Home / Case Studies / Drew, Dimon, Volcker and Voldemort

Drew, Dimon, Volcker and Voldemort

The shock news this week is that JPMorgan, that mighty institution of financial stability that has steered through this crisis with ease and made Jamie Dimon, its CEO, the sage of finance … has been rocked by a trading scandal on the scale of a Nick Leeson, Jerome Kerviel and Kweku Adoboli.

This time the culprit is Bruno Michel Iksil.

Iksil struck fear into other bankers, for being the biggest better in London.  Known as the London Whale – or within banking circles he was often referred to as Voldemort after the evil wizard who cannot be named in the Harry Potter series – he reportedly was earning around $100 million a year.

And yet the share price of JPMorgan was savaged over the weekend – dropping over 10 percent – as news was released of a $2 billion loss on his trading operations.

The losses were made in the last six weeks as investments made by Iksil went wrong, and may actually be significantly greater.

What had Iksil done that could go so wrong?

Well, his job was to hedge JPMorgan’s investments, which he achieved with credit default swaps (CDS).  However, as his overblown position became so clear, hedge funds and other investment firms targeted Iksil’s investments and bet against them. 

In other words, everything that Iksil was hedging against would go wrong as others invested in the opposite direction.

The fact that one trader could amass such losses raises big question about the role of JPMorgan’s internal investment office and the Chief Investment Officer, Ina Drew, whose department has built up a portfolio of securities worth $361 billion in the last few years.

According to the Financial Times, one banker who recently left JPMorgan’s investment unit said:

“It’s embarrassing that we had hedge funds openly complaining about the big whale – clearly this was a position that was too big.  Either the CIO should have found other ways to hedge, or reduced the underlying position, or this was a directional bet, which wasn’t in the mandate.”

In an interview with American television network NBC, Jamie Dimon said: “we got very defensive and people started justifying everything we did … we told you something that was completely wrong a mere four weeks ago.”

Four weeks ago, JPMorgan released quarterly trading figures that looked startlingly good.

Doesn’t look so good now and the real downside is that Dimon himself has been leading the march against the Volcker Rule to close down proprietary trading, claiming that there is no such thing as “casino capitalism”.

Just a few months ago, in an interview with Fox Business Network, he dismissed Volcker as possibly creating regulations that “destroy” U.S. capital markets or let it “go overseas”.  The usual scaremongering, and followed it up by saying that monitoring hedging risks through trading would mean that every trader would have “a lawyer, compliance officer, doctor to see what their testosterone levels are, and a shrink”.

Maybe they should!

He also says: “we don't make huge bets” when being a market maker.


Uh-oh, feeling some Shadenfreude creep.

The interview in full for those who are interested (13th February 2012):

Meantime, the fallout from this is expected to be huge, with Ina Drew  likely to lose her job and some even saying Dimon will get cut down.

I doubt the latter, but the former is inevitable.

A story we’ll all be watching closely and waiting for another big whale, Goldman Sachs – or is that a squid? – to follow suit.

More information on JPMorgan's issue below:


About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

Check Also

Proving digital transformation works for shareholder returns

I wrote about the fact that digital transformation does not create greater shareholder value … …