JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon has transformed the bank's chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.

Achilles Macris, hired in 2006 as the CIO's top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO's previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.

Some of Macris's bets are now so large that JPMorgan probably can't unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms. Bruno Iksil, a London-based trader in Macris's group, gained attention last week after moving markets with his trades, drawing a comparison to Federal Reserve Chairman Ben S. Bernanke's power in the government-bond market.

"What Bernanke is to the Treasury market, Iksil is to the derivatives market," Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles, where she helps oversee $32 billion, said in a telephone interview.

Lines Blurred

Macris's team amassed a portfolio of as much as $200 billion, booking a profit of $5 billion in 2010 alone -- equal to more than a quarter of JPMorgan's net income that year, one former senior executive said.

The shifting role of the CIO group at JPMorgan, which reported record firmwide profit for 2011, underscores how blurry the line can be between "proprietary trading" and hedging, and it highlights the challenge U.S. regulators face in curbing speculative bets by federally backed lenders under the so-called Volcker rule. JPMorgan, whose $2.27 trillion of assets at year- end made it the biggest U.S. bank, says the CIO manages the firm's risks, with trades like Iksil's forming a part of that effort.

"It's a complete tempest in a teapot," Dimon said on a conference call with investors today after the bank announced first-quarter earnings. "Every bank has a major portfolio and in those portfolios you make investments that you think are wise."


The bank believes that its CIO activities comply with both the letter and the spirit of the Volcker rule, Chief Financial Officer Doug Braunstein, 51, said on the call. Regulators "see everything and anything we do whenever they want," Dimon said on an earlier call with reporters today.

The CIO's growing size and market power have made it an increasingly important customer to Wall Street's trading desks and a market influence watched by hedge funds and other investors, the former employees said. Iksil's positions in credit-derivatives have become so large that some market participants dubbed him "Voldemort," after the villain of the Harry Potter series who's so powerful he can't be called by name.

Yet it's Macris, not Iksil, who was behind the strategy that led to an unprecedented build-up of credit risk in JPMorgan's chief investment office, three former employees of the bank said. While they expressed doubt Iksil can unwind his positions without causing a dislocation in the markets he trades, they also said JPMorgan probably can afford to hold the assets until they mature and so won't be forced to sell them.

Earnings Report

London-based Macris, 50, didn't reply to a call seeking comment. He, Iksil and JPMorgan haven't been accused of any wrongdoing.

JPMorgan, which reported today that it earned $5.38 billion, or $1.31 a share, in the first quarter, doesn't break out revenue or profit for its chief investment office. The bank lumps the office into a "corporate" line item that also includes treasury and the firm's centrally managed divisions such as audit, finance and human resources.

In 2011, corporate revenue of $3.3 billion included $1.6 billion of securities gains and produced $411 million of net income, the bank said in an annual filing on Feb. 29. By comparison, JPMorgan's investment bank reported $26.3 billion in revenue and $6.8 billion of net income in 2011.

Surge in Holdings

Since 2007, the value of securities held in JPMorgan's chief investment office and treasury has more than tripled to surpass $350 billion from $76.5 billion, according to company filings. The biggest jump was in 2009, when the company disclosed that the CIO made "significant purchases" of government-backed mortgage securities, asset-backed securities, corporate securities, as well as U.S. Treasury and government- agency securities, according to the filings.

"These investments were generally associated with the chief investment office's management of interest-rate risk and investment of cash resulting from the excess funding the firm continued to experience during 2009," according to the company's 10-K report for 2009, filed in February of 2010.

The securities portfolio is about $360 billion today, Braunstein said in the conference call with reporters. "That generates earnings for us, and it also balances our interest- rate risk," he said.

Profit, not risk management, guided the purchases, according to the former employees. One of the employees, who previously held a senior executive position at the bank, said Dimon even ordered some of the trades himself.

Management Changes

The transformation of the CIO has its origins in Dimon's arrival at JPMorgan with the purchase in July 2004 of Bank One Corp., where he was CEO. Less than three months later, Dimon's long-time lieutenant Michael Cavanagh became chief financial officer. He replaced Dina Dublon, a 23-year veteran of JPMorgan and its predecessors.

At the time, JPMorgan also said Ina Drew, who ran global treasury at JPMorgan prior to the acquisition, would report directly to Dimon. Drew's title changed in February 2005 to "chief investment officer," according to the 2005 year-end filing.

Dimon pushed the unit to seek bigger profits by buying higher-yielding assets, including structured credit, equities and derivatives, and ramping up speculation, according to two former employees. While Drew's unit previously had small teams of traders who took speculative "macro" positions in currencies and interest-rate products, people who worked there at the time say the focus shifted and traders were given permission to put more capital at risk.

