Was London Whale really a rogue?

Then there's the related logic that says that a loss like the $5.8 billion London Whale loss is just an accident, bad luck, the result of a rogue trader or whatever. Again, I think that's a total misrepresentation of the core problems at global investment banks.

These banks are indeed too big to manage. And they have fully embraced a culture of risk-taking at the same time that they've refused to admit that they can't manage to keep the risk within bounds or make sure that it doesn't spiral into a culture of deception.

Notice that the defense that the CEOs at JPMorgan Chase and Barclays have both offered in the London Whale and Libor scandals blows the accident defense out of the water. (I'm pretty sure that isn't what either bank intended.)

At JPMorgan Chase, Dimon has told investors and Congress that he didn't know that the chief investment office was out of control until the London Whale trade blew up on the bank. JPMorgan Chase admitted to investors this quarter that it had a material weakness of internal controls. Some traders, the bank said, misstated or mispriced positions in order to avoid showing the full extent of their losses. And it wasn't just in the second quarter of 2012. Last week, the bank moved to restate earnings for the first quarter of 2012, as well.

The chief investment office team, the bank's internal investigation said, created a portfolio of derivative positions that "grew to a perilous size with numerous embedded risks that the team didn't understand and were not equipped to manage."

"Didn't understand?" "Were not equipped to manage?" And nobody noticed?

Either Jamie Dimon and the rest of the management team at JPMorgan Chase isn't nearly as competent as Wall Street has said it is -- which would be a serious indictment of banking analysts and conventional wisdom on the Street -- or they are indeed pretty smart men and women who have failed at the impossible task of running a very risky business at an investment banking behemoth that is simply unmanageable. That's a much scarier proposition.

Risk run amok

It gets even scarier when you consider the story line that shows the once conservatively run chief investment office gradually becoming accustomed to taking on more risk, as the managers of that unit worked to turn it into a major profit center for the bank. I don't think this is an isolated occurrence. Managers at many banks apparently no longer believe that traditional, low-risk, bread-and-butter banking generates the level of returns that a bank should earn.

Want to see what the pressure for higher returns produces when it is combined with management that isn't up to the job of running an impossibly complex global investment bank? Take a look at the unfolding Libor scandal.

So far, Barclays has agreed to pay a $450 million fine to settle charges that the bank manipulated the Libor benchmark interest rate used to price everything from mortgages to home-equity loans to derivative contracts used for hedging risk by corporations and governments so that it would look more financially solid to regulators, credit-rating agencies and investors.

How far back does the manipulation go? The Bank of England and the New York Fed, to name just two parties, seem to have stumbled upon the manipulation as early as 2008. Barclay's international documents push the beginning of the manipulation back to 2005.

But the inaction by regulators for four to seven years isn't the most distressing part of the Libor scandal. Libor is calculated daily by the British Bankers' Association as the average interest rate at which 16 big international banks based in London can borrow from each other.

It's just about impossible to imagine, therefore, that Barclays could have manipulated the Libor without the active or at least passive involvement of other banks. That is certainly the message of a memo that Barclays management sent out to the bank's staff after Barclays' settlement with U.S. and U.K. regulators. "As other banks settle with authorities, and their details become public, and various government inquiries shed more light, our situation will eventually be put in perspective," the memo says.

Where will the Libor scandal stop?

In other words, Barclays won't seem quite so culpable because further investigation will reveal that everybody does it. Who's everybody? The New York Times reports that UBS (UBS) is under investigation, but I'm sure the Libor scandal won't stop there.

I don't see any way to argue convincingly that the Libor scandal was just an accident or even that it was just a management failure at a single bank. Replacing Robert Diamond with a better CEO isn't going to fix the problem because the problem is at the heart of the current incarnation of a global investment bank: too big to manage and too addicted to risk.

And if that's indeed the case, there's also no way that the JPMorgan Chase London Whale disaster is just a one-time event. It's central to the way the bank does business.

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And it's about time that the financial markets started treating it that way.

At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any stock mentioned in this post as of the end of March. Find a full list of the stocks in the fund as of the end of March here.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

Stocks mentioned on the previous page include JPMorgan Chase (JPM), Bank of America (BAC) and American International Group (AIG).

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