Bruno Iksil: The London Whale who lost $6.2 billion in JPMorgan Chase trading funds

Bruno Iksil JP Morgan ChasePhoto by SolvencyIIWire

In April and May 2012, large trading losses occurred at JPMorgan’s Chief Investment Office, based on transactions booked through its London branch. The unit was run by Chief Investment Officer Ina Drew, who has since stepped down. A series of derivative transactions involving credit default swaps (CDS) were entered, reportedly as part of the bank’s “hedging” strategy. Trader Bruno Iksil, nicknamed the London Whale, accumulated outsized CDS positions in the market. An estimated trading loss of US$2 billion was announced, with the actual loss expected to be substantially larger. These events gave rise to a number of investigations to examine the firm’s risk management systems and internal controls.

In February 2012, hedge fund insiders such as Boaz Weinstein of Saba Capital Management became aware that the market in credit default swaps was possibly being affected by aggressive trading activities. The source of the unusual activity turned out to be Bruno Iksil, a trader for JPMorgan Chase & Co. Market-moving trades by the bank’s Chief Investment Office had first been uncovered in June 2011 by trade journal Creditflux, which reported on anomalies in CDX HY index tranche pricing dynamics caused by Bruno Iksil ‘s trading activity. The same journal reported on further tranche trading activity by the JP Morgan unit two months later. By 2012, heavy opposing bets to his positions had been made by traders, including another branch of JPMorgan, who purchased the derivatives that JPMorgan was selling in such high volume. Early reports were denied and played down by the firm in an attempt to minimize exposure.

On July 13, 2012, the total loss was updated to $5.8 billion with the addition of a $4.4 billion loss in the second quarter and subsequent recalculation of a loss of $1.4 billion for the first quarter. A spokesman for the firm claimed that projected total losses could be more than $7 billion. The disclosure, which resulted in headlines in the media, did not disclose the exact nature of the trading involved, which remained in progress as of May 16, 2012 as JPMorgan’s losses mounted and other traders sought to profit or avoid losses resulting from JPMorgan’s positions. As of June 28, 2012, JPMorgan’s positions were continuing to produce losses which could total as much as $9 billion under worst-case scenarios. On the company’s emergency conference call, JPMorgan Chase CEO Jamie Dimon said the strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored”.

On February 2, 2012, at the Harbor Investment Conference, speaking to an audience of investors, Boaz Weinstein recommended buying the Markit CDX North America Investment Grade Series 9 10-Year Index, CDX IG 9. This is a derivative that measures the spread between the interest rates of investment-grade worthy companies and the London Interbank Offered Rate (LIBOR). This was a derivative which Weinstein had noticed to be losing value in a manner and to a degree which seemed to diverge from market expectations. It turned out that JPMorgan was shorting the index by making huge trades. JPMorgan’s bet was that credit markets would strengthen; the index is based on 121 investment grade bonds issued by North American corporations. Investors who followed Weinstein’s tip did poorly during the early months of 2012 as JPMorgan strongly supported its position. However, by May, after investors became concerned about the implications of the European financial crisis, the situation reversed and JPMorgan suffered large losses. In addition to Weinstein’s Saba Capital Management, Blue Mountain Capital, BlueCrest Capital, Lucidus Capital Partners, CQS, III, and Hutchin Hill are hedge funds which are known to have benefited from taking the other side of the trade to JPMorgan.

The $6.2 billion loss came from three positions

The $6.2 billion loss came from three positions which partially offset each other. It occurred when the world’s financial markets were in relative calm. Had quality spread curves twisted or worldwide economic distress been more pronounced the loss could have been much higher.

The internal investigation concluded in July 2012 which involved more than 1,000 people across the firm and outside law firm WilmerHale issued a report in January 2013.

Bruno Iksil ‘s trades occurred within the Chief Investment Office (CIO), where staff were reportedly “faithfully executing strategies demanded by the bank’s risk management model”. This unit is reported to have very wide latitude in otherwise unsupervised trading.

Impact on Volcker Rule implementation

The Volcker Rule, part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, bans high-risk trading inside commercial banking and lending institutions. The Volcker rule is sometimes referred to as a modern Glass-Steagall firewall that separates core banking system from higher-risk, hedge fund-style proprietary trading. The rule’s implementation had been repeatedly delayed however, with analysts predicting implementation in 2014 and lobbyists simultaneously pushing to delay it longer. The final version of the Volcker Rule was passed on December 10, 2013, which was implemented in July 2015.

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