Some top J.P. Morgan Chase & Co. executives and directors were alerted to risky practices by a team of London-based traders two years before that group’s botched bets cost the bank more than $2 billion, according to people familiar with the situation.
Interviews with more than a dozen current and former members of the bank’s Chief Investment Office, the unit responsible for the losses, indicate that discussions about reining in London traders started as early as 2010. Certain directors were briefed then on a foreign-exchange-options bet that went bad, and were told that the trader responsible wouldn’t be allowed to go overboard in the future, one of these people said.
Last year, top CIO executives set a plan to roll back a separate set of large London trades—only to learn later that the plan hadn’t been followed correctly.
The concerns dating back to 2010 show that J.P. Morgan had an opportunity to avoid the bungled trades, which over time could cost the bank as much as $5 billion.
J.P. Morgan’s battle to bring the London office to heel culminated last month in the disclosure of trading losses. The episode has tarnished the image of Chairman and Chief Executive James Dimon, who has already said he was “dead wrong” when he dismissed concerns about the trades on an April 13 conference call with analysts. It also has raised questions about the strength of oversight at J.P. Morgan, long considered one of the best-managed U.S. banks.
Mr. Dimon is expected to testify before the Senate Banking Committee on Wednesday. He is prepared to give committee members a detailed review of what went wrong.
The company’s investigation is expected to reveal a series of miscues. They include trading-risk limits that were too broad, a new trading model adopted this January that masked mounting dangers, and the failure of top executives to sufficiently probe the huge positions at the CIO, according to the people familiar with the matter.
When Mr. Dimon asked then-CIO head Ina Drew about the trades in early April, for example, she didn’t fly to London to visit the trading group, according to people close to the investigation. Achilles Macris, the London-based head of international at the CIO, assured her on a video conference call that everything was under control, these people said. Ms. Drew and Mr. Macris didn’t respond to requests for comment.
The CIO was little known to those outside the bank until the recent heavy losses. The unit invests the bank’s excess cash, which recently exceeded $370 billion. Under Ms. Drew, it recruited traders, some from hedge funds, who were comfortable using derivatives and other potentially risky tools to boost profits or protect the company.
One such hire was Mr. Macris, a Greek national who joined in 2006 and was charged with overseeing the London office. He was perceived to be a skilled trader but sometimes headstrong. At Bankers Trust, where he was a currency trader in the 1990s, he was asked to resign because of concerns that he wouldn’t get along with a new boss, said two people familiar with the events. Later at Dresdner Kleinwort Wasserstein, where he supervised proprietary traders, he left after losing a three-way battle for sole leadership of capital markets, said a person close to that situation.
Two members of his team were Javier Martin-Artajo, a Spaniard and former Dresdner colleague who became head of credit trading, and Bruno Michel Iksil, a French-born trader later nicknamed the London Whale for the large positions he took in markets. Mr. Iksil declined to comment, and Mr. Martin-Artajo didn’t return calls.
Several early trades made by this group profited by assuming the market was going to weaken in 2008. At one point that year, Mr. Iksil and others made about $1 billion betting against infrequently traded slices of a derivative index tracking subprime-mortgage debt known as the ABX. That trade was thought to help J.P. Morgan hedge its risks as the housing bust took shape.
