[ by Larry Goldfarb ]

A key question continue to swirl around the $6 billion loss suffered by JPMorgan Chase by its CIO Office.  Whose money did the Whale, Bruno Iksil, lose?  Was it depositor’s money or shareholders.  The noted author, William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” and a Bloomberg View columnist, analyzed the situation as we know it:

• Bruno Iksil, aka the London Whale, worked in the company’s chief investment office. The CIO’s job, we have been told, is to invest the difference between the $1.1 trillion in deposits the bank has on hand from its customers and the $750 billion the bank has lent out to corporate borrowers.
• Ina Drew ran the CIO group and was paid about $15 million a year for her services. Drew and her team invested the $350 billion in short-term, seemingly safe investments. The overall yield on the portfolio was about 2.6 percent, according to Dimon.
• $350 billion – an awful lot of money even by Wall Street’s standards – was invested on a daily basis under the direction of the CIO group.

He then posited his own theory behind who lost the money.  To my mind, the money that Iksil lost was depositors’ money. Iksil worked for the CIO, where depositors’ money is invested until it is lent out. The trade lost almost $6 billion in cash, which we know is real because hedge funds such as Saba Capital, run by wunderkind Boaz Weinstein, and Blue Mountain Capital staked out the other side of Iksil’s trade and made a fortune. How could there be any confusion that the money Iksil lost came from the bank’s depositors?

Not so fast, says JPMorgan Chase. When I wrote in passing last week that I believed JPMorgan Chase depositors lost their money as a result of the London Whale, Joseph Evangelisti, the bank’s head of communications,

"Depositors did not lose money -- that’s a fact," he reiterated.  "And by the way, the $350 billion portfolio is sitting on a $9 or $10 billion gain."  He added: "If what you say is true, we would be taking money out of depositors’ accounts."

In effect, depository banks such as JPMorgan Chase, Citigroup Inc., and Bank of America Corp. get our money for free and then turn around and use it for all sorts of things, including making loans to individuals and businesses that pay much higher rates of interest than the banks pay their depositors. This is banking 101. The London Whale fiasco also taught us that sometimes banks use that money to make crazy, proprietary bets on interest rates -- and sometimes that money gets lost.

JPMorgan Chase wants us to believe that it was shareholders’ money that was lost, not depositors’ money. There is no question that JPMorgan Chase’s stock got hammered when the full extent of the London Whale losses became known; shareholders lost almost $25 billion, in addition to the $6 billion Iksil lost on his trades.

Evangelisti said depositors lost nothing and, in fact, the CIO account has an embedded $10 billion unrealized gain. This leaves me feeling a little like the casino executive in “Ocean’s Eleven” who, upon realizing the casino’s vault had just been robbed of close to $163 million, incredulously asks Andy Garcia’s casino-owner character: “I don’t understand. What happened to all that money?”

A month ago JPMorgan Chase announced that Lee Raymond, the no-nonsense former CEO of Exxon Mobil Corp. (XOM), would lead another investigation by the board of directors into the London Whale fiasco. One thing he might try to pin down is an explanation, once and for all, of what exactly happened to all that money.

For further details, go to [Bloomberg, 9/23/12].