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(Answered)-Read the case "J.P. Morgan Private Bank". Answer the following

Read?the case "J.P. Morgan Private Bank". Answer the following questions and provide a critical?discussion in support of your answers:

(1) Would you recommend that?Georgiy?Zhpkharev?be moved from his current role as a risk advisor to the portfolio management team to become part of the risk management team as the manager responsible for risk management?

(2) Could?Morgan's risk management model have worked for AIG?s Financial Products?

Please do not restate information. Please evaluate?the two questions based on the information flows in the case. 3pages













J.P. Morgan Priv


vate Ban


nk: Rissk Man




durring the Finan


ncial Crrisis 20008-20099


n Erdoes (MB


BA 1993), the chief executtive officer off JP Morgan Chase?s (Mo




Maary Callahan


Assett Managemen


nt, reflected on the finan


ncial crisis and




its effecct on her thinking aboutt risk




ppened in 20008 that no one ever co


ontemplated. The crisis catapulted






Things hap


maanagers to a seat




at the maanagement taable. They neeed to be askin


ng the ?what ifs?, to push, to


iteerate through various scenaarios, to help us think thro


ough how to manage




the business






gement could


d very much be driven by


b an old-fasshioned, back


kward lookin




Risk manag




heck the box mentality.




It keeps




us safee by making sure we prop


perly do the things




we haave




ways done. But,




the probllem is not thee known risk


ks, it is the un


nknown riskss. And for th






ou also need highly




sophissticated, highly savvy people who havee market skills and who can


thiink about thee ?what ifs.?



J.P. Morgan




Prrivate Ban






organ?s Priva


ate Bank wass among the handful of the




most succcessful globaal private ban






nesses and wa


as known for its


i award-win


nning service and innovatiion.


Att its core, the business of private






ng was to pro


ovide ?high-to


ouch,? highly


y tailored pro




and seervices to weealthy individ


duals and fam


milies. The foccus of Morgan


n?s private wealth






effort was on capittal preservatio


on, capital grrowth, liquidiity, and the ch


hallenges of transferring










and products,




inccluding investtment


acrosss generationss. It offered a comprehenssive suite of services


advice, investmentt managemen


nt and brokerrage across a range of glob


bal products and markets. The




estaate planning and


a related advice,




often acting




as execcutors and tru




Privatte Bank also provided


of its clients? estattes, and offerred services to assist clien


nts in their philanthropic




c efforts, inclu




hen appropriiate, the Privaate Bank also made




loans to


o clients. Morrgan?s


manaaging associatted funds. Wh


privatte bankers sa


aw themselvees as problem


m solvers, ofteen of complex


x cross-border problems, where




discreetion and inn


novation weree crucial for success.




At the


t end of 20007, the Privaate Bank geneerated


$3.7 billion




in reveenue, up $1.66 billion from


m $2.1 billion at year end 2004 (see Exhibit 1 for Private


Bank Revenues an


nd Assets Under Managem


ment (AUM), 2004-2009). AUM




were $260




billion att year




end 20044.


end 2007, up $68 billion from $1192 billion at year








ors Anette Mikes and


a Clayton S. Rosee and Senior Reserracher Aldo Sesia Jr.


J of the Global Reesearch Group prep


pared this case. HB


BS cases


are deveeloped solely as thee basis for class disscussion. Cases are not intended to serrve as endorsemen


nts, sources of prim


mary data, or illustraations of


effectivee or ineffective man






ght ? 2010 Presiden


nt and Fellows of Harvard




College. To


T order copies or request permission


n to reproduce matterials, call 1-800-545-7685,


write Haarvard Business Scchool Publishing, Bo


oston, MA 02163, or


o go to www.hbsp This publicaation may not be digitized,




opied, or otherwise reproduced, posteed, or transmitted, without




the permisssion of Harvard Bu


usiness School.






