Read the case study and then answer the discussion questions below.

JP Morgan Chase & Co. suffered a $ 7 billion loss (plus another $1 billion in government fines) from highly speculative investments by a handful of traders in its London office. The ill-fated trades occurred in JP Morgan's chief investment office (CIO), a special unit whose original objective was to use the bank's own money to conservatively hedge against its investment risks. With top management's approval, however, the CIO became an active profit center by investing in higher risk derivatives. The unit's portfolio tripled over three years to $350 billion (15 percent of JP Morgan's total assets) and apparently generated more than 10 percent of the bank's net income. It had gained senior management's highest respect.

JP Morgan monitored risk compliance among its client-serving trading groups, whereas the CIO traders were under much less scrutiny, possibly because their assets were the bank's money, not clients' money. One U.S. government investigator quipped that supervision of CIO trades "was little more than a rubber stamp." CIO traders reported their results less often than did other groups. Due to the complexity of these products, the CIO traders also had considerable discretion to estimate the size of those gains and losses. One U.S. Senator remarked that the traders seemed to have more responsibility and authority than the higher-up executives.

Bruno Iksil, the lead trader in the CIO group's London operations, had developed a reputation for making bold, but ultimately profitable, bets on whether companies would default on their bond payments. A few years ago, traders nicknamed Iksil the "Caveman for his aggressive trading style. Later, Iksil became known as Voldemort" after the powerful Harry Potter villain, because his trades namelessly moved the markets in which he bet. But Iksil's most famous nickname was "the London Whale" because of his mammoth $100 billion credit default bet that ultimately cost the bank $7 billion. Iksil was revered for his trading success and reputation, which likely gave him considerable power to initiate trades that may have otherwise required higher authority.

But Iksil's considerable power couldn't save his oversized credit default position. Hedge funds noticed how his trades distorted the market, so they bet against those trades, which eventually created huge losses rather than profits for JP Morgan. Iksil's trading losses on one day alone were more than a half-billion dollars. We are dead," Iksil texted to his assistant. They are going to trash/destroy us. You don't lose $500 million without consequences."

As those losses mounted, Iksil and his assistant avoided scrutiny from head office by underestimating the size of those losses. They distorted or hid information about their trading losses, hoping that this would buy them time to recoup those losses before top management discovered the problem. U.S. government documents indicate that Iksil's boss actively encouraged this practice, even after Iksil eventually refused to continue the charade. When Iksil did eventually refuse to under-report the losses, his boss told him to "leave for the day" so a junior trader could file a lower loss amount.

The losses were revealed only after the bank completed one of its regular reviews. Until then JP Morgan's chief investment officer claimed no knowledge of the problems in the London CIO office. She later complained that some members of the London team failed to value positions properly" and that they hid from me important information regarding the true risks of the book. After he was fired, Iksil claimed that CIO's senior management were involved in these trades. The losses suffered by the CIO were not the actions of one person acting in an unauthorized manner," wrote Iksil in a public letter. My role was to execute a trading strategy that had been initiated, approved, mandated and monitored by the CIO's senior management."

When JPMorgan's top executives did become aware of Iksil's losses, they apparently delayed informing the board of directors. JPMorgan's senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company's problems, concluded a senior U.S. government official. Bruno Iksil, his boss, the bank's chief investment officer, and several others have since left the bank.

Discussion Questions

1. What sources and contingencies of power gave Bruno Iksil considerable power in the CIO group at JP Morgan?

2. What influence tactics, if any, were used to hide the financial losses?

3. Was organizational politics evident in the events described in this case? If so, what were the characteristics of those actions that

identified them as organizational politics?