Tales of the Harpooned “London Whale” – Sinking JP Morgan Chase

David S. White
Principal of David S. White & Associates, a real estate and general business law firm, West Los Angeles

At the heart of the latest news about JP Morgan Chase’s $2 Billion dollar trading loss story, now believed to be at least $3 Billion and possibly $4 or even $5 Billion, lies one gentleman, Bruno Iksil, a/k/a the “London Whale.”  Before the latest news, as recently as last year, Mr. Iksil was known as the “Caveman,” for making aggressive trades that some thought were overly aggressive, but which made money for Chase.  For a man that few had heard of outside the heady world of high finance, Iksil had yet another nickname too – “Voldemort” – Lord Voldemort is the enemy antagonist in the fabulously popular Harry Potter series

Late in 2011, Mr. Iksil had bet about a Billion dollars against a few junk-bond-rated companies.  The London Whale, f/k/a the Caveman, f/k/a Voldemort, bet that these companies would not be able to pay on their debts.  He bet a Billion dollars of Chase’s Money, fresh from the Fed Window and made available for being able to loan to Chase’s customers by the government, but used instead for betting, like you or I might do on a sunny afternoon at Santa Anita.

Mr. Iksil’s bet late last year was considered so risky that other traders took the other side of the bet – there are always at least two sides; somebody wins; somebody loses.  When two companies, parent companies of American Airlines and power company Dynegy filed their petitions for the protection of the bankruptcy courts last year, Mr. Iksil’s bet creamed the bets of similarly situated bettors at hedge funds and other trading rivals, and brought home about $450 Million in hard, cold cash to J.P. Morgan Chase – Ka-Chinnnngggg. . . . .

Now, when you or I go to Santa Anita and pick our horses after reading the horse racing handicappers’ ideas of who is headed to the finish line first, if we lose, we might lighten our wallets by a hundred or two – dollars, that is.  Nothing to write home about; nothing to have to crank up the government money printing presses over.  Life will go on as usual, regardless of the outcome, though you might be deprived of that couple of hundred dollars of ‘mad money,’ spent for a nice dinner with the wife on the way home.

Not so when JP Morgan Chase bets large.  We found that out a couple of weeks ago. The story is still unraveling and few outside the inner sanctum of Chase’s offices and executive suites yet really know the full story of exactly how you go about losing $2, or 3, or 4 or even 5, Billion dollars, betting on a day at the race track, er . . .  I mean at the trading desk of a major international bank.

Now the London Whale did not have a bad prior record, all things considered.  The JP Morgan Chase Chief Investment Office and Mr. Iksil were part of a group that brought in some net income (net, mind you) of $5.09 Billion over the last three years.  This can be gleaned from regulatory filings by the behemoth bank, which are currently being poured over by everybody from the FBI to financial journalists to regulators whose job it is to make sure that major banks do not self-destruct having all this fun making all these hefty bets.

In case you were wondering, that net income of $5.09 Billion has represented over 10% of JP Morgan’s profits (profits, mind you) of some $48.08 Billion during the recent three-year period.  Iksil’s bosses, in London, Achilles Macris, and in New York, Ina Drew, the latter, the head of JPMorgan’s chief investment office and reputedly one who earned some $14 Billion on such trading profits last year, are departing from their head roles as a result of the trading debacle.

Now, you don’t earn some $14 Billion per year without taking some jaw-dropping risks, and making some equally jaw-dropping profits.  Even grossly overpaid baseball players, like Albert Pujols, most recently of the Angels, had to hit a lot of home runs to pull down his long-term quarter Billion dollar contract, but that’s child’s play compared to the fearless bettors who fuel the engine of a JP Morgan Chase.

What is wrong with this picture?  Banks, back in the day – 1946, to be exact – of that indelible, feel-good, cinematic portrait of the American Small Town Banker portrayed by Jimmy Stewart in “It’s a Wonderful Life,” were a good deal simpler then.  Stewart plays George Bailey, who almost took his own life on Christmas Eve, until his guardian angel, Clarence Odbody, came to show George (Stewart) all the lives that he had touched as a banker in a small town, and just how different life in his close-knit community might have been if Stewart had never been born and not been able to play the Friendly Neighborhood Banker role.  How times change within a single lifetime!

In today’s madly interconnected digital world, the role of banks as the most aggressive bettors of government money (your tax dollars and mine, at work), backed up by “Too Big To Fail” Bail Outs, for when times get tough for the bankers, is a hard one to swallow, still remembering what happened in the Fall of 2008, and September of that fateful year, to be exact.  Remember the look on G.W. Bush’s face when he announced to the world that our US and world financial situation would literally melt down without immediate federal government intervention in the form of a boatload of money?  It could only be compared to the same look on the same Presidential face on the morning of 9/11, as he read a children’s book to pre-schoolers, after having whispered in his ear the fateful news of the terrorist attacks.

Much is now being written about risk controls in the major banks and how such systems and internal oversight could prevent such systemic financial shocks in the future.  But, to make Billions, these banks will continue to put at risk Billions, until somebody stops them from this kind of aggressive, overly-leveraged betting of OPM – Other People’s Money.  I fear that we have not learned much, if anything, over the last four years.

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