JPMorgan accused of hiding losses, deceiving regulators & misinforming investors

Dawn Kopecki & Michael J Moore

“We are dead I tell you,” Bruno Iksil, a London-based trader at JPMorgan Chase, messaged an associate on March 23, 2012. “It is hopeless now.” Iksil, a Frenchman who would soon become known as the London Whale because of the size of his trades, had lost $44 million on corporate-credit bets three days earlier and was down more than $500 million for the year. He and junior trader Julien Grout, under pressure from their manager, had tried to hide the extent of losses that would swell to more than $6.2 billion, the bank’s biggest trading blunder ever.

“They are going to destroy us,” Iksil wrote to Grout in one of hundreds of e-mails, messages, transcripts of recorded conversations and other documents released in March by the US Senate’s Permanent Subcommittee on Investigations after a nine-month probe. In a 301-page report and at a hearing, the panel accused the largest and most profitable US bank of hiding losses, deceiving regulators and misinforming investors.

The report, the bank’s own 129-page account and interviews with traders and executives offer evidence of a widening spiral of panic as the losses became known beyond a small circle of traders and the extent of the damage reached top management, including CEO Jamie Dimon.

Quartered Results

What the documents show is that Dimon presided over a company whose traders amassed growing positions in complex derivatives and whose executives offered rosy forecasts, withheld information from regulators and ignored risk limits that were breached 330 times in the first four months of 2012.

The records reveal how little has changed to prevent even the best-managed banks from speculating their way into trouble five years after the collapse of Lehman Brothers and three years after passage of the Dodd-Frank Act.

The FBI and the US Securities and Exchange Commission are scrutinising public statements, calls with investors and the April 13, 2012, earnings presentation by Dimon and then-CFO Douglas Braunstein, according to five people with knowledge of the probes.

The criminal investigation is focusing on, among other issues, whether traders painted the tape, a form of market manipulation that allows them to inflate the value of their positions, three of the people say.

After Bloomberg News first reported on April 5, 2012, that Iksil’s book had grown so large it was distorting markets, executives downplayed losses that by then had eclipsed $1 billion. Dimon dismissed the matter on an earnings call eight days later as “a complete tempest in a teapot”. When JPMorgan reported earnings on April 13, 2012, neither Dimon nor Braunstein said that JPMorgan’s first-quarter results included a $700 million loss on Iksil’s book, equal to about 10% of the bank’s pretax income.

Dimon didn’t mention that he had approved raising a risk limit breached by Iksil’s trading and that he had been sent a presentation the night before showing some positions were so illiquid they could take months to unwind, even under the most ideal circumstances.