Wall Street Crime and Punishment: The Truth About The London Whale

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

Bruno Iksil is one of the most mysterious figures in the realm of contemporary financial industry chaos. This French national has never given an on-camera interview. In fact, no confirmed photograph of him can be found on the Internet. Outside of a three-page single-spaced letter sent to several media outlets and an interview with a British financial website, he has never publicly presented his version of the events that earned him a permanent degree of notoriety.

Indeed, Iksil seems to have disappeared from sight completely — the most recent media coverage of his activities occurred in 2017.

And this desire not to be the center of attention seems to have been a long time in the making. During his peak years as a JPMorgan Chase & Co. JPM trader based in London, he was reportedly nicknamed by his peers in the financial industry as Voldemort, a reference to the character from the Harry Potter books who was talked about as “He who must not be named.”

But while Iksil is many miles away from today’s spotlight, his legacy continues to resonate from his reputation as the figure in the center of a scandal that cost his employer $6.2 billion. The only problem is that all evidence shows he was made the scapegoat for a wider scandal that covered many personalities.

From Atoms To Assets: Iksil was born in 1968 and raised in a middle-class Parisian suburb. His father was an executive for a machine parts supply company and his mother was a chemist. He graduated from the Ecole Centrale Paris in 1992 with a degree in nuclear chemical engineering and served a year’s compulsory military service at a nuclear facility near Paris. But after his discharge, France underwent a recession and Iksil wound up taking a job in IT and risk management at a Parisian hedge fund.

Iksil quickly adapted to the financial services world and moved among several companies in the roles of bond trader, asset manager and credit derivatives. In 2005, Iksil relocated with his wife and children to the U.K., where he took a job at JPMorgan’s equity derivatives proprietary trading desk while his family set up a home in a town 20 miles outside of the British capital.

In 2007, Iksil found himself at a crossroads. An opportunity arose to work within the company’s Chief Investment Office (CIO). But his wife had difficulty adapting to the English language and culture and wanted to return to France. The couple discussed their options and it was agreed that Iksil would stay in the U.K. for his job while his family returned home to France, with Iksil commuting weekly from Paris while maintaining a small apartment in London.

At first, everything went uncommonly well for Iksil, who displayed an extraordinary talent for taking risks that paid off handsomely. In 2009, the CIO group’s synthetic credit portfolio of financial derivatives generated $1.05 billion for JPMorgan. Iksil’s world seemed thoroughly copacetic — until all hell broke loose.

A Whale Without An Ahab: The CIO’s approach to trading epitomized the concept of “go big or go home.” Rival trading centers in London dubbed the JPMorgan operation the “London Whale” due to the leviathan-sized nature of its trades.

When this strategy worked, the results were enriching. But it didn’t always work, and by 2010 the London CIO office was racking up more misses than hits. There were a few key reasons why this occurred.

The CIO’s role within JPMorgan was to make investments that would balance the risks from other divisions of the bank. For example, if a bank loan defaulted, the CIO’s investing would be used to mitigate losses from the doomed loan.

But as the CIO unit grew, its activities somehow became detached from the rest of the bank’s operations. Complicating matters were efforts by rival trading operations to take bets against the unit’s trades. Due to the XL-sized nature of the unit’s trading positions, it suffered substantially when whacked with losses.

The London CIO unit reported to Ina Drew, JPMorgan Chase’s chief investment officer. Within London, the unit was run by Achilles Macris, a trader who held Greek and American citizenship. Iksil’s immediate supervisor was a Spanish national named Javier Martin-Artajo, while a Frenchman named Julien Grout was the unit’s junior member and would report to Iksil.

Iksil would later claim that the CIO’s senior executives would insist the unit’s goal was not to generate profits, but rather to limit losses. He said that Macris once warned him that if “the book makes $500 million because the market rallies and you’ve not told us, you’re fired.”

Iksil recalled that he became concerned by mounting losses within the London CIO in early 2011 and messaged Drew and other managers within the CIO; he would also fly to New York City to share his agitation in person with the bank’s U.S. leadership.

Among his reasons for unhappiness was an order by his senior managers to continue with the oversized trading strategy despite his repeated warnings that losses were mounting too quickly. He also pointed out the decision by CIO management to ignore their own metrics such as the value at risk (VaR) used to estimate the maximum risk during the day’s trading. The latter issue was addressed by temporarily increasing the VaR limit, a decision approved by CIO head Drew along with Chief Risk Officer John Hogan and CEO Jamie Dimon.

Related Link: The complete Wall Street Crime and Punishment series

Beached Whale: Iksil did not conceal his positions within the bank and stated that the unit should have honestly admitted the problems. Instead, others within the CIO unit tried to camouflage the severity of their losses by assigning deliberately false values to the positions in their internal reports.

