Photo: flickr: GavinLi
Since JP Morgan shocked the financial industry by revealing that its Chief Investment Office had suffered a $2 billion loss, most people on the Street have been asking questions that sound something like: ‘what will happen next?It’s been a little dramatic.
But now that heads are rolling (Chief Investment Officer Ina Drew has been sacked and replaced with Matt Zames) people are starting to ask a different question: How did this happen at the most respected bank on Wall Street?
Here’s an answer for you from Bloomberg. David Olsen, a former head of credit trading, said that when he started in 2006, JP Morgan’s CEO Jamie Dimon was trying to take the bank in another direction — a much riskier direction.
“We want to ramp up the ability to generate profit for the firm,” Olson, 43, recalled being told by two executives. “This is Jamie’s new vision for the company.”…
Dimon pushed (Ina) Drew’s unit, which invests deposits the bank hasn’t loaned, to seek profit by speculating on higher-yielding assets such as credit derivatives, according to five former executives. The CEO suggested positions, a current executive said. Profits surged over the next five years as assets quadrupled to $356 billion and employees were given proprietary- trading accounts, current and former executives said.
Basically, Dimon was trying to super charge the bank. Feed it some steroids, if you will. Dina Dublon, a former JP Morgan chief financial officer turned Harvard Business School professor, told Bloomberg that Drew and the CIO started using their hedges to make a profit, instead of using them to mitigate risk.
“Her position over the years has always been around hedging, but hedging for profit as opposed to hedging just to counter losses,” said Dublon.
Dublon worked with Drew for 22 years. She left the bank in 2004, 2 years before Achilles Macris was hired to oversee trading in London.
That’s not the end of the story, though. Drew still put strict limits on how much an investment could lose or gain at the CIO. For example, any trade that could lose the bank $20 million or more was supposed to be exited.
So what gives? It looks like Dimon and Drew simply didn’t see this coming.
Last month, when the story of the Bruno Iksil’s trades (the man known as the London Whale) were made public, Dimon called the whole thing a ‘Tempest in a teapot.’ That’s because, Bloomberg reports, he and Drew had no idea how large London’s losses were. Dimon checks the CIO’s profits and losses every day, though, so the bank is looking into whether or not this information was concealed intentionally.
That would be some kind of cover up.
Watch below: The Fallout From JP Morgan’s $2 Billion Loss