The FBI is reported to be looking into phone calls and theactions of four employees in its investigation into events surrounding the infamous “London Whale” trades that lost JP Morgan Chase upwards of $6 billion earlier this year. It has also been reported that the SEC is on the case.
Jamie Dimon has repeatedly diminished the importance of the misguided attempt by the bank’s Chief Investment Office to effectively corner a segment of the credit default swap market. In Congressional testimony, he took full responsibility in a dramatic “buck stops here” statement. But he also characterized the episode as a failure of management to maintain diligence, not a fundamental malfunction of JP Morgan Chase’s vaunted risk management systems.
Are the FBI and SEC investigating management foul-ups? I think not.
As reported previously here, the core issue of the London Whale episode involves arithmetic, or rather the complex Value at Risk algorithm universally used by banks and derivatives clearing houses to measure the risks posed by holding derivatives. VaR has been much maligned, especially following the 2008 financial meltdown in which banks almost universally mis-measured their risk exposures to the mortgage market. But, to paraphrase the pro-gun special interests, VaR doesn’t kill banks, people kill banks.