J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009



Morgan competed with a number of different private banking models. These included businesses,


like Morgan?s, that were embedded in larger banks: HSBC, UBS, and Credit Suisse were formidable


competitors. Many securities firms also had units that catered to the very wealthy, including


Goldman Sachs and Morgan Stanley. And there were also independent firms, like Bessemer Trust,


Northern Trust, Pictet & Cie in Switzerland, and a multitude of small private firms. Each of these


had somewhat different models, from those that offered only a single service like investment


management or estate planning, to some that serviced the full range of client needs.


Erdoes, who was named as head of the Private Bank in 2005, reported to James Staley who ran


Asset Management?one of the largest money managers in the world, with nearly $1.6 trillion of


AUM at year end 2007.a It contained the Private Bank, an institutional investment management


business and a mutual fund business.


Erdoes, born and raised in Chicago, had a BA in mathematics from Georgetown University and an


MBA from Harvard Business School. After early experience in investment banking and investment


management, she joined Morgan in 1996 to work in the Private Bank as a fixed income asset manager.


The Private Bank served two client segments: its traditional ?ultra-high net worth? client base


(generally described as those with a net worth in excess of $25 million) and ?high net worth? clients


(those with a net worth between $5 million and $25 million). There were a small number of ?ultra


high net worth? individuals and families globally. For example, in the U.S. there were approximately


49,000 individuals with a net worth over $20 million in 2004 (see Exhibit 2 for U.S. wealth pyramid).


These clients ranged from heirs of long standing fortunes to technology entrepreneurs to hedge fund


managers, located across the globe. They had diverse and complex financial needs and lifestyles, with


markedly different tolerances for risk, and they could be quite demanding of their bankers. Erdoes


explained: ?Managing money is (just) one piece of our work. To do our job right we need to


understand as much about a client?s business and their personal needs as we can. We work




Consistent with the ?high touch? nature of the business, there was a high ratio of private bankers


to clients. The Private Bank employed over 7,500 individuals, of which nearly 2,000 were focused on


creating and managing investment products and client relationship management. It had 118 offices


globally. Erdoes believed Morgan had a unique advantage in serving its clients stemming from the


bank?s intimate client relationships. Bankers were able to collect and discretely share insights within


this substantial network of well-informed and very wealthy individuals.


With the 2004 Bank One merger, Morgan actively began to develop the capability to serve ?high


net worth? clients. There were significantly more potential clients in this group than in the ultra-high


net worth group, over 300,000 in the U.S. alone. While the needs of this group were similar in many


ways to those traditionally served by Morgan, the same highly tailored relationship-intensive service


and product set was not designed to meet the needs of this larger segment. There was a need for


products, services and a relationship management model that satisfied client needs, but that could


also be ?scaled? to deliver a consistent client experience.



Investment Model


The Private Bank had a differentiated model for providing its clients with discretionary


investment management services. Most firms operated either an ?open architecture? or a ?closed


architecture? investment platform. With an ?open? architecture, the firm did not have its own


investment capability and products, but evaluated those available from a variety of external sources


a In October 2009 Erdoes was promoted to head Asset Management, reporting to the firm?s CEO, Jamie Dimon.






J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009






and chose the ones that were best suited to client needs. The ?closed? architecture model was one


where clients came to the firm specifically because of its investment capabilities and style(s); these


firms did not offer externally managed investment products.


Morgan?s Private Bank had developed what was internally termed a ?managed architecture?


model, where it offered both Morgan Funds and externally managed fund products. The notion


behind this strategy was that clients who had access to Morgan?s extensive and widely recognized


global investment expertise might be, in some circumstances, better served by external products. The


internally available products could come from dedicated investment teams in the Private Bank or


from the institutional or mutual fund areas of Asset Management. This strategy required that the


Private Bank perform substantial due diligence not only on the external products that it offered to


clients, but also on those that were internally generated. (See Exhibit 3 for J.P. Morgan General


Investment Principles Regarding the Use of JPMorgan Funds and External Managers.)


