In the face of its risk management failure that led to the loss of $2B on hedging and derivatives trading, JP Morgan is looking to restructure its Board’s risk management Committee.
The current Risk Committee has three members, one from the Investment Industry, one who is the President of the American Museum of Natural History, and one who is the Chairman and CEO of Honeywell, a technology and manufacturing company. Of these three, it seems reasonable that perhaps one might understand the complex derivatives and risk management strategies coming to light as part of the strategy of the Chief Investment Office. That office had responsibilities that grew from hedging the bank’s risks to becoming a profit centre on its own.
There is much speculation that the structure of the risk management committee and its membership should be reviewed in the wake of this episode.
JP Morgan is a smart, sophisticated company with, mostly, effective risk management. They have a CEO who is renowned for digging deep and understanding what is going on. That this kind of self-inflicted risk management miscue can happen there is an indication that no matter how smart the place is, there can always be blind-spots, and a focused CEO is only one element of a successful risk management strategy.