[ by Larry Goldfarb ]

From the time JPMorgan announced its major trading loss - commonly referred to as the "London Whale Trade" - I've played out several scenarios in an attempt to understand how something like this could happen at a bank known for its risk controls. 

Mismanagement at different levels of the bank has been singled out as a likely explanation for such a shocking loss - this essentially is confirmed in the report released last week by JPMorgan that is based on the bank's internal investigation.  Yet, as logical and credible as that explanation seems, I just don't buy it - oversight or mismanagement  wasn't the issue, here.

I've had the privilege of working at a number of top firms on Wall Street, have crossed paths with a number of current and former risk managers at JPMorgan Chase.  One in particular, whom I won't name, worked close to me before moving on to Chase - prior to its combination with JPMorgan.  She did well there and was heralded by the New York press for keeping the bank out of severe turbulence that buffeted other institutions.  I distinctly recall a conversation that began with the comment that Chase must have some pretty good systems, because its people are pretty ordinary, as we know.  My colleagues all laughed.

A Culture of Common Sense.   I've since come to believe that what makes JP Morgan different from its rival banks, particularly during the "Jamie Dimon" era, is a semblance of common sense.  The stupidity, or perhaps carelessness, that seems to periodically trap Citigroup and Bank of America, just never seems to happen at JPMorgan Chase.  Significantly, that culture of common sense seems to emanate from the top - which is not hard to understand because CEO Jamie Dimon encapsulates the clear thinking that his mentor, Sandy Weil, possessed, though without Sandy's hubris or bluster.  

And that is what makes the bank's London Whale Trade report so distressing - the fact that it paints Mr. Dimon in such an incompetent light.  First, it notes he has travelling when the issues of the trade became known.  Next, his loyalty to Ina Drew, who headed chief investment office, curiously bordered on stupidity or carelessness.  After all, here was a trading operation that managed a large portion of the bank's balance sheet, and yet, he supposedly was issuing risk waivers?

Finally, the report notes that upon asking for an explanation as to why traders were adding to the bank's position, as opposed to unwinding it, he was told - and presumably accepted - that adding to the position was the most efficient way to do it.  Such an explanation strikes me as strange, and I'm sure many would agree.

Summation.   As was mentioned in an earlier C-I posting about Dimon's relationship or involvement with the trade, I do believe Jamie Dimon is crazy like a fox.  [To read that posting, go to:  The JPMorgan Trading Loss: A Trader Taking Full Advantage of Very Lax Oversight or a Simple Conspiracy Plan, 6/12/12]   But, given the findings of the JPMorgan report and the fact that it was made available to regulators, Congressional leaders, along with the general public, my faith in the acumen and clear thinking of Mr. Dimon may require some reevaluation.

For more information, please read [NYT Dealbook, 1/16/13].