JP Morgan and rabbits

When my children were little we used to keep rabbits. Rather a lot of rabbits, actually - because of an all-too-well-timed escape by our natural male rabbit, we ended up with eight when we had previously only had three.  Two, including our male, were caught by foxes, but the rest lived happily together in a small shed leading to a large open-air run. Until one day they dug out of the run and had a big party all over the garden.

I was busy teaching at the time and didn't know about the escape until my daughter came running in screaming that the rabbits were on the lawn. We all (including my student) went out there, rounded them up and returned them to their pen. But it was apparent that all was not well. Most of them were injured, two quite seriously. I immediately thought that the foxes had attempted to catch them - but that turned out not to be the case. When I took them to the vet, the vet commented that the injuries were consistent with rabbits fighting.

FIGHTING? Mum and kids? They had never done that before. What on earth was going on?

It turned out that Mum was not well. In fact she had terminal cancer and we had to have her put down a few days later. So the rabbit fight was because Mum, who had previously run a very tight ship, was no longer in control, and the daughters were fighting for supremacy. (Our two neutered males, who were both of gentle disposition, didn't seem to have been significantly involved). The fighting continued after Mum died and eventually we had to separate one of the daughters and put her in a hutch on her own. I'm still not sure I isolated the real culprit.

So what has a rabbit fight got to do with JP Morgan?

The Chief Investment Office (CIO) was run by a formidable woman, Ina Drew. Drew had run a very tight ship during the financial crisis and was renowned for keeping a cool head and remaining in control when everyone else was panicking. She was trusted absolutely by Jamie Dimon, the CEO, who therefore didn't pay much attention to what was going on in the CIO.

But Drew contracted Lyme disease in 2010 and after that, it seems, was not fully in control. From the New York Times:

"....she was frequently out of the office for a critical period, when her unit was making riskier bets, and her absences allowed long-simmering internal divisions and clashing egos to come to the fore, the traders said...."

Mum was ill....so the daughters fought. And note that this is not just about personalities, it is about who is going to be "top rabbit". In the cut-throat world of investment banking, the way to ensure promotion is to make a LOT of money for the firm. I have no doubt that the heads of the London and New York offices were competing for Drew's job.  So Achilles Macris, the head of the London office, encouraged larger and riskier trading in order to build up his portfolio and make lots more money.  The only people who could really have reined him in were Drew, who was not compos mentis, and Dimon, who didn't have his eye on the ball. Althea Duersten, the head of the New York Office, it seems tried to limit his activities, but she lacked the position and authority to do so and her interventions just made the "personality clashes" worse. And she was trying to build up her own position too:

" “It felt like there was a land grab where no one was pushing back because Althea and Achilles both wanted more responsibility,” one of the former traders said." 

In the end, in an uncomfortable echo of my separation of the fighting rabbits - or, perhaps more chillingly, of the eviction of Snowball in Orwell's "Animal Farm" - Duersten took early retirement. She was replaced by Irene Tse, who as a newcomer to the CIO had little chance of standing up to Macris. Blood on the floor continued throughout 2011:

"On the conference calls, the yelling continued, only now it was between Ms. Tse and Mr. Macris...."

And no-one it seems was paying any attention at all to the huge risky bets being taken by Macris and his sidekick Iksil, the so-called "London Whale". Except hedge funds, who were fascinated by the market distortions these trades were causing and were making some risky bets of their own in the hope of making a killing when, as they expected, the whole edifice blew up. They were proved right.

Predictably, this sorry tale has led once again to calls for increased regulation of banking activities. There has been much discussion of whether the so-called "Volcker Rule" has been breached, and whether this affair shows that Dimon's famous calls for deregulation of banking are misconceived. The calls for reintroduction of "Glass-Steagall" separation of commercial and invesment banking have grown even louder and more strident, and in the UK, the Treasury commented that the JP Morgan losses "prove" that ringfencing of retail and investment banking is the right thing to do.

But this is a tale not of lack of regulation, but of lack of observation. Lisa Pollack of FTAlphaville, in her excellent "Whale Watching Tour" series of posts, asked "whither the regulators?" Asleep on the job, it seems. Others have asked why Dimon brushed off reports that these trades were highly risky - Dimon reportedly describing them as a "tempest in a teapot". Drew herself it seems minimised the significance of these trades in her reports to Dimon, giving the impression of being in control of the situation when she was not. It all boils down to a thoroughly nasty piece of corporate game-playing under the nose of a distracted CEO and complacent (or maybe even complicit) regulators.

So apparently investment bankers behave just like rabbits. Sad, isn't it?