The Whale comes up for air

The London Whale was plastered across the business press last week following the latest revelations, but it looks as though he might have helped investigators catch some even bigger fish. 

Has the London Whale dodged the harpoon? That was the widespread question on Wednesday when news broke that two former JP Morgan employees – supervisor Javier Martin-Artajo and junior trader Julien Grout – were facing criminal and civil charges for concealing huge bets that cost the bank US$6 billion in losses, while the whale himself – Bruno Iksil – would walk free.

Then again, it was known that Iksil had been helping the US Justice Department and Securities and Exchange Commission with the investigation.

Iksil was in charge of a portfolio of derivatives contracts, betting on companies’ creditworthiness. He has admitted to marking trades at favourable values, instead of the midpoint bid-ask range provided by dealers. He also effectively blew the whistle on himself, realising the losses could not and should not be hidden.

The episode took place from March to May 2012 – two years after the Dodd-Frank Act was signed into law, including the Volcker rule, which prevents US banks from engaging in proprietary trading.

But the rules have yet to be implemented, and JP Morgan has stated the London operation in which Iksil worked was for hedging and not to make money in its own right.

A New York Times editorial, following a US Senate hearing on the London Whale in March, said the bank’s trading losses were a bet, not a hedge.

Regulators should complete the rules under the Dodd-Frank laws, and make it free of “exceptions that disguise gambling as hedging,” the editorial read.

“The saga is a reminder that big banks are too big to fail, to manage, to regulate and to prosecute.”

JP Morgan wasn’t charged on Wednesday, but the bank could face civil proceedings by regulators. Any charges are believed to include allegations the bank failed to adequately monitor the two former traders.

United States attorney Preet Bharar, in a press conference, said the charges were a warning to other banks.

“We live in a time when not just one bank — but one trader at one bank — can do catastrophic economic harm, in practically the blink of an eye. Recent history bears this out,” Bharara said.

“That is why prosecutors need to be even more aggressive; regulators need to be even more vigilant; and — as I’ve been saying for years now — companies themselves need to pay much closer attention to the cultures they create.”

So will the indictments lead to a better, stronger financial market?

Many of the reforms that stem from the financial crisis of 2008 are still working their way through the slow process of becoming legislation. While Dodd Frank is currently being implemented, its European equivalent is not expected to be finalised until next year and other parts of the world are even further behind.

With regulation currently in such an incomplete state, one cannot simply gather that the London Whale incident suggests that more needs to be done. Yet there is a risk that the public perceives that markets have not been reformed and call for tougher regulations. The industry should be getting the message out there that much work has been done since the London Whale first kicked up a storm last year.