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Some top J.P. Morgan Chase JPM -2.62% & Co. executives and directors were alerted to risky practices by a team of London-based traders two years before that group's botched bets cost the bank more than $2 billion, according to people familiar with the situation.
Interviews with more than a dozen current and former members of the bank's Chief Investment Office, the unit responsible for the losses, indicate that discussions about reining in London traders started as early as 2010. Certain directors were briefed then on a foreign-exchange-options bet that went bad, and were told that the trader responsible wouldn't be allowed to go overboard in the future, one of these people said.
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Last year, top CIO executives set a plan to roll back a separate set of large London tradesonly to learn later that the plan hadn't been followed correctly.
The concerns dating back to 2010 show that J.P. Morgan had an opportunity to avoid the bungled trades, which over time could cost the bank as much as $5 billion.
J.P. Morgan's battle to bring the London office to heel culminated last month in the disclosure of trading losses. The episode has tarnished the image of Chairman and Chief Executive James Dimon, who has already said he was "dead wrong" when he dismissed concerns about the trades on an April 13 conference call with analysts. It also has raised questions about the strength of oversight at J.P. Morgan, long considered one of the best-managed U.S. banks.
Mr. Dimon is expected to testify before the Senate Banking Committee on Wednesday. He is prepared to give committee members a detailed review of what went wrong.
They include trading-risk limits that were too broad, a new trading model adopted this January that masked mounting dangers, and the failure of top executives to sufficiently probe the huge positions at the CIO, according to the people familiar with the matter.
When Mr. Dimon asked then-CIO head Ina Drew about the trades in early April, for example, she didn't fly to London to visit the trading group, according to people close to the investigation. Achilles Macris, the London-based head of international at the CIO, assured her on a video conference call that everything was under control, these people said. Ms. Drew and Mr. Macris didn't respond to requests for comment.
The CIO was little known to those outside the bank until the recent heavy losses. The unit invests the bank's excess cash, which recently exceeded $370 billion. Under Ms. Drew, it recruited traders, some from hedge funds, who were comfortable using derivatives and other potentially risky tools to boost profits or protect the company.
One such hire was Mr. Macris, a Greek national who joined in 2006 and was charged with overseeing the London office. He was perceived to be a skilled trader but sometimes headstrong. At Bankers Trust, where he was a currency trader in the 1990s, he was asked to resign because of concerns that he wouldn't get along with a new boss, said two people familiar with the events. Later at Dresdner Kleinwort Wasserstein, where he supervised proprietary traders, he left after losing a three-way battle for sole leadership of capital markets, said a person close to that situation.
Two members of his team were Javier Martin-Artajo, a Spaniard and former Dresdner colleague who became head of credit trading, and Bruno Michel Iksil, a French-born trader later nicknamed the London Whale for the large positions he took in markets. Mr. Iksil declined to comment, and Mr. Martin-Artajo didn't return calls.
Several early trades made by this group profited by assuming the market was going to weaken in 2008. At one point that year, Mr. Iksil and others made about $1 billion betting against infrequently traded slices of a derivative index tracking subprime-mortgage debt known as the ABX. That trade was thought to help J.P. Morgan hedge its risks as the housing bust took shape.
J.P. Morgan Chase's investigation is expected to reveal a series of miscues.
Mr. Dimon was aware of a number of the trades and sometimes spoke with the traders involved, according to people familiar with the situation.
That same year, a separate group of traders in New York lost about $1 billion on holdings of Fannie Mae and Freddie Mac preferred securities when the companies were taken over by the government, according to people close to the matter. Mr. Dimon also was aware of that trade, those people said.
In 2010, another bad trade caught the attention of a senior finance executive who notified top J.P. Morgan executives. Joseph Bonocore, then chief financial officer of the CIO, became concerned when London-based traders lost about $300 million in a few days on a foreign exchange-options trade, without any offsetting gains to balance out the losses.
