Inspector general: Federal Reserve failed to act on ‘London Whale’ losses at JPMorgan

Concluding an investigation began two years ago, the inspector general said that the New York Fed identified risks at JPMorgan’s London investment office as early as 2008 and planned two inspections of the office, but never got around to conducting the examinations or notifying the Office of the Comptroller of the Currency, the bank regulator primarily responsible for JPMorgan, of its findings.

JPMorgan’s loss on derivatives bets made by a trader now known as the “London Whale” raised fears that regulators had not sufficiently learned the lessons of the 2008 financial crisis. The trades prompted a series of congressional hearings and ultimately brought about a $920 million settlement with regulators in which JPMorgan, the world’s biggest bank, acknowledged wrongdoing.

In the summary report of its investigation released Tuesday, the Fed inspector general says that there was a “missed opportunity” for the New York Fed to notify the OCC of the risky practices going on in JPMorgan’s London investment office. The inspector general also knocked the New York Fed for failing to conduct examinations of the bank’s trading office itself because of a lack of resources, saying that its own inability to carry out the investigation “should have increased FRB New York’s urgency to initiate conversations with the OCC.”

The inspector general summary report includes 10 recommendations for the Fed to improve its supervision in the future, in part by increasing collaboration with other regulations and encouraging employees to “escalate” concerns about interagency cooperation.

The Federal Reserve Board and the New York Fed challenged parts of the inspector general’s analysis, but those objections were only included in the complete report, which was not published because it contains confidential information.