Saturday, August 4, 2012

JP Morgan trader urged to boost value of positions in losing trade

The Wall Street Journal reported that the JP Morgan "Whale" was prodded to increase the value of the positions that were underlying the money losing credit default swap trade.

This is another example of behavior that would be eliminated if banks were required to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Quite simply, with this disclosure, market participants would have noticed that the positions were aggressively priced.

Sunshine really is the best disinfectant.

J.P. Morgan Chase & Co. executive encouraged the trader known as the "London whale" to boost valuations on some trades, said a person who reviewed communications emerging from the bank's internal probe of recent trading losses. 
After reviewing emails and voice-mail messages, the bank has concluded that Bruno Iksil, the J.P. Morgan trader nicknamed for the large positions he took in the credit markets, was urged by his boss to put higher values on some positions than they might have fetched in the open market at the time, people familiar with the probe said....

Determining accurate prices for infrequently traded investments such as the bets made by Mr. Iksil can be difficult, and J.P. Morgan routinely reviewed the valuations made by traders. 
The oversight process by the bank's so-called valuation control group includes input from outside pricing companies and brokers, which the group uses to set what it considers an appropriate range for various investment positions. The arrangement is a common risk-management practice among large banks. 
In Mr. Iksil's case, though, the high valuations didn't sound any alarm bells, according to people familiar with the internal investigation. The reason: The values claimed by the trader were within the broad range set by the oversight group, so it approved the valuations. 
People close to the probe said the control group's acceptance of the numbers was the weakness referred to by J.P. Morgan last month. As part of the company's cleanup efforts, the group will establish a narrower band of values for such positions and check traders' valuations more frequently than its previous practice of once a month, these people said. The group operates separately from the CIO.

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