The 2012 Derivative Debacle
Table of Contents
Derivative Debacle Overview4
Events Leading Up to the Debacle5
Credit Default Swaps and their Use5
Why did JPMorgan Lose Nearly $6 Billion?7
What Did we Learn from this Debacle?9
JPMorgan Chase & Co. is the leading financial services firm in the world with operations in over fifty countries. It was founded and based in the United States where its corporate headquarters is located in New York City. It has six core businesses: Investment Banking, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, and Asset Management (JPMorgan Chase & Co.). This bank came to be JPMorgan Chase & Co. in 2000, when the Chase Manhattan Bank, originally founded in 1799, merged with J.P. Morgan & Co., originally founded in 1871. It also had many predecessors such as Chemical Bank, Bank One, and Manufacturers Hanover Trust Co. (JPMorgan Chase & Co.). Over the years, JPMorgan Chase & Co. played major roles in certain transactions and events. For example, this bank was involved in the First World War where it helped the British and the French by arranging a $500 million Anglo-French loan which was, at the time, the largest foreign loan in Wall Street history (JPMorgan Chase & Co.). It also supported the European Allies by becoming their purchasing agent. Furthermore, many of its predecessors helped revolutionize banking throughout the years. For instance, they introduced automated teller machines (ATM), helped in the formation of electronic banking networks, and helped pioneer the earliest forms of online home banking services (JPMorgan Chase & Co.). Moreover, there were key mergers and acquisitions that shaped the company. Some acquisitions include Bank One (2004), Washington Mutual (2008), and Bear Stearns & Co. Inc. (2008). Although JPMorgan Chase & Co. succeeded in becoming a global leader in many areas of business, it recently suffered a steep downfall due to derivative trading.
Derivative Debacle Overview
In May 2012, Jamie Dimon, CEO of JPMorgan Chase & Co., announced a trading loss of $2 billion on synthetic credit positions (Shorter, Murphy, & Miller, 2012). The unit mainly responsible for this loss was the Chief Investment Office (CIO). This London-based unit oversees the company’s investment exposure and is therefore heavily involved with risk management such as dealing with interest and foreign exchange rate risk. It also manages certain types of credit risks that result from daily operations of different lines of business (Shorter, Murphy, & Miller, 2012) There were several people who were directly involved with the derivative debacle. Jamie Dimon played a key role since he was responsible for restructuring the CIO in a way to create a larger emphasis on making profits by dealing with much riskier financial derivatives. Within the CIO, there was Ina Drew who was hired by Jamie Dimon to be the head of the CIO. She was pressured by the CEO to switch positions from being a hedger to a speculator for the company in order to seek profit. Therefore, Drew had created the trading strategies for the unit to carry out (Fitzpatrick & Zuckerman, 2012). While managing the CIO, Drew hired Achilles Macris as a trading supervisor in the London office. Working alongside Macris was Javier Martin-Artajo, who was the managing director. Both were responsible for carrying out Drew’s strategies and oversaw the trades (Fitzpatrick & Zuckerman, 2012). Reporting to Mr. Martin-Artajo was Bruno Iksil, a key trader in the CIO. He is known as the “London Whale” since he would take on large and risky positions when trading. As a consequence of the derivative debacle, all four individuals of the CIO left the firm shortly after the loss was reported (Fitzpatrick & Zuckerman, 2012) Investigations of the...