LONDON WHALE: 'It Is Hopeless Now... We Are Dead I Tell You... I Am Going To Be Hauled Over The Coals'
This afternoon, the Senate Permanent Subcommittee on Investigations released a massive 300-page report slamming JPMorgan claiming the bank mislead investors and regulators over the "London Whale" trade.
The subcommittee's ranking Republican, Senator John McCain, told reporters that JPMorgan "dodged federal regulators and misled the public by hiding losses, by mismarking credit derivatives’ values," according to Bloomberg News.
The Senate report cites instant messages and phone transcripts between traders providing a glimpse of what was happening on the inside at the bank.
Here's an exchange between Bruno Iksil (the actual "London Whale"/the head trader in charge of the Synthetic Credit Portfolio), Javier Martin-Artajo (the head of Credit and Equity Trading who oversaw the SCP) and junior trader Julien Grout who was in charge of marking the portfolio's positions each day.
Note that this conversation took place in March of 2012. The "London Whale" wasn't revealed in the media until April.
From the Senate report (emphasis ours):
(4) Trading Stopped
On Friday, March 23, 2012, Ina Drew ordered Mr. Martin and Mr. Iksil to “put phones down” and stop trading credit derivatives related to the SCP book. The halt in trading did not, however, produce a halt in the mismarking.
The SCP book, which was essentially frozen in place on March 23, continued to incur losses throughout the trading day. Mr. Iksil informed Mr. Martin-Artajo that the SCP losses that day were huge, between $300 and $600 million, depending upon whether the CIO used the midpoint or “best” prices available in the daily price range (bid-ask spread): “I reckon we have today a loss of 300M USING THE BEST BID ASKS and approximately 600m from the mids.”
Using instant messaging, Mr. Iksil asked Mr. Grout to find out from Mr. Martin-Artajo what level of losses to report for the day. Mr. Iksil characterized the huge losses as “hopeless,” predicted “they are going to trash/destroy us,” and “you don’t lose 500 M[illion] without consequences,” concluding that he no longer knew what marks to use:
Mr. Iksil: “It is over/it is hopeless now. ... I tell you, they are going to trash/destroy us. ... [T]onight you’ll have at least [$]600m[illion], BID ASK, MID. BID ASK, YOU HAVE [$]300M[illion] AT LEAST... it is everywhere/all over the place. we are dead i tell you.”
[Later that day]
Mr. Grout: “will you give me the color please? if there is some.”
Mr. Iksil: “nothing for now... it will be negotiated with the IB [Investment Bank] at the top and I am going to be hauled over the coals. ... you don’t lose 500M without consequences. ... ask javier what pnl [profit and loss] we print today. ... please, go see javier. i don’t know which pnl i should send.”
Mr. Grout: “did you talk to javier?”
[5 minutes later]
Mr. Iksil: “yes. we show -3 [basis points] until month end on this one. ... all that I am asking you is to tell Javier what you see. that’s it and he decides what we show. because me, i don’t know anymore.”723
Less than an hour later, Mr. Iksil repeated many of the same complaints to a CIO colleague, stating that the crux of the problem was that the CIO had become “too big for the market.”
Mr. Iksil: “[I]t had to happe[n]. [I]t started back in 2008 you see. [I] survived pretty well until [I] was alone to be the target. [Y]es [I] mean the guys know my position because [I] am too big for the market. ... [B]ut here is the loss and it becomes too large and this is it. [W]e realize that [I] am too visible.”
Despite the emails predicting losses of between $300 million and $600 million, at the end of the day on March 23, 2012, the CIO reported internally a daily loss of only $12.5 million.”
The JPMorgan "London Whale" trader first surfaced in media reports in April of 2012. Both Bloomberg and the Wall Street Journal reported that Iksil had a position so big it was rattling the market.
Initially, CEO Jamie Dimon dismissed it as a "tempest in a teapot."
Then on May 10th, JPMorgan revealed a $2 billion dollar trading loss in it's Chief Investment Office in London related to derivatives trades from the so-called "London Whale."
In June, Dimon was grilled before the Senate Banking Committee and the House Financial Services Committee. He maintained that it was an "isolated incident" and said "senior management and myself should have better monitored the CIO office."
When the bank released its Q2 earnings results on July 13th, it was revealed that the trading loss was actually $5.8 billion, more than previously thought. The bank also had to restate its Q1 net income saying it was $459 less than previously reported.
There is a Senate hearing scheduled for tomorrow on the London Whale trade and it include appearances from JPMorgan's ex-CIO Ina Drew and ex-CFO Douglass Braunstein this time.