Based on a paper by: Andrew F. Roberts
However, in 2012 it became clear that one of the bank’s key traders, Bruno Iksil, had been practicing assertive and risky trading for quite some time. In fact, traders in another branch of JP Morgan made such bets against Iksil, who came to be known in the media as the “London Whale” because of the widespread effects of his trading. By April, reports began to surface about the magnitude of the losses. Initial estimates put the total losses at $2 billion. However, as the breadth of the scandal unfolded, the loss count was nearly quadrupled, reaching over $7 billion (Silver-Greenburg, 2012). Although the company looked to downplay the widespread effect of the poor trades, it quickly became clear that even the highest executives felt influence of Iksil’s negligence. In the end, the billions of dollars lost by Iksil led to the London Whale being forced to resign from his position as a trader at JP Morgan.
Before evaluating the case through the lenses of the normative ethical theories, it is crucial to understand the stakeholders in the JP Morgan crisis. The stakeholders in this particular case include executives at the bank (including Iksil, the top trader), other employees, competitors to JP Morgan, and those who have accounts, funds, stocks, etc. associated with the bank.
From the individualist standpoint of business ethics, JP Morgan Chase & Co. would have been performing ethically had the trading tactics been successful. This normative theory does not focus on the general population and its happiness, nor does it have its roots in good will. Instead, the individualist theory views decision-making as being strictly based on maximizing benefits (profits) for the company and its stakeholders. Had Iksil’s trades succeeded, these risky moves would have benefited all stakeholders, keeping the bank from violating the individualist view of ethics. However, since the trades failed atrociously, the company can easily be viewed as violating individualist beliefs. Not only did the company not maximize their profits, they lost billions of dollars in the process. Furthermore, these losses did not only affect the company, but also its stakeholders as well. Investors, employees, those with bank accounts, etc. at the bank all felt the ripple effect of the poor trading.
In looking at the utilitarian theory of ethics, the main focus of all actions should come in maximizing utility. In the field of business ethics, utility is most easily described as aiming to reach extreme happiness, while lowering the level of suffering. That is to say, total happiness for the company and the public as a whole should be the main factor in decision-making. In this view of business, Iksil’s actions on behalf of JP Morgan were extremely unethical. As a direct result of the risky trading, huge amounts of money were lost, thus leaving those within the company quite unhappy. Furthermore, because of the widespread effects, the scandal left people worldwide discontented. If the trading did indeed work out to the benefit of the bank, then the utilitarian view of ethics would have been satisfied. However, the company did not only fail to increase happiness, they effectively damaged the level of happiness that already existed. To compound the issues caused by Iksil, the executives also acted in ways contrary to Utilitarianism. In their efforts to minimize the suffering caused by the poor trades and subsequent money loss, executives such as Dimon and CIO Ina Drew “sought to hide the extent of the losses from regulators and the public” (Puzzanghera, 2013). Once the news broke to the public, there was an obvious feeling of distrust for said executives. In all, the company accomplished exactly what it had sought to avoid; there was an extreme lack of utility, with the suffering multiplied by careless cover-ups from Dimon and Drew.
In relation to JP Morgan, Iksil’s risky trading violated all four of Kant’s basic principles. The London Whale was most definitely acting irrationally when looking to maximize profits off of deals that had a high likelihood of failure. In turn, his actions (that were unknown to the vast majority of stakeholders) left others in a position where they were unable to make rational decisions themselves. In other words, JP Morgan’s actions did not encourage rational decision-making in others, but instead prohibited it. Additionally, the company obviously did not respect the needs of others, instead choosing to focus on the needs and desires of a few top traders, especially Iksil. Finally, there was absolutely no evidence of Iksil and JP Morgan acting out of good will, as the decisions to take part in risky trades were far from doing what was right. Even if the trades had gone well, the ends would not have justified the means whatsoever. This relates back to the Formula of Humanity, which Iksil’s deceit and greed clearly violates. His risky trading attempted to use the ends to justify the means, and even had he succeeded, would not have been acting humanely. Overall, a Kantian ethicist can clearly recognize that JP Morgan did not follow any of the principles laid out in Kantianism.
