Trading Loss of JPMorgan Chase (London Whale Scandal)

ECON 3303-005 Professor Choi

Kathy Bernard

Salina Fabia

Frank Hernandez

Ahmed Imaad

Amy Trinh

History of the Company:• 1977• 2000• 2008

Scandal• In February 2012, hedge fund insiders

such as Boaz Weinstein of Saba Capital Management became aware that the market in credit default swaps was possibly being affected by aggressive trading activities. • The source of the unusual activity turned

out to be Bruno Iksil, a trader for JPMorgan Chase & Co.

James “Jaime” DimonJP Morgan Chief Executive

• Subprime Mortgage • Tried to persuade the US

government to water down new regulations so called the “Volcker Rule” which aims to limit risk taking by banks considered “too big to fail”

Lots of Junk Bonds • Corporate bonds=

investment grade or “strong”• JP Morgan owns a lot of junk

bonds or “high yield” which are low rated bonds from companies that are close to default. • SOLUTION: If you have high

yield bonds, then you balance that risk to bet on investment grade corporate bonds.

Bruno Iksil JP Morgan trader

• Placed a GIANT bet on U.S. corporate bonds• Iksil was so powerful and his bet was so large that other traders nicknamed him the “London Whale”

Which Whale?• Not to be confused by the

Whale in the River of Thames• Bruno Iskil aka “London

Whale” and “Voldemort”• Javier Martin-Artajo and

Julien Grout• Corporate bonds for 125

high-quality companies

Flattening Trade

• CDSs- type of derivative• Insurance Buyers or

insurance sellers• Price of insurance

depending on how long you want to insure for.

Volcker Rule

Volcker Rule

• Part of Dodd frank wall street reform• Proposed by Paul Volcker, former

chairman of the federal reserve and an American economist• Restricts U.S banks from making

speculative investments.• Referred to as ban on proprietary

trading on banks own accounts by using banks deposits

Also referred to asNew Glass-Steagall

• In reference to the moral hazard issue of the whole phenomenon.• The rule in turn simply proposes large banks to form

their own hedge funds, protecting the interest of depositors

Questions Left Unanswered About Bruno Iksil aka London

Whale• What were his true motives behind the trading? • Did he know about the risks involving CDS trading? • Was his superiors aware of this type of trading that

led to such a loss? • https://www.youtube.com/watch?v=trb2UKcJRPE

Review and Take Away Message

Questions?