[ by Larry Goldfarb and Howard Haykin ] The series of errors and misjudgments that resulted in JPM's announced $2 billion loss on 5/10/12 is as spectacular as it is predictable.  Among the points raised in today's WSJournal article ["Inside J.P. Morgan's Blunder"] on the events leading up loss and the aftermath:

• The JPM operating committee gave the Chief Investment Office (CIO) a pass because of its continued profitability over the years.  At company meetings, other investment units typically subjected to harsh questioning.
• Risk controls in effect at JPM require traders to sell out of positions when a loss exceeds $20 million.  The Head of London's trading group exempted the CIO from those limits - something that Jamie Dimon says he was unaware of.
• Jamie Dimon learned of the problem with the CIO's holdings when he read an article about "Bruno Iksil, The London Whale" in the 4/6/12 edition of the WSJournal.  [C-I Note: So much for dotted line reporting, or disciplined internal management reporting.]

Playing 'Follow the Leader', Instead of Just Picking Up On His/Her Cues. The problem at JPM seems like a classic case of "follow the leader."  Jamie Dimon's trusted lieutenants turned their attention away from the CIO group because he did.  They saw that Dimon had implicit faith in the CIO unit's head, Ina Drew, so they adopted that same mentality. The problem with following such a course of action, is that these bank managers - in London and/or elsewhere - abdicated their subordinate obligations to Dimon, their superior.  And they violated a fundamental tenet of every organization - which is to protect the leader at all times - which means look out for anything bad that can happen.  But, before we get too far, it's important that we expose Jamie Dimon's carelessness, and show how it contributed mightily to the series of errors and blunders. Jamie Dimon was careless in the way he handled his implicit faith or confidence in Ms. Drew and her CIO staff - and not in possessing such a high esteem for this bank unit and its leader.  He made 2 "egregious" errors:

• he let down his guard, and allowed his instinctual tendencies of concern about potential risks to evaporate, like wisps of thin clouds - while risks can be abated, they can never be eliminated;  and,
• he expressed his beliefs about Ms. Drew in a way to others - i.e., his lieutenants - either implicitly or explicitly - that communicated to them that it was all right to treat Ms. Drew's CIO unit in reverential terms.  Instead, he would have been better off explicitly reminding his lieutenants that they should do as he says, and not as he feels or acts.
  • CI Note: We could go on and on, expressing our opinions on what Mr. Dimon did and didn't do, what he should or should not have done, but to what purpose?  We believe that its key to simply recognize that management and other errors were made, and nothing we say further will change what one takes away from this concept.

A Question of Competency. The above scenario also says that perhaps JPMorgan's management team was not as strong as it should have been.  The CEO should be hearing both the good and the bad, not just what he wants to hear.  It appears that "Group Think" befelled JPMorgan, and it cost the bank dearly.  Not only did they lose billions, which caused a precipitous decline in shareholder value, but its reputation - previously held in such high esteem - has been blighted and soiled, which exposes a vulnerability in the bank. As a result, the final version of the Volcker Rule will seriously reflect upon recent events - regardless of whether it is appropriate - and the beneficiaries will be those who seek to limit banks in the risks they take. Now the positive for JPMorgan. The WSJournal noted that Jaime Dimon, upon fully understanding the scope of the problem, took great pains to get the information out into the public domain.  As soon as the amount was known, he announced it.  He further delayed the publication of the 10-Q to include the piece of information.  By doing this, he cost his bank untold billions as traders at competing firms made it increasingly difficult and costly to unwind the position. But in the end, JPM will survive and the integrity of the CEO will be of things that is remembered. This should be a lesson to all of those firms that would rather accept a fine than create and honor their compliance controls.  Money can be made or lost, but your reputation is something that once lost, can never be salvaged.  Even after the trading fiasco, customers are not leaving the bank, JPM was still the lead underwriter in the Face Book IPO and the bank will continue to set the standard for large commercial banks in this country.  Bravo Jamie Dimon! To access the referenced article, go to:  [WSJournal, 5/18/12].