Bruno Iksil, aka “the London Whale,” has issued a letter to the media arguing that his actions in the market were directed and overseen by senior executives at J.P Morgan Chase when it lost $6 billion in 2012.
What is troubling about the case is that it is still a story. In pre-2008 years, if a trader lost a large sum of money, it was called a losing trade. But these days, it’s cause for a multi-year investigation. The crux of the problem with this case is simply this, J.P. Morgan Chase lost $6 billion, but it HAD and HAS the money to cover the loss. If it didn’t have the cash to cover, then we are talking about something much different indeed.
Of course, in the wake of the 2008 financial crisis, there has been heightened focus on counterparty risk, increased margin and capital requirements, pre-trade risk controls, post-trade analysis and so on. Should the bank fall under scrutiny for failed risk management? Maybe, if such margin and other risk management thresholds were breached. But the case should be done and over with by now. If Iksil did nothing wrong, he should be allowed to move on with his career and life. If J.P. Morgan has learned from the error and implemented better risk management structures, let’s move along.
It would be easy to equate J.P. Morgan’s Whale case with say, AIG or others during the 2008 meltdown, but for this one simple fact – they have the cash to cover the loss.
Of course, we can’t have a heads I win/tails the taxpayers lose situation, either. In 2008, what angered both sides of the aisle is that, after the fact, many of the risk takers did not lose one dollar of their personal fortunes. If the taxpayers are to come to the rescue, it should be after the Bruno Iksils and his superiors have their bonuses clawed back. So the global regulatory overhaul includes capital charges, leverage limits, liquidity coverage and other rules designed to give banks a backstop to prevent a passing of the hat to society at large. The downside of this, of course, is that idle capital is a drag on productivity and growth. Finding that sweet spot continues to be a challenge for our banks.
The danger in today’s environment is that we’re at a point where institutions are not allowed to take risk nor lose money. This has a deleterious effect on the markets, as banks shutter trading operations and pull out of various sectors in the trading ecosystem.