To Understand JPMorgan's Trading Fiasco You Have To Go Back To 2005

jamie dimon

Ever since JP Morgan revealed that it had taken a $2 billion + loss off a badly executed trade in its chief investment office, everyone’s been abuzz about the stability of the bank, the fate of CEO Jamie Dimon and what the huge loss meant for the future of banking regulation.

Even a week after the initial disclosure, bombshell reports are still unveiling what happened within the bank and the events that led up to the huge loss.

To help you make sense of the whole fiasco, we’ve compiled a timeline of all the events that may have contributed to the trading mess, and what has happened in the wake of the bank unveiling the loss.

It starts in 2005… so get ready!

2005: Jamie Dimon becomes CEO of JP Morgan and appoints Ina Drew to head its chief investment office.

JP Morgan's CIO is in charge of managing the bank's risks through hedging, and oversees the bank's excess money--the difference between deposits and what is loaned out.

After taking the helm at JP Morgan, Dimon pushed for the CIO to make more money by making bigger bets on riskier assets such as credit derivatives, but he was not completely aware of the risks and trades that the CIO took on under his orders.

Source: WSJ, Bloomberg

2006: Drew hires Achilles Macris to manage trading within the CIO.

Macris was known to have led the CIO into riskier investments like derivatives connected to corporate and mortgage debt. He also removed the risk controls in place that required CIO traders to exit a position if losses exceeded $20 million.

Source: WSJ, Bloomberg

2006 - 2011: Money in JP Morgan's CIO swells, growing nearly 4 times in value.

The push by Dimon to make the CIO into a 'profit centre' and the hiring of Macris initially proved very successful. From 2006 to 2011, the CIO's assets quadrupled--it currently manages about $360 billion.

In 2010, the CIO's $5 billion profit was nearly 25% of the JP Morgan's overall profit for the year.

As the CIO continued to generate profits, Dimon began to pay less attention to its operations, sources told the WSJ.

Source: Bloomberg, WSJ

October 2011: JP Morgan's Treasurer Joseph Bonocore leaves the firm, his replacement is not named until March 2012.

As JP Morgan's treasurer, Bonocore was in charge of overseeing the bank's day-to-day balance sheet, capital, funding and liquidity. When Bonocore left JP Morgan last October, his departure was not made public. In his absence, senior members of different departments at the bank reported directly to the CFO.

Bonocore's replacement, Sadie O'Connor, was announced this March.

Source: WSJ

February 2012: Boaz Weinstein of Saba Capital Management unveils a new investment idea: buying investment grade series 9 10-year index CDS.

The Investment Grade Series 9 10-Year Index CDS recommended by Weinstein would later turn out to be on the other end of JP Morgan's losing trade. Many believe Weinstein was one of the first to notice the opportunity in the index CDS.

The Markit CDX North America Investment Grade Series 9 10-Year Index is comprised of 125 equally weighted credit default swaps on investment grade entities distributed in six sub-indices -- high volatility; consumer; energy; financial; industrial; and tech, media and telecom, according to Bloomberg data.

Weinstein revealed his idea at the charity Harbor Investment Conference, which was hosted by hedge fund manager Bill Ackman.

Source: BI

April 5: Bloomberg breaks the news of JP Morgan's 'London Whale' Bruno Iksil.

Bruno Iksil was reported to have positions so large he was moving prices in the $10 trillion credit markets, which worried investors and other traders. Because of his influence, he was nicknamed the 'London Whale,' and later 'Voldemort.'

The publicity also exposed JP Morgan's huge position, and allowed hedge funds and other firms to take the other side of JP Morgan's bet.

Source: Bloomberg

April 9: Drew tells JP Morgan execs that the big bets in the CIO office would work out.

JP Morgan executives discuss the 'London Whale' story during a meeting before releasing their earnings report.

From the WSJ:

Ms. Drew told the group that the bank had made both bullish and bearish trades and that 'hedge funds are squeezing us,' attendees say. But she was adamant that the trades would work out.

