Posted Tuesday, June 12, 2012, at 1:29 PM
Photograph by Jemal Countess/Getty Images for Time.
As I wrote on May 25, "JPMorgan's Risks Aren't Well-Managed Because JPMorgan Doesn't Want Sound Risk-Management." The question of why JPMorgan doesn't try to manage its risks soundly is an interesting one and the answers seem to be somewhat complicated. But the fact that they don't is very clear. Another example comes today from Bloomberg's reporting:
Dimon treated the CIO differently from other JPMorgan departments, exempting it from the rigorous scrutiny he applied to risk management in the investment bank, according to two people who have worked at the highest executive levels of the firm and have direct knowledge of the matter. When some of his most senior advisers, including the heads of the investment bank, raised concerns about the lack of transparency and quality of internal controls in the CIO, Dimon brushed them off, said one of the people, who asked not to be identified because the discussions were private.
Leslie Gelb wrote that the irony of Vietnam is that the disaster came about precisely because the system worked as intended, and we see here that it's not as if JPMorgan's CEO was somehow trying and failing to impose control on the chief investment officer. He meant for it to be beyond the ordinary levels of scrutiny, and so it was.
John Coates, a former trader who left to become a neuroscientist, has a great book that'll be published this week titled The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust, but in some ways the most interesting thing about it is that it had to be written at all. You might think that all the very best informaton about the biological bases of risk-assessment were proprietary information of major banks and hedge funds. Just as star athletes are assisted by teams of trainers, coaches, and nutritionists who try to make sure they stay at peak physical condition, the top traders in the world could constantly have their diet, drug and alcohol intake, medications, exercise regime, etc., tweaked to get the biophysical aspects of risk-assessment right. But they're not. Not because there's less money at stake on Wall Street than in the NFL, but because on some level they're simply not trying.