J.P.

Morgan Private Bank: Risk

Management during the Financial
Crisis 2008-2009
 
 
 
Gestión de proyectos de negocios 
Grad. Jaime Moreno Pine

Submitted by:
❖ Noemi Quiroz González
❖ Arlenne Fierros Hernández
❖ María del Rosario Mérida López

April 26, 2017

Index

● Executive summary…………………………………………..2

● Main ideas……………………………………………………..3

● World presence……………………………………………….4

● Market segmentation………………………………………...6

● Organizational structure……………………………………..6

● Operation activities…………………………………………...7

● Investment model: “Managed Architecture………………...7

● Risk management in Global Access………………………..8

● Risks tools……………………………………………………..9

● Financial crisis………………………………………………...9

● Financial evolution from 2008-2017………………………10

● Conclusions………………………………………………….15

● Bibliography………………………………………………….16

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Executive summary

JPMorgan Chase & Co. is a global leader in financial services that offers solutions
to consumers, enterprises, commercial banks, corporations, governments and
institutions most important at the world in more than 100 countries.
The firm has been in the market for more than 130 years, it has a long history that
demonstrates its leadership during times of economic growth and instability.

Morgan’s Private Bank offers services such as investment advice, investment

management and brokerage across a range of global products and markets; focused
on capital preservation, capital growth, liquidity, and transferring wealth across
generations.

Risk management is often defined as the active attempt to mitigate the effects of
the unexpected. But the problem is not the known risks, is the unknown risks.
However, for JPMorgan Chase to work through risk management has never been an
insurmountable challenge, not until the year of 2008, when world economies, and
especially the American collapsed, posing the biggest challenge that the successful
company would face.

The global financial crisis in September-October of 2008 is one of the worst since
the great depression, and it resulted in a historic stock market crash. Became
particularly visible in september 2008 with the failure, merger or rescue of several
major financial institutions in the United States. The main factors attributed as
causes of the crisis failures in economic regulation, the large number of crimes
committed by banks, the overvaluation of products worldwide and energy food crisis,
and the threat of a recession are found throughout the world, as well as a credit,
mortgage and market confidence crisis.
For everyone the great recession represented a time of instability, uncertainty, and
concern; for some even huge losses. Even so, the effect that any consumer could
experiment, would be multiply exponentially for those who was in charge of a
company and such a huge bank like JPMorgan Private Bank; it was not only in
danger the future of the company but of all its customers and investors, who had
placed their trust in them.

Below is presented an analysis of the activities and development of JPMorgan

Private Bank, with the main focus of the actions made to confront the recessionary
period of the crisis, and its growth from then to now, almost ten years later.

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Main ideas:
● The focus of Morgan’s private wealth management effort was on capital
preservation, capital growth, liquidity and the challenges of transferring wealth
across generations.
● Services and products as investment advice, investment management,
brokerage across a range of global products and markets, services to assist
clients, made loans to clients. Also provided estate planning
● Morgan’s private bankers saw themselves as problem solvers.
● Erdoes: head of the Private Bank in 2005
● Two client segments:
➢ Ultra-high net worth (a small number): net worth in excess of $25
million
➢ High net worth (majority): between $5 millions and $25 million
● Essential: to understand about a client’s business and their personal needs.
● Employed over 7,500 individuals:
➢ 2,000 were focused on creating and managing investment products
and client relationship management
● 2004: Bank One merger
➢ Morgan developed the capability to serve “high net worth” clients.
There was a need for products, services and a relationship
management model that satisfies client needs.
❖ “Managed architecture” model
❖ The Global Access Portfolios
● Portfolio’s original purpose: to provide a handful of Latin American
clients with the “real time” benefits of the Private Bank’s best
investment ideas
● Chief Investment Officer: Richard Madigan​. He described the Global
Access portfolios as “dynamic, multi-asset class portfolios”
● 4 keys investment strategies:
➢ Balanced
➢ Growth
➢ Wealth Preservation
➢ Hedge Fund
This strategies defined the proportion of assets allocated across the main asset
classes
● Georgiy Zhikharev: head of Global Access risk management
● Zhikharev: ​to keep portfolios in alignment with both broad Private
Bank-level policies and to keep portfolio managers honest

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World presence
Graphic 1. Geographical expansion of JP Morgan & Chase Co.

