Jp Morgan Case Study
Essay Preview: Jp Morgan Case Study
Report this essay
Non-graduation of punishment
Non-linear and dynamic feedback characteristics between the participants in the market can create too much uncertainties as is seen in the SCP portfolios by JP Morgan Chase. This in most cases cause very chaotic results. Far-reaching uncertainty thrives because the market participants are not able to predict the reactions of the counterparty (Heminway, 2014). Although the CIO invested too much in risky portfolios, the investors could not be able to gauge the true reaction of the OCC. At least, they could know whether or not the actions of the CIO were favorable. Furthermore, the CIO did not fully inform the oversight authority regarding the increased derivatives portfolio in 2012. He perhaps knew that the OCC would counter react and control the exponential increments in the derivative portfolios. That is why he was reluctant even as the company risk piled up. Systems theory postulates that feedback loops can either be positive or negative. The latter implies that the system is likely to revert back to a stable equilibrium (Martinez-Moyano et al., 2013). Positive feedback loop on the other hand implies that the underlying system could cause chaos/breakdown after exploding.
There was no trust between OCC and the JPMorgan bank. Whenever this scenario occurs in a systems theory, the outcomes of a particular case cannot be credibly predicted in a mutual manner. Systems theory argues that lack of trust between two parties causes uncertainty of behavior (Sheedy et al., 2017). More importantly, when uncertainty is feasible in an organization, its quantifications cannot be done via probability. As such, the JPMorgan Chase risk models were not able to correctly predict the ‘black swan’ happenings in the London Whale incident. In this case, the company suffered a losses amounting to $6 bn. Subsequently, there was too much panic that heightened lack of trust between the counterparties and hence, the bank runs continued to cascade.
The ability of the JPMC to dodge the oversight of OCC of the multi-billion (SCP) till mounting losses, and exposition of its activities by the media reveals that regulators of banks and other financial institutions need an aggressive oversight using more effective tools in detecting unsafe, unsound and fraudulent behaviours in derivative securities business (Ertürk., 2016). Opportunistic trading based on chance is quite safe but may rely on feedback loops that are dysfunctional.
CLD offers a good demonstration through which the breach of technical, moral and legal standards succeeds via opportunistic plans. The dysfunctional feedback loop (R1) indicates that SCP made the bank get a profit of $1.772bn. That is from 2008-2011. This kind of loop leads to the distortion of risk tolerance and perception (Adams, 2016). R2 and R3 reinforcing loops indicate that unsafe policies by the management place the SCP’s profits in the area of windfall gains. This increases risk tolerance and increases its perception. The ‘getting away with it seems safe’ balancing loops facilitated increments in the daily losses for the bank especially when losses started occurring in the trades. These kind of loops are again dysfunctional.
The external and internal safety groups (the OCC, and the VCG) are represented by the B3 and B2 balancing loops respectively. JPMC CIO faced a problem of breaching their responsibility in providing timely and adequate standard risk information to both OCC and VCG. Financial institutions are mandated to internally audit their performance. The VCG and the SCP were under the line management of the CIO. Normally, ex post arrangements of safety and the ex-ante which is dysfunctional facilitate the contraventions to technical and social norms (Bouvard and Lee, 2016). The ‘whale trade’ in London crisis led to the use of dubious metrics and interpretations in risk management. For example, the GAAP principles and the policy of the bank allowed for the exercising of subjective judgment in the computation of the derivatives fair value.
Nevertheless, the VCG allowed the existed CIO to diverge from the mid prices of the VCG. The permitted deviations were so huge and could differ by million dollars from the mid prices of the VCG. There was absence of the balancing feedback loop (From OCC) after CIO delayed to disclose the full standard peril reports regarding the SCP trading. This scenario was compounded by the OCC’s inability to entirely scrutinize SCP’s normal risk data reports timeously. As a result, OCC experienced a delay in influencing and mitigating the leadership operations and strategies as far as it concerned JPMC’s high tail perils.
In a summoned subcommittee meeting, the JPMorgan chase argued that the initial purpose of the SCP was to hedge against certain perils that were affecting the bank as a lender. While there is some truth in the above statement, the documentation for the portfolio shows the exact credit risk, likely losses as well as tail risks that were being hedged by the bank. The group behaviour and tail risks hedging of this bank are c in relation to the avoidance and conducting of oversight into the activities of the bank (Sheedy et al., 2017).
As earlier noted, SCP was created to insure the JPMorgan chase against imminent credit risks, tail risks or even bankruptcies. However, is very contradictory that the hedge book intended to protect the bank from the above perils decides to exchange the protection for credit risk. The CIO office tried to its best to evade regulation. In the event that the bank found itself colliding with the OCC, the CIO manoeuvred unorthodox ways of escaping, especially through peddling lies. This was a calculated machination by the members of the CIO level in the bank to undertake unorthodox business practices. Tail risk can be defined as the ‘care’ risk or the chance of default of loans that a bank tries to avoid in future (Martinez-Moyano, 2013).
The bank in this case utilized the group behaviour dynamics of gambling on tail risk ventures relying on good fortune(s). This posed a big threat to the bank’s financial resources. Group behaviour in most cases is opportunistic, and tends to go against the societal norms and government regulation as it occurred with JPMorgan chase. Tail risk plans have two forms, whereby there is excessive risk taking and legalizing of looting (Adams, 2016). These two strategies breach the banking standards as well as