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Was a Lowly Tick to Blame for the $3 Billion JP Morgan Chase Trading Loss?

Posted on May 25, 2012

According to Harvard Business Review contributor, Justin Fox, the $3 Billion JP Morgan Chase trading loss could be tracked down to one lowly tick.  It was a tick-borne illness that kept JP Morgan Chase's Ina Drew out of the office and off morning conference calls which she presided over.  These conference calls were crucial in maintaining alignment and perspective in the Chief Investment Office at JP Morgan Chase which Ina Drew ran.  According to a very detailed article in The New York Times, without Drew present to lead the team, the calls reportedly broke down into shouting matches and ego battles betweent her deputies in New York and London.

So, you might be asking, how does this struggle impact risk management at a major financial insitution?

When you think of risk management, most people think of pragmatic analysis involving information trends, set formulas and sophisticated data models.  However, when in comes to the extremely complex, moving target business risks that are inherit in today's large scale financial trading, risk management requires a great deal of human judgement pared with the ability to influence others. It was this type of judgement and influence that Ina Drew displayed during the financial crisis of 2008 which ultimately lead JP Morgan Chase out of the crisis in relatively good shape.  

With Ina Drew;s absense, judgement in risk management practices was heavily influenced by the loudest voice.  Managing this type of argument in risk management is crucial since it is often the case that those who are the most certain are also more likely to be wrong.  According to Fox, "Successfully managing most of the biggest risks that businesses and societies face requires succesfully managing arguments about what exactly those risks are and how seriously they should be taken."  It would appear that the void left by Ina Drew was not successfully filled and the loudest voices prevailed.

Next time you think about powerful institituions, such as JP Morgan Chase, keep in mind that they could be vulnerable to events that might seem to be a small and insignificant.  Besides, who better to blame the $3 Billion trading loss on than the lowly tick.

Source Article:  Harvard Business Review, May 25, Managing Risks Means Managing Arguments