As top executives inside a JP Morgan trading unit confronted massive losses on derivatives, they were so desperate to limit the damage that they did more than mislead regulators and manipulate their books: They pressured colleagues in other units of the bank to absorb some of the losses, according to the Senate probe of the episode released late Thursday.
On March 23, 2012, Javier Martin-Artajo and Achilles Macris -- two managers inside the unit suffering the losses, the Chief Investment Office -- called the co-chief executive officer of JPMorgan’s investment banking business, Daniel Pinto, according to the report.
Pinto’s traders sometimes took positions that ran counter to the CIO’s, meaning that losses for one office meant gains for the other. During this call, Martin-Artajo accused traders on the investment banking side of leaking information about the CIO’s vulnerability to losses on its positions in a bid to encourage the market to move in its favor.
“[R]isk management knows that we have large, large, concentrations, ok?,” the CIO manager said during the call, according to the Senate report. “Now, I, I, I am hearing in the market that, you know, some of the guys in the company are talking to them and wondering what we are going to do with the positions. Now, I, I just want to stop that ... yeah?”
Martin-Artajo allegedly asked Pinto to review “the marks that we get from the investment bank,” using industry jargon to ask that the investment banking unit buy some of the CIO’s bad derivarives investments for more than they were then worth. That would have effectively transferred money from the investment banking unit to the CIO, lessening the trading unit’s paper losses.
Pinto dismissed Martin-Artajo’s suggestions of impropriety, asserting that the CIO’s vulnerabilities were by then common knowledge.
“Everyone” in the market knew of the CIO’s positions, he said, according to the Senate report. “Obviously, you bought those positions in the market, so it is very likely that some of the market people can put two and two together. That the market knows that, what your positions are? That may be, because you bought tons of it.”
The rebuff promoted the managers at the CIO to escalate their dispute, the Senate report said. Macris soon wrote the head of the CIO, Ina Drew, to seek her help in persuading the investment banking unit to cease driving down the value of the CIO trading positions.
“Javier and team here feel ‘surrounded’ and blindsided in terms of methodology,” Macris wrote in an email included in the report.
“The issue here is that the investment bank is manipulating the prices,” Martin-Artajo reportedly told a colleague at the CIO’s office around the same time “We have a good position, it’s not performing and we are getting paranoid here, okay?”
JPMorgan did not immediately respond to a request for comment on the specific exchanges in question. In response to the report, Jennifer Zuccarelli, a spokesperson for the bank, said, "While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone.”