JP Morgan Chase & Co Chief Investment Officer Ina Drew is retiring, the first casualty after the bank suffered trading losses that could reach more than $3 billion and that have sparked an investigation by U.S. securities regulators. In Drew’s place, the bank on Monday named Matt Zames, a trader by background who is well versed in risky financial bets. He was at one time employed at Long-Term Capital Management, whose 1998 collapse nearly caused a global crisis.
The biggest U.S. bank by assets said on Monday that Mike Cavanagh, CEO of the Treasury & Securities Services group, will lead a team of executives overseeing its response to the losses. The bank’s statement made no mention of two of Drew’s subordinates who were involved with the trades — London-based Achilles Macris and Javier Martin-Artajo — who sources had said were expected to leave. Neither could be reached for comment. The departure of Drew after 30 years at JPMorgan comes after the unit she ran, known as the Chief Investment Office (CIO), mismanaged a portfolio of derivatives tied to the creditworthiness of bonds, according to bank executives.
The portfolio included layers of instruments used in hedging that became too complicated to work and too big to quickly unwind in the esoteric, thinly traded market. Shares of JPMorgan fell 2 percent to $36.19 at midday on the New York Stock Exchange. The stock has shed nearly 12 percent in value since the losses were disclosed, or some $18.12 billion in total. Ratings service Moody’s warned Monday the trading losses were a “credit negative” for bondholders as well. One hedge fund manager who previously ran a proprietary (or prop) trading book at JPMorgan said the bank’s public commitments to trim balance sheet risk were at odds with its network of trading silos, who were making bets independently — with only a handful of the bank’s most senior executives notified of their vast, complex exposures.
“This (CIO) group was completely separate, completely distinct from the prop trading unit. We had no clue about their prop book and they would have no clue about ours for that matter,” the manager said. REGULATORY OVERSIGHT The mammoth losses have marred JPMorgan’s reputation for risk management and thrown an unflattering spotlight on Dimon, a critic of increased regulation. He is scheduled to speak on Tuesday at the bank’s annual meeting in Tampa, Florida. Dimon has said he is open to regulatory scrutiny of the losses, which the White House confirmed on Monday was underway. “There is an investigation into what happened at JPMorgan that the SEC is conducting,” White House spokesman Jay Carney told reporters aboard Air Force One, declining to elaborate. But even as U.S. officials dig into the losses, European regulators had sharp words for the oversight to date. “The issue does not only underline the failure of good risk management … but might also raise questions on external supervision,” Michel Barnier, European Union commissioner in charge of financial regulation, said in a statement. “More internal and external controls and supervision are needed. Supervisors need to be more proactive on this front.”
PAST PERFORMANCE: Drew had repeatedly offered to resign in recent weeks after the magnitude of the debacle became clear, according to one source, but the resignation was not immediately accepted because of her past performance at the bank. Until the loss was disclosed late Thursday, Drew was considered by some market participants as one of the best managers of balance sheet risks. She earned more than $15 million in each of the last two years.
According to JPMorgan’s last annual proxy statement, Drew was one of the four largest holders of company stock among directors and executive officers, with 1.36 million shares or imminently exercisable options. The proxy also indicated Drew would be entitled to the continuation of almost $14.7 million in stock awards in case of resignation, provided she was an employee in good standing and had met “full-career eligibility” criteria.
“Ina is an amazing investor,” said a money manager who knows her but declined to be identified. “She’s done a really good job over a lot of years. But they only remember your last trade.” JPMorgan described her replacement, Zames, as a “world-class risk manager and executive.” Before joining JPMorgan in 2004 he ran prop trading in the interest rate group at Credit Suisse First Boston, having joined CSFB from a trading job at Morgan Stanley. He was seen as one of the winners in 2009, when Jes Staley reorganized JPMorgan’s investment bank, taking on the fixed income co-head role.
The derivative hedging game played by JPMorgan Chase is no different than that played by AIG in 2008.
Yet Jamie Dimon tells us that JPMorgan had merely “made a terrible, egregious mistake.” He might as well have said that the bank was wrong to keep raising in a poker game when it was apparent it should have folded.
And why was JPMorgan busy betting in the first place — right after our economic meltdown, and while fighting government regulation?
One answer is that it knew it could bear the gambling losses.
That’s right. With $2 trillion at hand, JPMorgan can yawn when $3 billion goes down the tube.
Nonetheless, Dimon tells us that he sees no problem with the government dismantling big failing banks. This is good to know because the government might have to start dismantling big banks before they fail — and before they have another chance to take us down with them.
The important lesson from the JPMorgan fiasco is not that stringent regulations are still needed to reign in on derivatives, but that banks big enough to remain standing after taking huge hits are ripe enough for us to chop down to size.
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