[ by Howard Haykin ]

Bruno Iksil, JPMorgan Chase's "London Whale," for once got scared.  He expressed doubts about his bets, and told another trader the size of his bets was getting "scary."  Months before the portfolio grew large enough to result in a $6 billion loss, this CIO trader tried to alert others he was losing control and facing mounting risks.

This is what members of the Senate Permanent Subcommittee on Investigations are learning, according to emails in a JPMorgan report dated 1/16/13.  This was before CEO Jamie Dimon dismissed as a "tempest in a teapot" reports on the whale trades - including The Wall Street Journal's opening piece on 4/6/13.  And that was way before May 2013, when JPMorgan first disclosed the trading losses.  Mr. Dimon subsequently admitted he was wrong to have played down concerns raised by the news report.

Yet, Mr. Iksil of the Chief Investment Office kept trading early in 2012, trading through the doubts he had expressed to his bosses.  Managers did not stop the trading until late March, the emails show, according to the people familiar with them.  Yet, in spite of all his concerns, Bruno Iksil didn't seem prepared for how heavy the losses eventually would become, according to the emails, which suggests a couple of possibilities:  (i) he couldn't get an accurate read on how susceptible his portfolio was to deep and sudden trading losses;  or, (ii) he began to believe what his managers and others may have been saying to him - that he'll find a way to turn a profit, or that the risks always seem worse than they really are (even though certain of these people had didn't know how the positions related to the rest of the market).  The latter possibility would reflect good natured and well-intentioned exhortations that unfortunately were entirely incorrect.  

The panel, led by Senator Carl Levin (Dem-MI) also is looking into ... whether JPMorgan failed to disclose crucial information to its primary bank regulator, the Office of the Comptroller of the Currency ("OCC"), and whether the OCC failed to press the bank for details about how it managed its risks.  The bank acknowledged previously that its information was wrong early in 2012.
The OCC prepared an assessment of its performance and shared it with the subcommittee, said people familiar with the OCC report. It isn't known if the subcommittee intends to release the OCC document.

A Senate report is expected to offer details about the skepticism of Mr. Iksil, whose trades ultimately led to the losses and the departure of several executives and traders - although a JPMorgan spokesperson says the company already has commented extensively on the matters in prior reports - even to the point of highlighting a trader's worries, though the trader is not identified.

Nevertheless, emails reviewed by the subcommittee and JPMorgan show Mr. Iksil as worrying about the trades as early as January 2012, according to the people familiar with them.
In early 2012, both Mr. Iksil and another London trader, Javier Martin-Artajo, also suspected that other traders in a different part of J.P. Morgan leaked their positions to outside hedge funds that were taking opposing positions to those held by Mr. Iksil's group.  Both later communicated these suspicions to internal investigators, said people familiar with the case.  News of the alleged leaks was reported this week by Reuters, and those concerns were conveyed to the SEC and the U.S. attorney's office for Southern District of New York.

JPMorgan's Report On Its Internal Investigation.   The bank's own investigation, which included interviews with Mr. Iksil, showed traders raising questions early in 2012.  The bank redacted the names of London traders in its 129-page report released in January after a British regulator asked JPMorgan to keep the names out.  Messrs. Iksil and Martin-Artajo were key members of the London team that built a complicated, bearish position in an index that tracks the health of a group of investment-grade companies.  Last year, the bets morphed into a not-easily-liquidated position on corporate credit. The wagers accumulated losses when the traders added to their positions instead of unwinding them and the market went the other way.

The JPMorgan's report details through emails and interview transcripts conversations between Iksil and other traders, including his immediate manager.  It also related Mr. Iksils communications with bank officials who listened but continued to encourage Iksil to keep trading for profit - even as unrealized losses grew by $100 million and more on a month-by-month basis. 

Ms. Drew didn't appear overly concerned by this potential $100 million loss. One week later, Mr. Iksil told those who attended the Feb. 3 meeting aside from Ms. Drew that he would need to expand his positions. He was told to proceed, while concentrating on managing profits and losses. He and the other traders added to their trades in February. Losses reached $169 million by the end of that month.

At one point, Mr. Iksil told a trader to stop trading a certain credit index because he wanted to observe its behavior. He told Mr. Martin-Artajo about his plans, but Mr. Martin-Artajo, who was Mr. Iksil's direct superior, told him to keep trading.

In March, traders overseeing the positions began to discuss whether they should place higher estimates for the values of certain trading positions of the CIO group, a step crucial in how they viewed the positions and reported them to investors and other outsiders. On the last day of the first quarter, Mr. Martin-Artajo asked Mr. Iksil to reduce an estimate of losses that day to $200 million from $250 million and encouraged him to keep trading despite orders from Ms. Drew to stop.  The loss reported at the end of that day was $138 million.

After the Journal reported on April 6 that Mr. Iksil's trades were roiling debt markets, Ms. Drew told the bank's operating committee that losses were manageable. On April 8, Mr. Iksil sent a draft presentation to Mr. Martin-Artajo saying additional losses could hit $500 million but were more likely to be $150 million to $250 million.  But on April 10, losses mounted again, and traders were at odds over how bad it could get. The estimates for that day ranged from $5 million to $700 million; the final number landed at roughly $400 million.

After Mr. Dimon told analysts on April 13 that concerns were a "tempest in a teapot," losses ballooned by $117 million the following week. Then, on six trading days between April 23 and April 30, losses went up by nearly $800 million more. The losses caused Mr. Dimon and other top executives to question whether the traders "adequately" understood the trading portfolio "or had the ability to properly manage it," J.P. Morgan said in its Jan. 16 report.

For further details, go to:   [ WSJournal, 1/31/13 ].