Ina Drew, the former head of a JPMorgan Chase & Co. (JPM:US) unit responsible for $5.8 billion in trading losses this year, will forfeit her pay and other managers were ousted after an internal inquiry found employees may have intentionally hid souring bets.
The bank accepted Drew’s offer to return about two years of compensation, the maximum clawback allowable under employment terms, said Joe Evangelisti, a company spokesman. Other London- based managers of the chief investment office’s synthetic-credit bets left without severance and will be required to forfeit as much as two years of pay, including restricted stock and options, the bank said in a presentation. Recordings, e-mails, and documents show traders may have tried to mask losses by mismarking positions, according to the presentation.
“We’ve made the decision to claw back compensation from each of these individuals,” said Michael Cavanagh, who was enlisted from running Treasury and Security Services to run the review. He didn’t name the managers. The money-losing bets were overseen by Bruno Iksil, known as the London Whale, his boss Javier Martin-Artajo and former Europe CIO head Achilles Macris.
The largest U.S. bank lost almost $40 billion in market value (JPM:US) in the months after Bloomberg News reported April 5 that the London unit’s illiquid bets on credit derivatives were big enough to move markets. The firm restated first-quarter results today to reduce profit by $459 million, in part because London traders had priced their positions “aggressively” toward the end of market spreads, Cavanagh said.
The company decided to restate after executives and lawyers interviewed employees, reviewed tens of thousands of hours of tapes and searched about 1 million e-mails.
“We just have questions about whether the traders were doing what they need to do for accounting, which is put a mark on their positions where they think they can exit,” Cavanagh told reporters on a conference call. “Instead it felt more like they were pricing their marks a little bit more aggressively, but generally inside the bid-ask spread.”
Net income fell 9 percent to $4.96 billion for the three months ended June 30, including a $4.4 billion loss on the trades. The bank boosted second-quarter profits with $1 billion in securities gains, $2.1 billion in reserve releases and an $800 million accounting gain on the cost of the company’s debt.
Drew, 55, was awarded about $29 million in total compensation for 2010 and 2011, according to JPMorgan’s regulatory filings. She retired May 14 with about $57.5 million in stock, pension and other pay, according to bank disclosures and estimates from consulting firm Meridian Compensation Partners LLC. About $21.5 million of that money, based on the May 14 closing price, would have been automatically forfeited if she had been fired for cause.
‘Acted With Integrity’
“She has acted with integrity and tried to do what was right for the company at all times, even though she was part of this mistake,” Chief Executive Officer Jamie Dimon said today during a meeting with analysts. “In that spirit, Ina came forward and offered to give up a very significant amount of her past compensation.”
A 30-year JPMorgan veteran, Drew had a track record of success at JPMorgan and its predecessor companies. Dimon commended her in announcing her resignation and again in front of Congress last month, saying “the CIO unit had done so well for so long” that he didn’t scrutinize her work as much as he did with other executives.
Drew was the bank’s third-highest compensated executive officer the past two years, regulatory filings show. Her division made “several billion dollars” in the three or four years preceding the loss, Dimon told lawmakers. The CIO manages the bank’s excess deposits and hedges against risk.
‘Saved the Company’
Dimon said that when Drew decided to retire he received letters from former chairmen in her support, including one who said “she saved the company.”
JPMorgan’s long-term incentive plan gives Dimon, with approval from the board, the right to reduce Drew’s restricted stock or to further defer vesting if her performance wasn’t satisfactory, according regulatory filings. Restricted stock also can be deferred longer or forfeited if performance has “been unsatisfactory for a sustained period of time.”
The JPMorgan board awarded Dimon $23 million in salary and bonuses for his performance in 2011. The CEO has said any impact on his pay would be decided by the board of directors.
“For senior people, which most of these people are, you can claw back for even bad judgment,” Dimon told the Senate. “You can claw back any unvested stock, you can claw back for things like cash bonuses, so it’s pretty extensive.”
Soaring pay pushed traders to disregard risk and helped to spark a global economic slump in 2008, the Financial Crisis Inquiry Commission said last year. Wages in the financial sector also limited regulators’ ability to lure top talent to police banks, the panel found.
Dimon hired Macris in 2006 with a mandate to generate profits for the unit, whose main mission had been to reduce risks for the bank’s excess cash. He and Iksil eventually built up a position in credit derivatives that was so large it couldn’t be unwound without roiling markets.
A Greek citizen, Macris previously was co-head of capital markets at Dresdner Kleinwort Wasserstein before joining JPMorgan. In that role, he helped oversee a unit that made proprietary trades, or bets with Dresdner’s own money, according to two people who worked with him at the time. Before joining Dresdner, Macris oversaw currency trading at Bankers Trust, now part of Deutsche Bank AG.
Iksil joined JPMorgan in 2005 and had held his current role since 2007, according to his career-history record with the U.K. Financial Services Authority. He worked at the French investment bank Natixis from 1999 to 2003, according to data compiled by Bloomberg. Martin-Artajo, who had been Dresdner’s head of credit-derivatives trading, joined JPMorgan in London in 2007.
While Macris had a mandate to make money from the beginning, he didn’t start putting on big bets until after the credit crisis in 2008. Two of the former executives said the following year he bought AAA-rated pieces of collateralized debt obligations. As competitors dumped securities and prices slumped, Macris’s group at JPMorgan emerged as the biggest buyer in some markets, said one former executive at the bank who was familiar with the trades at the times.
To contact the reporter on this story: Dawn Kopecki in Washington at firstname.lastname@example.org;
To contact the editor responsible for this story: David Scheer at email@example.com