Case | HBS Case Collection | 2010 (Revised from original 2010 version)

J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009

by Anette Mikes, Clayton S. Rose and Aldo Sesia

Abstract

Mary Erdoes, the CEO of JP Morgan's asset management business, and three colleagues provide insights into risk management issues faced by the firm's private bank during the financial crisis in 2008–2009. The case provides perspective on the philosophy with which they approach risk management, issues of greatest concern, tools and processes used in practice, the benefits and limitations of quantitative models and balance between the use of models and exercising judgment, and lessons learned from the crisis about risk management.

Keywords: Judgments; Financial Crisis; Globalized Firms and Management; Management Analysis, Tools, and Techniques; Risk Management; Mathematical Methods; Banking Industry; United States;

Format: Print

17 pages

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Citation:

Mikes, Anette, Clayton S. Rose, and Aldo Sesia. "J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009." Harvard Business School Case 311-003, November 2010. (Revised from original September 2010 version.)

In June of 2012, Barclays plc admitted that it had manipulated LIBOR—a benchmark interest rate that was fundamental to the operation of international financial markets and that was the basis for trillions of dollars of financial transactions. Between 2005 and 2009 Barclays, one of the world's largest and most important banks, manipulated LIBOR to gain profits and/or limit losses from derivative trades. In addition, between 2007 and 2009 the firm had made dishonestly low LIBOR submission rates to dampen market speculation and negative media comments about the firm's viability during the financial crisis. In settling with U.K. and U.S. regulators the firm agreed to pay $450 million in fines. Within a few days of the settlement, Barclays' CEO, Robert Diamond, had resigned under pressure from British regulators. Diamond blamed a small number of employees for the derivative trading related LIBOR rate violations and termed their actions as "reprehensible." As for rigging LIBOR rates to limit market and media speculation of Barclays' financial viability, Diamond denied any personal wrongdoing, and argued, that if anything, Barclays was more honest in its LIBOR submissions than other banks—questioning how banks that were so troubled as to later be partly nationalized could appear to borrow at a lower rate than Barclays. This case explains why LIBOR was an essential part of the global financial market, the mechanism used to establish the rate, and what Barclays did wrong. The case allows for an examination of: i) the consequences of violating the trust of market participants, ii) cultural and leadership flaws at Barclays'; iii) the challenge of effectively competing in a market where systemic, and widely understood, corruption is taking place, iv) the complicity of regulators in perpetuating a corrupt system; v) what might, or might not, be effective remedies for the systemic flaws in LIBOR.

Aubrey McClendon, founder and CEO of Chesapeake Energy, was, according to Fortune Magazine, the highest paid U.S. CEO in 2008 receiving over $100 million in total compensation. McClendon received this compensation despite a significant drop in the company's stock price and financial performance during the year. The (A) case addresses the specifics of the compensation and the rationale for the compensation from the perspective of Chesapeake's board and its compensation committee including McClendon's role in consummating several joint ventures, which the board and committee believed positioned the company for future growth in the relatively young industry of unconventional natural gas exploration and extraction. In addition, the (A) case describes the role of the compensation committee and the company's executive performance measurement factors.

In the summer of 2012, Barclays plc, one of the largest banks in the world agreed to settle with authorities and acknowledged that the firm had manipulated LIBOR (London Inter-Bank Offered Rate)—a benchmark reference rate that was fundamental to the operation of international financial markets and was the basis for trillions of dollars of financial transactions. The scandal brought into question the credibility of LIBOR and raised the issue of who was responsible for the manipulation that had occurred at Barclays. The scandal cost Barclays' chairman and its controversial CEO Bob Diamond their positions, and called into question the actions of the Bank of England, U.K.'s central bank. The case provides students with an opportunity to understand the details behind the scandal and the roles in it of multiple parties. It allows students to explore the challenges faced by leaders in operating in a corrupt system, and to understand the responsibilities that financial institutions and their leaders/managers have to the financial and economic systems in which they operate. Because LIBOR is so widely used as a benchmark reference, the case study and analysis have global implications.

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