Chris Blackhurst: So what's $6bn between friends? Such a big loss and so little fuss

Midweek View: Has a government or business been ragingover the London Whale's exploits? No. Has a client made a civil claim? No

Chris Blackhurst
Wednesday 14 August 2013 00:27 BST
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Normally, after the exposure of a great banking scandal, the turn of events is predictable. Regulators launch an urgent inquiry, politicians huff and puff, corporate and supervisory heads roll, charges are brought, arrests made, civil lawsuits launched.

This is why the case of $6.2bn (£4bn) worth of losses run up by JP Morgan in the "London Whale" trading disaster is so strange.

Everything about the affair is odd. From the very off, when Bruno Iksil, the investment bank's trader in London (he was nicknamed the "London Whale" after his location and the scale of the market bets he placed) panicked at what he'd done, nothing has felt right. The initial response of JP Morgan's extremely PR-savvy and image-conscious chief executive, Jamie Dimon, was to dismiss it as a "tempest in a teapot". Later, he apologised, but his first reaction is nevertheless telling: he did not appear to care that much.

Mr Iksil, at the bank's Chief Investment Office (CIO) in London, seems to have been able to operate with a degree of latitude that is extraordinary. Again, hardly anyone is bothered. Indeed, the authorities seem more concerned about attempts to cover up his exploits than the losses piling up and spiralling out of control. He is said to be co-operating with investigators, while charges are reportedly close to being brought in the US against Javier Martin-Artajo and Julien Grout, his former colleagues in London, for allegedly trying to conceal what had occurred. JP Morgan brought a civil suit against Mr Martin-Artajo in London last year but that was dropped.

When the US Senate took an interest, JP Morgan maintained that the CIO was intended to restrict the bank's exposure to risk rather than to make money. This reasoning was dismissed by the Senate committee.

At other banks, faced with huge trading losses, there have been wholesale clearouts. Not at JP Morgan. Some bonuses have been clawed back but that's about it; many of Mr Iksil's colleagues are still there.

Even the bank's shares have not suffered. While JP Morgan is a huge banking organisation, a deficit of $6bn should be enough to raise serious questions about management practice – questions that ought to affect the share price. Not a bit of it. The shares are up by a third from their pre-Whale level.

As for clients, they are similarly unaffected. This is curious, since as one newspaper reported at the weekend on the rapid expansion of the CIO after the financial crisis (with its assets growing from $75bn in 2007 to $375bn in 2012): "JP Morgan, America's biggest bank, was viewed as a safe haven after the financial crisis and saw a huge influx of deposits from businesses and foreign governments." Has there been a business or government jumping up and down about the Whale's exploits? No. Has a civil claim been brought by a client to recover its cash? No.

This may be because the CIO was a proprietary trading operation, playing with the bank's own money. But $375bn? And losses of $6bn, that the bank can swallow with ease? I know prop trading has grown enormously in recent years, but is JP Morgan so rich that $6bn does not hurt? That it does not cause the chief executive to go nuclear, rather than dismiss it so casually? The latter may be true, in which case it confirms the suspicion that banks increasingly function on a different plane, one divorced from ordinary people, where $6bn is a mere trifle.

It does not seem right. What if, though, the Whale's stake money was not the bank's at all, not a client's or clients', but someone else's – namely, the US taxpayer's?

In 2008, after the collapse of Bear Stearns, the US Federal Reserve was desperate to avoid other failures and bank runs. It was anxious to shore up liquidity and persuaded the US banks to take heavily discounted loans. Several, including JP Morgan, did not actually require saving but took the money from the federal "discount window" nonetheless. What if that cash ended up with the Whale?

If true, it would explain JP Morgan's relative insouciance. It would be the reason for the lack of the usual fallout, the absence of legal actions from clients and demands for management heads to roll.

That would not make it, however, any less of a scandal.

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