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

More documents

Recommendations

Info

106 B. Mismarking the CIO Credit Derivatives The mismarking of the SCP credit derivatives appears to have begun in late January, accelerated in February, and peaked in March 2012. Recorded telephone conversations, instant messaging exchanges, and a five-day spreadsheet indicate that key CIO London traders involved with the marking process were fully aware and often upset or agitated that they were using inaccurate marks to hide the portfolio’s growing losses. (1) Mismarking Begins On January 31, 2012, CIO trader Bruno Iksil, manager of the Synthetic Credit Portfolio, made a remark in an email to his supervisor, Javier Martin-Artajo, which constitutes the earliest evidence uncovered by the Subcommittee that the CIO was no longer consistently using the midpoint of the bid-ask spread to value its credit derivatives. Mr. Iksil wrote that, with respect to the IG9 credit index derivatives: “we can show that we are not at mids but on realistic level.” 648 A later data analysis conducted by the bank’s Controller reviewing a sample of SCP valuations suggests that, by the end of January, the CIO had stopped valuing two sets of credit index instruments on the SCP’s books, the CDX IG9 7-year and the CDX IG9 10-year, near the midpoint price and had substituted instead noticeably more favorable prices. 649 This change in the CIO’s pricing practice coincided with a change in the SCP’s profitloss pattern in which the Synthetic Credit Portfolio began experiencing a sustained series of daily losses. The SCP book lost money on 17 of 21 business days in January, reporting just four profitable days. 650 By month-end, not only had the book reported losses totaling $100 million, but there was not a single day in January when the book was cumulatively in the black. 651 In addition, the book lost money on nine business days in a row at the end of January, producing collective losses of $81 million. 652 February was equally bleak, losing money on 15 of 21 business days, including on seven consecutive business days at the end of the month. 653 March continued the pattern, losing money on 16 of 22 business days, including a string of losses -- 15 In this regard, VCG is responsible for calculating / monitoring these reserves and consulting with the business on such estimates ….”); Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 648 1/31/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “hello, quick update in core credit…,” JPM-CIO-PSI 0001229 (Mr. Iksil: “as to IG9, things look much better. Not that we are immune but we can show that we are not at mids but on realistic level.”). 649 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 17, JPM-CIO-0003637-654, at 653, excerpted in charts below. The report showed that the two prices used by the CIO deviated from the midpoint prices by more than one basis point and produced prices more favorable to the CIO. The IG9 7-year credit index was priced at 102.000, when the midpoint price was 103.500; the IG9 10-year index was priced at 119.500 when the midpoint price was 120.750. Id. at 653. For more information about credit indices, see Chapter II. 650 See OCC spreadsheet, OCC-SPI-00000298, reprinted below. Numbers do not reflect restated P&L figures. 651 Id. 652 Id. 653 Id.
107 of the last 16 business days -- at the end of the month. 654 April and May were more of the same. 655 The following chart, which was prepared by the Subcommittee using daily SCP P&L data supplied by the OCC, sets out the daily profit-loss figures reported internally by the CIO to bank management from January through mid-May 2012. 656 654 Id. 655 Id. 656 See OCC spreadsheet, OCC-SPI-00000298. Numbers do not reflect restated P&L figures. While most P&L numbers in January likely used midpoint prices to calculate the value of the book’s derivatives, the remaining P&L figures likely incorporated the more favorable prices used by the CIO from late January to mid-May 2012.
Page 1 and 2:
United States Senate PERMANENT SUBC
Page 3 and 4:
JPMORGAN CHASE WHALE TRADES: A CASE
Page 5 and 6:
(a) Background ....................
Page 7 and 8:
JPMORGAN CHASE WHALE TRADES: A CASE
Page 9 and 10:
materials and reports on the whale
Page 11 and 12:
(2) Hiding Losses 5 In its first fo
Page 13 and 14:
7 The ability of CIO personnel to h
Page 15 and 16:
9 incorrect information, and at oth
Page 17 and 18:
11 “fully aware” of its activit
Page 19 and 20:
13 activities to continue, includin
Page 21 and 22:
15 Senior bank management was also
Page 23 and 24:
17 specified level; and requiring d
Page 25 and 26:
19 principal bank subsidiaries are
Page 27 and 28:
to assuming that post in February 2
Page 29 and 30:
consisted of stressed or distressed
Page 31 and 32:
25 commuted to his job in London. 8
Page 33 and 34:
27 banks’ deposits, the OCC is th
Page 35 and 36:
29 holding down interest rates, the
Page 37 and 38:
31 combine them into a single dolla
Page 39 and 40:
33 index known as the “XO” inde
Page 41 and 42:
III. INCREASING RISK 35 In 2005, JP
Page 43 and 44:
37 derivatives was unusual for a CI
Page 45 and 46:
39 provide information to the agenc
Page 47 and 48:
