JPMorgan CIO retires, Obama says proves reform case

LONDON/NEW YORK Mon May 14, 2012 7:56pm EDT

1 of 8. A customer exits the lobby of JPMorgan Chase & Co. headquarters in New York May 14, 2012.

Credit: Reuters/Eduardo Munoz

LONDON/NEW YORK (Reuters) - The leader of JPMorgan Chase & Co's hedging unit is retiring after trading losses that could end up exceeding $3 billion, a shortfall that President Barack Obama said might have led the government to step in had such losses struck a smaller bank.

The Federal Reserve meanwhile said it is now looking into whether JPMorgan has similar risk problems at other units, joining a probe by the U.S. Securities and Exchange Commission and upcoming hearings in the U.S. Senate.

Late Monday, a leading shareholder law firm said it filed a federal lawsuit against JPMorgan and various bank officials over the trading loss and its effect on the bank's stock price. A JPMorgan spokeswoman had no immediate comment.

The news of the losses has wiped nearly $19 billion from JPMorgan's market capitalization in just two trading days and renewed the debate about financial regulation and the concept of being "too big to fail."

"This is the best, or one of the best managed banks. You could have a bank that isn't as strong, isn't as profitable making those same bets and we might have had to step in. That's exactly why Wall Street reform's so important," President Obama told ABC's "The View" in an interview taped to air Tuesday. The network released a partial transcript late Monday.

JPMorgan said Chief Investment Officer Ina Drew, 55, who was among the highest-paid executives at the bank, had decided to "retire from the firm."

She will be succeeded by Matt Zames, a trader by background who is well-versed in risky financial bets. He was at one time employed at Long-Term Capital Management, a hedge fund whose 1998 collapse nearly caused a global crisis. Zames has in past been tabbed as a potential successor to Dimon.

The bank's statement made no mention of two subordinates of Drew who were involved with the trades -- London-based Achilles Macris and Javier Martin-Artajo -- who sources had said would leave. A memo Zames sent to staff, a copy of which was obtained by Reuters, said only that Macris would "transition his ... responsibilities."

"I am proud of the firm's efforts over the past several days to address our mistakes and pleased to join the dedicated employees in our Chief Investment Office today," Zames wrote.

Shares of JPMorgan closed 3.2 percent lower at $35.79 on the New York Stock Exchange on Monday. Ratings service Moody's warned Monday the trading losses were a "credit negative" for bondholders as well.

But one investor called the sell-off "a gift" and said he was adding to his position, with an expectation the stock would rise roughly a third from current levels by year-end.

"Dimon has fallen on his sword, promised to take action, tossed a few players under the bus ... nothing left to be done that is not already under way," said Edward Shill, chief investment officer of QCI Asset Management, which held more than 280,000 shares as of March 31.

'NO CLUE' ON PROP BOOK

The departure of Drew after 30 years at JPMorgan comes after the unit she ran, the Chief Investment Office (CIO), mismanaged a portfolio of derivatives tied to the creditworthiness of bonds, according to bank executives.

Drew reported directly to Dimon, who was known to visit London to meet with traders from the CIO unit, including Macris. That said, it remains unclear how involved Dimon was in the precise details of the positions.

JPMorgan, the biggest U.S. bank by assets, also said that Mike Cavanagh, CEO of the Treasury & Securities Services group, would lead a team of executives overseeing its response to the losses.

In appointing Cavanagh to coordinate the bank's response to the loss, Dimon is turning to a long-time protégé. "Jamie usually gives him jobs heavy on management and strategy," said a former JPMorgan executive.

One hedge fund manager who previously ran a proprietary trading book at JPMorgan said the bank's public commitments to trim risk were at odds with its network of trading groups making bets independently, with only a handful of the bank's most senior executives notified of their vast, complex exposures.

"This (CIO) group was completely separate, completely distinct from the prop-trading unit. We had no clue about their prop book and they would have no clue about ours for that matter," the manager said.

REGULATORY SCRUTINY

The mammoth losses have marred JPMorgan's reputation for risk management and thrown an unflattering spotlight on Dimon, a critic of increased regulation. He is scheduled to speak on Tuesday at the bank's annual meeting in Tampa, Florida.

"JPMorgan is one of the best managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion and counting," Obama told ABC. At one time Dimon was considered a favorite for Treasury secretary in a potential second Obama administration.

Dimon has said he is open to regulatory scrutiny of the losses, which the White House confirmed on Monday was under way.

"There is an investigation into what happened at JPMorgan that the SEC is conducting," White House spokesman Jay Carney said, declining to elaborate.

A U.S. Treasury official said the Financial Stability Oversight Council had not convened to discuss the losses and did not plan to. The Senate Banking Committee plans to hold hearings in the coming weeks on Wall Street reform, it said on Monday, during which it will likely press U.S. regulators about the JPMorgan losses.

The Fed said late Monday it was reviewing JPMorgan's risk practices across the firm.

PAST PERFORMANCE

Until the loss was disclosed late Thursday, Drew was considered by some market participants as one of the best managers of balance-sheet risks. She earned more than $15 million in each of the last two years.

According to JPMorgan's last annual proxy statement, Drew would be entitled to the continuation of almost $14.7 million in stock awards in case of resignation, provided she had met "full-career eligibility" criteria.

A JPMorgan spokesman did not immediately return calls for comment on whether she will retain all the compensation awards. Drew could not immediately be reached.

"Ina is an amazing investor," said a money manager who knows her but declined to be identified. "She's done a really good job over a lot of years. But they only remember your last trade."

Her expertise was in balancing the interest-rate risks of the banks' loans and other assets against the rate risk associated with its deposits and other liabilities, said veterans who have worked with her.

JPMorgan described Drew's replacement, Zames, as a "world-class risk manager and executive."

Before joining JPMorgan in 2004 he ran prop trading in the interest rate group at Credit Suisse First Boston, having joined CSFB from a trading job at Morgan Stanley. He was seen as one of the winners in 2009, when Jes Staley reorganized JPMorgan's investment bank, taking on the fixed income co-head role.

Last summer, the Wall Street Journal listed Zames among a group of senior JPMorgan executives in their mid-40s who were thought to be potential successors to Dimon.

(Additional reporting by Carrick Mollenkamp, Jed Horowitz, Dan Wilchins, Jonathan Spicer, Christian Murray and Lauren Tara LaCapra in New York, Rick Rothacker in Charlotte, North Carolina, Ross Kerber in Boston, Dave Clarke, Mark Felsenthal and Jeff Mason in Washington, Alister Bull aboard Air Force One, John O'Donnell in Brussels and Drazen Jorgic, Sinead Cruise, Kylie MacLellan and Anjuli Davies in London; Writing by Ben Berkowitz in Boston; Editing by Alwyn Scott, David Holmes, Jeffrey Benkoe, Tim Dobbyn, Phil Berlowitz, Matthew Lewis and Steve Orlofsky)