Rearranging the deck chairs on the Titanic JPMorgan Flaws Should Ring Alarm Bells Everywhere

From Slate: JPMorgan was supposed to be among the best managers of bank risk in the world. This week it published an internal report into the failings which led to $6.2 billion of trading losses at its chief investment office in 2012. If the mix revealed – conflicting mandates, discredited theory, inadequate checks and primitive technology – is really as good as it gets, financial watchdogs and investors everywhere should worry. There are plenty of lessons for regulators and bank execs who want things done right.

First, the controls should match the mission of a unit that manages excess cash, as the CIO did, and is trying to make money in the process. The report suggests JPMorgan’s supervision was set for the days when the CIO was a sleepier and much smaller operation which engaged in simple, old-fashioned hedging. Not enough changed when the CIO morphed into a trading operation that was a force in the market for complex synthetic credit default swaps. One trader was nicknamed the London Whale in press reports.

In particular, the CIO was under pressure to minimize reported risk. Models are used to calculate the measures of risk: risk-weighted assets (RWA), used to calculate capital strength, and value-at-risk (VaR), used to estimate likely losses. When the models suggested that some assets should be sold to keep the risk at an acceptable level, the unit’s traders sometimes just tried to change the models (i.e. move around the deck chairs…)

Read all about it at http://www.slate.com/blogs/breakingviews/2013/01/18/jpmorgan_flaws_should_ring_alarm_bells_everywhere.html