Risk Systems and Position Limits

Lesson 1 opens on

The JPMorgan London Whale, 2012

Traders in JPMorgan's Chief Investment Office, one of them nicknamed the London Whale for the size of his positions, built an enormous book of credit derivatives, the Synthetic Credit Portfolio, whose notional size tripled in the first quarter of 2012 from 51 billion to 157 billion dollars, until it could not be exited without moving the market against itself. In late January 2012, while the book was in breach of both the office's and the bank's value-at-risk limit, the bank temporarily raised the limit and then hurriedly adopted a new value-at-risk model, the number meant to measure how much could be lost, that immediately cut the book's reported risk by 50 percent, so the risk system said the position was safer at the very moment it was becoming more dangerous; in May the bank revoked the new model as inaccurate and restored the old one. From January 1 to April 30, 2012 the office's risk limits and advisories were breached more than 330 times, on all five of its risk metrics, and traders and risk staff repeatedly attacked the accuracy of the metrics rather than cutting the book.