London Whale Case Summary

4. Poor CIO Judgment, Execution and Escalation in the first quarter of 2012

CIO established competing and inconsistent priorities for the SCP without adequately exploring or understanding how the priorities would be simultaneously addressed. The decisions on priorities were poorly reviewed and casually made. This caused the quick increase in traders and losses.

Besides, the trading strategies that were designed in an effort to achieve the various priorities were poorly conceived and not fully understood by CIO and other CIO personnel. They might have been in a position to manage the risks of the SCP effectively. In order to meet the demand from senior management, they made decisions quickly on SCP by neglecting the risk limits and metrics.

Moreover, CIO management (including CIO’s

This may be due to the same proportion of representations of CIO traders and management. The growth in the notional size of the SCP should have triggered additional scrutiny by the Risk organization into both the trading strategies and the proposed exit strategy.

The CIO risk organization did not evolve into the type of robust and independent function that is needed for risky trading activities. The staff at CIO Risk function was not experienced or strong personnel. This London Whale case meant that the necessary infrastructure was not in place when the need arose.

Besides, the CIO Finance function failed to ensure that the CIO VCG price-testing procedures were operating effectively. The price-testing process relied on using spreadsheets that were not vetted by CIO VCG management. The manual inputs to entries and formulas increased the potential for errors. As a result, the CIO VCG price-testing procedures suffered from a number of operational deficiencies.

6. Inadequate Approval and Implementation of CIO Synthetic Credit VaR