There's not a whole lot of new information in JPMorgan Chase's internal report [PDF] about what happened in the lead-up to the $6 billion losses incurred by the London Whale last year. But it's a gripping read, if only because it presents a Rashomon-like counter-narrative to the largely sympathetic hagiography of Ina Drew, the former chief investment officer who ran the division that tallied the losses.
What we are meant to think happened to Drew, after her ultrasympathetic New York Times Magazine profile, is that she was a generally cheery and competent manager who slipped up when it came to supervising the London Whale's errant trades and was forced to take the fall and announce her (semi-forced) retirement as a matter of symbolic leadership. But JPMorgan's account of things is a little different.
In the firm's official telling, Drew was not a sympathetic patsy who got in over her head, but an imperious manager whose single-minded focus on profits and losses made her underlings so terrified of losing money that they allowed a trade to spiral out of control rather than admit they'd screwed up. As personal profiles go, it's basically night and day.
Here is what the report says about the beginnings of the CIO's losses in a trading book called the "Synthetic Credit Portfolio," which were small at the time but ultimately became the Whale. It shows that when confronted with a big trade that was losing money, Drew looked for a loophole that would buy her traders time to make it profitable (getting the firm's higher-ups to give the CIO a special, one-time raise in the amount of risk-weighted assets it was allowed to have on its books) instead of reducing the size of the portfolio and taking a small loss.
In early January, the Synthetic Credit Portfolio incurred mark-to-market losses of approximately $15 million. On January 10, one of the traders informed Ms. Drew that the losses resulted from the fact that (among other things) it “ha[d] been somewhat costly to unwind” positions in the portfolio. Ms. Drew responded that there might be additional flexibility on the RWA reduction mandate, and requested a meeting to review the unwind plan to “maximize p [&] l.”
Drew's profit-centric approach to her portfolio filtered down to her traders, who got the message loud and clear:
Throughout February, the traders continued to add to their investment-grade long positions, and also at this time began to add significantly to their high-yield short positions ... traders sought to “defend the position” or “defend the P&L.”
Then, later that spring, when the London Whale's trades began losing real money, traders began making excuses and scurrying in a frantic effort to avoid having to report a loss to Drew.
[Traders] expressed concern that the prices they were receiving from other market participants were distorted because those with opposing positions (e.g., CIO was long where they were short) were engaged in tactical trading or were providing indicative prices that they would not stand behind. The traders appeared to believe that if they did not respond through additional trading, they would be forced to recognize losses.
Why would JPMorgan's traders have been hesitant to "recognize losses"? Maybe because this is how Drew acted when they did:
The day after the meeting, Ms. Drew learned that the positions in the Synthetic Credit Portfolio were significantly larger than had been reflected in the figures discussed at the prior day’s meeting, as the figures used during the March 21 meeting were from March 7 and did not reflect trading activity during the intervening two weeks. Ms. Drew reacted strongly to this.
According to the report, Drew's tendency to "react strongly" to her traders' mistakes had real consequences. In one case, it seems to have caused a CIO trader to deliberately fudge the size of the Whale's initial losses, running a complex bit of number-crunching called a "Monte Carlo simulation" to get more acceptable numbers to present to her and other executives. That made it impossible for Jamie Dimon and other top brass to know how much money was at stake with the Whale.
I don't put a whole lot of faith in the JPMorgan report, which goes out of its way to implicate people (Drew, Bruno Iksil) who don't work at the firm anymore, while mostly sparing people (Dimon, Doug Braunstein) who do. It's clearly a political work, and others have pointed out that it more or less mirrors Dimon's view of how the Whale debacle went down.
But if it's accurate, then Drew's story changes completely. Rather than chalking up her failure to poor oversight, the task force seems to imply that her flaw was that she created a culture of fear in JPMorgan's chief investment office — one that kept her traders from being forthright with her about their mistakes.
If true, that's a Management 101 snafu. If you're a newspaper editor, you don't freak out when a reporter brings a correction to your desk, because freaking out will make that reporter less likely to fess up to errors in the future. And if you're running a huge, important investment office whose positions are sensitive to small swings in the market, you don't make your traders deathly afraid of admitting that they've lost money.
JPMorgan's CIO traders had a triple mandate in early 2012. They were supposed to reduce their overall risk-weighted assets in compliance with new regulation, "neutralize" the Synthetic Credit Portfolio to make it less bearish, and make money. The task force is essentially accusing Drew of focusing on the latter, to the near-exclusion of the first two:
The Task Force believes that the CIO management, including Ms. Drew, should have emphasized to the employees in question that, consistent with the Firm’s compensation framework, they would be properly compensated for achieving the RWA and neutralization priorities — even if, as expected, the Firm were to lose money doing so. There is no evidence that such a discussion took place.
If I were Ina Drew, this is not a report I'd be happy with, even if most of what's inside won't make it into the Times.