The London Whale incident has cost JPMorgan Chase $2 billion and counting. It has inspired tons of discussion and has also thrown up lots of good questions. (Well, except on Capitol Hill.) One question remains above all: who else is underestimating critical risks? Or was JP Morgan – who used to be seen as the smartest kid in the class — the only one caught unawares?
Something at Wells Fargo caught my eye the other day: a new job listing. Three listings, actually, for identical positions in three different cities. Here’s the screenshot from LinkedIn:
And a description:
This position is a Model Validator in Wells Fargo Securities Model Validation and Approval group. The group is responsible for validating and approving all qualifying models used within Wells Fargo Securities and Global Transaction Banking/Foreign Exchange International. These models are primarily for pricing and risk measurement of derivative instruments on various underliers including commodities, equities, foreign exchange, interest rates, municipal products, asset backed securities and structured products.
Specific duties mentioned:
- Review and assess the theoretical and conceptual soundness of models.
- Verify models performance (correct implementation, limiting behavior, response to stressed/extreme input conditions, etc.).
- Work with MVA’s [Wells Fargo Securities Model Validation and Approval group] internal Testing and Support group to develop and execute tests to support model validation.
- Work with MVA’s internal Library Development group to ensure that appropriate benchmarks are included in each validation.
- Quantify the degree of model risk inherent in each model.
- Interpret test results in the context of model applicability.
- Write validation reports distilling the relevant results of testing and theoretical review, calling particular attention to areas of concern or uncertainty.
- Work with other members of Risk Management to ensure that when necessary appropriate limits around model use are in place.
- Support relationships with regulators and internal audit.
Here’s the thing about JPMorgan’s Fail Whale fiasco. The company has always maintained that the unexpected losses of $2 billion+ were caused or made worse by a change that it made to its risk models. The change was meant to be an improvement but it didn’t quite turn out that way. Here’s how they put it on May 10, as reported by Reuters:
“In the first quarter, we implemented a new VaR [value-at-risk] model, which we now deemed inadequate,” Jamie Dimon, JPMorgan chief executive, said on an emergency conference call with analysts and investors. “We went back to the old one, which had been used for the prior several years, which we deemed to be more adequate.”
JPM could have really used the sort of folks that Wells is now looking to add to their team to “validate and approve” existing risk models. It looks like Wells is not taking any chances.