News of the $2 billion trading losses at JPMorgan Chase continues to criticize senior executive leadership, including CEO Jamie Dimon, with questions surrounding what went wrong with the bank’s risk management. Several top executives, including the bank’s Chief Investment Officer, have resigned as turmoil continues to swirl. A front-page story in the May 15, 2012 issue of The New York Times, raises questions about the disregard of risk management concerns in the years leading up to the crisis.  Several executives allege that despite a number of concerns being expressed about the bank’s increasing investments in complex trades that were hard to understand, dangers were “ignored or dismissed.”  And, they allege that the increased appetite for such trades had the approval of senior executives, including the CEO.

According to the NY Times article authored by Jessica Silver-Greenberg and Nelson D. Schwartz, “top investment bank executives raised concerns about the growing size and complexity of bets held by the bank’s chief investment office as early as 2007.” Several current and former employees in the chief investment office allege that executives leading the trading strategies failed to adequately respond to concerns from the bank’s internal risk officer and “risk managers were largely sidelined.” Some allege that risk controls were insufficient and that breakdowns in communications between the bank’s London and New York offices led to the lack of proper oversight.

Red flags began to emerge in March 2012 following erratic trading sessions that saw big gains followed by big losses. However, by the time senior management focused on these red flags, it was too late to avoid the massive losses, according to the article.

This situation provides an unfortunate reminder of the importance of establishing and maintaining an appropriate risk culture whereby risk management’s voice is heard and protected. It may also provide more fodder for those who believe chief risk officers need to have direct lines of reporting to independent directors who serve on the board.

Link: The New York Times, “Red Flags Said to go Unheeded by Bosses at JPMorgan,” by JessicaSilver-Greenberg and Nelson D. Schwartz, May 15, 2012, p. 1.

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ERM Enterprise Risk Management Initiative 2012-05-15