JPMorgan Chase & Co (NYSE:JPM)’s whale losses prompts switch to older risk model

by Loventrice Farrow | Saturday, Apr 13, 2013 | 543 views

Northern, WI 04/13/2013 (usastockreport) – Last year JPMorgan Chase & Co (NYSE:JPM) (Closed: $49.01, Down by 0.61%) had adopted a formula that had understated risks and resultantly incurred losses in excess of $6.2 million. The company has now moved onto a new model. Adopting its fourth such model since January 2012, JP Morgan has said that it seeks to judge the risk-status of its derivatives position. Bruno Iksil had built the portfolio and the very size of the bets that had moved the markets had earned him the nickname of London Whale.

Insignificant impact

In a supplement JP Morgan said that the bank had changed its measure for VaR or value of risk in this year’s first quarter, for the credit derivatives book. The objective was to achieve consistency with similar products. The New York-based bank said that the change that had been adopted had a largely insignificant impact to the average value of risk for fixed income as well as the trading and credit portfolio of the bank. Last year, most of the credit book had been taken over from the chief investment office by JP Morgan which was when the VaR model had been changed by the company.

Timing mismatch

This model estimates the maximum amount of money that can be lost by a trading position over 95 percent of trading days. Last year, that change had reduced the third-quarter estimated risk to $115 million which had amounted to 24 percent drop. In June, Jamie Dimon the Chief Executive Officer said that the changes that had been made to the model risk last January had in most probability fuelled the Chief Investment office’s trading loss. He added that last May the effectiveness of that VaR model had been reviewed and had been considered to be inadequate.

SEC scrutiny

The decision to revert to the pervious model had been taken at that point of time. This reversal also means that there would be a two-fold increase in the risk that had been reported in 2012 April. The Securities Exchange Commission’s inquiry is focused on the switch that took place in January 2102 and the disclosure timing. The U.S has been examining for exactly how long the JP Morgan executives were aware about the ballooning bets and losses that the CIO had incurred.

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