JPMorgan CIO unit "a secret hedge fund"


A few years ago, the notion came into vogue that Goldman Sachs was one giant hedge fund.

Company executives hated the concept, and I would have to agree that the Goldman Sachs in its entirety was far from a hedge fund. Still, it would be hard to deny that proprietary trading and trading more generally has come to dominate the company. Given the reliance on trading, it's easy to see why the description seemed to stick.

Perhaps the description is more apt when it comes to the JPMorgan Chase pre-London Whale implosion CIO unit. A new class action suit charges that the bank turned the ill-fated unit, which on paper was supposed to hedge against other risks held by the bank, into the equivalent of a hedge fund.

Finextra notes a class-action complain filed last week in New York that alleges JPMorgan CEO Jamie Dimon "secretly transformed the CIO from a risk management unit into a proprietary trading desk whose principal purpose was to engage in speculative, high-risk bets designed to generate profits."

The suit also claims that "JPMorgan senior management made a conscious, strategic decision to use the CIO for proprietary trading in pursuit of short-term profits."

The plaintiffs include the Arkansas Teacher Retirement System, Ohio Public Employees Retirement System and the state of Oregon.

So what to make of this? One of the more interesting questions that has yet to be resolved is just what the disastrous trades were hedging  against. Some think they were legitimate economic hedges, but the view that that they were hedges in name only and meant to generate huge returns has proven persistent. The discovery process in this suit just might turn up some very interesting information.  

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