Source: WSJ

The bank kicked off Q1 earnings season for major financial stocks by beating analyst estimates--the bank earned $1.31 per share on revenue of $27 billion.

During the conference call, Dimon called the London whale issue a 'tempest in a teapot.'

Source: BI

Mid-April to early May: JP Morgan's CIO offices begins taking huge losses.

Losses in the $100's of millions started showing up in the CIO's books, which grabbed Dimon's attention.

The losses originated from a synthetic credit portfolio, connected to the IG Series 9 CDS that Weinstein had pointed out in February, and which the London Whale Bruno Iksil had built up a a huge position in. Essentially, the CIO had failed on very complex basis trade.

Source: WSJ, BI, Reuters

Dimon allegedly told other JP Morgan executives that they will not file the 10-Q until he understood why the CIO was taking on so many losses.

A 'war room' was set up in JP Morgan's offices full of risk, financial and regulatory executives to understand what went wrong.

When Dimon finally realised the severity of the loss, he allegedly became very stressed, often felt sick and was unable to get a good night's sleep.

Source: WSJ

May 10: JP Morgan releases its 10-Q and announces a surprise conference call.

During the call, Dimon talks about losses incurred in a synthetic credit derivative in the CIO. The portfolio was meant to hedge a severe credit environment, but it was 'poorly monitored, poorly structured, poorly reviewed.'

It would result in a $800 million loss for JP Morgan's corporate side, and a possible $2 billion (or more) loss for the bank, Dimon said during the call.

Dimon said the losses were 'self-inflicted' and called the errors the bank made 'egregious.'

JP Morgan's stock would plunge over 10% over the next couple of days.

Source: BI

May 14-15: Drew steps down as CIO as Dimon goes into damage control mode.

The Monday after disclosing its huge losses, JP Morgan announces Ina Drew's retirement. Matt Zames, the co-head of Global Fixed Income is named as her replacement. Zames immediately reshuffles the CIO's ranks, replacing the offices' risk and financial chief.

In addition, the bank appoints Mike Cavanagh, the CEO of JPM's Treasury & Securities Services, to investigate and oversee firmwide response to the trading loss

Meanwhile JP Morgan holds its annual shareholder's meeting in Tampa, Florida on May 15, which is relatively underwhelming.

Source: BI

May 16-18: JP Morgan's losses continue to mount, with reports that it is now $3 billion and could reach $5 billion.

In the days after JP Morgan discloses its $2 billion blunder, the bank's loss from the trade continue to mount as hedge funds scramble to take the other side of the trade. The New York Times reported that the bank's loss from the trade is already over $3 billion.

There are also chances that the losses could mount to $5 billion, according to the WSJ.

Source: NYT, WSJ

May 15: The Justice Department is set to begin an inquiry into the loss. The SEC, CFTC and Fed are already looking into the bank also.

The Justice Department--which has the power to press criminal charges--announced earlier this week that it would start a preliminary inquiry into JP Morgan's loss.

The FBI in New York, which is assisting the DoJ, will look into what Dimon knew about the bad trade and when he knew it, sources told the FT. They will also review the accounting procedures and disclosure practices, according to the New York Times.

Source: FT, NYT

May 18: Dimon agrees to testify before the Senate Banking Committee.

Dimon agrees to testify within minutes of a release by Senate Banking Committee chairman Sen. Tim Johnson (D-SD) inviting him to a hearing on JP Morgan's trading loss.

Sen. Johnson said he would like Dimon to testify after the Committee finishes a series of hearings on Wall Street reform in May and June, so the Dimon hearing could occur as early as June.

Source: BI

Upcoming Dates To Watch

May 21: Jamie Dimon is expected to speak at Deutsche Bank Global Financial Services Investor Conference, we expect him to touch on the mounting trading losses.

Sometime in June: Jamie Dimon is expected to testify before the Senate Banking Committee about JP Morgan's trading loss, an exact date for the hearing has not been set.

Source: JP Morgan

Before JP Morgan's loss, Jamie Dimon was a respected banker....

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