JPMorgan Chase & Co.’s chief investment office no longer emphasizes protecting the bank from risk. Instead, Achilles Macris, the CIO’s head executive in London, has transformed the CIO into a unit whose trading risk is equivalent to JPMorgan’s investment bank.
According to a report in Bloomberg, the CIO could potentially lose up to $57 million on most days of 2011, while the investment bank, which encompasses the largest stock and bond trading units on Wall Street, had the potential to lose $58 million on most days.
The transformation of the CIO, said to be closely managed by chief executive officer Jamie Dimon, would appear to contradict the intent of the forthcoming Volcker Rule, which will ban banks with federal government backing from proprietary trading.
Last week, one of Macris’ traders, London-based Bruno Iksil, elicited comparisons to Federal Reserve Chairman Ben Bernanke influence in the government-bond market when Iksil’s trades moved the derivatives market. Iksil’s positions in credit derivatives are now so big that some participants in the market has started calling him “Voldemort” after the Harry Potter villain.
One possible incentive for JPMorgan Chase to increase trading operations in the CIO is that CIO employees’ share of trading profits is smaller than those of investment-bank employees. As a result, tensions have risen between the CIO and the sales and trading desks in the investment bank.
JPMorgan continues to insist that the CIO manages the risks of the bank and trades such as Iksil’s are actually part of the effort to minimize risk. On Friday, Dimon referred to any controversy as “a complete tempest in a teapot.”
But former JPMorgan executives who spoke to Bloomberg describe the credit risk buildup in JPMorgan’s CIO as “unprecedented.” They don’t believe that Iksil would be able to unwind his position without causing market dislocations.
In 2010, Macris’ team made a $5 billion profit on its $200 billion portfolio. The profit comprised over one-fourth of JPMorgan’s net income in 2010.
The CIO portfolio currently includes around $70 billion of securities that are linked to mortgage debt in Europe, Dimon said on Friday. JPMorgan chief financial officer Doug Braunstein said that $175 billion of the portfolio is mortgage-related, with the “vast majority” government-backed or government debt.
While Dimon and Braunstein insist that JPMorgan is cooperating with both the spirit and the letter of the forthcoming Volcker Rule, taking huge positions on European debt doesn’t seem like the most likely choice for a strategy to minimize risk.
But JPMorgan’s evasive strategy shows how challenging it will be to enforce the Volcker Rule, as long as banks keep trying to redefine what constitutes proprietary trading and what constitutes hedging.
Jon Lewin is a Feature Writer for the Compliance Exchange and Wall Street Job Report. He is also a columnist for the Faster Times and a blogger for Subway Squawkers. Lewin’s work has appeared in the New York Daily News, Huffington Post and Digital Innovation Gazette as well as the “Cambridge Companion to Baseball” and the Daily News history essay collection “Big Town Big Time.”