A Morgan relationship banker had the job of considering all the needs of the client and what the


firm might offer to help satisfy those needs. These individuals often partnered with Private Bank


investment specialists, who would work directly with clients to advise on investment strategy and


products. In many cases, the Private Bank managed a client?s assets on a discretionary basis?that is,


the firm had full authority to make the investment decisions within a well-defined mandate. Those


involved in managing client money worked with a broad set of approved products. They used the


insights of a strategy team led by the Private Bank CIO, Michael Cembalest, to consider the Private


Bank?s views about opportunities and risks in the context of the specific needs and risk tolerance of a


given client.



Risk Management Challenges


The ?managed architecture? structure created some unique challenges. The discretionary


investment management platform in Morgan?s Private Bank was subject to fiduciary standards


governing self dealing and conflicts of interest. Notwithstanding the fact that the ?managed


architecture? model was intended to be Morgan?s way of delivering the best solution to a client, the


generic concern was to protect clients from having their funds directed to an internally managed


fund where a firm would likely make more money while there might be better external options




The ?managed architecture? model placed a greater burden on Morgan to demonstrate it was


making the right decisions. To accomplish this, the Private Bank had a dedicated group that subjected


all internal and external investment products, strategies and vehicles to due diligence. Those that


passed this rigorous vetting process with high marks were added to the Private Bank?s investment


platform. The due diligence group?s reviews of investment products were ongoing and it had the


authority to remove a product from the platform at any time. In addition, the relationship bankers


and investment specialists performed annual reviews of each client?s account to make sure that the


products used in client portfolios were consistent with the goals agreed upon between the firm and




Joseph Regan, head of Risk Management for Asset Management, reported jointly to Morgan?s


Chief Risk Officer, Barry Zubrow, and to Staley (and then Erdoes). Regan, who graduated from Saint


Joseph?s University in Philadelphia, had worked at Morgan for over 20 years. He started in risk


management functions and then spent time in Japan and Hong Kong before becoming the CFO of the


Asset Management business in the late 1990s. While on his second assignment in Asia, Staley asked


him to return to New York to take on the senior risk management role in Asset Management, which


he did in February of 2009 in the middle of the crisis. (See Exhibit 4 for the 2009 Organizational Chart


of Asset Management Risk Management.)








J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009



From an overall Asset Management perspective, Regan?s agenda focused on development of a


market-oriented risk function. He explained, ?We want a risk function that is capable of looking at


the details within our portfolios to understand more about the market-related risks.? Erdoes pointed


out that Asset Management more broadly, and the Private Bank specifically, had begun to evolve to


this model with the 2006 purchase of Highbridge Capital Management, a large hedge fund with a


?market-oriented risk manager? who was a partner with the traders. Regan added:


Within Asset Management, including the Private Bank, management of risk/return profiles


is primarily the responsibility of our portfolio managers. That?s thoroughly instilled in our


fiduciary culture as an investment management firm. I am aware of certain competitors who


have aggressive independent risk management protocols where risk managers are authorized


to ?sanitize? a portfolio, meaning they could hedge a trade or reduce risk tolerances if they


deemed it in the best interest of a client. We have a culture where the fiduciary obligation is


embedded and engrained in the portfolio managers, and we rely on that as our primary




But, we (Morgan?s independent risk management) want to enable independent insight on


the risks being assumed and raise the transparency and awareness of potential unintended


risks. Regardless of whether these risks reside within funds, or client accounts, or even across


our complex of investment strategies, we are seeking to be a second set of eyes partnering with


the portfolio managers.


With respect to the Private Bank, Regan initially identified three goals. The first was to strengthen,


where necessary, the traditional compliance-oriented monitoring that risk management had


performed. In addition to monitoring the issues around fiduciary duty for the ?managed


architecture? model, Regan?s focus included assuring compliance with investment mandates across


all investment teams and products. This included monitoring that clients were obtaining the


investment strategies they had agreed upon with the firm, which was often a product that


incorporated a broader set of portfolio decisions. Additionally, he focused on the governing processes


and support for the risk culture that were necessary to protect Morgan?s reputation through its own


actions, those of the firms it hired to provide investment products, and those of the clients that it


served. Finally, there was a need for ongoing review of the operational risks in the Private Bank; to


make sure that neither the clients nor the firm would suffer from breakdowns in documentation,


clearing, settlement or reporting.


