Research Topics

This policy brief by Senior Scholar and Program Director Jan Kregel builds on an earlier analysis (Policy Note 2012/6) of JPMorgan Chase and the actions of the “London Whale,” and what this episode reveals about the larger risks inherent in the financial system. It is clear that the Dodd-Frank Act failed to prevent massive losses by one of the world’s largest banks. This is undeniable evidence that work remains to be done to reform the financial system. Toward this end, Kregel reviews the findings of a recent report by the Senate Permanent Subcommittee on Investigations and expands on the lessons that we can draw from the evolution of the London Whale episode. 

What a Hedge Gone Awry at JPMorgan Chase Tells Us about What's Wrong with Dodd-Frank

What can we learn from JPMorgan Chase’s recent self-proclaimed “stupidity” in attempting to hedge the bank’s global risk position? Clearly, the description of the bank’s trading as “sloppy” and reflecting ”bad judgment” was designed to prevent the press reports of large losses from being used to justify the introduction of more stringent regulation of large, multifunction financial institutions. But the lessons to be drawn are not to be found in the specifics of the hedges that were put on to protect the bank from an anticipated decline in the value of its corporate bond holdings, or in any of its other global portfolio hedging activities. The first lesson is this: despite their acumen in avoiding the worst excesses of the subprime crisis, the bank’s top managers did not have a good idea of its exposure, which serves as evidence that the bank was “too big to manage.” And if it was too big to manage, it was clearly too big to regulate effectively.