Monday, October 08, 2012

Poor Ina Drew

Executives at large financial corporations tend to be smarmy bureaucrats, not savvy investors. They rise to the top via excellent credentials, good connections, better timing, and learning to not say anything so clearly as to betray their ignorance on things large and small. Ina Drew sounds like a Dilbert caricature.

A New York Times puff piece on the former JPMorgan CIO tries to paint her as the scapegoat of their infamous first quarter debacle, but their description of the $6B bad trade/hedge sounds like she never understood it. Most of the piece is about her life, but then they get to The Trade and there's vague and inconsistent descriptions of events given the author's access. They mention
Drew’s deals essentially turned on one key question she seemed to answer correctly more often than most (or at least when it mattered most): Would interest rates go up or down?
I find this laughable. Anyone who's been in finance for a couple decades knows that anyone with an edge in interest rate forecasting is deluded, ignorant, or not a corporate executive. That's just not where those kind of people end up. An executive who thinks calling market direction is really important doesn't understand the Serenity Prayer, that banking is about intermediation and not speculating.

 As a short credit position got large in 2011:
Ina knew the product, the size they were trading, but she did not know what the true P.& L.” — profit and loss — “impact could possibly be in a stressful scenario,” he said...One serious defect in the risk evaluation of Iksil’s position was that its limit was folded into the aggregate risk of the unit’s entire portfolio. In other words, Iksil could continue to increase the position without triggering alarms.
How can a CIO not understand what would happen in the mild hiccup in the first quarter of this year? How could such a large position be 'folded into the aggregate risk of the unit' yet be marked to market?  I suspect she understood it as so many senior executives do, which is, not very well. They then discuss how they tried to close the position by putting on a correlated position going the other way. Clearly this didn't work as expected, which means it was a bad hedge, clearly in the CIO's bailiwick. 

They mention she's became quite wealthy. She should be grateful to the Gods of corporate chance.

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