Missile in Flight

In London, Macris expanded his team, adding expertise in credit and fixed-income trading. A Greek citizen, Macris previously was co-head of capital markets at Dresdner Kleinwort Wasserstein before joining JPMorgan in 2006. In that role he helped oversee a unit that made proprietary trades, or bets with Dresdner's own money, according to two people who worked with him at the time.

One former colleague at Dresdner said he remembers visiting Macris's London apartment in 2004 for a gathering of fellow colleagues from the firm. He said he was struck by a picture on the wall in a room that contained more than six trading screens. The picture, which he estimated was more than six-feet high and six-feet wide, was of a missile in flight.

'Off-the-Wall Ideas'

Before joining Dresdner, Macris oversaw currency trading at Bankers Trust, now part of Deutsche Bank AG. Macris was an idea- generating machine who was blunt and didn't suffer fools, said Duncan Hennes, who worked with him at Bankers Trust.

"He always had off-the-wall ideas, but in hindsight sort of smart ideas," Hennes said in a telephone interview. "He was always thinking out of the box."

David Sandelovsky, who reported to Macris at Bankers Trust in the 1990s, remembers being impressed with his "great knowledge" of art, wine, politics and history. He was an active trader -- "a big hitter" -- as well as a manager, Sandelovsky said.

"It wasn't just a simple 'Let's go long the dollar against the yen,'" Sandelovsky said. "He had serious ideas, and they were macro, involving interest rates, foreign exchange. He didn't think in simplistic terms."

At JPMorgan, Macris hired Evan Kalimtgis, a former head of credit portfolio strategy at Dresdner, to help with risk management, according to one former employee.

'London Whale'

In 2007 Javier Martin-Artajo, who had been Dresdner's head of credit-derivatives trading, joined JPMorgan in London. George Polychronopoulos, who worked at hedge fund Endeavour Capital LLP, also joined the London office in 2009.

Martin-Artajo, Polychronopoulos and Kalimtgis didn't return calls and e-mails seeking comment.

Iksil, whose credit-derivatives trades have earned him the moniker "London Whale," joined JPMorgan in 2005 and has held his current role since 2007, according to his career-history record with the U.K. Financial Services Authority. He worked at the French investment bank Natixis from 1999 to 2003, according to data compiled by Bloomberg.

While Macris had a mandate to make money from the beginning, he didn't start putting on big bets until after the credit crisis in 2008. Two of the former executives said the following year he bought AAA-rated pieces of collateralized debt obligations. As competitors dumped securities and prices slumped, Macris's group at JPMorgan emerged as the biggest buyer in some markets, said one former executive at the bank who was familiar with the trades at the times.

Trading Risk

In one example, a New York-based CIO trader named Jonathan Horowitz bought about $1.1 billion of AAA-rated portions of collateralized loan obligations for about 80 cents on the dollar in November and December 2008, people familiar with the matter said at the time. Horowitz declined to comment.

The portfolio now includes about $70 billion of securities linked to European mortgage debt, Dimon said today. Braunstein said the "vast majority" of the overall portfolio is government or government-backed debt, and about $175 billion is mortgage-related.

"It's a big portfolio," Dimon said. "It's sophisticated, obviously complex, but at the end of the day it's our job to invest that portfolio intelligently over a long period of time to earn income and offset other exposures we have."

One public sign that the chief investment office does more than hedge: Its trading risk is on par with that of JPMorgan's investment bank.

JPMorgan's annual report for 2011 shows that the CIO stood to lose as much as $57 million on most days of the year. That compares with $58 million for the investment bank, which includes Wall Street's biggest stock- and bond-trading units.

'Extraordinary Platform'

Another sign: The relationship between the CIO and the investment bank's sales and trading desks is strained, two former employees said. Employees in the CIO get a smaller share of their trading profits than those in the investment bank, giving Dimon a cost-management incentive to direct more trading through the CIO, one former executive said.

Last year Drew, 55, hired Irene Tse, a former Goldman Sachs Group Inc. partner, to oversee the CIO in North America. Tse more recently was a portfolio manager for Stanley Druckenmiller's hedge fund Duquesne Capital Management.

JPMorgan "offers an extraordinary platform for me and the entire CIO group to invest and manage risk," Tse said in the January 2011, press release announcing her appointment.

Drew and Tse didn't reply to e-mails and phone calls seeking comment.

'Very Comfortable'

JPMorgan, like rivals, has shut groups in the investment bank that specialized in speculative bets with the company's own money, anticipating implementation of the Volcker rule. The ban, part of the Dodd-Frank financial-reform law, will prohibit banks backed by the federal government from engaging in so-called proprietary trading. One former JPMorgan employee said the number of risk-taking traders in the CIO has been reduced in recent months.

"We have had for many years a structural credit book that hedges against stress loss, meaning downturns in the credit market," Braunstein said today. "These positions that you've all been writing about are just simply part of that structural credit book, which, by the way, we've been reducing over time, and we are very comfortable with the positions that we have."

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