Fed IG Report Sheds Light on 'London Whale'

By Dow Jones Business News, January 08, 2015, 10:55:00 PM EDT

WASHINGTON--The Federal Reserve Bank of New York's failure to examine J.P. Morgan Chase & Co.'s investment unit ahead of the bank's 2012 "London whale" trading debacle stemmed from turf battles with other regulators, overreliance on J.P. Morgan's solid reputation and financial-crisis-related distractions, according to the Fed's watchdog.

A full version of the Fed's Office of Inspector General's report on its investigation into the incident sheds additional light on how the New York Fed stumbled in its oversight of the bank's chief investment office, where the traders engaging in the problematic derivatives transactions were based.

The inspector general previously had released only a four-page summary of its report, which said the New York Fed failed to examine the investment office ahead of the trading debacle although a team of Fed experts had recommended a " full-scope examination" in August 2009.

The New York Fed team never carried that examination out. The Wall Street Journal obtained the full report through an open-records request, though passages were redacted.

The 77-page report sheds new light on tensions between the Fed and the Office of the Comptroller of the Currency, which oversaw J.P. Morgan, as well as between Fed staff in Washington and New York.

In its response to the report, top Fed officials expressed some resistance to the inspector general's conclusions.

Michael Gibson, the Fed's director of banking supervision and regulation, pinned the "whale" failures on a lack of resources.

"The resource challenges faced by the Federal Reserve System and the FRBNY during this period cannot be underestimated," he said.

In light of that, the Fed believes it was "wholly appropriate...to rely on the assessments of the Office of the Comptroller of the Currency and JPM's internal audit department in lieu of conducting its own examination," he said.

Link:
Fed IG Report Sheds Light on 'London Whale'