Unfortunately for those dishonest members of the team, the London CIO unit kept surveillance on all interoffice communications: telephone calls were recorded and instant messages accessed by the IT staff, so the attempted subterfuge was detected quickly.

By early 2012, the bank decided to reduce the risk in the London swaps portfolio with more offsetting bets. This decision poured more fuel into a financial fire as Iksil’s positions swelled to the point that they conspicuously disrupted the trading markets where he concentrated.

The CIO’s market-moving trading activities were never an industry secret — the financial trade journal Creditflux reported on it as early as June 2011 — but by April 2012 the problems started to become obvious to the general public. During an earnings call, Dimon was asked about the CIO unit losses based on its aggressive trading and he blithely dismissed the issue as a “tempest in a teapot.”

One month later, Dimon admitted the teapot-based tempest was actually a sinkhole, with JPMorgan losing $2 billion from the CIO unit. That sum would eventually swell to $6.2 billion.

The Blame Game: The complexity of the CIO unit’s fiasco made it difficult to telescope the story into user-friendly summaries. Media outlets opted to simplify the story by placing the brunt of the blame on a single person — ironically, the one person who warned that a calamity was brewing.

“For no good reason, I was singled out by the media,” Iksil recalled, who was manacled with the “London Whale” nickname that was initially dubbed on the full CIO unit. The initial flurry of news stories painted Iksil as a rogue trader who singlehandedly brought wreckage to JPMorgan Chase.

In reality, Iksil was eager to offer his input to highlight the full scope of the matter, working with both the U.S. Department of Justice (with whom he had a non-prosecution deal) and the Securities and Exchange Commission (SEC).

Somewhat less forthcoming was CIO head Drew, who testified before the U.S. Senate Committee on Homeland Security and Governmental Affairs in March 2013. She insisted that her oversight on the London unit’s trading was “reasonable and diligent” while noting she “naturally relied heavily” on input from Iksil’s superiors Macris and Martin-Artajo to frame her decision leadership decisions.

When asked what role she accepted for the unit’s failure, she stated she did not bear any “personal responsibility for the losses.” Drew wound up losing her job at the bank.

Dimon also admitted problems while keeping responsibility at arm’s length. In his 2013 letter to JPMorgan shareholders, he declared the handling of the matter was “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” But he did not accept personal responsibility — to riff on Harry S. Truman, the buck didn’t stop with him.

Unlike Drew, Dimon did not lose his job, although the bank cut his pay in half to $11.5 million and mildly chastised him in a January 2013 internal report that theorized he “could have better tested his reliance on what he was told” by senior managers.

In September 2013, the bank agreed to a $920 million regulatory settlement, with $300 million going to the Office of the Comptroller of the Currency, $200 million going to the SEC, $200 million going to the Federal Reserve and $220 million transferred to the U.K. Financial Conduct Authority (FCA). The bank also reached a separate $100 million settlement with the Commodity Futures Trading Commission, and in early 2016 it secured a $150 million settlement of lawsuits filed by investors.

The U.K. FCA weighed bringing charges against Iksil, but opted not to pursue him. On this side of the Atlantic, the federal government attempted to bring criminal charges against Iksil’s supervisor Martin-Artajo, who left London for his native Spain, but the Spanish government would not agree to his extradition. Iksil’s junior colleague Grout also left London, returning to his native France where he eluded extradition efforts.

As a result, the charges against Martin-Artajo and Grout were dropped; no charges, either civil or criminal, were brought against Iksil. Iksil, Martin-Artajo and Grout were all fired by JPMorgan, although the company agreed to cover their legal expenses during the investigatory period.

Out To Sea: In an April 2017 interview with FinancialNews.com, a British site, Iksil defined himself as being in a state of financial and emotional exhaustion, with the bank clawing back the majority of his multi-million-dollar compensation package and suffering under the blot of the “London Whale” tag affixed to his reputation.

“I have to fight,” he said. “I have no choice. I have to make people be aware of what really happened.”

Iksil said he was writing a book about what transpired in the London CIO office, but in the four years since the interview, the book has not been published.

Today, Iksil’s whereabouts and activities are not known. Most likely, he is still in France, but there is no evidence that he is involved in the financial services industry.

While Iksil did not face criminal charges or prison for what took place in London, he wound up with an existential life sentence of being falsely branded as the man who singlehandedly drained $6.2 billion from JPMorgan. And that clearly falls into the category of cruel and unusual punishment.

Illustration: Kravical, Deviant Art / Creative Commons.