● JP Morgan has a major presence internationally.

● The company was formed in 2000, when Chase Manhattan Corporation
merged with J.P. Morgan & Co.
● It is the largest bank in the United States
● The world's third largest bank by total assets, with total assets of roughly
US$2.5 trillion
● World's most valuable bank by market capitalization
● According to Forbes magazine is the world's sixth largest public company
based upon a composite ranking.
● The hedge fund unit of JPMorgan Chase is the second largest hedge fund in
the United States.
● The corporate headquarters is located at 270 Park Avenue in Midtown
Manhattan, New York City.
● The retail and commercial bank is headquartered in 270 Park Avenue,
Midtown Manhattan, New York City, New York, U.S
● JPMorgan Chase & Co. is considered to be a universal bank and a custodian
bank.
● As of 2016, JPMorgan Chase is one of the Big Four banks of the United
States, followed by Bank of America, Citigroup, and Wells Fargo.
Graphic 2. Top ten of the largest American Banks.

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 ● 43 multilateral institutions on five continents
● More than 75 financial institutions supporting public policies in more than 42
countries
● National governments in more than 70 countries on 6 continents
● More than 120 central banks worldwide
● More than 130,000 companies based in more than 70 countries
Graphic 3. J.P.Morgan presence on the world

. The benefits of the products and services offered by JPMorgan has increasingly
attracted new customers and revenue. Clearly, there is a growing and important
participation of JP Morgan in the world, which has allowed significantly boost
investment. Increased opportunities derived from its territorial expansion can be
translated into growth in demand for its various financial products.

Graphic 4. Trusted advisor to the world’s most sophisticated clients.

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Market segmentation:
● Originally it was targeted to wealthy families and individuals
○ two types of consumers:
■ Ultra-high net worth: these types of consumers have a net worth
greater than 25 millions of dollars.
■ High net worth: these types of consumers have a net worth between 5
million and 25 million dollars.

Organizational structure:

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Operation activities
● Asset Management:​ this can be divided into three segments:
○ Information: guides the consumers through their various accounts with
ease in order to increase the amount of cash and visibility in
transactions
○ Investments and advice: ​JP Morgan offers special strategies which
can be used by the clients of the bank as well as advice which takes
care of the whole spectre of assets.
○ Risk: solutions are developed to help both the emitters and the
investors to carry on the deal having in mind all the possible risks that
can occur from this
● Corporate and investment banking: ​Clients are provided with detailed
assistance which comes with possible solutions, coaching when it comes to
capital and debt; and the possibility of fusing together with other clients.
● Private and commercial banks: the private bank offers possible solutions to
heritage problems, each client receives personalised attention which makes
the service unique to the consumer. the commercial bank offers a wide variety
of services in which they can look at themselves.
● Retirement plans, Cross-Border Trade Finance and Receivable and
payable accounts.

Investment model: “Managed Architecture”:

● “Managed architecture”​: both Morgan Fund and externally managed
fund products. The investment model is both closed and open
architecture
● Was intended to be Morgan’s way of delivering the best solution to a
client
● Generic concern: to protect clients from having their funds directed to
an internally managed fund where a firm would likely more money
while there might be better external options available.
● Joseph Regan:head of Risk Management for Asset Management
● Regan’s agenda focused on development of a ​market-oriented risk
function.
● Private Bank began to evolve to this model with the 2006 purchase of
Highbridge Capital Management, a large hedge fund with a
market-oriented risk manager.
● Private Bank- Regan initially identified 3 goals:

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 ➢ The first was to strengthen the traditional compliance-oriented
monitoring that risk management had performed.
➢ Regan's focus included ensuring compliance with investment
mandates across all investment teams and products. Also, he
focused on the governing processes and support for the risk
culture
➢ There was a need for ongoing review of the operational risks in
the Private Bank.
● Portfolio managers, within the Private Bank, defined and analyzed risk
differently as was appropriate for their specific investment processes.

