The $2 billion-and-counting derivatives-trading debacle at JPMorgan Chase & Co. (NYSE: JPM) may be traced back to misplaced trust and -- a case of Lyme disease?
Two extensive reports -- one by the New York Times and the other by the Wall Street Journal -- trace the deterioration of JPMorgan Chase's once-disciplined corporate culture and its aftermath. They lay bare a top-down hierarchy characterized by misplaced trust and growing hubris that fueled a power struggle during a leadership vacuum. And it all began when now-retired Chief Investment Officer Ina Drew was frequently absent as she battled a case of Lyme disease.
Now the banking industry is back to being a bogeyman for corporate pomposity in some circles. The punditocracy has made JPMorgan an exemplar of all that is wrong (or acceptable) in the modern economic growth model. Its debacle is a cause célèbre for those seeking tighter regulations. And it may all be traced back to one JPMorgan executive's travails that began with a bug bite.
Drew admirably navigated the rough seas of the 2008 financial crisis, making JPMorgan appear to be the lone sane person in a nuthouse. So much so that CEO Jamie Dimon was once described as the least hated banker in America. In an age of Vampire Squids and movements fueled by bank bailouts, it's not hard to consider the moniker a compliment. Drew's status rose with Dimon's, as she earned the CEO's trust along the way, according to unnamed traders and former employees who spoke to the Times.
The pre-Lyme disease era of Drew's tenure was marked by a hands-on approach and steadiness that made her a favorite among traders, according to interviews conducted by the Times.
When Ina was there, things ran smoothly, one former trader said.
It kept the bank's chief investment office profitable in the face of losses by the institution's other businesses, such as home loans, as it contributed almost 10 percent of JPMorgan's overall profit during the past three years.
Big Egos, Big Bets, Little Oversight
Then Drew contracted Lyme disease in 2010, leaving her out of the office sporadically at a time when her unit, driven by continuing success, began taking bigger risks and making more complex trades. Their implementation of the riskier bets was personally approved by Dimon, according to the Journal.
But Dimon took his eye off the ball, trusting Drew's profit-generating machine was well-oiled. That misplaced trust -- combined with the power vacuum created in Drew's absence -- begat a struggle for authority between Drew's New York- and London-based deputies.
Althea Duersten, a 16-year-employee of the bank, was Drew's right hand in New York, with Achilles Macris filling a similar role across the Atlantic Ocean in London. The duo began bickering over the breadth of risk being undertaken: To put it in Freudian terms, Duersten functioned as the superego and Macris as the id. Shouting matches and bickering over employees ensued.
The strife distracted everyone because no one could push back, one current JPMorgan trader said. I think everything spiraled because of the personality issues.
Drew returned to her job, but in a slightly more reserved manner. Gone were the hands-on morning sessions with traders. She physically distanced herself from the chief investment office, leaving her old digs one floor above the trading desk behind for an office on the 48th floor of JPMorgan's headquarters with the rest of the company's senior executives. Then the final constraint on Macris' ambition left.
Duersten retired last year, leading to the installment of Irene Tse, a former employee at the hedge fund Duquesne Capital Management. Still new to the company, Tse reportedly avoided causing a stir as she navigated her way through a new job. Macris, with a weakened and distant boss and no Duersten to battle, reportedly unleashed his traders, which led to more complex deals that were increasingly difficult to escape.
Macris supposedly dropped risk-control caps that forced JPMorgan traders to bail out of any position that cost the company more than $20 million, according to the Journal. Dimon was wholly unaware of the policy change, blinded by goodwill and trust.
Enter Bruno Iksil, the now-infamous London Whale, who took on massive positions within credit markets.
No one could sufficiently push back against Achilles, so he and Bruno could do what they wanted, one former trader said.
Both Marcis and Iksil are still employed by JPMorgan, although these is skepticism over the duration of their future tenures.
Bad Investments Come Home To Roost
Macris prevailed in his push for more risk and more reward, setting in motion the series of trades and positions taken that would eventually lead to the April 6 story in the Wall Street Journal, which laid bare machinations that would eventually cost the company $2 billion and counting.
Drew dismissed the reports of risky positions, reportedly telling attendees at an April 9 operating-committee meeting, We can ride through this.
Trusting his CIO, Dimon dismissed early reports of the bank's dangerous trades as a tempest in a teapot, but eventually he pushed back the company's quarterly regulatory filing scheduled for April 27 until he could get a firm grasp of the trades' impact.
Associates handed Dimon summaries of the losses on April 30 in a conference room, according to the Journal. But the paperwork was devoid of details about the actual trades.
I want to see the positions! Dimon said, according to attendees who spoke with the Journal. Now! I want to see everything!
In an interview with the Journal, Dimon said: The big lesson I learned: Don't get complacent despite a successful track record. No one or no unit can get a free pass.
Dimon eventually learned of the extent to which Macris and Iksil ran with his OK of the risky trading approach: a series of positions that could cost as much as $5 billion on the income statement and that have already gutted $25 billion in shareholder value.
Dimon created a war room, with financial, risk, and regulatory managers brainstorming and mapping out the company's complex positions as they sought a path out from under the morass of bad deals.
We're in a major storm, Dimon reportedly told the collective. We've got to get to the bottom and come clean.
All the while, officials at JPMorgan and other executives pushed Dimon to give Drew the boot.
What if this were your sister after 30 years of great performance and you said: 'You're out of here'? Dimon reportedly said in response. The CEO eventually relented.
Drew was inevitably shown the door, with Dimon reportedly giving her a bear hug before she stepped out of the offices -- taking with her what is arguably the most expensive case of Lyme disease in history.