JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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agitation over underreporting SCP losses, and an “exhaustive” meeting on the SCP, she did not
learn at that time that the CIO London team was mismarking the SCP book.
On March 23, Mr. Iksil estimated in an email that the SCP had lost about $600 million
using midpoint prices and $300 million using the “best” prices, but the SCP reported a daily loss
of only $12 million. On March 30, the last business day of the quarter, the CIO suddenly
reported a daily loss of $319 million, a loss six times larger than any prior day. But even with
that outsized reported loss, a later analysis by the CIO’s Valuation Control Group (VCG) noted
that, by March 31, 2012, the cumulative difference in the SCP’s P&L figures between using
midpoint prices versus more favorable prices totaled $512 million.
On April 10, 2012, the CIO initially reported an estimated daily loss of $6 million, but 90
minutes later, after a confrontation between two CIO traders, issued a new P&L report estimating
a loss of $400 million. That change took place on the first trading day after the whale trades
gained media attention; one CIO trader later said CIO personnel were “scared” at the time to hide
such a large loss. As a result, the SCP internally reported year-to-date losses of about $1.2
billion, crossing the $1 billion mark for the first time.
One result of the CIO’s using more favorable valuations was that two different business
lines within JPMorgan Chase, the Chief Investment Office and the Investment Bank, assigned
different values to identical credit derivative holdings. At one point, the CIO accused the
Investment Bank, which was a counterparty to some of its trades, of damaging the CIO by using
different marks and leaking the CIO’s positions to the marketplace, accusations it later dropped.
Other CIO counterparties also noticed the price differences between the two business lines and
objected to the CIO’s values, resulting in collateral disputes peaking at $690 million. In May,
the bank’s Deputy Chief Risk Officer Ashley Bacon directed the CIO to mark its books in the
same manner as the Investment Bank, which used an independent pricing service to identify the
midpoints in the relevant price ranges. That change in valuation methodology resolved the
collateral disputes in favor of the CIO’s counterparties and, at the same time, put an end to the
CIO’s mismarking.
On May 10, 2012, the bank’s Controller issued an internal memorandum summarizing a
special assessment of the SCP’s valuations from January through April. Although the
memorandum documented the CIO’s use of more favorable values through the course of the first
quarter, and a senior bank official even privately confronted a CIO manager about using
“aggressive” prices in March, the memorandum generally upheld the CIO valuations because, on
their face, the prices generally fell within the daily price range (bid-ask spread) for the relevant
derivatives. The bank memorandum observed that the CIO had reported about $500 million less
in losses than if it had used midpoint prices for its credit derivatives, and even disallowed and
modified a few prices that had fallen outside of the permissible price range (bid-ask spread), yet
found the CIO had acted “consistent with industry practices.”
The sole purpose of the Controller’s special assessment was to ensure that the CIO had
accurately reported the value of its derivative holdings, since those holdings helped determine
the bank’s overall financial results. The Controller determined that the CIO could properly
report a total of $719 million in losses, instead of the $1.2 billion that would have been reported
if midpoint prices had been used. That the Controller essentially concluded the SCP’s losses