JPMorgan’s London Whale review: Inside job

JPMorgan CEO Jamie Dimon

FORTUNE — Early on in the report on JPMorgan Chase’s ill-fated $6 billion derivatives trading loss, the authors make it clear how culpable they believe CEO Jamie Dimon is: Not very.

On page 8 of the report the authors write, “The Task Force’s views regarding firm chief executive officer Jamie Dimon are consistent with the conclusions he himself has reached with respect to the [London Whale] portfolio.”

If that sounds a little bit like suck-up, it might very well be. Dimon is, afterall, the chief author’s direct boss.

JPMorgan (JPM), and Dimon in particular, have come under a lot of scrutiny in the wake of the revelation of the London Whale and the fact that the bank had a largely unknown division making huge trading bets. On Wednesday, the firm released two reports detailing what went wrong at the firm in the run-up to the multi-billion dollar loss. The bank has already agreed to revamp its risk controls in settlements with bank regulators. JPMorgan hopes the reports will finally put the affair behind it.

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But legal and shareholder governance experts say the reports only raise more questions. The biggest one: Why did JPMorgan decide to do its review itself? Experts say most firms in a similar situation would have handed over the job of investigating what went wrong to an outside law firm or former prosecutor.

“It’s incomprehensible to me that they did these reports internally,” says Harvey Pitt, a former chairman of the Securities and Exchange Commission who is now head of Kalorama, a consulting firm that also conducts corporate investigations, and has read the reports. “It’s like asking Joe Paterno to do the Penn State [sexual abuse] investigation instead of [former FBI director] Louis Freeh.”

Even more puzzling, Pitt and others say, is why Dimon would have chosen Michael Cavanagh, a top JPMorgan executive and by all accounts a chief lieutenant of the CEO, to head up the review of what went wrong at the company. A second report, which looks solely at the behavior of the board, was similarly prepared by members of the board.

“I think Dimon has been a spectacular CEO, but having picked Cavanagh to do this strikes me as potentially foolish in the extreme,” says Pitt. “The only reason you do a review this way is because you don’t want to find anything unduly damaging.”

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Indeed, much of the blame placed by the report is on lower level employees or executives who have already exited the firm. Barry Zubrow, JPMorgan’s former risk officer, gets singled out. But Zubrow has left the firm and was on his way out even before the London Whale losses occurred. Another example where the reports find fault: An unnamed overworked staffer in London copied and pasted the wrong figures into an Excel spreadsheet, throwing the firm’s risk models out of whack.

The London Whale losses have led to a management shake-up at JPMorgan. One of the beneficiaries of that was Cavanagh. Last summer, he was elevated to co-head of the firm’s investment banking division.

A JPMorgan spokesman declined to comment on why the firm didn’t hire an outside investigator. Both the board and the firm used outside law firms in preparing the reports. One of the lawyers JPMorgan consulted was Bill McLucas of WilmerHale, a former SEC official who conducted an independent review of Enron.

Not everyone is critical, however. Simon Lorne, who is the co-chair of the Stanford Directors College and a former general counsel of the SEC, says he would have advised JPMorgan to do the same thing in these circumstances. He says regulators are reviewing the case as well, and the fact that the review resulted in the firm docking Dimon’s pay adds credibility to the report. “This was an opportunity for the bank to present the case as they see it,” says Lorne. “I don’t think an independent review at this stage would have added that much.”

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And Wall Street doesn’t have a great recent history with outside reviews either. JPMorgan and other banks recently shut down external reviews of their foreclosure practices, agreeing instead to pay a collective $8.5 billion fine. The reviews have been widely criticized as expensive and flawed.

In JPMorgan’s report on the London Whale, Dimon comes in for some criticism. The report says the Dimon should have “better tested” the information he was getting from his executives. But it also says Dimon was right to rely on his officers to deal with any concerns they had themselves or to bring them up independently with him. The report commends Dimon, saying he “responded forcefully.”

Similarly, the report prepared by the board concludes that the board did little wrong. The facts of the case “do not imply that practices or processes in place in 2012 fell below the standard required of directors or caused the CIO losses.”

Pitt, however, says he is skeptical of those conclusions. He says the fact that the firm used outside law firms to prepare the reports doesn’t make them any less biased, as long as JPMorgan employees were directing the review. He says he would agree with the review if it was just of a trading strategy. But he says the point of the review should have been to determine how the firm got into the mess and how risk models that were supposed to protect the firm got dismantled. “[The report] attempts to contain and limit the fall-out of an event that was initially headed incredibly badly,” says Pitt.

Michael Pryce-Jones, a senior policy analyst at Change to Win, a Washington-based shareholder group that owns shares of JPMorgan and has been pushing for changes on the board, also says the reports fall short. He says the same criticism that the report puts on Zubrow should have been place on the board’s risk committee. Pryce-Jones has called for a number of the members of the risk committee to resign from the board.

John Coffee, a professor at Columbia Law School, says he, too, finds it odd that the review on such a high profile event was conducted internally. “It’s unusual,” says John Coffee, a professor at Columbia Law School. “But it’s a lot cheaper to do it in house.”

In this case, JPMorgan may have gotten its results because it didn’t pay for them.

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