Risk Management at JPMorgan: Relying on Excel Spreadsheets

I spent some time this morning reading the recently published “JPMorgan Chase & Co. Management Task Force Regarding 2012 CIO Losses,” a 129-page report on how and why the Chief Investment Office (CIO) lost more than $6 billion for the company in 2012. The media has been quick to point the finger at Bruno Iksil, the so-called “London Whale” responsible for executing the trades. As Felix Salmon notes, the executive summary on the first 17 pages of the report is well-written and provides the context behind this trading disaster for JPMorgan.

I went through the other portions of the document and wanted to highlight that the Risk Management, particularly in the CIO, wasn’t up to snuff. First, this was a huge red flag:

The Firm’s Chief Investment Officer did not receive (or ask for) regular reports on the positions in the Synthetic Credit Portfolio or on any other portfolio under her management, andinstead focused on VaR, Stress VaR, and mark-to-market losses. As a result, she does not appear to have had any direct visibility into the trading activity, and thus did not understand in real time
what the traders were doing or how the portfolio was changing. And for his part, given the magnitude of the positions and risks in the Synthetic Credit Portfolio, CIO’s CFO should havetaken steps to ensure that CIO management had reports providing information sufficient to fully understand the trading activity, and that he understood the magnitude of the positions and what
was driving the performance (including profits and losses) of the Synthetic Credit Portfolio.

But the big question: why did it take so long for JP Morgan to discover that these trades were losing money for the company? Turns out, it had to do with rudimentary platforms in place to measure/track risk on a daily basis. Alas, they were relying on Microsoft Excel!

During the review process, additional operational issues became apparent. For example, the model operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another. In addition, many of the tranches were less liquid, and therefore, the same price was given for those tranches on multiple consecutive days, leading the model to convey a lack of volatility. While there was some effort to map less liquid instruments to more liquid ones (i.e., calculate price changes in the less liquid instruments derived from price changes in more liquid ones), this effort was not organized or consistent.

In addition to these risk-related controls, the Task Force has also concluded that the Firm and, in particular, the CIO Finance function, failed to ensure that the CIO VCG (Valuation Control Group) price-testing procedures – an important financial control – were operating effectively. As a result, in the first quarter of 2012, the CIO VCG price-testing procedures suffered from a number of operational deficiencies. For example, CIO VCG did not have documentation of price-testing thresholds. In addition, the price-testing process relied on the use of spreadsheets that were not vetted by CIO VCG (or Finance) management, and required time-consuming manual inputs to entries and formulas, which increased the potential for errors.


If you’re into risk management at all (like I am), the entire report is worth perusing.

Jon Corzine and the Romance with Risk

By now, I’ve read dozens of articles about Jon Corzine and the fall of MF Global. But I think this piece in Dealbook is a best all-around explainer about Jon Corzine and his appetite for risk:

[Jon Corzine] pushed through a $6.3 billion bet on European debt — a wager big enough to wipe out the firm five times over if it went bad — despite concerns from other executives and board members. And it is now clear that he personally lobbied regulators and auditors about the strategy.

His obsession with trading was apparent to MF Global insiders over his 19-month tenure. Mr. Corzine compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets. And unusually for a chief executive, he became a core member of the group that traded using the firm’s money. His profits and losses appeared on a separate line in documents with his initials: JSC.

This seems like a surprise, however:

He was a popular manager, former employees say. An avuncular presence with a beard and sweater vest, he had a knack for remembering names. Even in the firm’s final hours, they recall that Mr. Corzine never lost his temper. His work ethic also impressed colleagues. He often started his day with a five-mile run, landing in the office by 6 a.m. and was regularly the last person to leave the office.

But the most mind-boggling revelation is that MF Global, through Jon Corzine’s insistence, shied away from implementing a rigorous risk management system at the firm:

Yet soon after joining MF Global, Mr. Corzine torpedoed an effort to build a new risk system, a much-needed overhaul, according to former employees. (A person familiar with Mr. Corzine’s thinking said that he saw the need to upgrade, but that the system being proposed was “unduly expensive” and was focused in part on things the firm didn’t trade.)

Risk management is perhaps the most important function for a bank/financial firm. There is no too steep a price to pay for having a system of checks and balances that would have caught MF Global’s downward spiral and perhaps have done something about it. I need not even mention the lost customer deposits that is now at the core of the investigation following MF Global’s bankruptcy.