JPMorgan Pay Fueled Risk Amid London Whale Loss: Report

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By Laura Marcinek & Dawn Kopecki - Mar 15, 2013 6:00 AM PT

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Andrew Harrer/Bloomberg

An exhibits folder for the Senate Permanent Subcommittee on Investigations hearing titled 'JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses' arrives to the hearing room in Washington on March 15, 2013.

JPMorgan Chase & Co. (JPM) (JPM), the biggest U.S. bank by assets, compensated chiefinvestment office traders in a way that encouraged risk-taking before the unit amassed losses exceeding $6.2 billion, a Senate committee said.

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Executives including Ina Drew, former head of the CIO, are scheduled to testify today at a subcommittee hearing on the London Whale. Source: JPMorgan Chase & Co. via Bloomberg

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JP Morgan Chase & Co. endured 41 days of trading losses last year as it worked to stabilize bets tied to credit derivatives. Photographer: Scott Eells/Bloomberg

Pay that rewarded “effective risk management” would have suggested the synthetic credit portfolio functioned as a hedge, the Senate Permanent Subcommittee on Investigations said yesterday in a report on the New York-based bank’s so-called London Whale loss. Instead, compensation practices suggest the bets “functioned more as a proprietary-trading operation.”

Executives including Ina Drew, 56, former head of the CIO, are scheduled to testify today at a subcommittee hearing on the London Whale. The bank endured 41 days of trading losses last year as it worked to stabilize bets tied to credit derivatives. The board cut Chief Executive Officer Jamie Dimon’s 2012 pay by 50 percent to $11.5 million, saying he “bears ultimate responsibility for the failures that led to the losses.”

The lender awarded Achilles Macris, 51, the trader behind the expansion into credit trading, $31.8 million in the two years before the firm racked up the CIO losses, making him among the highest-paid employees at the firm, the report said.

His pay, along with that of Bruno Iksil, the derivatives trader dubbed the London Whale for the size of his position in the market, and Javier Martin-Artajo, Iksil’s supervisor, was reviewed by JPMorgan’s operating committee and approved by Dimon, 57, according to the Senate report.

Top Earners

“They were compensated at levels that were at the top range of, or better than, the best investment-bank employees,” the committee wrote.

Martin-Artajo was paid about $11 million for 2011 and $12.8 million for 2010, the report shows. Iksil was awarded $6.76 million for 2011 and $7.32 million for 2010.

As the synthetic credit portfolio amassed losses, Iksil said in an e-mail that he would be “hauled over the coals” and wouldn’t get away with losing millions of dollars “without consequences,” according to the report.

Soaring pay on Wall Street pushed traders to disregard risk, the Financial Crisis Inquiry Commission said in a 2011 report that reviewed the losses that led to taxpayer bailouts of banks. Stock-option bonuses motivated financial firms to use leverage to boost returns, the FCIC said.

The chief investment office was supposed to manage cash while minimizing risk. The lack of sufficient oversight “allowed the traders to pursue their flawed and risky trading strategies,” the bank said in its January report. “Senior firm management’s view of CIO had not evolved to reflect the increasingly complex and risky strategies CIO was pursuing.”

Drew’s Paybacks

JPMorgan accepted an offer from Drew to return about two years of compensation, the maximum clawback allowable under employment terms, the lender said in July. The bank said top executives fired because of the trade also agreed to clawbacks. Recordings, e-mails, and documents show traders may have tried to mask losses by mismarking positions, according to the bank.

Drew retired May 14 with about $57.5 million in stock, pension and other pay, according to estimates from consulting firm Meridian Compensation Partners LLC, and based on regulatory filings.

JPMorgan’s corporate and investment bank cut employee compensation costs 3 percent in 2012 to $11.3 billion as the division generated 1 percent more revenue. That was enough to give each of the unit’s 52,151 employees $216,928, according to figures posted in January on the company’s website.

“We really believe in pay per performance,” Michael Cavanagh, 47, co-CEO of JPMorgan’s corporate and investment bank, said in a Feb. 26 presentation. “Talent is critically important in our business.”

The CIO didn’t have its own incentive-pay system and followed a bank-wide program overseen by the board’s compensation and management-development committee, according to JPMorgan’s report cited by the Senate panel.

To contact the reporters on this story: Laura Marcinek in New York atlmarcinek3@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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