JPMorgan Bet Against Itself in 'Whale' Trade

There is a new twist in the London Whale trading scandal that cost JPMorgan Chase $6.2 billion in trading losses last year. Some of the firm's own traders bet against the very derivatives positions placed by its chief investment office, said three people familiar with the matter.

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Mark Lennihan

The U.S. Senate Permanent Committee on Investigations, which launched an inquiry into the trading loss last fall, is looking into the how different divisions of the bank wound up on opposite sides of the same trade, said one of the people familiar with the matter.

The committee is expected to release a report on its investigation in the next few weeks.

The people familiar with the situation did not comment on the dollar value of the opposing trades placed by JPMorgan Chase & Co's investment bank traders, which was much smaller than the total positions put on by the CIO.

The intra-bank trading was not mentioned in a 129-page report JPMorgan released on Jan. 16, which chronicled some of the bank's risk management failures. The scandal has led to a number of management changes at JPMorgan and has sullied CEO Jamie Dimon's image as a hands-on risk manager.

Kristin Lemkau, a spokeswoman for JPMorgan, declined to comment on the investment bank's trading positions.

A spokeswoman for the Senate committee, led by Michigan Sen. Carl Levin, a Democrat, declined to comment on its investigation.

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It was widely known that a group of about eight credit-focused hedge funds, such as BlueMountain Capital Management and Saba Capital Management, were on the other side of the trades that JPMorgan's London-based Whale team made on an index tied to corporate default rates. But the role JPMorgan's own investment bank may have played in the messy unwinding of the derivatives trade has not come out until now.

One of the three people familiar with the matter claimed that JPMorgan managers discussed merging the two sets of trades in an attempt to offset some of the CIO's losses. Those talks ended about a month before Bloomberg News first reported the CIO trades on April 5 last year, the source said.

JPMorgan's Lemkau said that this "never came up in our exhaustive internal investigation."

Last July, the bank fired the three London-based traders in the CIO most closely tied to the trading, including Bruno Iksil, dubbed the London Whale by hedge fund traders because of the size of the trades he placed for the CIO.

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Two people familiar with Iksil and his boss, Javier Martin-Artajo, said the two CIO employees complained about the investment bank's actions in the spring of 2012, accusing its traders of deliberately trying to move the market against the CIO by leaking information on its position to hedge funds. Iksil made his complaint to a member of JPMorgan's compliance department, one of the people said.

But those same sources said they had not seen any evidence to support that claim and JPMorgan's Lemkau declined to comment on the allegation.

Martin-Artajo's lawyer did not respond to a request for comment. A lawyer for Bruno Iksil declined to comment.

It is not clear when the investment bank traders and the London Whale team became aware they were taking opposing sides on a trade that involved index linked to credit default swaps sold on corporate debt.

JPMorgan's internal report did note that, in deciding how to handle the CIO trades, JPMorgan eventually applied a valuation methodology from the investment bank and not the one the chief investment officer had been using.

Federal authorities are currently investigating whether some employees in the CIO deliberately used misleading valuations to try to conceal some of the losses.

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It is not uncommon for large banks to hold opposing positions in the same market. That is sometimes done as a way of hedging a position or because different trading desks formulate opposing views about a trade.

Still, the revelation that the bank was taking two sides on the same trade also is likely to rekindle the debate about whether banks such as JPMorgan Chase are too big to manage and should be scaled back.

"The big banks have always had a habit of pitting people in the bank against each other," said Charles Geisst, a finance professor at Manhattan College and a former banker. "When it's discovered it's not taken well."

A group of JPMorgan shareholders led by the AFL-CIO labor federation is pushing for a vote at JPMorgan's annual shareholders meeting this spring on reducing it's overall size by spinning off one or more of its businesses. They cite the big trading losses in the London Whale scandal as evidence the bank is too big to manage.