The London Whale Crisis

The London Whale describes a series of trading losses the financial giant JPMorgan Chase recently experienced in 2012 through its England branch. The debacle has left behind a financial minefield and generated much debate about the stability of the financial sector. The “whale” in question is a man named Bruno Iksil who, working for the Chief Investment Office of JPMorgan, made a series of risky trades based on his confidence that they would pay off when the American economy continued to flail. He made these trades with the full knowledge of his company officers and wound up digging the bank into a public relations mess as his investments proved to have been a huge risk (Moore). Iksil hedged such a large bet that even the smallest market dip resulted in millions of dollars lost. The entire time period that Iksil was trading and selling the CIO was reporting figures far from what the reality of their financial trading was, misleading executives and traders alike.

Since the financial collapse in 2008, our nation’s resources have been diverted towards ensuring that the same sort of crisis cannot happen again. This means that companies have been able to refinance their debt and enjoy increasing stock market prices even in the shrunken post-depression economy. Had it not been for the massive influx of Federal Reserve backing to assist in stabilizing the economy, Iksil would have correct in his predictions for economic failure. However the London whale could not have foreseen just how much big business in America would profit from new policy-making aimed at protecting the assets of existing corporations (Petruno). In order to ensure some sort of economic stability, United States policymakers have taken steps to invest in businesses and financially back those investments. This is part of our nation’s attempt to stabilize the overall global market.

The traders in London bet on the American economy’s remaining weak in the wake of the financial crisis, however, this did not turn out to be the case (Roe). When they were unable to reverse these trades, they wound up costing the company billions of dollars in lost revenue. The monetary loss was nothing that the big bank couldn’t handle, but the entire situation was made much worse when the truth about how much money was lost came out. The deception can be traced back to a series of financial coverups, from the trader level all the way to financial executives. Roe presents the argument that in inducting the traders for this crisis, lawmakers are ignoring the larger problem at hand. These financial systems have in a way grown too big to fail and will continue to operate as they have been as long as the system allows them to. This means more financial risks that will potentially be passed on to the public sector and affect the overall economy in a negative way.

Traders bet on credit-derivatives, gambling on the perceived future of American companies which to date are clearly doing much better than expected. Two men involved in the trading, Javier Martin-Artajo and Julien Grout have been charged by the Securities and Exchange Commission with wire fraud, falsifying bank records and contributing to false regulatory filings (Protess & Silver-Greenberg). The “whale” Iksil does not currently face charges, as he has agreed instead to cooperate against both men should the cases come to trial. “JPMorgan agreed to pay $920 million to settle charges brought by the Federal Reserve, the Comptroller of the Currency, the Securities and Exchange Commission and Great Britain's Financial Conduct Authority,” (Mullaney).

The indictments are for JPMorgan’s misleading statements made to company executives and the general public about the size of reported losses, (Roe). While in this circumstance, the statements did not lead to a large enough crisis to put JPMorgan in serious danger, the issue remains that such falsified information could easily have misled investors into a much more urgent crisis. Regulators would have had no time to prepare for an impending problem because according to what information they had everything was fine (Roe). It has been reported that there were two sets of books, the actual losses that had been happening for quite some time, and the falsified data that was presented to higher-level executives (Ben-Achour).

In fact, JPMorgan was able to manipulate the market into creating a falsified demand for credit derivatives. Having already run up an enormous debt, the bank created an artificial pressure to buy even more of the same derivatives by selling an enormous amount of them. Ignoring pricing forces, JPMorgan flooded the market with $7 billion worth of these bets, in a reckless attempt to reduce how much they owed (Mullaney).

In fact, the Dodd-Frank Act put in place after the problems of 2008 has provisions for the potential breaking-up of banks that are deemed too big for failure. It additionally enacted laws to make credit default swaps trading more transparent. This does not apply directly to banks, as there are exceptions in place to exempt such cases. So while the behavior of JPMorgan’s “whale” was certainly risky, it was not technically illegal. It is evident as the JPMorgan case unfolds that this huge shareholder in the international market is a long way away from shutting down even in light of the heavy fines imposed on it. This information is directly pertinent to the type of further regulation Roe calls for in his op-ed piece, as he claims lawmakers should look towards building a sounder financial system. It is telling that the very act put in place to stabilize the market swings and protect investors and consumers alike exempts the biggest financial players in the game from following such policy. These companies control so much of the wealth in market circulation and yet are hardly held responsible when officials engage in hidden practices and deception. The JPMorgan debacle raises fewer questions about what actually did happen, and more about what could have occurred had the situation escalated enough that the bank would have been looking at potential failure. If the situation were to arise that another bailout was called into question, it is vital that every necessary party has enough information to make an informed decision. If anything is apparent resulting from the JPMorgan fiasco, it is that nobody was properly informed about what was happening until far too late.

