JP Morgan: Lessons Learned
(6 pages of text)
Following the revelation of a US$2 billion loss on trading at JP Morgan’s chief investment office (CIO) in London, the company’s board of directors is tasked with recommending changes to its risk management practices and corporate governance structure. The case provides background on JP Morgan's well-respected risk management infrastructure and discusses how the CEO focused on its historic strength in risk management to argue against the need for the United States to implement the strict regulations contained in the Dodd-Frank Act and the associated Volcker Amendment. The role of regulation is significant. As a result of trying to meet the tighter requirements of these U.S. standards as well as the new Basel III accord, the CIO took on significant derivative positions that were not well understood and, rather than decreasing the firm's risk exposure, actually increased it. Of further interest is the concurrent change in JP Morgan's method of calculating risk, which allowed for a significant reduction in risk measurement and thus an improvement in the firm's level of risk-weighted assets.
The objective of the case is to allow for a discussion of risk management from several directions: leadership (or failures of leadership) in a large organization, the role of regulation in the decision-making process, the impact of market-to-market accounting on corporate decisions and investor perceptions, the role of financial models in decision-making, and corporate governance in a complex organization.
Finance and Insurance
United States; United Kingdom, 2006
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