Fed spotted JPMorgan 'Whale' risks years before scandal: inspector

Tue Oct 21, 2014 1:59pm EDT
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By Jonathan Spicer and Michael Flaherty

NEW YORK/WASHINGTON (Reuters) - The Federal Reserve's New York branch knew about risks JPMorgan Chase & Co was taking with its massive "London Whale" derivatives bets four years before they imploded, but it failed to act properly to head them off, the U.S. central bank's inspector general said.

The Fed's Office of Inspector General said on Tuesday one of the key flaws it uncovered in its probe of the 2008 transaction at the Wall Street bank was the New York Fed's over-reliance on certain personnel who left the supervisory team in 2011. That created a "significant loss of institutional knowledge" within the team assigned to inspect JPMorgan, the report said.

In what amounts to another recent black eye for the New York Fed's bank supervision unit, the report also noted that competing supervisory priorities and limited resources contributed to a failure to conduct key follow-up examinations.

The London Whale case emerged from JPMorgan's (JPM.N: Quote) credit derivative trading losses in Europe in 2012, which were connected to its chief investment office (CIO) and ballooned to $6.2 billion by the end of that year. The bank was fined more than $1 billion by U.S. and British regulators for the loss, which sparked concerns in the U.S. Congress over lax Fed oversight in the throes of the financial crisis.

The inspector general's findings could stoke long-simmering concerns among Americans that federal regulators, the Fed in particular, are too deferential to Wall Street to head off another crisis and recession.

"It's a failure to coordinate, and it's frustrating," said Cornelius Hurley, a former assistant general counsel at the Fed's Board of Governors.

"It's nice to think that with the new set of players (since 2008) in Treasury and the New York Fed that we would get a re-examination of bank supervision, but I really don't see that happening without another financial crisis."

Perhaps the most damaging finding on Tuesday was evidence that the New York Fed became aware of risks in J.P. Morgan's CIO four years before the scandal broke. According to the report, the New York Fed identified the risks and planned two examinations of the bank's CIO office.   Continued...

The offices of JP Morgan in the Canary Wharf district of London, January 28, 2014. REUTERS/Simon Newman