From a personal viewpoint, I feel that the London Whale’s actions were about as far from ethical as possible. My reasoning for this is simple: Iksil, along with Dimon and Drew were deceitful to the majority of stakeholders throughout the scandal. Iksil’s misleading information about the true risk of his trades meant that he was acting carelessly with other peoples’ money. What makes it truly unethical is the fact that the people whose money he was risking had no idea that this money was being used in such a way. Perhaps even more unethical are the actions of the bank’s top executive, Dimon and Drew. While they were not directly responsible for Iksil’s trading practices, the unethical attempts to cover up the true impact of his actions are sickening. I am not alone in thinking that any person who trusts a bank in handling their money should be treated honestly. This includes admitting mistakes on the part of the bank and its employees. Keeping the truth from those who hold stake in the company is simply inexcusable from an ethical standpoint.
As for preventing a similar scandal in the future, JP Morgan must put into place three key practices to ensure nothing of this magnitude happens again. The most important step is to refine the practices for monitoring the traders employed by the bank. As Drew said, she was unaware of the true risks of Iksil’s trades. Therefore, the management of the big-money traders must be dedicated to observing their subordinates more closely. By instilling the idea of a low-risk trading philosophy, the traders at JP Morgan will be less likely to begin trade practices similar to those of Iksil. Secondly, the bank should be more open about how and why money is being used. The open approach will not only gain the trust of the stakeholders, but will also force traders to be more conscious about the decisions that they make regarding said trades. Thirdly, if a problem arises and trades similar to Iksil’s occur, JP Morgan must immediately terminate the employee. Practicing this speedy disassociation will show that the company values justice and ethical practices, along with overall control over the situation at hand. If JP Morgan approaches the future with a plan of action seeded in these three practices, it will undoubtedly be better suited to avoid a future scandal of this size.
These facts and Analyses are based on a paper by Andrew Roberts, "JP Morgan Trading Scandal: Risky Trades, Greed, and Record Losses " (2013).
Carey, B. (2013, February 27). JP Morgan chase announces 19,000 layoffs. Examiner. Retrieved from http://www.examiner.com/article/jp-morgan-chase-announces-19-000-layoffs on April 5, 2013.
Forbes. (2012, April 15). The world's biggest companies. Forbes magazine, Retrieved from http://www.forbes.com/global2000/list on April 9, 2013.
Kopecki, D. (2013, April 12). JP Morgan 33% profit jump beats estimates on reserve releases. Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-04-12/jpmorgan-profit-increases-33-beats-estimate-on-mortgage-fees.html on April 3, 2013.
Pollack, L. (2012, May 14). [Web log message]. Retrieved from http://ftalphaville.ft.com/ 2012/05/14/998601/two-billion-dollar-hedge on April 7, 2013.
Puzzanghera, J. (2013, March 15). Ina drew, who oversaw JP Morgan's 'London Whale,' saddened by losses. Los Angeles Times. Retrieved from http://articles.latimes.com/2013/mar/15/business/la-fi-mo-jpmorgan-london-whale-senate-hearing-20130315 on April 7, 2013.
Salazar, Heather. Kantian Business Ethics. Retrieved from https://kodiak.wne.edu/ d2l/lms/content/viewer/main_frame.d2l?tId=129594&ou=18408 on April 11, 2013.
Silver-Greenberg, J. (2012, July 13). New fraud inquiry as jpmorgan’s loss mounts. Wallstreet Journal. Retrieved from http://dealbook.nytimes.com/2012/07/13/jpmorgan-says-traders-obscured-losses-in-first-quarter/?ref=morganjpchaseandcompany on April 7, 2013.