JPMorgan's Whale Tale: More To Come?

JP Morgan London Offices
Bloomberg via Getty Images
JP Morgan London Offices

The London Whale Gone Rogue narrative laid out by JPMorgan Chase on Friday is already starting to unravel.

You’ll recall that JPMorgan restated its first-quarter earnings last week, suggesting that traders in its Chief Investment Office had basically cooked the books:

Traders in CIO were expected to mark their positions where they would expect to be able to execute in the market. In this instance, while the positions were within thresholds established by an independent valuation control group within CIO, the firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter. As a result, we are no longer confident that the trader marks reflected good faith estimates of fair value at quarter end.

Remarking the trades back to middle-mark reality forced JPMorgan to reduce its first-quarter net income to $4.92 billion from $5.38 billion, a $459 million difference. (Dick Bove says the "London Whale" doesn't matter—JPM has bigger worries.)

Those numbers do not really give a full picture of what happened. JPMorgan actually says now that the CIO suffered a $600 million loss. As I reported on CNBC's "Power Lunch" on Friday, the CIO had been claiming internally that its synthetic credit portfolio had lost just $12 million.

How is it possible that the difference between $600 million and $12 million is “within thresholds established by an independent valuation control group?” There’s something that just doesn’t smell right about this.

Bloomberg’s Dawn Kopecki has tracked down former executives from the CIO unit who have told her that they don’t understand how this could have happened. The apparently cooked books should have been detected by the independent valuation group.

JP Morgan requires traders to mark their positions daily so the firm can track their profits, losses and risk. An internal control group double-checks the marks against market prices monthly and at the end of each quarter, said three former executives from the CIO and a senior executive in market risk. The firm uses the control group’s prices, not what individual traders submit, to calculate earnings, making it difficult for one trader or trading desk to rig prices, the people said.

The implication is that the conspiracy to “avoid showing the full amount of losses” must have been broader than the small group of London traders who have been in the news.

Don't be surprised if there are a few more chapters to this story.

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