By William Cohan
Whose $6bn did JPMorgan Chase lose during the now-infamous London Whale debacle?
Was it depositors’ money or shareholders’ money? Or was no money lost at all? And was the whole thing the very “tempest in a teapot” that Chief Executive Officer Jamie Dimon originally called it?
What the bank has told us so far — during its news conference on May 10, in Dimon’s two rounds of testimony before Congress, and in the come-to-Jesus live presentation to analysts on July 13 — is that the man behind the trades, Bruno Iksil, aka the London Whale, worked in the company’s chief investment office. The CIO’s job, we have been told, is to invest the difference between the $1.1trn in deposits the bank has on hand from its customers and the $750bn the bank has lent out to corporate borrowers.
That $350bn — an awful lot of money even by Wall Street’s standards — was invested on a daily basis under the direction of a well-respected banker, Ina Drew, who was paid about $15m a year for her services. Drew and her team invested the $350bn in short-term, seemingly safe investments. The overall yield on the portfolio was about 2.6 percent, according to Dimon.
With Drew’s authorisation — but, Dimon insists, without his knowledge — Iksil took a $10bn chunk of the $350bn portfolio and made a proprietary bet in an obscure debt index. For myriad reasons — among them that the bet was wrong and that Iksil had such a large position in the tranche that escape would have been extremely costly — JPMorgan Chase has lost $5.8bn, and counting.
To my mind, the money that Iksil lost was depositors’ money. Iksil worked for the CIO, where depositors’ money is invested until it is lent out. The trade lost almost $6bn in cash, which we know is real because hedge funds such as Saba Capital, run by wunderkind Boaz Weinstein, and Blue Mountain Capital staked out the other side of Iksil’s trade and made a fortune. How could there be any confusion that the money Iksil lost came from the bank’s depositors?
Not so fast, says JPMorgan Chase. When I wrote in passing last week that I believed JPMorgan Chase depositors lost their money as a result of the London Whale, Joseph Evangelisti, the bank’s head of communications, sandblasted me.
“That’s untrue,” he emailed. “We lost shareholder money, not depositor money. Depositors have never lost a penny from our institution.”
We debated it back and forth. Although I concede in this instance no individual depositor lost his or her money, it’s only because there was no run on the bank by depositors at the same time the London Whale was being harpooned. Had depositors suddenly lined up and wanted their $1.1trn back, not only would JPMorgan Chase be kaput, but those depositors with more than $250,000 in their accounts — that is, above the limits of the Federal Deposit Insurance Corp — surely would have been left with losses.
Evangelisti wasn’t buying that either. He says the bank would have had more than enough assets to sell in liquidation mode to cover even those depositors with more than $250,000 in their accounts.
“Depositors did not lose money — that’s a fact,” he reiterated. “And by the way, the $350bn portfolio is sitting on a $9 or $10bn gain.” He added: “If what you say is true, we would be taking money out of depositors’ accounts.”
But taking money out of depositors’ accounts is exactly what banks do. People like you and me put money into banks because they are perceived as safer than a mattress. In return, we get access to our money whenever we want — assuming everyone doesn’t demand money at the same time — plus a tiny sliver of interest. (At the moment, checking deposits at Chase receive 0.01 percent annual interest, while savings deposits get a whopping 0.30 percent annual interest.)
In effect, depository banks such as JPMorgan Chase, Citigroup and Bank of America get our money for free and then turn around and use it for all sorts of things, including making loans to individuals and businesses that pay much higher rates of interest than the banks pay their depositors. This is banking 101. The London Whale fiasco also taught us that sometimes banks use that money to make crazy, proprietary bets on interest rates — and sometimes that money gets lost.
JPMorgan Chase wants us to believe that it was shareholders’ money that was lost, not depositors’ money. There is no question that JPMorgan Chase’s stock got hammered when the full extent of the London Whale losses became known; shareholders lost almost $25bn, in addition to the $6bn Iksil lost on his trades.
Now that the JPMorgan Chase stock has returned more or less to where it was trading before the scandal, it’s safe to say shareholders have lost nothing as a result of the London Whale.
WP-Bloomberg
