Discussion - How did JP Morgan find itself in this position

Discussion Post

• 1) How did JP Morgan find itself in this position? Develop a timeline of events from 2011 to the summer of 2012.
• 2) Consider standard market risk management practices for financial institutions, such as VAR:
  • a. Why was the risk management not sufficient to prevent such an extraordinary loss?
  • b. Which risk metric do you consider most appropriate? Should liquidity of an asset be considered as well?
  • c. Consider risk-weighted assets: should they include net exposure or gross exposure? Should derivatives of all types be regarded as the same type of RWA?
• 3) Is it appropriate to employ derivatives in a cash management function?
• 4) How did the bank, its shareholders and the regulators react to the situation? Were these reactions appropriate?
• 5) Consider the organizational structure and processes at JP Morgan in early 2011:
  • a. How active should/can risk management be in terms of enforcing limits or breaches?
  • b. Would it help to change the organizational structure of JP Morgan?
  • c. If you were to redesign the risk management policy, what would be your top three changes?
• 6) Describe the lessons you would take away and the steps you would take to prevent a similar occurrence in your company.