Desktop version

Home arrow Management

JPMORGAN CHASE AFTER THE CRISIS: THE PERILS OF HUBRIS

The problem of too much success also beset JPMorgan Chase, despite (or perhaps because of) its emergence from the financial crisis as a complex financial institution with $2.3 trillion in assets. In 2012, JPMorgan Chase unexpectedly lost $6.2 billion on operations of its London office. When news accounts broke, CEO Dimon dismissed them on an analysts call as "a tempest in a teapot." Two weeks later losses accelerated significantly, and only then did top management request an independent review of positions of the London office.

In early 2013 the company published findings of the internal task force investigating the losses. Of relevance here, the task force found that the company failed to allow negative messages to rise to top management and failed to engage in timely constructive dialogue to understand the contours of the problem:

• "A number of ... employees ... became aware of concerns about aspects of the trading strategies at various points throughout the first quarter. However, those concerns failed to be properly considered or escalated, and as a result, opportunities to more closely examine the flawed trading strategies and risks ... were missed...

• "These concerns were not fully explored. At best, insufficient inquiry was made into them and, at worst, certain of them were deliberately obscured from or not disclosed to [London] management or senior Firm management. Although in some instances, limited steps were taken to raise these issues, as noted above, no one pressed to ensure that the concerns were fully considered and satisfactorily resolved

• "[The London office's] Risk Management lacked the personnel and structure necessary to properly risk-manage the Synthetic Credit Portfolio, and as a result, it failed to serve as a meaningful check on the activities of the [office's] management and traders. This occurred through failures of risk managers (and others) both within and outside of [the office] –

• "As Chief Executive Officer, Mr. Dimon could appropriately rely upon senior managers who directly reported to him to escalate significant issues and concerns. However, he could have better tested his reliance on what he was told. This Report demonstrates that more should have been done regarding the risks, risk controls and personnel associated with [the London office's] activities, and Mr. Dimon bears some responsibility for that."[1]

The JPMorgan Chase board of directors issued its own report, emphasizing that it could not make sound decisions without access to good information:

The ability of the Board or its committees to perform their oversight responsibilities depends to a substantial extent on the relevant information being provided to them on a timely basis Because the risks posed by the positions in the [London office] were not timely elevated to the Risk Policy Committee as they should have been or to the Board, the Board and the Risk Policy Committee were not provided the opportunity to directly address them.[2]

The company responded to these losses in a way that would seem to banish current hubris from its risk management and decision making processes. Top management accepted resignations from several high-ranking officers, including the chief investment officer to whom the London office reported and the firmwide chief risk officer, and terminated or accepted resignations from a number of employees of the London office. The board of directors, while expressing confidence in how he ultimately responded to the crisis, cut Mr. Dimon's 2012 compensation by 50 percent.

  • [1] "Report of JPMorgan Chase & Co. Management Task Force Regarding 2012 CIO Losses," January 16, 2013.
  • [2] "Report of the Review Committee of the Board of Directors of JPMorgan Chase & Co. Relating to the Board's Oversight Function with Respect to Risk Management," January 15, 2013.
 
< Prev   CONTENTS   Next >

Related topics