Matt Lyons
After a tumultuous period of banking hyper-regulation after 2008, no one would have suspected in 2012 that JP Morgan, the world's largest bank, had ineffective controls in place that left the company flat-footed when its "rogue" trader, Bruno Iksil (known affectionately as "The London Whale"), had taken untenable, long-term positions on a security class near and dear to everyone's hearts these days—Credit Default Swaps.
There are many questions worth asking about The London Whale: How on earth does a rogue trader take a $2 billion position on Credit Default Swaps without triggering some sort of internal controls red flag?
How do two hedge fund managers 5,000 miles away in New York start placing bets against Bruno's bad bet before JP Morgan recognizes its rogue employee's behavior? Third, perhaps most important, what is "broken" within JP Morgan's control environment that didn't alert upper management to such an egregiously bad decision?
Questions are good; but we imagine business leaders favor solutions. Those solutions are table stakes for consulting firms. Here are some things consultants have learned from JP Morgan and the Whale:
Controls are only one part of the overall control environment at a company. Take JP Morgan. With a matrixed organization comprising over 100,000 employees spanning the globe, JP Morgan's control environment encompasses approximately 400 local regulatory agencies with which to comply. Is it reasonable to assume something can fall through the cracks?
Absolutely! No matter how well designed or implemented, controls can't catch everything. This is why other aspects of the control environment are so vital. It starts on the front line—in this case, Bruno's desktop. If he had a birds' eye view of financial risk at JP Morgan—and some sort of inkling what his $2 billion bet was going to do to it—he might have thought twice before making the trades. Another thing that might have helped was extensive financial risk training for employees like Bruno, to help them understand the larger implications of their individual trading decisions.
Tone at the top matters more than ever. In the communication business, the rule is "tell them what you want to tell them, tell them, then tell them what you told them." Repetition might seem the wrong way to go, but the tone at the top—that we don't do these kinds of things as a company—cannot be overcommunicated. We are not privy to the communication habits of JP Morgan's CEO, Jamie Dimon; they were surely succinct and on the mark. But more reminders and repetition may have helped.
We can take some solace in the limited impact of the London Whale event. $2 billion is a lot of money to lose. And the $1 billion fine JP Morgan received as a result is also nothing to sneeze at. Nonetheless, this unfortunate event didn't lead to mass panic or JP Morgan's implosion. So, in all sincerity, kudos to the consultants and front-line employees for designing systems that catch most of this activity.
So, when said whale swallows bad debt, then pukes it back up all over his employer, what can be learned? A lot, it turns out. And consultants are at the forefront of that learning.
Matt Lyons is Research Analyst for Kennedy Consulting Research & Advisory. For more information, visit www.kennedyinfo.com/consulting.
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