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Has London Become The Epicenter Of Financial Trading Disasters?

This article is more than 10 years old.

Bruno Iksil has been referred to as the London Whale for making huge derivatives bets that are at the center of the controversy that has seen JPMorgan Chase & Co. suffer $2 billion of trading losses in six weeks. As his nickname suggests, Iksil is not based at JPMorgan’s headquarters in New York, but works a desk out of London.

JPMorgan’s chief investment office manages about $360 billion and it’s the group’s London trading desk, which has been run by Achilles Macris, that has executed the trades that have caused the bank’s recent problems.

“Why did it have to be in London?” asks Robert Wosnitzer, a former corporate bond salesman at Lehman Brothers who is now writing a dissertation at New York University on the social history of proprietary trading at U.S. investment banks. “A lot of it has to do with U.S. regulations, capital regulations, capital laws.” Wosnitzer adds: “I don’t want to say all bad things happen in London, but there is a distinct reason that these groups are being set up outside of U.S. jurisdiction.”

It’s getting harder to ignore that some of the biggest financial trading scandals have in recent years been centered in London. Last year Swiss bank UBS blamed a $2 billion loss in its investment bank on a rogue trader in London, Kweku Adoboli. That scandal cost UBS CEO Oswald Gruebel his job and caused UBS’ investment bank to decrease its risk-weighted assets.

The biggest recent trading scandal to take place in London involved American International Group’s Financial Products unit. AIGFP had a large operation in London, where its leader, Joseph Cassano, engaged in trading that brought down the entire company and was seen as so threatening that it prompted the U.S. government to provide the giant insurer a $180 billion bailout.

Britain’s financial regulator, the Financial Services Authority, did not oversee AIGFP’s London operations because the unit was deemed to be an internal treasury operation of AIG. As a result, the unit was effectively regulated by the U.S. Office of Thrift Supervision, which operated as part of the U.S. Treasury Department.

The Office of Thrift Supervision is now part of the Office of the Comptroller of the Currency, also part of the Treasury Department, that is the regulator for JPMorgan’s chief investment office, including its operations in London. My colleague, Robert Lenzner, thinks there is no practical way for the OCC to monitor big derivates trades taking place in London.