To support the development of independent market-risk analysis, Regan sought to address the


need for a common language for risk within Asset Management. Portfolio managers within the


Private Bank (and across Asset Management more broadly) defined and analyzed risk differently as


was appropriate for their specific investment processes. Regan wanted a way to understand the


investment risk analytics at the institutional level supported by common risk language and


references. He said, ?We want to have a set of metrics that we can rely on to observe changes in risks


within investment portfolios. Regulators, clients and other interested parties, increasingly expect an


independent risk function to have this capability.? Regan also sought to create a mechanism (and


culture) for affording Morgan?s senior decision makers within the business timely access to


comprehensive information on investment risk. This would counter the tendency of larger firms to


compartmentalize information, thereby making it cumbersome to access at the moments when it was


most needed.


Erdoes summarized Regan?s essential roles as ?bridging? the two risk management cultures of


compliance/oversight and market risk awareness.






J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009






The Global Access Portfolios


The first Global Access portfolio, established in 2005b, was among a select few funds that were


managed within the Private Bank. The portfolio?s original purpose was to provide a handful of Latin


American clients with the ?real time? benefits of the Private Bank?s best investment ideas. Initially,


the firm pooled money from these clients and created a fund that it managed on a discretionary basis.


It was soon available to other Morgan clients, including those characterized as ?high net worth.? By


year end 2007, there were $3.5 billion AUM in Global Access. The team consisted of 15 professionalsc


in New York, London and Hong Kong.


Chief Investment Officer Richard Madigan ran Global Access from its inception. Upon receiving


his MBA from New York University in 1990, he worked in investment banking and focused on


emerging markets fixed income, currency and commodities, spending several years in Mexico and


then New York. In 1998, he left emerging markets to become a money manager. In 2004, he became


the strategist for Morgan?s Private Bank in Latin America and a senior member of the Private Bank?s


investment team.


Madigan described the Global Access portfolios as ?dynamic, multi-asset class portfolios.? There


were four key investment strategies within Global Access that were built based on those used by the


Private Bank?s investment strategy team: Balanced, Growth, Wealth Preservation and Hedge Fundonly. The strategies were constrained by broad mandates that defined the proportion of assets


allocated across the main asset classes. For example, the Balanced strategy should have 40% invested


in equities, 40% in fixed income and debt, and 20% in alternative investments; however, tactical


portfolio asset allocations could deviate from these levels by up to 15%. Within these categories, the


Global Access team had the freedom to choose the investments they believed offered the best risk-toreturn characteristics for a particular set of clients. Unlike many investment products, the Global


Access portfolios were not designed to beat market indices or benchmarks. They were designed to


offer investors superior risk-to-return performance through the investment cycle. Georgiy Zhikharev,


head of Global Access risk management, explained:


Our investment process is not benchmark oriented. Rather, it is built around optimizing


risk budget utilization, which we generally view as the percentage of world equity volatility. In


that line of thinking, the ?up/down capture ratios? are linked to the equity markets. For


example, Balanced portfolios are expected to capture 60% of the MSCI World upside, but only


50% of the downside, provided that we are at 100% utilization of the risk budget. This sort of


differential in ?captures? should deliver 55%-60% of equity volatility while capturing 80%-100%


of equity returns over the cycle, and is likely to outperform equities in most cycles. Similarly,


for Growth portfolios we have 75% up/65% down capture targets; and finally, Wealth


Preservation is more like 35% up/25% down. The exception is the Hedge Fund-only strategy,


which is measured against a benchmark: HFRI Fund of Funds: Diversified index. While absolute


levels of capture may differ at various points in the cycle, and will depend upon the level of


risk budget utilization we are running, one thing should be constant: capture of return must be


better than the capture of volatility. The more we can achieve this, the more value we can


deliver from a risk-adjusted perspective.


There were five teams in Global Access, each overseen by a portfolio manager who reported to


Madigan and each was responsible for investment results. The teams were built around specific client


needs, based largely on geography and client segments: Onshore U.S., Onshore Europe, Offshore,


b Established as a Cayman segregated portfolio company and privately offered to select clients.


c 30 by 2010.









