While Parallels Unfold Between Bernie Madoff and the London Whale.

[ Howard Haykin with Melanie Gretchen]

London Whale and Bernie Madoff.  Bernie Madoff and London Whale.   One trades, the other didn't.  The more we learn about each, the more we come to understand that both episodes lasted much longer than anyone initially imagined. 

And with a confession by the U.S. Office of the Comptroller of the Currency - or "OCC" - it's revealed that regulators chose to disregard plain-as-day red flags in the JPMorgan Chase cover-up - in much the same way as SEC officials incredulously disregarded a virtual roadmap into the methodology of Bernie Madoff's Ponzi scheme - as constructed by Harry Markopolous. 

• In both scenarios, billions would have been saved had appropriate regulatory intervention taken place at early points in the times lines of these 2 grand larcenies.
• Also relevant is the fact that an opportunity to lay the blame squarely and solely on both firms and their respective teams of senior and supervisory officials has been squandered, because regulators rightfully share some of the blame.

The OCC said it overlooked changes to JPMorgan's risk-tracking system ...  that could have prompted a probe by the watchdog that might have revealed JPMorgan's mounting risk on its derivatives bets.  JPMorgan's revised model - implemented in January 2012, but later scrapped - cut the firm’s reported risk in half and ultimately exacerbated losses by underestimating their potential size as they began to mount.

The OCC described its breakdown in regulatory oversight in a report to the Senate Permanent Subcommittee on Investigations - submitted in the 2nd half of 2012.  The congressional panel is set to release its own findings in coming weeks after examining how JPMorgan and regulators handled the bank's botched trading strategies that led to $6.2 billion in trading losses. 

One reason for the OCC's oversight was the failure on the part of JPMorgan to notify the regulator that it had changed its risk management model - even though the largest U.S. bank by assets had an obligation to do so, whenever it made changes to its VaR formula.

Going forward, OCC Comptroller Thomas Curry said the agency ...  would conduct a review into the loss that would look at the board’s oversight, compensation practices within the CIO, and the adequacy of risk controls at JPMorgan and other banks.  In addition, the Federal Reserve’s internal investigatory arm, the Office of Inspector General, opened its own investigation into the central bank’s supervision of JPMorgan’s CIO loss to assess the effectiveness of its oversight.

For further details, go to [ Bloomberg, 2/2/13 ].