New York Fed Failed To Examine J.P. Morgan 'London Whale' Unit

By Ryan Tracy 

WASHINGTON--The Federal Reserve Bank of New York failed to examine J.P. Morgan Chase & Co.'s investment unit ahead of the bank's 2012 "London Whale" trading debacle, despite a recommendation from other Fed supervisors that they look at the unit involved in the trades, according to a new report.

The Fed's Office of Inspector General released a report Tuesday saying Fed supervisors didn't follow up on signs that the bank's chief investment office--where the traders engaging in the problematic derivatives transactions were based--needed a closer look. A team of experts from across the Fed system recommended that the New York Fed conduct "a full-scope examination" of the unit in 2009, but the New York Fed never did so, the report said.

In 2012, J.P. Morgan announced losses in the unit related to botched derivatives trades that eventually cost the bank $6 billion.

The inspector general found that the New York Fed had weaknesses in its supervisory planning process, and that it depended on certain people for expertise about the J.P. Morgan unit, but that expertise was lost when the regulator reorganized its team overseeing the bank in 2011.

J.P. Morgan declined to comment. The New York Fed told the inspector general it is "committed to improving supervision," according to the report.

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