And so the drama moves on to a courtroom. Two prime traders in JPMorgan Chase’s “London whale” misadventure have been indicted. Side plots may unfold, perhaps via extradition proceedings. But here is the big question: will the indictments lead to better, stronger financial markets? Well, yes and no.
Recall the problem: JPMorgan’s London trading desk made trades that would be profitable if the post-crisis American economy remained weak. As the economy improved, the traders sought to reverse the investments, but could not, ultimately losing the bank and its shareholders $6bn.
The indictments are not for the loss, but for deliberately misstating the size of the loss to higher-ups at the bank. That, in turn, led to misstated financial statements to the public and the bank’s regulators. Whether higher-ups pushed for lower reported losses remains to be seen.