J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009



Alternative Asset only and U.S. Mutual Funds. By September of 2010, these five teams managed 23


separate portfolios, each based on one of the four investment strategies and designed to satisfy the


particular needs of a certain set of clients.


Madigan and his five portfolio managers, supported by Zhikharev, made all key investment


decisions for all Global Access portfolios, with Madigan having the final vote. These decisions


included asset class underweights and overweights, passive and active risk budget allocations,


manager selection and tactical rotations. Each portfolio manager was then responsible for translating


those decisions into the investments most appropriate for the strategies in his/her team. Selection of


implementation vehicles, timing of the rotations and cash management were among the portfoliospecific decisions they made.



Risk Management in Global Access


Madigan required each of the Global Access portfolio managers to have a view about the trading


and risk environment. He emphasized:


I am unapologetic as a boss and a colleague when someone does not have a view. You can


change your view every minute, based on information. What you cannot do is say to me, ?this


thing has just happened, what does it mean?? Everybody has to have a view the minute they


walk in the door.


He wrote Market Thoughts, a quarterly newsletter to investors, in which he underlined the


importance of view formation:


There is a degree of humility and staying power that should come with managing money;


you need to know what you can?t know. Markets by definition are uncertain; however, that


does not preclude having a view. The view is essential. So where do we think we are heading?


Madigan expected not only portfolio managers, but also risk managers to have a view too. In


Global Access, he wanted risk managers to serve as strategic partners.


Global Access? risk oversight operated in two teams. The first was the independent oversight


function run by George Lencyk, who was responsible for risk management oversight across all the


investment activities in the Private Bank; he reported to Regan. When Global Access started out, the


independent risk team worked on the initial new product approval and drafted limits for the


portfolio managers. Subsequently, the team monitored trade approvals, product suitability, and


investment performance. It also ensured that the governance processes were sound and compliant


with regulatory standards.


The second team, a new development within the Private Bank, was a precursor to Regan?s broader


goal of evolving the investment risk management function throughout Asset Management: this


positioned risk management as a ?business partner.? From the business risk management team,


Madigan recruited a market-oriented risk professional, Zhikharev, to become a risk advisor to his


team of portfolio managers. Zhikharev, born in Kazan, Russia, was educated at Kazan State


University and earned an MBA in Finance from DePaul University in Chicago. He had had nine


years experience in market risk management when he joined Morgan in 2001. Madigan explained the


rationale behind Zhikharev?s appointment:


I looked really hard for a risk manager. Georgiy was the one. When we were undergoing a


new product approval internally, he was the one guy in the room who was giving me a hard


time, the whole time. ?Can you explain that chart? I really don?t understand this one.? By the


time we walked out, I said we?re going to hire him. He has a passion for markets. What also





J.P. Morgan Private Bank: Risk Management during the Financial Crisis 2008-2009






won me over was that early in his career (1998), Georgiy worked in Moscow with an asset


management company while Russian markets exploded around him. That experience is hugely




Since 2007, Zhikharev and his team of three have worked closely with Madigan and the Global


Access portfolio managers to help them think more deeply about the risks across positions, with the


goal of improving overall returns and protecting the portfolios from major downside shocks.


Zhikharev explained his role:


Allowing any team to run $9 billiond requires a lot of trust. My colleagues in independent


risk management who sit outside the Global Access team don?t necessarily have the proximity


and real time visibility of what trades and risks are being taken. So we want somebody on the


inside looking out for everybody?s interest, and that person is me.


I am not managing portfolios. I serve as a close business partner to portfolio managers. I?m


the team member responsible for keeping portfolios in alignment with both broad Private


Bank-level policies, such as Investment Review Committee process, fund concentration limits,


counterparty exposure limits, bite sizes, etc., as well as Global Access-specific, market-risk


related items such as trade approvals, portfolio risk analysis, positional concentrations, etc.


Market risk is my primary responsibility, but I also liaise with the independent risk team on


Private Bank policies. On one hand, I am there to make sure we are okay w...


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