JP Morgan and London Whale Essay Example

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Risk Management Practices


JP Morgan is rated to be one American multinational banking, and financial services company. In fact, it is the largest bank in the United States. The worth of JP Morgan Chase & Co is approximated to be 2.6 trillion dollars (Reubenfeld 2011). Its role is to provide classical financial services especially with regards to composite banking. It has the second largest hedge fund in the financial sector of the United States. That means that the financial institution engages in improvising limited partnership of investors which applies high-risk methods. These methods include investment in borrowed money with the hopes of realizing high capital gains.

Basic outline of the timeline between 2011 and 2012

The JP Morgan is stipulated as an active entity in credit services. The period between 2011 and 2012 are characterized by a series of inappropriate and risky activities that could have possibly resulted in the dissolution of the banking institution. In January 2011, the bank wrongly overcharged thousands of militant families with regards to their mortgages. The bank further facilitated an inappropriate foreclosure of more military families. Thus, it violated the service member Civil Relief Act. The cases and negotiation went all the way to June the same year. From a statistical point of analysis, the bank accepted to have violated the act and privileges of approximately 6000 active military personnel and 18 military shareholders homes (Du 2012).

The initial expense that the banking had to face was approximately 27 million dollars in compensation of the class-action suit against it. That led to the forgiveness of the some loans belonging to some personnel whose property had faced inappropriate foreclosure. Besides, the financial institution suffered several financial losses in the year 2011. Following a lawsuit in the month of May 2011, the bank was forced to pay a sum of 100 million. These fines were leading towards immense depletion of the entire reserve. Later in the month of August, JP Morgan managed to settle fines associated with violations associated with sanctions.

In the year 2012, the JP Morgan faced a series of trading losses. These losses occurred at the Chief Investment Office. Some units run by Ina facilitated a chain of derivative transactions that incorporated credit default swaps. The credit swaps were part of the hedging strategy in investment. An estimated loss was calculated to be approximately 2 billion dollars (Du 2012). In fact, there are assumptions that the loss could be larger than assumed. There were aggressive trading activities that facilitated the heightened the extent in which the financial institution was facing credit losses. The market-moving trades facilitated by the bank’s Chief Investment Office.

Analysis of the risk management

The 2011-2012 trading losses, especially with regards to the London Whales scandal and other faulty actions facilitated by the CIO. It is assumed that the risk management strategies in the financial institution with regards to the investment docket. There are a series of factors that have facilitated the inference that the losses encountered at the largest bank to be considered affected by poor risk management practices. First, the CIO risk management is ineffective especially because it failed to deal with synthetic credit portfolio (Du 2012). Also, the CIO risk limits for the CIO did not reflect enough or sufficient granular. Therefore, the approval made and the successive implementation of the CIO related synthetic Credit VaR model was inadequate. Here, it is clear that the model of ensuring that the priority risks are or counterattacked is effective. However, the dimension in which it gets implemented is inadequate.

The banking institution’s Chief Investment Office had compliant tradesmen. However, the investment office and trading personnel repeatedly received unsupervised trading. That meant that the risk management parties operated for approximately five months without a treasurer for five months of the inappropriate trading activities (Reubenfeld 2011). Besides, the measures of advising the trade activities were said to have been perpetrated by inexperienced executives that were in charge of the risk management activities. Unfortunately, the risk management was destitute in the essence that it was impossible to discern the hidden losses that some of the CIO employees were hiding.

The most appropriate risk metric

There are a series of metric risk measures that can apply in such a case. However, there is an outstanding one that can help address the issue in a bid to ascertain the fact that it will never occur again. The CS01 could have served as the appropriate risk metric. However, the fact that JP Morgan is interested in dealing with high-risk investment ventures requires it to have a statistically analytical metric (Billio & Pelizzon 2000). Therefore, the VaR is the most applicable risk metric. Further, the liquidity of assets should be considered. Most importantly, in the context of Credit Default Swap, the liquidity of the assets is supposed to be considered in mild terms. Subsequently, it could be supplementary metric.

Similarly, the similar approach is useful in facilitating the mark-to-market accounting. There are two most basic approaches to the mark-to-market. An asset’s book value is assumed to represent the acquisition cost and less the depreciation level. The rationale supports the general applicability of the approach that it will allow selective realization of gain or giant gains trading.

Risk-weighted assets

From a point of considering the Risk Weight Assets, such investments are usually more appropriate and ascertaining than when the investments are on mere assumptions. Arguably, the net exposure to risk should be considered. Net exposure is precise compared to the gross exposure. That means that the feasibility of the investment to get deterred by risks is comparatively high. Further, it is imperative to denote that derivatives are via different criterion. Most importantly, there are different classes of assets. Therefore, there is different risk weights associated with them. The standard calculation of risk weights depends on the possibility of a bank having adopted the IRB or Standardized approach (Tang 2006). Therefore, banking institutions or financial institutions can also employ derivatives in cash management functions.

Reaction of the shareholders and regulators

The greatest reaction to the predicament was that the shareholders withdrew from investing in the financial institution. Concurrently, the regulators ended up resigning from the bank after the trading failure took place. That means that they felt that the losses being incurred by the institution were beyond what a business stakeholder was willing to hold. However, some shareholders insisted that the investments or trades were costing them. However, they believed that there was a possibility that the trades would work out. Arguably, the move by insiders to resign to resign did not reflect a solution to the financial misfortune. Instead, the best approach was to reverse and restructure the risk management team. Skills and approach were factors that ought to have been considered prior to any form of commitment to resign or participate.

Extent of effectiveness of risk management in enforcing limits

The organizational structure and processes early 2011 resulted in a series of failures and fines. Failure to utilize or implement appropriate risk management strategies resulted in massive losses. The institution made inappropriate charges that were above limits hence breaching the rights and acts. Risk management is necessary for the process of ensuring that the risk management practices are intact (Chang, Jiménez-Martín, McAleer & Perez Amaral 2011). Therefore, it should be intensively active. First, this would help ensure that there is strict compliance and accountability in the organizational structure. That means that organizational structure becomes more of concessional than hierarchical.

Redesigning the risk management policy for CIO

The process of redesigning the risk management policy would be quite complex. The first change would be to reinforce the approach and the risk metrics that serve the best purpose. The second approach would be to change and adopt better training approach as far as risk management is concerned. The ultimate change presume be to make the risk management team remain to be independent of other departments. Independence is essential.

Lessons learned from coca cola’s risk management

There are three things learned from the risk management at coca cola. The first approach is facilitating an executive buy-in. The second approach is ensuring that the policies are in the business. Finally, it is imperative to keep the plan simple. The one event that keeps management team members alert is that of high competition and short cycles of demand for the products. The firm has to overcome the obstacle of other beverage firms that have developed diversity into their operations.


Du, L. (2012, May 19). A Complete Timeline Of JP Morgan’s $2 Billion Trading Blunder — Business Insider. Retrieved from

Reubenfeld, S. (2011). J.P. Morgan Chase Pays $88.3 Million To Settle Sanctions Violations — Corruption Currents — WSJ. Retrieved from

Billio, M., & Pelizzon, L. (2000). Value-at-risk: a multivariate switching regime approach. Journal of Empirical Finance7(5), 531-554.

Chang, C. L., Jiménez-Martín, J. Á., McAleer, M., & Perez Amaral, T. (2011). Risk management of risk under the Basel Accord: Forecasting value-at-risk of VIX futures. Available at SSRN 1765202.

Tang, C. S. (2006). Perspectives in supply chain risk management.International Journal of Production Economics103(2), 451-488.