Bloomberg News

JPMorgan Switches Risk Model Again After Whale Loss

April 12, 2013

JPMorgan Adopts Fourth VaR Model in New Switch After Whale Loss

Businessmen check their mobile phones in front of JPMorgan Chase & Co. offices in New York. Photographer: Scott Eells/Bloomberg

JPMorgan Chase & Co. (JPM:US), whose trading loss of more than $6.2 billion last year was fueled by the adoption of a formula that understated risks, has adopted yet another model.

JPMorgan said today it employed a new formula to judge the risk of its credit derivatives position, at least the fourth such model it’s used since January 2012. The portfolio was built by Bruno Iksil, known as the London Whale because his bets were so big they moved markets.

The bank changed its measurement of value at risk, or VaR, for the credit derivatives book in the first quarter of this year “to achieve consistency with like products” within the corporate and investment bank, JPMorgan said today in a supplement. “This change had an insignificant impact” to average VaR for fixed income and the investment bank’s trading and credit portfolio, the New York-based bank said.

JPMorgan had previously changed the VaR model, which estimates the most amount of money a trading position can lose on 95 percent of the trading days, when the corporate and investment bank took over most of the credit book from the chief investment office last year. That change last year reduced JPMorgan’s estimated risk by 24 percent to $115 million in the third quarter.

JPMorgan’s switch of risk models in January of last year may have helped fuel the trading loss at the chief investment office, Chief Executive Officer Jamie Dimon told the Senate Banking Committee in June. Dimon said last May that the bank had reviewed the effectiveness of that VaR model, deemed it “inadequate” and decided to return to the previous version. Restoring the use of the earlier model meant the risk was twice what the bank had reported in April of 2012.

CIO’s Losses

The January 2012 switch and the timing of the firm’s disclosures are the focus of an inquiry (JPM:US) by the Securities and Exchange Commission as the U.S. examines how long executives knew about the CIO’s swelling bets and losses.

Dimon told lawmakers in June that the models “never are totally accurate in capturing changes in business, concentration, liquidity or geopolitics.” JPMorgan uses data going back one year, Dimon has said, so the VaR figure might fall just because a volatile week was no longer included in the calculation.

JPMorgan slipped 0.6 percent to $49.02 at 10:41 a.m. in New York. The bank said today that first-quarter profit rose 33 percent on cost cuts and an improvement in consumer credit that allowed the bank to reduce loan-loss reserves.

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net;

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $59.45 USD
    • 0.29
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