There is a paragraph and a half of the reproachful U.S. Senate report on JP Morgan Chase’s “London whale” derivatives trades that left the bank with a $6.2 billion loss, that gets to the nub of the matter:
The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.
The JPMorgan Chase whale trades provide another warning signal about the ongoing need to tighten oversight of banks’ derivative trading activities, including through better valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, more accurate risk models, and improved regulatory oversight.
While this will reopen debate on whether the provisions of the Dodd-Frank financial reforms, or even some of the tougher measures being proposed by the European Commission are adequate to rein in this sort of alleged behavior, it does raise a bigger question of whether some of the world’s larger banks are now, not too big to fail but too big to regulate.