Just six months ago they were riding high. Indeed, they were Masters of the Universe, dominating an obscure credit derivatives market. The JPMorgan execs were making money for the firm hand over fist and racking up eight-figure bonuses for themselves.
Now, due to pesky emails and taped calls, they may be facing jail time for hiding losses from investors. How inconvenient the securities laws turned out to be.
The Whale's $6-billion trading blunder, which was belatedly revealed when JPMorgan restated its earnings in July, has the characteristics of a classic Wall Street failure. Reckless traders take on way too much risk and the position in a stock, bond or ginned-up derivative du jour collapses.
Then management faces the big question: Do we come clean and reveal our recklessness, or do we try to stuff the formerly money-making genie back into its bottle?
Some JPMorgan executives may have chosen the latter and attempted to dissemble and insulate themselves from blame for the trading collapse, according to a story earlier this month in the New York Times by Ben Protess and Azam Ahmed. And now the Feds are sniffing around.
Federal authorities are using taped phone conversations to build criminal cases related to the multibillion-dollar trading loss at JPMorgan Chase, focusing on calls in which employees openly discuss how to value the troubled bets in a favorable way," according to the Times. "Investigators are looking into the actions of four people who previously worked for the team based in London responsible for the $6 billion loss, according to officials briefed on the case.
And the FBI could make arrests in the coming months, the Times reported.
All of this is toxic news for JPMorgan Chase's CEO Jamie Dimon. In April he brushed off the sordid episode, deeming it "a tempest in a teapot" to securities analysts.
The opposite turned out to be true, and Dimon wound up with egg on his face. "This would be a huge embarrassment, an admission of failure just as Dimon was trying to convince regulators and Congress that banks could manage themselves, if only they were careful enough and had the right, prudent people in place," wrote Susan Dominus in the Times' Sunday Magazine this month. "It meant, in the near term, (JPMorgan Chase) stock would plummet."
And now the FBI is combing through JPMorgan's files, reportedly looking for obfuscation and maybe a cover-up. As we said, pity the London Whale and the folks at the Chief Investment Office at JPMorgan Chase. They used to have it so good, but it's gone South quicker than anyone could have imagined.
Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions, including JPMorgan Chase.