Jp morgan london whale case study. London Whale - Casestudy and Timeline -
The new strategy would further increase the size of the breach as the overall exposure of the portfolio would increase with its implementation. The focus of the SCP seems to have blurred from the original motivation of setting up the SCP which was to hedge the credit risk of the long term income bearing portfolio of the CIO. In addition, Risk committee meetings were held infrequently and did not seem to have any specific charter or mandate and were rarely attended by other than CIO personnel.
The main investment was in high quality income bearing securities such as whole loans, mortgage backed securities, corporate securities, sovereign securities, asset backed securities, etc.
Martin-Artajo, who directed Mr. The bank eventually conceded that the new VaR standard was seriously flawed JP Morganbut not jp morgan london whale case study the change emboldened traders to increase the size of the London Whale bet, which resulted in doubling down after a loss with bigger and bigger bets; eventually leading to even greater losses.
Chief Financial Officer sends the e-mail 6-Apr Traders focus had shifted from hedging to profit making, particularly following the implementation of the revised VaR model. CIO traders tried to defend their existing positions by further growing their portfolios with huge trades to support market prices.
For the first quarter financial results, CIO manufacturing business plan proposal had tried to downplay mark to market losses by setting marks that were at a significant variance to the midpoints of dealer quotes in order to show a better than actual MTM picture on the books.
Additionally, the bank began using a new formula for manufacturing business plan proposal at risk that cut Mr. Most of the risk metric breaches were not fast tracked to the CIO head and as mentioned earlier, separate risk numbers, exposure or daily trade data for the SCP were not communicated to Ina Drew.
For Mr. The mandates given to the SCP team enhanced this conflict.
Federal officials charged the responsible persons on five counts, including securities fraud, conspiracy, filing false books and records, wire fraud and making false filings with the U. A separate spread sheet was still kept by Mr.
The former is appropriate for small moves in credit spread but does not account for the convexity present in more complex portfolios. In addition these limits were not hard limits, i.
It is not a single event that brings about catastrophic loss. London Whale — timeline of Events The traders started to substantially increase their investment-grade long positions. They also hedged investments with securities that moved in the opposite direction. Dimon, Braunstein, Hogan and Ms.
In the meeting held in Februaryfor example, they mentioned that they were working on reducing RWA as tasked by the bank, but they failed to mention that their strategy required them to increase overall portfolio exposure and that the SCP was already making significant losses. Further, there were no limits on portfolio composition or asset concentration or by risk factor as well as no limits on the actual market value of the SCP.
Spread Sheet Error. London Whale — pricing deficiencies Due in part to the illiquid nature of the indices, traders had too much flexibility when setting prices to be used as marks for the mark to market process. Limits were not granular enough, being reported only at the aggregate CIO portfolio level instead of also separately for the SCP.
That prompted Mr. Weiland did not have the necessary clout to withstand the pressures from the traders and CIO management. Therefore there was nothing to benchmark the growing risk appetite of the traders in the light of more favourable risk limits following a revision to the VaR model nor their determination to continue to trade to defend existing positions so as to minimize the negative impact on PNL.
Wrong decisions, poor choices, lapses in judgement, not understanding or accepting limitations, faulty controls and oversight, conflicting interests as well as external events beyond company control, all contribute to bring about a calamitous news breaking event.
In order to reduce the negative impact on PNL the SCP team started making speculative high risk trades as well as defending their positions against adverse price movements by buying and growing instead of reducing the portfolio. Given the illiquidity of the markets, however, the CIO became significant market movers in these securities, thus reducing their ability to exit the markets without being impacted negatively by it.
In addition, as the securities in the SCP were fairly illiquid and because the CIO were a significant part of the market any attempt to sell would cause prices to dip thus worsening the position.
That was later confirmed as a deception by Mr. The task force assigned by Britannia khao world cup jao case study Morgan Chase Bank to investigate CIO Losses reported that the risks of the trading strategies were neither adequately analysed nor questioned prior to their implementation. There was no segregation or independent evaluation of the risk of the SCP by the bank wide risk management team.
Hogan directed senior members of firm-wide Market Risk to commence a position-by-position review of the Synthetic Credit Portfolio and eventually to take over the responsibility of for the Synthetic Credit Portfolio.
London Whale Presentation
Instead of averaging the midpoints of bid ask prices from several different dealers with significant trades in the instruments, only those that were favourable were chosen by the traders to set the prices.
London Whale — conflicts of interest Ina Drew was the reporting line for both the investment and risk management teams.
Manual updates required in EXCEL spread sheets Lowered volatility for illiquid securities based on the assumption that prices for days on which trades did not occur would be the same as the price when last traded Coding errors in the calculation short essay noise pollution hazard rates and correlation estimates Use of a wrong Uniform Rate option in the built in analytics suite instead of the Gaussian Copula model option required under Basel 2.
A solution was to implement a new VaR model for setting VaR limits.
Goldman, this was his first risk management position in his career which mainly had a capital markets focus. The time line and the depth of research and resources expended for construction and implementation were dictated by the demands of the traders rather than the standard practice of a thorough review and testing of the model.
The new model would also influence the amount of risk weighted assets that were being calculated for the CIO.
However, the Mr. Chief Investment Office did everything including misguiding the authorities by placing trust upon untested models which showed less risk which in turn provided free hand for traders to try to exploit riskier options and ignoring all the danger signals provided by the stress testing.
- Spread Sheet Error.
- London Whale — Overview To briefly recap the debacle before moving to the contributing factors:
In addition to this in Aprilsenior management were misinformed about the potential losses and market recovery of the SCP positions. Highly subjective judgement and inconsistent selection processes were used to determine the most favourable marks.
London Whale - Casestudy and Timeline -
London Whale — Inadequate controls VaR works well for liquid markets because of the existence of a credible price history- it may not be appropriate for illiquid markets with numbered institutional investors literature review irb price history is more fragmented and less frequent. If the protection was bought short risk positions the cash flows were as follows: The premise for implementing a new model was that the existing one was too conservative which lead to an overstatement of risk thus resulting in limit breaches.
Zubrow, as the JPM task force report admits, did not take adequate steps to strengthen the risk and control framework for the CIO, while Mr.