Financial News highlights 10 key questions that need answers – some of
which we have; some of which are still outstanding.
1) Who is the London Whale trader…
…and why is there so little information on someone able to build up such a
big position?
“What [Ben] Bernanke is to the Treasury market, Iksil is to the derivatives
market,” is how Bonnie Baha, head of the global developed credit group at
US firm DoubleLine Capital, described Bruno Iksil, the London-based trader
in the chief investment office who was widely identified in the media as the
banker at the centre of JP Morgan’s big bets.
However, for a man thought to have earned JP Morgan around $100m a year in
recent years, little is known about him other than he is a low-profile
Frenchman working predominantly in the bank’s London office.
The Wall Street Journal reported last month that “Iksil, who has worked at
JP Morgan since January 2007, commutes to London each week from his home in
Paris, and works from home most Fridays. He sometimes wears black jeans in
the office and rarely a tie, according to someone who worked with him” [ http://on.wsj.com/I9GXaf ].
Before that, he was a portfolio manager at French bank CDC Ixis from 1997 to
1999, when he moved to Natexis Banques Populaires and worked as head of
credit derivatives, according to his Bloomberg profile.
Quite who first dubbed him the London Whale remains unclear. As to his
future, a source close to the bank said that Iksil had not been fired as a
result of his trading actions.
JP Morgan chief executive Jamie Dimon said that a review was underway and
that "many errors," "sloppiness" and "bad judgment" had occurred at the bank
as a whole.
2) What was he doing? How was he doing it? When and why did he stop?
Iksil is believed to have taken large positions for the bank in credit-
default swaps, while hedge funds and other market participants subsequently
made heavy opposing bets. While they bought default protection on a basket
of US companies' bonds, Iksil sold the protection via the CDX IG 9 index, in
doing so placing his own bet that the companies won't default.
It is thought he took massive bets early this year. Does that suggest that
this was the moment JP Morgan became worried about the position?
Also, as Financial News’ Chart of the Day today shows [ http://bit.ly/IIr5hg ], it became much cheaper to buy CDS through the index than buying protection on the individual companies from December time. Does this suggest that that was when the London whale began his trade?
3) What is the CDX IG 9? What are the underlying companies?
A CDX IG 19 is a credit default swap index that offers protection on 121
leading US companies. They include, among others, McDonald’s, American
Express, Hewlett Packard, Walt Disney and shopping emporium Macy’s. It
originally consisted of 125 companies, but mortgage providers Fannie Mae and
Freddie Mac, loan provider CIT and savings bank Washington Mutual were
removed after they went into default, according to data provider Markit.
According to The Wall Street Journal, Iksil turned his attention to the
index earlier this year and took large positions in January and February
before he stopped selling the contracts at the end of March [ http://on.wsj.com/LvZtgV ]. But JP Morgan sold so many of the index swaps that the cost of protection on those companies dropped, which left hedge funds fuming because they were hoping for the opposite, reported the Journal. Consequently, it had become much cheaper to buy CDS through the index than buying protection on the individual companies with the gap widening to as much as $29,000 in January.
Yesterday, five-year protection on $10m of the corporate bonds underlying
the index cost $76,000 annually. Theoretically, buying the protection for
the individual companies would have cost exactly the same, according to data
from Markit.
4) What is the chief investment office?
The CIO is a business within the corporate division of JP Morgan, which is
formally described as the unit responsible for “managing structural
interest rate, currency and certain credit risks that are created from the
day-to-day operations of the firm's primary lines of business across the
company”, according to a recent job advert for a position at the unit in
New York [ http://bit.ly/ImeUIO ]
Last month, The WSJ reported JP Morgan to state: "Our CIO activities hedge
structural risks and invest to bring the company's asset and liabilities
into better alignment."
It added that the unit is “focused on managing the long-term structural
assets and liabilities of the firm and is not focused on short-term profits."
The CIO accounts for about $350bn of investment securities as of December 31
, according to JP Morgan’s company filings, or about 15% of the bank's
total assets.
Bloomberg reported today that the unit oversees about $360bn, the difference
between money JP Morgan received from deposits and the amount it extends in
loans. It added that Dimon had been pushing the unit to boost profit by
investing in higher-yielding assets, including structured credit, equities
and derivatives.
According to a Bloomberg article published last month, Dimon “has
transformed the bank’s chief investment office in the past five years,
increasing the size and risk of its speculative bets.”
It said that the unit, led by Achilles Macris, who joined in 2006 as the CIO
’s most senior London executive, there has been an expansion into corporate
and mortgage-debt investments to generate profits. Bloomberg cites a senior
executive as saying that Macris’s team built up a portfolio of as much as
$200bn and booked a profit of $5bn in 2010 – equal to more than a quarter
of JP Morgan’s net income that year.
