JPMorgan blames risk management for "London Whale" loss

NEW YORK Thu Jan 17, 2013 3:18am IST

A woman walks past JP Morgan Chase's international headquarters on Park Avenue in New York July 13, 2012. REUTERS/Andrew Burton/Files

A woman walks past JP Morgan Chase's international headquarters on Park Avenue in New York July 13, 2012.

Credit: Reuters/Andrew Burton/Files

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NEW YORK (Reuters) - Peter Weiland, the most senior risk officer in JPMorgan Chase's Chief Investment Office before the "London Whale" scandal broke last April, quietly resigned in October, according to a report by the bank that emphasizes the CIO's risk-management failures.

Weiland's resignation had not been previously reported in the media.

The JPMorgan Chase & Co report (JPM.N) was released on Wednesday in conjunction with its fourth-quarter earnings. It cited failures in risk management inside the CIO and by JPMorgan's senior management.

"CIO risk management made a number of key missteps," the report said. It added that "the firm did CIO evolved commensurately with the increased complexity and risks not ensure that the controls and oversight of CIO's activities."

The CIO lost $6.2 billion when positions in a small, opaque derivatives market quickly lost value under a squeeze by several hedge funds. From the time the squeeze was first reported in April to a series of midsummer statements by JPMorgan and Chief Executive Officer Jamie Dimon, a number of managers at the bank lost their jobs or changed positions.

The bank conducted an internal investigation into the incident and regulators in the United States and the United Kingdom opened their own inquiries. The bank revealed in July that it found evidence some CIO employees in London might have attempted to hide losses in the CIO's books mis-marking the values of some derivatives trades. An investigation by the U.S. Securities and Exchange Commission and the Federal Bureau of investigation is continuing.

By at least August, Weiland had hired a lawyer to represent him in the investigations into the trading losses. He continued to work in risk management in the CIO until October, when he resigned.

Weiland's lawyer did not respond to requests for a comment.

RISK-WEIGHTED ASSETS

According to the report, problems began inside the CIO in December 2011 while JPMorgan was trying to adjust its risk-management protocol to meet new international regulatory capital requirements in the Basel Accords.

A CIO trader raised concerns with the managers of a book of credit derivatives over the use of trades in the book to reduce the bank's holdings of risk-weighted assets. Regulators would use these assets to calculate the amount of capital the bank would need to hold.

Over the next two months, the concerns were passed on to a chain of managers inside the CIO, eventually coming to the head of the office, JPMorgan chief investment officer Ina Drew.

"These concerns were not fully explored," the report said. "At best, insufficient inquiry was made into them and, at worst, certain of them were deliberately obscured from or not disclosed to CIO management or senior Firm management."

The report quoted Weiland saying in an email that he thought one of the traders involved had provided an "overly optometric" view of how the bank could use derivatives to reduce its risk-weighted assets.

Meanwhile, the CIO traders managing the credit derivatives portfolio wanted to add to their positions to "defend" against losses, the report said.

Weiland, who was the head of market risk for the CIO until mid-January 2012, was the most senior risk officer in the bank's money-making office when some of the derivatives trades that helped lose the $6.2 billion were being made.

The report described him as the de facto chief risk officer for the CIO, reporting directly to top JPMorgan risk manager Barry Zubrow until January, when Zubrow was moved out of the bank's risk management team. Weiland also sat on the firm-wide risk working group of which Zubrow was chairman.

In mid-January 2012, JPMorgan appointed Irvin Goldman chief risk officer of the CIO, placing him in above Weiland. Goldman held that position until May and left the bank in July.

"The report points out that Irv Goldman made an effort to put in improved practices in the Chief Investment Office as soon as he was appointed chief risk officer," said Goldman's lawyer, Lawrence Iason, a partner at Morvillo Abramowitz.

"It's worth noting that there has been no criticism of the procedures that Irv was putting in place. At no point does anyone say that what he was doing was deficient in any way." (Reporting By Emily Flitter; Editing by M.D. Golan and Andre Grenon)

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