What is london whale

This changed when losses appeared and continued to mount. By then, however, the losses had become unavoidable. Faced with losses, the trader took the view that markets might rebound in his favor.

It was more the action of a risky gambler than a risk manager or a rational, systematic proprietary trader. It was the opposite of hedging his bet. When the losses continued, a liquidity problem emerged. The market was willing to sell the trader more of what he already held but was much less willing to buy back the product. The trader was stuck with his position. As the positions grew, the larger size was accompanied by larger losses and declining liquidity. The appropriate fair value for reporting would be the most representative point within the bid-ask spread in a hypothetical transaction for a comparable contract.

As markets became less liquid, the traders relied increasingly on the accounting method of setting the fair value to the mid-market price within a bid-ask spread, as permitted under ASC Topic Using aggressive marks seems to be an effort to falsely minimize reported losses. The situation worsened.

Weaknesses in internal controls masked these events. But VCG policies were rewritten during the course of the crisis. The actual price testing also was subjective and insufficiently independent from the traders, who influenced the process. Eventually, when the extent of the failure was uncovered, JPMorgan moved the positions out of the CIO to its trading unit.

Several individuals in the CIO lost their positions, were exposed to compensation clawback, and are subject to continued legal action. In this case, those disputes represented the tip of the iceberg.

One set was for external reporting. The other was kept at the trading desk, allowing the small CIO team to track the difference between reported and reliable prices. The lack of liquidity in the positions forced JPMorgan to take more time executing a liquidation. To JPMorgan, this seemed to be a survivable storm. The company still had sufficient regulatory capital even after the losses.

But Dimon and the board of directors were duped. Faulty information was transmitted, and information access was limited for both senior management and the board.

It was still a daily p. VAR reporting approach, but now the flawed reporting extended to time zone choices! The first breakdown resulted in an unprecedented SEC action related to internal controls.

The failure to maintain internal controls constituted violations of the Securities Exchange Act of and various parts of SEC Rule 13a. This warning sign metric was ignored and then actually raised.

Senior bank management was told that potential losses were massive and no longer functioned as a hedge to the bank; management then proceeded to downplay those issues until the losses mounted into the billions of dollars United States Senate, pg. By June , Mr. Management instituted a number of changes as a result of the CIO trading imbroglio. All CIO managers based in London with any responsibility for the Synthetic Credit Portfolio were separated from the firm with no severance and without incentive compensation.

Along with upgraded personnel skills in the CIO Risk organization, management rightfully instituted a common sense approach to structural issues. To the chagrin of Mr. Dimon, this episode strengthened the case for more government oversight of the financial industry. Bianco, J. Understanding J. The Big Picture. English, S. The Independent. Retrieved from Factiva. The Telegraph Online. Farrell, M. CNN Wire. Foley, S. Austin, U. Osborne, A. PBS NewsHour. Scuffham, M. The Globe and Mail.

Shorter, G. Congressional Research Service. Washington, DC. As illustrated in the table above, there is a reward opportunity for getting the underlying thesis right. So, if this is a prop trade that went wrong. However, that reward lies at the end of some indefinite timeline, during which a trader must have the wherewithal to survive adverse changes in liquidity. Dimon has called these trading losses a failed hedge. I understand the arguments for common factor exposure and historical correlations.

Still, economic history is replete with examples of cause and effect being different than correlation. Calling the trades complex, poorly monitored, and poorly understood is one thing.

Calling the trades for what they actually are is quite another. If the information we now have is accurate, there were no hedges in package B; it was prop trading. And package C was pretty clearly used to paper over losses on package B. As we have noted here at CFA Institute, there is nothing wrong with prop trading per se, but it should be done inside a broker dealer , thereby immunizing the bank and taxpayers from losses. All posts are the opinion of the author.

CFA Institute members are empowered to self-determine and self-report professional learning PL credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker. Tags: credit default swaps , economic history , Financial History. Risk managers need to be ablke to identify andf control for loss aversion illusion of control and the disposition effect. I wonder who sold all those CDS to that trader anyway!

Would it be possible that this is one leg of a trade package that other divisions of JPM would have sold? If the sellers are European Banks or European Government, it would explain better the importance of avoiding a default in Greece for example. However, I do know that the European banks have been writing huge amounts of CDS to pad near term cash flow and earnings, so it is conceivable that it came from a European Bank…with all its attendant implications.

How can you call this a failed hedge? As you stated in the article, a hedge is a way to attempt to protect the asset againts its own downside risk. This is in part, and example of risk idiosynchratic and systematic compounding which is why with such investment decisions, you see billions of dollars lost. Which I always wonder why investors are allowed to make bets based upon the success of other bets in order to cover the losses of other bets??????