Red Flags Said to Go Unheeded by Bosses at JPMorgan

By JESSICA SILVER-GREENBERG and NELSON D. SCHWARTZ

Keith Bedford/ReutersJamie Dimon, chairman and chief executive of JPMorgan Chase.

In the years leading up to JPMorgan Chase’s $2 billion trading loss, risk managers and some senior investment bankers raised concerns that the bank was making increasingly large investments involving complex trades that were hard to understand. But even as the size of the bets climbed steadily, these former employees say, their concerns about the dangers were ignored or dismissed.
An increased appetite for such trades had the approval of the upper echelons of the bank, including Jamie Dimon, the chief executive, current and former employees said.
Initially, this led to sharply higher investing profits, but they said it also contributed to the bank’s lowering its guard.
“There was a lopsided situation, between really risky positions and relatively weaker risk managers,” said a former trader with the chief investment office, the JPMorgan unit that suffered the recent loss. The trader and other former employees spoke on the condition of anonymity because of the nature of the investigations into the trading losses.
Instead, the bank maintains that the losses were largely the fault of the chief investment office. Overall tolerance for risky trading did not increase, current executives said, just the scale of the office’s activities because of the bank’s acquisition of Washington Mutual in 2008 and its more risky credit portfolio.
Despite Mr. Dimon’s recent apologies about the losses, which will most likely be repeated on Tuesday as JPMorgan shareholders gather for the company’s annual meeting in Tampa, Fla., regulators will scrutinize risk management at the chief investment office.
Top investment bank executives raised concerns about the growing size and complexity of the bets held by the bank’s chief investment office as early as 2007, according to interviews with half a dozen current and former bank officials. Within the investment office, led by Ina Drew, who resigned on Monday, the bets were directed by the head of the Europe trading desk in London, Achilles Macris.

JPMorgan Chase, via Bloomberg NewsIna R. Drew has stepped down as chief investment officer at JPMorgan Chase.

Mr. Macris, who is also expected to resign, failed to heed concerns as early as 2009 from the unit’s own internal risk officer, said current and former members of the chief investment office. Mr. Macris and Ms. Drew were not available for comment.
Under Mr. Dimon’s stewardship, JPMorgan Chase has long had a reputation for its strong risk-management abilities — indeed, it came through the 2008 financial crisis largely unscathed, unlike many big banks. For their part, senior bank officials on Monday disputed the assertions that the company weakened risk management in recent years while seeking higher trading profits.
Risk managers were largely sidelined by Mr. Macris, who had wide latitude and also had Ms. Drew’s support, with only modest interference from her. At one point, after concerns were raised about positions assembled by Bruno Iksil, now known as the London Whale, Mr. Macris brought in a risk officer with whom he had worked closely in the past.
Risk officers are empowered to halt trades deemed too dangerous, so the coziness of the arrangement generated talk in New York as well, according to the former trader within the chief investment office.
Several bankers said that risk controls were not sufficiently strengthened by Doug Braunstein, who took over as chief financial officer in 2010, another reason the bolder trades continued.
The bank disputes that Mr. Braunstein tolerated additional risk in any way, said Joe Evangelisti, a spokesman for the bank.
David Olson, who headed up credit trading for the chief investment office until December, said that in his trading “the management was very involved and the risk controls were very strong.”
Part of the breakdown in supervision, current executives said, was a fundamental disconnect between the chief investment office in London and the rest of the bank. Even within the chief investment office there were heightening concerns that the bets being made in London were incredibly complex and not fully understood by management in New York.
Despite these concerns, the scope of the chief investment’s offices trades widened sharply following the acquisition of Washington Mutual at the height of the financial crisis in 2008. Not only did the bank bring with it hundreds of billions more in assets, it also owned riskier securities that needed to be hedged against. As a result, the business’s investment securities portfolio rapidly grew, more than quadrupling to $356 billion in 2011, from $76.5 billion in 2007, company filing show.
Ms. Drew made presentations to the board about twice a year, one former executive recalled, “but it was just not talked about a lot,” he said.
What is more, said another senior former executive, Mr. Dimon had other fires to put out, and the chief investment office wasn’t a “problem child” for either top managers or the board of directors, despite its rapid expansion. Gigantic losses were piling up from bad mortgages, and new regulations were threatening the profitability of traditional banking, among other pressing matters.
All of these factors may explain why Mr. Dimon, an executive known for his ability to sense risk who also was familiar with the minutiae of his business, failed to heed the first alarm bells that were sounded in early April.
Sirens had gone off after a series of erratic trading sessions in late March resulted in big gains one day, followed by even bigger losses the next on the London trading desk of the bank’s chief investment office. Mr. Dimon was convinced by Ms. Drew and her team that the turbulence was “manageable,” executives said. Nor did anyone on the operating committee, of which Ms. Drew is a member, question her conclusion — in fact the full operating committee wasn’t told of the scope of the problem till early last week, just days before Mr. Dimon went public.
The alarm bells were silenced in early April, but days after first-quarter earnings were reported on April 13, the erratic trading pattern continued, except this time there were few gains to offset the losses, and the red ink was flowing faster by the day.
Mr. Dimon convened a second round of checks, which soon concluded there was a ticking time bomb, but by then it was too late, a situation made worse as traders actually increased their bets instead of shrinking them, resulting in a loss that now totals more than $2 billion and threatens a management team that until now could seemingly do no wrong.
The company has indicated publicly that the losses could eventually double, depending on market conditions.
On Monday, the bank replaced Ms. Drew with Matthew E. Zames and appointed a former chief financial officer, Mike Cavanagh, to head up the task of fixing what went wrong. One of the most respected senior executives at the bank, Mr. Cavanagh has been a loyal lieutenant of Mr. Dimon since before he took over JPMorgan Chase and has been discussed as a possible successor.