The devil is in the details and the desperation is in the e-mails.
In the US Senate Permanent Subcommittee on Investigations’ report on JPMorgan Chase's epic $6 billion loss thanks to bad bets by the London Whale, we see what happens inside an vaunted investment firm when things start to collapse.
Thanks to the committee’s 301-page report on the botched derivatives bets, there are nearly 600 pages of e-mails, telephone transcripts and other internal reports. And it isn't pretty.
Bruno Iksal, the so-called London Whale, sent an email to about 20 colleagues with bad news: his book had double the losses that were actually on the books. Cue Javier Martin-Artajo, the London Whale’s supervisor, to chew him out.
"Yea I don't understand your logic, mate, I just don't understand," Martin-Artajo said. "Achilles, he told me that he didn’t want to show the loss until we know what we’re going to do tomorrow. But it doesn't matter. I know that you have a problem, you want to be at peace with yourself, okay, it's okay, Bruno."
A spreadsheet detailing the bank's comprehensive risk measure, or CRM, "just shows the problem," Martin-Artajo told his trader. "It shows that that we have a book that has been reduced in terms a lot. It shows that these guys have been doing something with the model that is stupid, okay, because the CRM now, they just don't know how to explain what we do, okay? They're just stupid quants, really."
You have to love the "Stupid Quants" line.
So, the men and women with the advanced degrees are responsible for the losses at the bank. Blame the eggheads! No mention of the traders who tested the formulas or stopped them the instance they started to lose big. In fact, Bruno's e-mail estimated that the daily loss of $43 million in the synthetic credit portfolio had a $600 to $800 million "lag" - the so-called difference between the levels reported internally and actual mid-prices in the market.
There was a recent tweet on Twitter asking "Why do the losses inside JPMorgan Chase require Senate hearings?"
Well, these e-mails show a corporate culture where supervisors urge underlings to hide losses, not share information with regulators and keep the looming disaster mum. In fact, it took CEO and Chairman Jamie Dimon weeks to discover the scope and scale of the losses. And even then they had to plan how the news would be released. If the losses rolled on, they could have had an impact on the other sections of the bank, especially the Chase team, where you and I have our checking accounts and money markets.
If Lehman Brothers faded in a cloud of dust thanks to being leveraged more than 40 to 1, what could happen with a bad multi-billion bet?
I doubt a stupid quant would make that bet. Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio