Most people haven't got a clue as to what the London Whale was doing. And none more so than the senior management at JP Morgan.
JPM pretty much invented Value at Risk and time and time again it has been shown to be useless. But this is not important as what is a few billion to a bank with a tier 1 capital of over USD120bn?
Bruno Iksil is still employed, according to the FSA (fsa link), and may lose his job so Dimon can save face. Another french engineer hiding his actions in C++ and thrashing around with little guidance or risk management oversight. He was shorting a short so going long CDS on an old index with little liquidity despite value running into trillions. Alarm bells then. JPM owned the market (movement) and is also a part owner of this market (beneficial owner) and so was conflicted.
The CDX market JP Morgan were trading with and against is run by Markit. The same company that owned all the subprime indices so beloved of the banks pre the 2008 crash. It has 3000 employees and started out in London as a dotcom.
Markit is a private market / index provider owned by its co-founder Lance Uggla (a man with a reputation, stock worth billions and a regular user of lawyers so enough said), a sort of facebook for off the beaten track indices that FTSE, Dow and S&P avoid. It is also owned by all the big banks including JP Morgan who treat Markit as their own private club.
Markit owns all the pricing data of the CDX market and charges handsomely for it. This is the data created by the banks and sold onto non members of the Markit club like hedge funds and other users. With its monopoly position it is able to run indices on the pricing data it has access to. Markit has been able to acquire many companies since it started in 2001 (I represented a well known American bank in the early days when Markit had its roundtable meetings and ran the business on a couple of spreadsheets), in the pursuit of data ownership and production of indices so loved by structured product providers. JP Morgan loves Markit, especially playing around with shareholders money and pretending to be a whale like hedge fund fending off little fish like BlueCrest and BlueMountain Capital, hedge funds run by ex JPM people.
Markit is also unregulated. Well it appears to be unregulated. Nothing on its website about being FSA or BoE regulated or a MiFID registered exchange. It seems to get round this because it says its a data vendor. Most heavily traded indices are regulated by some government body or other and in Europe exchanges are covered by MiFID. On top of this, exchanges like the LSE, have rules about concentration and misuse, the sort of rules JP Morgan et al would be caught out by if Markit was regulated as a proper exchange.
Markit controls trillions in asset. Especially the CDS market where its indices are pretty much the only ones used. About 25 trillion according to wikipedia. Markit's indices were the ones that packaged up all those lovely subprime sandwiches which pre-empted the mess we are in today. The index so loved by the Whale was the Markit CDX North America Investment Grade Index of credit-default swaps Series 9-18 (IBOXUMAE).
So when will the SEC and FSA take note that one man has created a mechanism to allow bank's to trade trillions of dollars off market and allow a handful conflicted individuals trade hundreds of billions without recourse to anyone except a friendly government who has to bail them out?
I don't like Volker but I did like Glass Steagall. It is not a level playing field when small minnow hedge funds who are accountable to fickle investors are tossed around by government sponsored too big to fail banks.
Dimon may blame the Whale but he is wrong. The fault is allowing Markit to create a gated playground for these banks to have fun in.
JP Morgan to spin out new hedge fund: BlueCIO (forbes)
Hedgies plead for help in April (bloomberg)
JP Morgan to be split into two (JP Morgan and Chase) (boston)
FT Alphaville tell it as it is (ftalphaville)
Goldman Sachs having a good laugh at the Whale spotters. (casinowhale)