On 10 May
2012, JP Morgan, the largest US bank by assets, announced that poorly designed
and executed hedging strategies had caused more than $2 billion in derivatives
trading losses from transactions in London. Even more worrying is the fact that
some regulators, including the US Commodity Futures Trading Commission (CFTC)
and the US Securities Exchange Commission (SEC), have argued that since they do
not yet monitor JP Morgan as a swap dealer, they became aware of the trading
losses after JP Morgan’s announcement despite earlier media reports at the
beginning of April that raised red flags over the London Whale’s $100 billion
notional exposure in one credit index. Even the regulators, the US Office of
the Comptroller of the Currency (OCC) and Federal Reserve Bank, failed to detect
the risk posed by the massive hedging strategy, despite having more than 100 of
their own staff embedded at JP Morgan, up until April, around the same time that
Bloomberg and Wall Street news reports suggested that the UK-based trader at
the bank was playing a dominant role in certain markets and distorting prices.
