Head of bank's hedging unit first casualty after losses that could exceed US$3bn
The leader of JPMorgan Chase & Co's hedging unit is retiring, the bank said on Monday, marking the first casualty from stunning trading losses that experts say could exceed US$3bn.
The White House seized on the bank's problems to renew calls for tighter regulation of big banks, and confirmed that the US Securities and Exchange Commission is investigating the losses, a black mark for the reputation of CEO Jamie Dimon.
JPMorgan said Chief Investment Officer Ina Drew, who was among the highest-paid executives at the bank, had decided to "retire from the firm." She will be succeeded by Matt Zames, a trader by background who is well versed in risky financial bets. He was at one time employed at Long-Term Capital Management, a hedge fund whose 1998 collapse nearly caused a global crisis. Zames has in past been tabbed as a potential successor to Dimon.
The bank's statement made no mention of two subordinates of Drew, 55, who were involved with the trades - London-based Achilles Macris, 50, and Javier Martin-Artajo - who sources had said would leave. Neither could be reached for comment.
The departure of Drew after 30 years at JPMorgan comes after the unit she ran, the Chief Investment Office (CIO), mismanaged a portfolio of derivatives tied to the creditworthiness of bonds, according to bank executives.
Drew reported directly to Dimon, who was known to visit London to meet with traders from the CIO unit, including Macris. That said, it remains unclear how involved Dimon was in the precise details of the positions.
The biggest US bank by assets also said that Mike Cavanagh, CEO of the Treasury & Securities Services group, will lead a team of executives overseeing its response to the losses.
In appointing Cavanagh to coordinate the bank's response to the loss, Dimon is turning to a longtime protégé. "Jamie usually gives him jobs heavy on management and strategy," said a former JP Morgan executive.
Shares of JPMorgan were down 2.7 percent to US$35.98 in afternoon trading on the New York Stock Exchange. The stock has shed nearly 12 percent of its value since the losses were disclosed, or some US$18.12bn in total. Ratings service Moody's warned Monday the trading losses were a "credit negative" for bondholders as well.
But one investor called the selloff "a gift" and said he was adding to his position, with an expectation the stock would rise roughly a third from current levels by year-end.
"Dimon has fallen on his sword, promised to take action, tossed a few players under the bus ... nothing left to be done that is not already under way," said Edward Shill, chief investment officer of QCI Asset Management, which held more than 280,000 shares as of March 31.
One hedge fund manager who previously ran a proprietary trading book at JPMorgan said the bank's public commitments to trim risk were at odds with its network of trading groups making bets independently, with only a handful of the bank's most senior executives notified of their vast, complex exposures.
"This [CIO] group was completely separate, completely distinct from the prop-trading unit. We had no clue about their prop book and they would have no clue about ours for that matter," the manager said.
The mammoth losses have marred JPMorgan's reputation for risk management and thrown an unflattering spotlight on Dimon, a critic of increased regulation. He is scheduled to speak on Tuesday at the bank's annual meeting in Tampa, Florida.
Dimon has said he is open to regulatory scrutiny of the losses, which the White House confirmed on Monday was under way.
"There is an investigation into what happened at JPMorgan that the SEC is conducting," White House spokesman Jay Carney said, declining to elaborate.
A US Treasury official said the Financial Stability Oversight Council had not convened to discuss the losses and did not plan to either. The Senate Banking Committee plans to hold hearings in the coming weeks on Wall Street reform, it said on Monday, during which they will likely press U.S. regulators about the JPMorgan losses.
But even as some US officials mull the losses, European regulators had sharp words for the oversight to date.
"The issue does not only underline the failure of good risk management... but might also raise questions on external supervision," Michel Barnier, European Union commissioner in charge of financial regulation, said in a statement. "More internal and external controls and supervision are needed. Supervisors need to be more proactive on this front."
Drew had repeatedly offered to resign in recent weeks after the magnitude of the debacle became clear, according to one source, but the resignation was not immediately accepted because of her past performance at the bank.
Until the loss was disclosed late Thursday, Drew was considered by some market participants as one of the best managers of balance sheet risks. She earned more than US$15m in each of the last two years.
According to JPMorgan's last annual proxy statement, Drew would be entitled to the continuation of almost US$14.7m in stock awards in case of resignation, provided she had met "full-career eligibility" criteria.
JPMorgan spokesman Joe Evangelisti did not immediately return calls for comment on whether she will retain all the compensation awards. Drew could not immediately be reached.
"Ina is an amazing investor," said a money manager who knows her but declined to be identified. "She's done a really good job over a lot of years. But they only remember your last trade."
Drew kept a relatively low profile inside the bank, shrewdly managing the investment portfolio at JPMorgan and predecessor company Chemical Banking Corp for three decades.
Her expertise was in balancing the interest-rate risks of the banks' loans and other assets against the rate risk associated with its deposits and other liabilities, said veterans who have worked with her.
JPMorgan described Drew's replacement, Zames, as a "world-class risk manager and executive."
Before joining JPMorgan in 2004 he ran prop trading in the interest rate group at Credit Suisse First Boston, having joined CSFB from a trading job at Morgan Stanley. He was seen as one of the winners in 2009, when Jes Staley reorganized JPMorgan's investment bank, taking on the fixed income co-head role.
Last summer, the Wall Street Journal listed Zames among a group of senior JPMorgan executives in their mid-40s who were thought to be potential successors to Dimon.
One former executive of the firm said Zames was highly respected on the trading floor, with good connections in the hedge fund world.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.