Mr. Bonocore brought the matter to Barry Zubrow, then J.P. Morgan's chief risk officer, and Michael Cavanagh, then chief financial officer, both of whom reported to Mr. Dimon. Messrs. Zubrow and Cavanagh, who remain at the bank in other top roles, gave Mr. Bonocore authority to order that the position be reduced, said people familiar with the matter. Mr. Macris reduced the positions. Mr. Bonocore now works for Citigroup Inc. Mr. Dimon recalls being told of the trades, a person close to him said.
Last year, several executives in the CIO's New York office noticed that London again was taking large trading positions, this time in derivative indexes that were viewed as illiquid, or hard to trade in and out of. Peter Weiland, then the chief risk officer of the CIO, and some more junior executives became concerned that if J.P. Morgan chose to sell the positions, the bank might suffer deep losses, said people familiar with the matter.
During a CIO management meeting late last year that included Ms. Drew, Mr. Macris and Mr. Weiland, the group discussed the size of the credit positions. They agreed that the positions needed to be reduced over time.
Even though everyone in the meeting was in agreement on what to do, the London office put on new trades this year that appeared to be at odds with the strategy, said people close to the company. Mr. Weiland was among those who became aware this year that the plan hadn't been followed, those people said.
Mr. Weiland had begun a review last summer of the CIO's risk limits and participated in a discussion about whether restrictions needed to be tighter and more specific, according to people familiar with the situation. But new limits were never agreed to, those people said. Mr. Weiland also told Ms. Drew that the CIO needed to free up its credit-risk officers to focus on their jobs, not other tasks.
Late this January, Mr. Weiland was replaced as the unit's head of risk by Irvin Goldman, a former trader who had no experience as a risk manager and happened to be the brother-in-law of Mr. Zubrow, the bank's chief risk officer until early January.
By April, new questions began surfacing about a big bet made by London on the value of corporate credit indexes. On April 13 Mr. Dimon dismissed those concerns as a "tempest in a teapot." Days later, management told a different story to some directors.
At a regularly scheduled meeting of J.P. Morgan's audit committee just before the full board convened April 17, one of Mr. Dimon's top executives told directors "there was something wrong in the London office," said one person knowledgeable about the committee meeting. The matter, directors were told, "was being investigated."
J.P. Morgan Had Early Warning of Risks by London Trading Desk - WSJ.com
Interviews with more than a dozen current and former members of the bank's Chief Investment Office, the unit responsible for the losses, indicate that discussions about reining in London traders started as early as 2010. Certain directors were briefed then on a foreign-exchange-options bet that went bad, and were told that the trader responsible wouldn't be allowed to go overboard in the future, one of these people said.
Enlarge Image
Last year, top CIO executives set a plan to roll back a separate set of large London tradesonly to learn later that the plan hadn't been followed correctly.
The concerns dating back to 2010 show that J.P. Morgan had an opportunity to avoid the bungled trades, which over time could cost the bank as much as $5 billion.
J.P. Morgan's battle to bring the London office to heel culminated last month in the disclosure of trading losses. The episode has tarnished the image of Chairman and Chief Executive James Dimon, who has already said he was "dead wrong" when he dismissed concerns about the trades on an April 13 conference call with analysts. It also has raised questions about the strength of oversight at J.P. Morgan, long considered one of the best-managed U.S. banks.
Mr. Dimon is expected to testify before the Senate Banking Committee on Wednesday. He is prepared to give committee members a detailed review of what went wrong.
They include trading-risk limits that were too broad, a new trading model adopted this January that masked mounting dangers, and the failure of top executives to sufficiently probe the huge positions at the CIO, according to the people familiar with the matter.
When Mr. Dimon asked then-CIO head Ina Drew about the trades in early April, for example, she didn't fly to London to visit the trading group, according to people close to the investigation. Achilles Macris, the London-based head of international at the CIO, assured her on a video conference call that everything was under control, these people said. Ms. Drew and Mr. Macris didn't respond to requests for comment.
The CIO was little known to those outside the bank until the recent heavy losses. The unit invests the bank's excess cash, which recently exceeded $370 billion. Under Ms. Drew, it recruited traders, some from hedge funds, who were comfortable using derivatives and other potentially risky tools to boost profits or protect the company.
One such hire was Mr. Macris, a Greek national who joined in 2006 and was charged with overseeing the London office. He was perceived to be a skilled trader but sometimes headstrong. At Bankers Trust, where he was a currency trader in the 1990s, he was asked to resign because of concerns that he wouldn't get along with a new boss, said two people familiar with the events. Later at Dresdner Kleinwort Wasserstein, where he supervised proprietary traders, he left after losing a three-way battle for sole leadership of capital markets, said a person close to that situation.
Two members of his team were Javier Martin-Artajo, a Spaniard and former Dresdner colleague who became head of credit trading, and Bruno Michel Iksil, a French-born trader later nicknamed the London Whale for the large positions he took in markets. Mr. Iksil declined to comment, and Mr. Martin-Artajo didn't return calls.
Several early trades made by this group profited by assuming the market was going to weaken in 2008. At one point that year, Mr. Iksil and others made about $1 billion betting against infrequently traded slices of a derivative index tracking subprime-mortgage debt known as the ABX. That trade was thought to help J.P. Morgan hedge its risks as the housing bust took shape.
J.P. Morgan Chase's investigation is expected to reveal a series of miscues.
Mr. Dimon was aware of a number of the trades and sometimes spoke with the traders involved, according to people familiar with the situation.
That same year, a separate group of traders in New York lost about $1 billion on holdings of Fannie Mae and Freddie Mac preferred securities when the companies were taken over by the government, according to people close to the matter. Mr. Dimon also was aware of that trade, those people said.
In 2010, another bad trade caught the attention of a senior finance executive who notified top J.P. Morgan executives. Joseph Bonocore, then chief financial officer of the CIO, became concerned when London-based traders lost about $300 million in a few days on a foreign exchange-options trade, without any offsetting gains to balance out the losses.
Mr. Bonocore brought the matter to Barry Zubrow, then J.P. Morgan's chief risk officer, and Michael Cavanagh, then chief financial officer, both of whom reported to Mr. Dimon. Messrs. Zubrow and Cavanagh, who remain at the bank in other top roles, gave Mr. Bonocore authority to order that the position be reduced, said people familiar with the matter. Mr. Macris reduced the positions. Mr. Bonocore now works for Citigroup Inc. Mr. Dimon recalls being told of the trades, a person close to him said.
Last year, several executives in the CIO's New York office noticed that London again was taking large trading positions, this time in derivative indexes that were viewed as illiquid, or hard to trade in and out of. Peter Weiland, then the chief risk officer of the CIO, and some more junior executives became concerned that if J.P. Morgan chose to sell the positions, the bank might suffer deep losses, said people familiar with the matter.
During a CIO management meeting late last year that included Ms. Drew, Mr. Macris and Mr. Weiland, the group discussed the size of the credit positions. They agreed that the positions needed to be reduced over time.
Even though everyone in the meeting was in agreement on what to do, the London office put on new trades this year that appeared to be at odds with the strategy, said people close to the company. Mr. Weiland was among those who became aware this year that the plan hadn't been followed, those people said.
Mr. Weiland had begun a review last summer of the CIO's risk limits and participated in a discussion about whether restrictions needed to be tighter and more specific, according to people familiar with the situation. But new limits were never agreed to, those people said. Mr. Weiland also told Ms. Drew that the CIO needed to free up its credit-risk officers to focus on their jobs, not other tasks.
Late this January, Mr. Weiland was replaced as the unit's head of risk by Irvin Goldman, a former trader who had no experience as a risk manager and happened to be the brother-in-law of Mr. Zubrow, the bank's chief risk officer until early January.
By April, new questions began surfacing about a big bet made by London on the value of corporate credit indexes. On April 13 Mr. Dimon dismissed those concerns as a "tempest in a teapot." Days later, management told a different story to some directors.
At a regularly scheduled meeting of J.P. Morgan's audit committee just before the full board convened April 17, one of Mr. Dimon's top executives told directors "there was something wrong in the London office," said one person knowledgeable about the committee meeting. The matter, directors were told, "was being investigated."
J.P. Morgan Had Early Warning of Risks by London Trading Desk - WSJ.com