Risk Management in Global Access:

● There are two teams:
○ Independent oversight function (run by George Lencyk)
■ Responsible for risk management oversight across all the
investment activities
■ When risk Global access began the team was in charge of:
● Approving the new product
● Drafting limits for portfolio managers
● Monitoring trade approvals, product suitability and
investment performance
● Making sure that all governance processes stuck to the
necessary regulatory standards
○ Portfolio Managers
■ Goal of improving and increasing overall returns as well as
protecting the portfolios from major downside shocks
■ Hired a risk advisor to supervise the team
● Makes sure that all members of the team are aware of the
risks that must come with the decisions they make
● Keeps portfolio managers honest
● The discretionary investment management platform in Morgan's Private Bank
was subject to fiduciary standards of governing self dealing and conflicts of
interest.
● This model only brought greater challenges to the Bank as it was now forced
to demonstrate that it was making the right choices.

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Risk Tools:
● Everything was subjected to a rigorous vetting process and only the things
that obtained high marks were added to the Private Bank’s investment
platform.
● Those with low marks could be deleted from the platform
● Traditional tools to measure the market risk embedded in client portfolios
were unsatisfactory to Madigan and Zhikharev
● New Risk Tool: “Value at Risk” ​VaR ​was an estimate of the maximum loss of
an asset or portfolio during specified time interval, at a specified likelihood.
● VaR doesn’t indicate the severity of loss beyond the threshold, VaR tells you
the average bad case in a normal environment.
● Global Access Risk Factor Model: designed to help portfolio managers
create trades in light of their risk implications to the portfolio. The Model tells
you, in percentage terms, where you are taking your risks.
● The Model was designed with the ultimate user in mind, it was a tool to
improve the judgement of the Global Access team.

Financial crisis:
2007: The ​housing market was well past its peak and in ​decline​. A number of
hedge funds involved in “statistical arbitrage” suffered heavy loses. By the end of
2007, the markets had calmed down.

2008: ​By September, a ​crisis erupted​. For the first eight months, the Global Access
portfolios captured about equal amounts of the market’s return and its volatility. The
value of most hedge fund was crushed during September and October.
Madigan and the team reduced the risk in the funds to their lowest level ever.
In the middle of the crisis, the portfolio decisions resulted in a substantial decline in
the amount of market volatility capture in each strategy.
Global Access Risk Factor Model ​helped Madigan and the portfolio managers with
a better understanding of how specific changes in the portfolios would affect the level
of risk, allowing them to ​make sure the portfolios were in synch with their views of
macro environment.

2009: ​They began to see things as ​binary. ​They decided to “tip-toe” back into the
market through a combination of downside-protected trades and by quickly taking
gains and cutting loses. They looked at trades with ​strong fundamental value​.
Strategy: “cutting risk happens in several stages, so does adding it back”.

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Madigan ​raised the risk in the portfolios. Global Access portfolios captured more of
the market’s upside than of its volatility.

Lessons Zhikharev learned from the crisis:

● The importance and power of the liquidity; it was the tool for the companies
for getting through the uncertainty and having significant resources to
reallocate when the outlook improves.
● The need of staying dynamic in each moment, and be aware of opportunities
for profit-taking and rebalancing.
● “Sticking to the view”
● There is a huge responsibility in the money management, it demands the
understanding of how big can be the gain or lose.
● Constant prevention in risk management: “being prepared and continuing to
plan what could go wrong, even when things are going well”.

