Three top executives involved with a failed hedging strategy that cost JPMorgan Chase & Co at least $2 billion and tarnished its reputation are expected to leave the bank this week,sources close to the matter said on Sunday.
The bank – the biggest in the United States by assets – is expected to accept the resignation of Ina Drew,its New York-based chief investment officer and one of its highest-paid executives,in the next few days,the sources said. Two of Drew’s subordinates who were involved with the trades,London-based Achilles Macris and Javier Martin-Artajo,are expected to be asked to leave,they said.
The departures come after the unit Drew runs,known as the Chief Investment Office,mismanaged a large portfolio of derivatives tied to the creditworthiness of bonds,according to bank executives. The portfolio included layers of instruments used in hedging that became too complicated to work and too big to unwind quickly in the esoteric,thinly traded market.
Drew had repeatedly offered to resign in recent weeks,after the magnitude of the debacle became clear,according to one of the sources. But the resignation was not immediately accepted because of Drew’s past performance at the bank.
Until the loss was disclosed late on Thursday,Drew was considered one of the best managers of balance sheet risks. She earned more than $15 million in each of the last two years.
“Ina is an amazing investor,” said a money manager who knows Drew,but who declined to be quoted by name. “She’s done a really good job over a lot of years. But they only remember your last trade.”
While departures had been expected in the wake of the trading losses,JPMorgan appeared to be moving swiftly. In disclosing the losses on Thursday,CEO Jamie Dimon said only that the bank was continuing to investigate and would take disciplinary action with those involved.
The losses have deeply marred JPMorgan’s reputation for risk management,prompted a downgrade in its credit ratings and thrown an unflattering spotlight on Dimon,who had become perhaps America’s best-known banker and a cavalier critic of increased regulation.
On Sunday,Dimon’s bravado was badly burnished when the New York Times reported remarks he made recently at a dinner party in Dallas. Dimon called arguments about two-big-to-fail banks – arguments made by former Federal Reserve chief Paul Volcker and Richard Fisher,president of the Federal Reserve Bank of Dallas – “infantile” and “nonfactual,” according to the Times.
Dimon is himself a board member of the Federal Reserve Bank of New York. Elizabeth Warren called for him to resign that post on Sunday. Warren,who chaired the congressional committee that oversaw the bank bailout program known as TARP and is currently running for the Senate,said he should not be on the panel advising the Fed on bank management and oversight.
“We need to stop the cycle of bankers taking on risky activities,getting bailed out by the taxpayers,then using their army of lobbyists to water down regulations,” Warren said.
Dimon certainly has struck a more contrite pose since revealing the losses. In an interview that aired on Sunday,he told NBC’s “Meet the Press” program that the bank’s handling and oversight of the derivative portfolio was “sloppy” and “stupid” and that executives had reacted badly to warnings last month that the bank had large losses in derivatives trading. He said executives were “completely wrong” in public statements they made in April after being challenged over the trades in news reports.
“We got very defensive. And people started justifying everything we did,” Dimon said. “We told you something that was completely wrong a mere four weeks ago.
The loss,and Dimon’s failure to heed the warnings,have become major embarrassments and have given regulators new arguments for tightening controls on big banks and requiring them to hold more capital to cushion possible losses.
JPMorgan lost $15 billion in stock market value the day after the announcement. Analysts were shocked that Dimon did not have as much control of the company’s derivatives book as they had thought. Before the loss,Dimon had been widely praised for successfully managing the company through the credit bubble and the financial crisis.
His strategy in dealing with the issue has been to apologize repeatedly and say straight-forwardly that he and the bank erred. He has not,however,been willing to describe the exact trading positions,for hear of giving traders in the market information with which to inflict deeper losses.
PAYING THE PRICE
Dimon did not explain in the NBC interview why the trades went wrong. He had declined on Thursday,too,to describe details of the trades when pressed by analysts. He said the positions were first designed to hedge risks in the bank’s investments. “The strategy we had was badly vetted,” Dimon said in the interview. “It was badly monitored. It should never have happened.”
The bank hasn’t said much publicly about the trades. But others in the market say they involved complex layers of credit default swaps,the same instruments that were central to the financial crisis. JPMorgan helped create the CDS market in the 1990s. But its trades have become ever more complex,involving indexes and derivatives based on corporate bonds. The instruments were known as “synthetic,” because they trade the risk of default without trading the underlying bonds.
Under Drew,JPMorgan’s CIO unit had layered these trades in ways that exposed the bank to moves in both directions in the value of the bonds,according to CDS traders not at JPMorgan who spoke on condition of anonymity. Because these markets are so thinly traded,and JPMorgan’s positions were so large,it was impossible for the bank to exit quickly when the positions soured.
Dimon said the bank could lose $3 billion or more as it unwinds the positions in the coming months.
The debacle provides ammunition to advocates already calling for tougher regulation of banks,Dimon said. “This is a very unfortunate and inopportune time to have had this kind of mistake,” he said.
Dimon has been the most outspoken bank executive in arguing that new regulations being finalized and implemented by the U.S. government go too far. “We hurt ourselves and our credibility,” he said in the NBC interview. “We got to fully expect and pay the price for that.” He said the huge trading loss was not “life threatening” to JPMorgan.
Dimon is scheduled to speak on Tuesday at the bank’s annual meeting in Tampa,Florida.