JP Morgan – Top trading exec costs company and stakeholders billions of dollars (2012)

Based on a paper by: Andrew F. Roberts

            JP Morgan Chase & Co. is one of the largest banks in the world. Often referred to as the shortened JP Morgan, the corporation has leads all American banks in terms of assets, and is the second largest bank worldwide. The size of the company can be attributed to a merger in 2000 between Chase Manhattan Corporation, founded 1799, and JP Morgan & Co., founded 1871. In the wake of the merger, JP Morgan Chase & Co. has raised their total assets to $2.5 trillion, making it the second largest public company in the world (Forbes, 2012). The bank, which is headquartered in Manhattan, offers a wide array of services from credit card services to private banking to asset management. As a result of its size, JP Morgan is recognized as being one of the “Big Four” banks, alongside Bank of America, Wells Fargo, and Citigroup. Furthermore, the bank has been the most successful of the big four in avoiding the major impacts of the recession in the banking industry.
          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.

          The executives of JP Morgan had one major interest in their positions—to maximize profits for the bank. Major profits in both 2007 and 2008 allowed the bank to establish itself as one of the most powerful in the world. The executives looked to continue this profit-streak, and keep finding large profits each quarter. This is the leading reason why some traders, particularly Iksil, pushed themselves to make dangerous and ill-advised moves. Simply put, the executives’ focus was on making money. Employees not in the high-end “money making” positions (e.g. bank tellers, tax preparers, etc.) had a main interest in working in an environment that offered job security. These employees had a focus on working in a position that offered rewarding duties while providing the comfort of knowing that they could have a steady job. However, as the scandal unfolded, employees were unsure whether or not they would have a job in the aftermath. In fact, in the months following the crisis, JP Morgan found itself laying off 19,000 employees to offset losses caused by the London Whale (Carey, 2013). Perhaps the most important players in this scenario are those who have invested money in any way at JP Morgan. The main interest of these stakeholders is to find a safe way to protect and grow their savings. Those customers at the bank saw the once trusted bank lose $7 billion dollars in a shockingly quick manor. This left many customers wondering how this would affect interest rates, investments, and more. Unfortunately, they found that this simply was not true in the case of Iksil. This idea rings true in the four normative theories; Individualism, Utilitarianism, Kantianism, and the Virtue theory.

         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.

          Kantianism is another theory that was clearly not considered by JP Morgan during the trading scandal. In his thoughts on ethics, Kant follows four main principles including: acting consistently as well as rationally in decision-making, assisting others in making rational choices, respecting all others’ needs and the differences each person possesses, and (perhaps the most basic, yet most important) acting out of good will. The last principle, acting in good will, essentially speaks to the idiom of “the ends do not justify the means”. In other words, acting out of good will does not mean doing something because it is convenient or easier, but instead doing it because it is the right thing to do. This ideology is represented in Kant’s Formula of Humanity, which suggests that one should treat all others and themselves as an end, or something that has value in itself. If one has done this, they have practice the idea of humanity (Salazar, 2013).
          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.        

        Yet another theory that was violated during the trading scandal is the Virtue theory of ethics. The theory essentially operates on the idea that there are numerous characteristics that permit everything to work correctly. Similar to Kantianism, the Virtue theory has four major characteristics. Within the theory, these four characteristics are vital to ethical business operations. The four are courage, honesty, temperance, and justice. While it did indeed take courage to make such risky trades, the extreme downfall came from the company lacking the other three characteristics. The fact that Iksil was making trades without the knowledge of other executives and almost all stakeholders completely ignores the idea of honesty. In fact, Iksil’s own supervisor was unaware of the true riskiness of his trades. Drew, the former CIO for JP Morgan told the LA Times that “she was deceived by traders working for her about the size of the risk they were taking in the bank’s Synthetic Credit Portfolio” (Puzzanghara, 2013). Furthermore, these actions do not exemplify temperance, in that the London Whale did not show any sort of restraint or self-control at all. The fact is that Iksil did not pay attention to any regulations and disregarded the risk limits that are in place for traders. Finally, although Iksil was technically acting within the law, his trading practices violated the laws of social justice. By essentially gambling on long-shot bets using the money of those utilizing the bank’s services (without their knowledge), Iksil was not acting in a way that reflected justice for all stakeholders. The only true justice came when JP Morgan chose to force Iksil to resign from the position in May of 2012.
         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. 

Overall, JP Morgan’s response to the plan was relatively successful, and the bank was able to regain the support and trust of their stakeholders. This can be easily seen by their recent quarterly profit of $6.53 billion, up from $4.92 billion last quarter (Kopecki, 2013). However, this solution could have been solved in a much smoother way had the company changed their approach slightly. First, the company should have avoided the attempted cover-ups by other executives, such as the CEO Dimon. These attempts were not successful, and only added to the negative representation in the public eye. Additionally, the bank should have disassociated itself with Iksil much quicker than they did. The top executives at JP Morgan were investigation the trades for a long time (over a month), yet kept Iksil on their payroll. Furthermore, rather than firing him immediately when news broke to the public, the bank chose to simply remove Iksil from his duties; this meant that he was still being paid by JP Morgan. By the time he was forced to resign officially, the damage was already done. The bank was seen as both protecting Iksil, as well as being indecisive about what should become of the London Whale. Had JP Morgan chosen to approach the situation while taking into account these two changes, the situation would have been viewed as a much more fair solution to the crisis. 
          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).

References

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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.