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Sunday, December 4, 2016

Sept. 24 (Bloomberg) — Whose $6 billion did JPMorgan Chase & Co. lose during the now-infamous London Whale debacle?

Was it depositors’ money or shareholders’ money? Or was no money lost at all? And was the whole thing the very “tempest in a teapot” that Chief Executive Officer Jamie Dimon originally called it?

What the bank has told us so far — during its news conference on May 10, in Dimon’s two rounds of testimony before Congress, and in the come-to-Jesus live presentation to analysts on July 13 — is that the man behind the trades, Bruno Iksil, aka the London Whale, worked in the company’s chief investment office. The CIO’s job, we have been told, is to invest the difference between the $1.1 trillion in deposits the bank has on hand from its customers and the $750 billion the bank has lent out to corporate borrowers.

That $350 billion — an awful lot of money even by Wall Street’s standards — was invested on a daily basis under the direction of a well-respected banker, Ina Drew, who was paid about $15 million a year for her services. Drew and her team invested the $350 billion in short-term, seemingly safe investments. The overall yield on the portfolio was about 2.6 percent, according to Dimon.

With Drew’s authorization — but, Dimon insists, without his knowledge — Iksil took a $10 billion chunk of the $350 billion portfolio and made a proprietary bet in an obscure debt index. (JPMorgan Chase likes to call Iksil’s gamble a “hedge.”) For myriad reasons — among them that the bet was wrong and that Iksil had such a large position in the tranche that escape would have been extremely costly — JPMorgan Chase has lost $5.8 billion, and counting.

To my mind, the money that Iksil lost was depositors’ money. Iksil worked for the CIO, where depositors’ money is invested until it is lent out. The trade lost almost $6 billion in cash, which we know is real because hedge funds such as Saba Capital, run by wunderkind Boaz Weinstein, and Blue Mountain Capital staked out the other side of Iksil’s trade and made a fortune. How could there be any confusion that the money Iksil lost came from the bank’s depositors?

Not so fast, says JPMorgan Chase. When I wrote in passing last week that I believed JPMorgan Chase depositors lost their money as a result of the London Whale, Joseph Evangelisti, the bank’s head of communications, sandblasted me.

“That’s untrue,” he e-mailed. “We lost shareholder money, not depositor money. Depositors have never lost a penny from our institution.”

We debated it back and forth. Although I concede in this instance no individual depositor lost his or her money, it’s only because there was no run on the bank by depositors at the same time the London Whale was being harpooned. Had depositors suddenly lined up and wanted their $1.1 trillion back, not only would JPMorgan Chase be kaput, but those depositors with more than $250,000 in their accounts — that is, above the limits of the Federal Deposit Insurance Corp. — surely would have been left with losses.

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