In mid-August, the US Justice Department formally indicted two high-level JPMorgan employees over the derivatives scandal that created a €6,2 billion hole. This is not Bruno Iksil, the most famous character of the scandal, the trader from whom the monstrous loss originated and thus nicknamed the "whale of London". Iksil is collaborating with the investigators and was able to demonstrate by email that he had tried to warn his superiors of the seriousness of the situation but that he had not been listened to. The superiors, who reject all accusations, are the Spaniard Javier Martin-Artajo, at the head of the derivatives unit and the Frenchman Julien Grout, who recorded the daily assessments of the bank's positions on derivatives. Grout is accused of deliberately downplaying the team's losses.
But the JpMorgan case is not just a story of possible wrongdoing. Just a few days before another possible scandal, the one revealed by the NY Times on the investigation by the Sec for suspicious hiring of children of poppies in China, the economist Jan Kregel highlighted in an interesting study (“More swimming lessons from the london whale”, where Kregel, senior scholar at the Levy Economics Institute of Bard College, New York, deepens and analyzes the conclusions of the report of the US Senate subcommittee) that the JPMorgan's problems have systemic significance, they call into question the management of the big banks and shine a light on some problems that will not be solved by the removal of those responsible for the derivatives scandal. We have already talked about some of these in previous discussions: there is the issue of a bank that has grown so much in size and complexity that it is too big for management to have a clear idea of the real situation; and there is the debate about proprietary trading (which according to Kregel is not a problem in itself) and about a financial system that allows banks to operate in all fields of finance.
Finally, here it is useful to focus attention on another of the hot spots highlighted by Kregel and not mentioned enough: the problem of how the remuneration of the Cio division is managed (chief investment office). In short, the strategies that could have reduced the losses of the "whale" would have implied large costs that the management of the CIO division, whose remuneration is driven by the profitability of its unit, did not want to bear. Kregel explains: “A hedging unit (where trader Iksil worked, i.e. a unit whose function is to invest excess liquidity and take care of hedging the bank's strategic risks, ed.) incurs losses most of the time when the strategy bank operations and credit ratings are managed well; it will generate profits only in times of crisis. Consequently, it was totally inappropriate to remunerate the operations of the IOC on the basis of profitability”.
On the one hand, therefore, there are the traders of the Cio who find themselves after 2010 in a more complex situation than the previous one (when the hedging activity worked without problems) because in a climate that generated expectations of economic recovery they found themselves having to cover new risk areas without the management being able to give them a precise mandate (without going into the technicalities it is enough to mention the huge trading asset portfolio inherited with the Bear Stearns acquisition or the deposits and dubious assets linked to the another acquired bank, Washington Mutual, combined with a change in macro terms and embarrassing losses from the Eastman Kodak bankruptcy).
On the other hand, while dealing with contradictory mandates, traders tried to continue to generate profits (because remuneration depended on it). The trouble therefore does not come from hedging or proprietary trading per se. But “The problem – concludes Kregel – is the failure to accept that this activity has a cost and therefore cannot be a profit centre”.
