losses for months before the bank detected the problem and went back to the old model.

The official line seems to be that chief investment office went rogue in the absence of clear and specific guidelines telling them not to do what they did.

From the Journal story:

…the CIO didn't vet its risky trading strategy with senior management the way it should have. Also, risk limits for the CIO weren't "granular" enough, the bank said -- there weren't risk limits applying specifically to the derivatives portfolio that was the source of the risky bets, no limits in terms of how big the portfolio could get or what kinds of assets it could invest in.

In press release JPMorgan issued July 13 restating the first quarter earnings from this year blame was placed and hints arose about unethical behavior on the parts of traders who sought to hide and minimize the full amount of losses.

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July 15, 2012 at 1:15 pm

i can already see the excuses that will be made:
a.) markets are not predictable.
b.) we did not invest so much after all.
c.) the economy/customers/bosses/clients/society pressured us into taking high risk investments in order to produce high outcomes that would not have been possible with more conservative tools.

- all 3 are BS.

July 15, 2012 at 1:52 am

Bankers stole it, that's what happened. What did you think happened?