LONDON, May 11 (IFR) - The implementation of a new
Value-at-Risk model looks to have masked a US$2bn mark-to-market
loss that built up in JP Morgan's chief investment office over
the past few months.
JP Morgan chief executive Jamie Dimon admitted the firm will
likely experience volatility in its earnings over the coming
quarters as it tries to manage a synthetic credit portfolio that
the CIO designed to hedge a stressed credit environment, but
ended up being extremely costly for the firm.
Dimon revealed the CIO's VaR had almost doubled from an
average of US$67m for the first quarter to US$129m, after
scrapping the CIO's new model and revising the figures
appropriately. JP Morgan has decided to revert to the
methodology the CIO used to calculate VaR in 2011.
"In the first quarter we implemented a new VaR model, which
we now deemed inadequate, and went back to the old one that we
used for the past several years, which we deemed to be more
adequate," Dimon explained on a conference call with analysts.
VaR models are used by risk managers to assess the potential
future losses a portfolio could be subject to. VaR came in for
heated criticism following the financial crisis as many models
failed to predict the extent of the losses that devastated many
large banks in 2007 and 2008.
The revelations vividly illustrate the potential for banks'
internal risk models to produce vastly different results that
can have real economic impacts. The case may well bring into
focus once more how bank VaR models can hinder as well as aid
Dimon laid the blame for the CIO losses squarely at the feet
of the trading strategy aimed at reducing the CIO's synthetic
credit portfolio hedge, which he said was "flawed, complex,
poorly reviewed, poorly executed and poorly monitored."
However, there seems little doubt that the new VaR model
masked the losses racking up in the CIO by artificially
depressing the potential risks the bank was exposed to.
The CIO's average VaR for the first quarter was US$67m under
the new VaR model. This was broadly in line with the average CIO
VaR for 2011of US$60m, calculated under the old model.
Scrapping the new VaR model and revising figures to be
directly comparable to those reported in 2011 shows how much the
new hedging strategy increased the bank's risk.
The CIO's VaR at the end of the first quarter was US$186m
using the CIO's original model - more than three times bigger
than its position a year ago of US$55m.
The new model may also have helped mask volatility of the
CIO's new hedging strategy. The CIO's VaR was relatively stable
in 2011, remaining between a minimum of US$55m and a maximum of
JP Morgan has not detailed how VaR behaved under its new
model in 2012. However, it showed that VaR swung around in a
range of US$85m to US$187m during the first quarter under the
Dimon declined to elaborate on the decision to switch VaR
models in the CIO other than saying: "There are constant changes
and updates to models; we're always trying to get them better
than they were before. It's an ongoing procedure."
Commenting on the incident in general, the chief executive
told analysts: "We have had many lessons learnt and we have
already changed some policies and procedures as we've gone