Financial evolution from 2008 to 2017

Graphics 5 & 6. Private Bank Revenues and Assets under Management (US$ Billions) 2004
to 2009

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Graphic 7. Total revenues vs Total costs from 2007 to 2016 (US$ Million)

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Graphic 8.​Net profit or net earnings from​ 2007 to 2016 (US$ Millions)

Table 1. Increment and decreasement per year in the ​Statement of financial position

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Graphic 9. Assets vs ​Liabilities plus Stockholders' equity (US$ Millions)

Table 2. Increment and decreasement per year in the ​Balance sheet

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Source:​ Prepared based on financial reports obtained from JPMorgan & Chase
Economatica

An analysis of growth rates of assets, liabilities and capital reveals that by 2008,
the balance sheet of the company registered a growth of 39% of assets and
liabilities, and 35% of capital. These figures are a clear reflection of speculative
processes related to the subprime crisis of 2008. Similarly, the subsequent fall of
these items shows the impact of the crisis on the corporation itself that was rescued
by the US government, why, the drop was not as pronounced as in other sectors.

By an a horizontal analysis of the Statement of financial position we can appreciate

that the revenues and costs increased in 2008, and thereafter began a declining
trend reaching the lowest point in 2015, which can be understood as the recovery of
economies following the crisis.

Nevertheless, the company had no net losses in all his years, lower earnings
reported were in 2008 and 2009 for obvious reasons, and for 2010 there is a growth
trend that stays until 2013. In the year most bubble inflation view, the percentage
decrease of profits was 64%.

The behavior of the banking sector was, thought, one of the least resentful of the
housing bubble in 2008. Although the recession hit the industrial and service sectors,
the banking system in general did not fall as other sectors; Part of the explanation is
that the bailout is driven in 2009.

JPMorgan's fall was only temporary and to date continues to grow and expand its
activities. To better understand the behavior of the company, it is necessary to resort
to study the behavior of market value (shares), through observing the behavior of the
securities of the company.

Also, in recent years, JP Morgan has been increasing its dividend, buying back
shares and increasing your risk capital (adequacy ratio) that have had a direct
impact on increasing their capital levels.

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Conclusions
JP Morgan is one of the most successful banks of the world. They stand out for being risk
takers and innovative. Customers are number one priority in the eyes of this bank, which is
why they are constantly working on improving existing models or creating new ones to
please the clientele. This approach is their competitive advantage, it is the reason they stand
out from above all other banks of the world.

The world encountered a serious economic crisis in 2008 in which many companies
went broke. JP Morgan is one of the lucky ones which was able to make a quick recovery
from their great losses due to their wide macroeconomic vision. Where a lot of people saw
the crisis as something terrible, this bank saw it as an advantage, an opportunity to grow and
become stronger. Overall the impact of the crisis on the banking segment was not as
harmful as with other segments due to the quick movement the governments had to make in
2009, of course, this was a huge advantage for companies in this segment.

Overall, ​JP Morgan's decline was only momentary due to the good performance of its
shares in the market​. During the past ten years, they have maintained their position as one
of the best banks known worldwide as a result of the constant increase in the growth of their
investments. Their dividends have also increased by virtue of an increase in their risk capital.
What helps JP Morgan to be so successful and be able to continue growing in a healthy way
is that all employees are motivated and encouraged to have an innovative vision as well as
be risk takers. There are specialists who work on calculating the risks that need to be taken
and they are there to approve or improve suggestions based on their possibility of success.
Finally, they are stood in such a high pedestal because of their ability of seeing problems as
an opportunity to grow and never giving up.

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Bibliography
● Castro, N. H., Torres, G. F., & Piedras, I. (2013). Trabajo 3: J. P. Morgan &
Chase Co. Universidad Nacional Autónoma de México, 1-17. Retrieved April
23, 2017, from
file:///C:/Users/Lenovo/Downloads/JPMorgan%20trabajo%203_0.pdf.
● JP Morgan Financial Statements Economatica from 2007 to 2016
● Administrator. "Glosario De Los Estados Financieros En Forma Comparativa
Español - Ingles." ​INICIO​. Web. 26 Apr. 2017.
● J.P. Morgan | J.P. Morgan​. Web. 26 Apr. 2017.
● "JPMorgan Chase." ​Wikipedia​. Wikimedia Foundation, 25 Apr. 2017. Web. 26
Apr. 2017.

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