Ethics Paper Final BU486
The London Whale Scandal
BU486-B : Accounting Information Systems and Computer Audit & Controls
Kevin G. Bullock
Wilfrid Laurier University
Alexander Brik - 110882860
Aman Smagh – 110257570
Jack Welton – 100791540
Zaid Iqbal – 110184970
Synopsis of the Case
In April and May of 2012, JP Morgan Chase & Co. incurred major trading losses of $6 billion dollars. However, JPMorgan’s financial statements represented these losses as only $2 billion. The losses were the result of risky bets taken in the credit markets by a trader named Bruno Iksil. Iksil worked at JP Morgan’s London office, and made extremely large trades in the credit markets. Because of this, Iksil earned the nickname “London Whale,” and this entire scandal is referred to as the “London Whale Scandal.”i In the worlds of finance and gambling, whales are people who “play” with very large sums of money.
This debacle started in JP Morgan’s Chief Investment Office (CIO), in the London branch of the firm. CIO’s are central to any major bank. Their purpose is to invest the difference between deposits the bank has on hand from its customers and the credit lent out to borrowers. This difference is called the bank’s reserves. With $1.1 billion in deposits and $750 billion on loan, JP Morgan’s CIO handled assets in excess of $350 billion.ii In theory, CIO’s are supposed to keep the reserves safe and to protect them against inflation. However, in reality, most CIOs will enter into more risky investments in order to earn higher returns. This is what the London Whale was doing. Still however, these investments should not be too risky and risk management and risk assessment controls are implemented to stop investments from being entered into when their risk exceeds the CIOs appetite.
Ironically, it was actually JP Morgan who pioneered the most prevalent risk management tool on Wall Street. Value at Risk (VAR) measures the risk of loss on a specific portfolio of financial assets. For example,
BU486-B : Accounting Information Systems and Computer Audit & Controls
Kevin G. Bullock
Wilfrid Laurier University
Alexander Brik - 110882860
Aman Smagh – 110257570
Jack Welton – 100791540
Zaid Iqbal – 110184970
Synopsis of the Case
In April and May of 2012, JP Morgan Chase & Co. incurred major trading losses of $6 billion dollars. However, JPMorgan’s financial statements represented these losses as only $2 billion. The losses were the result of risky bets taken in the credit markets by a trader named Bruno Iksil. Iksil worked at JP Morgan’s London office, and made extremely large trades in the credit markets. Because of this, Iksil earned the nickname “London Whale,” and this entire scandal is referred to as the “London Whale Scandal.”i In the worlds of finance and gambling, whales are people who “play” with very large sums of money.
This debacle started in JP Morgan’s Chief Investment Office (CIO), in the London branch of the firm. CIO’s are central to any major bank. Their purpose is to invest the difference between deposits the bank has on hand from its customers and the credit lent out to borrowers. This difference is called the bank’s reserves. With $1.1 billion in deposits and $750 billion on loan, JP Morgan’s CIO handled assets in excess of $350 billion.ii In theory, CIO’s are supposed to keep the reserves safe and to protect them against inflation. However, in reality, most CIOs will enter into more risky investments in order to earn higher returns. This is what the London Whale was doing. Still however, these investments should not be too risky and risk management and risk assessment controls are implemented to stop investments from being entered into when their risk exceeds the CIOs appetite.
Ironically, it was actually JP Morgan who pioneered the most prevalent risk management tool on Wall Street. Value at Risk (VAR) measures the risk of loss on a specific portfolio of financial assets. For example,
Cited: