The Inadequacies of JPMorgan Chase
“Inadequate oversight and governance to protect the bank from material risk, inadequate risk management processes and procedures, inadequate control over trade valuation, inadequate development and implementation of models used by the bank, and inadequate internal audit processes,” are among the deficiencies that the Federal Reserve and Office of the Comptroller of the Currency found in JPMorgan’s (NYSE:JPM) derivative trading activities.
Last year, JPMorgan lost about $6.2 billion in a highly-publicized fiasco centered around a London-based trader nicknamed the London Whale. This trader, whose real name is Bruno Iksil, made outsized credit derivative bets that clearly did not work out in his favor. Regulators from both the United States and the United Kingdom opened investigations into JPMorgan as a result, and now the first mandates have come from on high.
Regulators are not requiring the bank to pay fines (not yet, at least) but have outlined steps that the bank should take to upgrade its risk management. These include revisions to the inadequacies mentioned above, as well as changes to internal process such as the way that issues are elevated from trading desks (like the one in London) through management and to the board of directors…
JPMorgan’s trading loss is just one of a few that have baked in the media spotlight over the past few years. A trader at UBS (NYSE:UBS) named Kweku Adoboli lost $2.3 billion in 2011 making unauthorized trades in equity index futures over the course of three months, and cooked the books to hide his actions. Adoboli was eventually convicted of fraud, abuse of position, and false accounting, and was sentenced to seven years in prison.
It’s unclear what the fate of Iksil will be, and perhaps less clear what the fate of JPMorgan will be. Coming at the heels of the regulatory slaps, the company is due to release its fourth-quarter earnings before the markets open on January 16. Also expected with the firm’s earnings is a 50-page internal probe into the trading loss that could fault CEO Jamie Dimon.
JPMorgan also faces pressure to enhance its money-laundering controls. Regulators have made a wide-sweeping effort to get banks to beef up their security in light of a series of money laundering events. Most recently, a former Citigroup (NYSE:C) secretary was found guilty by a federal jury on three counts of money laundering, and for stealing $1.3 million from William Salomon — another instance of a banking employee abusing their position.
Investors seem uncertain what to do with the company’s stock ahead of the news, which is likely to generate a flurry of trading activity, one way or another.
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