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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Which statement about the 2012 JPMorgan 'London Whale' episode is most accurate with respect to operational and model risk failures?

The London Whale losses involved a flawed VaR model change in JPMorgan's Chief Investment Office, with error-prone spreadsheet processes that understated risk, plus weak oversight and limit breaches. It was not a missing model, a hidden clerk account, or listed equity futures.

  1. AThe loss arose because the trading desk had no VaR model
  2. BA change to the VaR model for the Chief Investment Office, implemented with errors such as spreadsheet-based calculation flaws, understated risk and weakened oversightCorrect
  3. CThe loss resulted from an unauthorized hidden account concealed from all risk reports by a junior clerk
  4. DThe positions were entirely in listed equity futures with daily margining

Explanation

The CIO synthetic credit portfolio used a revised VaR model with manual, error-prone spreadsheet processes that understated risk, and limit breaches and oversight were weak. It was not a hidden clerk account, and the positions were credit derivatives, not listed equity futures.

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