This case is being looked to internationally as setting a precedent for the legalities of handling such large corporations. Settlements in the billions of dollars essentially amount to a slap on the wrist for most big banks, and in past years have hardly cumulated in any admission of wrongdoing (Protess & Silver-Greenberg). The JPMorgan debacle has a huge historical significance in the power to change how such high-risk business decisions are handled in the court of law. This is primarily because bank officials admitted to a lack of transparency that enabled such a huge mistake to continue, claiming their own fault in the debacle. Such corporations hold an immense amount of power to influence the livelihood of every person involved in even the smallest market transactions, and so to have headlines that read “JPMorgan admits fault” is legendary in the industry.

What is so hard to believe is the full scope of how many traders were implicated in these transactions. The trading went through the lowest levels, all the way up to company executives who had at least some inkling of how many credit derivatives were being sold, and for what purpose. This implicates untold tiers of the JPMorgan corporation for allowing such irresponsible investing to occur, the same lack of oversight that led to the 2008 crisis. Yet only two men are implicated with charges pending, and little discussion is taking place about the broader consequences for the financial system as a whole.

Roe presents both an interesting and valuable point of view in his consideration that current regulation does not go far enough to protect the market from financial shortfalls of this kind. The loopholes in Dodd-Frank combined with ineffectual examinations of financial records on the part of bank officials create many more problems for the overall economy than they solve. Perhaps every bank should come under much closer scrutiny than they must currently contend with in order to ensure complete protection. In order to stimulate economic growth and get the entire system up and running as it was before the 2008 crisis, consumers and investors must be confident in how they are using their money. His claim that there is a “false sense of security” created through such measures is completely valid, in that members of the public look to the huge lawsuits being hefted against JPMorgan and imagine that such large dollar amounts would surely cripple the bank and result in increased scrutiny. There was even reported paycheck docking that took place within the company, as executive salaries were cut in half following the incident being revealed, (Ben-Achour). The JPMorgan scheme has far-reaching consequences for a market that has become globalized, in that investors all over the world put their money towards such a big bank with confidence, and if a scandal like this were to go in a different direction or affect a smaller corporation, there would be international implications.

It has been said that more stringent financial codes will cripple the entire system and result in yet another crisis. While it is true that restrictions placed on banks and businesses will certainly change the way market transactions occur, more transparency can hardly be considered a negative for anyone who is looking to establish a legitimate practice. The flip side to that risk is that investors can invest their money with more confidence, being able to see where their funds are applied within the market. The entire premise behind money bought and sold in the form of stocks and bonds is that it is based on consumer confidence.

Dodd-Frank clearly had little effect on actual business practices and many of the existing loopholes should have been closed long ago in order to prevent any more of these particularly dishonest transactions. Such confidence cannot come from a system steeped in financial corruption and shady business dealings, and so the answer is to reform. The issue here is larger than even a London whale, for it points out larger flaws in the system that desperately need to be amended.

The JPMorgan case raises many questions about the implications of a financial system not understood by the majority of those active participants within it. There is little protection against this kind of trading taking place, instead, lawmakers are looking to punish after the fact. This is a step in the right direction, and away from the policies of recent years that have allowed massive abuse of information to exist within the financial system. This entire scandal took place at the helm of the London investing firm, and yet it has affected every country in the globalized market. Rather than focus on punishing wrong-doers with legal suits and hefty fines, it would be better to prevent such huge mistakes from happening in the first place on an international scale, with regulation between countries as to the transparency and regulation of business practices. It is vital that policymakers from various financial sectors across the corporate work together to form comprehensive guidelines as to the allowances of big business, and form solutions pertaining to the violation of trustworthy business practices

Works Cited

Ben-Achour, Sabri. "U.S. Charges Former JPMorgan Bankers in 'London Whale' Case." Marketplace.org. Marketplace, 14 Aug. 2013. Web. 27 Oct. 2013. <http://www.marketplace.org/topics/business/us-charges-former-jpmorgan-bankers-london-whale-case

Koba, Mark. "Dodd-Frank Act: CNBC Explains." CNBC.com. Cnbc, n.d. Web. 27 Oct. 2013. <http://www.cnbc.com/id/47075854

Moore, Heidi N. "JP Morgan's Loss: The Explainer." Marketplace.org. Marketplace, 11 May 2012. Web.

Mullaney, Tim. "'London Whale' Costs JPMorgan $100M More." USA Today. Gannett, 16 Oct. 2013. Web. 27 Oct. 2013. <http://www.usatoday.com/story/money/business/2013/10/16/jpmorgan-cftc-fine-london-whale/2993203

Protess, Ben, and Jessica Silver-Greenberg. "JPMorgan Chase Is Said to Admit Fault in Settlement of Trade Loss." Nytimes.com. New York Times, 16 Sept. 2013. Web.

Petruno, Tom. "5 Years after Financial Crash, Many Losers — and Some Big Winners." Los Angeles Times. Los Angeles Times, 14 Sept. 2013. Web. 27 Oct. 2013. <http://www.latimes.com/business/la-fi-crisis-winners-losers-20130915,0,7740247.story

Roe, Mark. "Will Banks Be Safer If the London Whale Gets Harpooned?" Financial Times. Financial Times, 15 Aug. 2013. Web. 27 Oct. 2013. <http://www.ft.com/intl/cms/s/0/1417bcba-0596-11e3-8ed5-00144feab7de.html