Operational Risk Management: A Complete Guide to a Successful Operational Risk Framework

CHAPTER 18

Case Studies

In this chapter, we dig deeper into four case studies: JPMorgan Whale, UBS Unauthorized Trading, Knight Capital Technology Glitch, and Standard Chartered Anti–Money Laundering Scandal.

JPMORGAN WHALE: RISKY OR FRISKY?

Are large losses at banks always a sign of poor governance, or are they sometimes merely the realization of losses that were expected, and even planned for, in the well-governed risk management of the firm? In May 2012, JPMorgan announced that it had lost $2 billion (possibly much more), on a hedging strategy that was being driven by Bruno Michel Iksil, aka “The London Whale” in its chief investment office. Was this poor governance, or were these losses predictable under JPMorgan's risk management practices? Was this acceptable risky behavior, or was it frisky misbehavior?

You can't win the game all of the time, and for every winner, there is a loser somewhere in the financial system. For each loss event that happens, we should ask the same question: Were these losses within the boundaries of the bank's known risk, or were they out of control?

We have all heard the worn out caveats “investments may go down as well as up,” and we all know that the banking industry sometimes makes money on its risk-taking activities and sometimes loses it on those same activities. So why all the noise in the press about these JPMorgan losses?

• “London Whale Harpooned”1
• “JPMorgan's ‘Whale' Causes a Splash”2
• “Beached London Whale”3

Anything over a billion dollars ...