Jpmorgan & the London Whale

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3/ PERSONAL BEHAVIOURS :

- Although the SPC fund was intended to be a long-term hedge fund, the traders used some highly speculative methods. For example, they shorted a large amount of the HY index in order to get exceptional revenues in the event of the bankruptcy by one of the underlying companies. This is for this reason that the trader Bruno Iskil got the nickname the “London Whale”.

⇒ the trading methods should be more monitored by the management in order to reduce the overall risk exposure of the fund.

- If we check the SCP risk limits breaches during 2012, we noticed that the CS01 metric limit has been exceeded for almost 4 months (same situation for thee CIO VaR metric).

- A lot of decisions in this case has been taken because some people were arrogant and thought the market was wrong and they were right. As an example it is said many times that Martin-Artajo thought this way. They didn’t want to see that the SCP was going in the wrong way and thus took the wrong decision regarding the settlement of the issues they faced. For example this led to the change in the Marking-to-Market policy with the only argument of “I think the market is wrong”.

⇒ Although breaches of the risk limit are not uncommon and do not necessarily require immediate action, in this extreme case, Ina Drew should “have sounded the alarm” and take appropriate immediate measures to reduce the risk exposure of the fund.

4/ THE KEY IMPROVEMENTS IN RISK MANAGEMENT POLICY :

The 3 top changes in the risk management policy would be :

Modify the global hierarchy organisation and control, especially the CRO and CIO positions.

The control tools have to be tried out before the implementation

The hedging methods have to be controlled and should respect the risk avoiding strategy

As a conclusion, Risk Management is important, and limits are set to warn about potential too high exposures, but it should not replace the final objective of hedging the portfolio. In other words, a bank must control on a daily basis the breaches of limits, but shouldn’t immediately react by reducing or increasing exposure. A breach of limit is a warning.