5) What is the relationship between the chief investment office (which takes
big risky bets) and the chief risk officer?
John Hogan is JP Morgan’s chief risk officer, having stepped up from
managing its investment bank’s risk to overseeing risk across the group in
January.
However, 55 year-old Ina Drew, who has been with the bank since starting at
predecessor firm Chemical Banking Corp in 1982, works as chief investment
officer.
Both sit on the bank’s 14-strong operating committee as well as its 68-
strong firm-wide executive committee.
The committee also includes Achilles Macris, Richard Sabo and Irene Tse from
the chief investment office. Macris is said to be the office’s top
executive in London since joining the bank in 2006, according to a Bloomberg
report last month.
But it is not so clear on how the CIO relates with the CRO.
6) Is the CIO just a giant proprietary trading unit and against the spirit
of the Volcker Rule?
Under the Volcker Rule, a provision of the Dodd-Frank Act, banks are
prohibited from trading for their own account. It is designed to curb
excessive risk-taking at banks. When pressed by US Congress to define
proprietary trading, Paul Volcker, former chairman of the Federal Reserve,
said that “every banker” he speaks with “knows very well what ‘
proprietary trading’ means”. But the case of JP Morgan’s CIO office
illustrates the blurred definition of proprietary trading and the challenge
facing regulators who are trying to impose the Volcker Rule.
But the Wall Street Journal’s Deal Journal last month cited JP Morgan chief
financial officer Doug Braunstein as saying that the positions were “
consistent with both, I think, the spirit and written rules of the Volcker
rule as it is written today”.
He said the office “balances our risks. They hedge against downside risk,
that’s the nature of protecting that balance sheet”.
But Dimon admitted last night that the latest development will hamper the
bank’s efforts to lobby for a softening of the Volcker rule on bank trading
and “plays right into the hands of a whole bunch of pundits out there. We
will have to deal with that – that's life”.
7) Were there any controls?
The impending scrutiny of regulators and the bank’s top brass is likely to
focus on how such a large loss was able to occur in a division that exists
to balance out the bank’s risks rather than take huge bets. Analysts wasted
little time in highlighting the fact that the loss raises control issues.
Deal Journal cited a note from CLSA analysts saying: “There appear to be
major issues with the CIO office...Here is a key point: this loss occurred
in a risk-mitigation unit and not a risk-taking one...The bigger issue is
who was watching the CIO office. This raises issues about checks and
balances at a $2 trillion bank that has performed better than peers. We view
this as a failure of basic asset-liability management at a large bank due
to poor investments of deposits in excess of liabilities”.
8) Why did JPM repeatedly downplay the trading positions in recent weeks?
Dimon last month dismissed the attention paid in the media to the trades,
during the bank’s first-quarter analyst call, saying: “It’s a complete
tempest in a teapot. Every bank has a major portfolio and in those
portfolios you make investments that you think are wise.”
9) Will the losses have an effect on JP Morgan’s $15bn share buyback
programme?
The US bank said in its first-quarter results on April 13 it had authorised
a new $15bn common equity repurchase programme, of which up to $12bn of
repurchases has been approved for this year.
Dimon said on the results call that JP Morgan spent approximately $450m year
-to-date on that new authorisation at a price of about $44.75, adding that
“obviously if the stock goes up I think we will be consistent and we will
buy less. When it goes down we will buy more”. At the market close
yesterday, JP Morgan shares were at $40.74.
10) What next for JP Morgan, now that its mantle as the King of Wall Street
throughout the financial crisis has slipped?
JP Morgan is holding discussions with the UK Financial Services Authority
over the trading losses incurred by the CIO.
It is likely that the losses will spark increased scrutiny from regulators
worldwide over so-called proprietary trading, although JP Morgan chief
executive Jamie Dimon has said the trades aren't bets with the firm's own
capital.
Nevertheless, the losses will give ammunition to supporters of the new
legislation in the US to prevent banks from trading on their own accounts.
Gary Jenkins, founder of Swordfish Research in London told Dow Jones: “I
don't see regulators or rating agencies giving the banks any benefit of the
doubt now."
The bank will also face a tough task winning over its shareholders, after
Dimon offered guidance that the bank is likely to see "slightly more" than $
2bn in losses for the second quarter. JP Morgan shares, which closed at $40.
74 yesterday in New York, were trading 8% lower in Frankfurt trading this
morning.
A key test for Dimon could come at the bank’s annual shareholder meeting on
May 15, when issues such as executive remuneration will be put to a so-
called say-on-pay vote.
Dimon said on Thursday that the bank was in the processing of conducting a
review into what went wrong. No one has been fired as a result of the losses
, but Dimon could take such action once the firm finishes its review, the
WSJ reported. |
发表于 2012-5-12 09:25
| 
发表于 2012-5-12 09:57
| 
ｂｔ大