Source: Replication of Subcommittee
Page 49 and 50:
43 costly if they do occur. 234 JPM
Page 51 and 52:
45 the SCP was expected to gain $1
Page 53 and 54:
47 bank in those scenarios. 275 Tha
Page 55 and 56:
49 would not function as a hedge at
Page 57 and 58:
earish. 308 According to Mr. Macris
Page 59 and 60:
53 Subcommittee for more complete R
Page 61 and 62: 55 until after the OCC began examin
Page 63 and 64: 57 (5) SCP Trader Compensation SCP
Page 65 and 66: The compensation data for both Mr.
Page 67 and 68: the CIO to protect its $350 billion
Page 69 and 70: 63 that CIO would exit the syntheti
Page 71 and 72: 2012, Mr. Iksil reported internally
Page 73 and 74: 67 Martin-Artajo, Mr. Macris did no
Page 75 and 76: 69 20.5 Bln but the current model u
Page 77 and 78: 71 Of the four scenarios laid out i
Page 79 and 80: 73 during a market rally so, accord
Page 81 and 82: 75 Buy protection on the tightening
Page 83 and 84: 77 asked the OCC about those losses
Page 85 and 86: 79 derivatives and incurring even m
Page 87 and 88: 81 Drew he wanted to wait until the
Page 89 and 90: 83 2012, Mr. Iksil warned his super
Page 91 and 92: poor the SCP recordkeeping was, but
Page 93 and 94: 87 The order to stop trading preven
Page 95 and 96: Source: See 07/16/2012 FDIC present
Page 97 and 98: positions in newly issued credit in
Page 99 and 100: 93 In another context, Mr. Dimon wa
Page 101 and 102: 95 order to be substantiated. In ad
Page 103 and 104: 97 agitation over underreporting SC
Page 105 and 106: A. Background 99 (1) Valuing Deriva
Page 107 and 108: which it holds a concentrated block
Page 109 and 110: 103 market making groups in the Inv
Page 111: 105 provide his judgment and estima
Page 115 and 116: 109 The SCP had never before experi
Page 117 and 118: 111 Evidence indicates that the CIO
Page 119 and 120: 113 showed that the unreported loss
Page 121 and 122: 115 that the bank’s internal inve
Page 123 and 124: 117 daily loss of $43 million and a
Page 125 and 126: 119 On the same call, Mr. Martin-Ar
Page 127 and 128: 121 Mr. Martin-Artajo: “No, no, n
Page 129 and 130: 123 showing the losses, Ms. Drew to
Page 131 and 132: 125 trades using the Investment Ban
Page 133 and 134: 127 Mr. Macris: “… Javier has,
Page 135 and 136: 129 Mr. Pinto: “Ok. And you think
Page 137 and 138: 131 to the portfolio’s enormous s
Page 139 and 140: 133 “In terms of the worse case s
Page 141 and 142: 135 point in the year. The cumulati
Page 143 and 144: 137 Subcommittee that the CIO did n
Page 145 and 146: 139 Chief Investment Office Collate
Page 147 and 148: sources, and inadequate procedures
Page 149 and 150: 143 CDX.NA.IG 0-3% S09 10Y 60.750 6
Page 151 and 152: 145 million before adjustment to th
Page 153 and 154: 147 “The Firm believes that its v
Page 155 and 156: 149 That the bank’s Controller fo
Page 157 and 158: E. Admitting the Mismarking 151 Som
Page 159 and 160: 153 The bank told the Subcommittee
Page 161 and 162: 155 In the case of the bank’s CRM
Page 163 and 164:
157 The bank’s reliance on Ms. Dr
Page 165 and 166:
159 For both the bank and its busin
Page 167 and 168:
161 breaches, bank documents indica
Page 169 and 170:
163 “[Mr. Zubrow] bears significa
Page 171 and 172:
usiness. 922 165 As a result, bank
Page 173 and 174:
167 period of time to a certain deg
Page 175 and 176:
169 management team in London. 941
Page 177 and 178:
171 Assets (RWA) results for the CI
Page 179 and 180:
173 Portfolio “maintained its ups
Page 181 and 182:
175 On January 16, 2012, the CIO’
Page 183 and 184:
177 The Subcommittee could identify
Page 185 and 186:
chief market risk officer in London
Page 187 and 188:
181 In addition, the Subcommittee w
Page 189 and 190:
Value-at-Risk 183 Value-at-Risk for
Page 191 and 192:
185 At the end of 2011, the SCP con
Page 193 and 194:
187 The newest VaR model “resulte
Page 195 and 196:
189 As discussed earlier and as out
Page 197 and 198:
191 Irvin Goldman, and Peter Weilan
Page 199 and 200:
“Hoping that the model is somehow
Page 201 and 202:
Mr. Bangia: Um hum. 195 Mr. Hagan:
Page 203 and 204:
197 allowed to categorize them in o
Page 205 and 206:
199 derivatives have to be marked-t
Page 207 and 208:
201 The email included a chart, exc
Page 209 and 210:
203 According to the JPMorgan Chase
Page 211 and 212:
205 of several months, exceeding th
Page 213 and 214:
207 CIO Mark-to-Market CSW10% Breac
Page 215 and 216:
209 In early December 2011 these st
Page 217 and 218:
211 advisories, or simply not doing
Page 219 and 220:
213 have in the IB [Investment Bank
Page 221 and 222:
management. 1195 215 While each of
Page 223 and 224:
217 Beginning in January and contin
Page 225 and 226:
219 experts. 1201 During the period
Page 227 and 228:
221 (1) 2006-2009: Minimizing OCC O
Page 229 and 230:
223 CIO management needed to “doc
Page 231 and 232:
225 risk personnel criticized the O
Page 233 and 234:
227 bank reportedly spent $1 billio
Page 235 and 236:
229 understanding: “We were infor
Page 237 and 238:
231 basic reports on a timely basis
Page 239 and 240:
233 report provided the OCC with we
Page 241 and 242:
235 apparent in contemporaneous ban
Page 243 and 244:
237 (1) Providing OCC with Limited
Page 245 and 246:
239 Subcommittee that the bank’s
Page 247 and 248:
241 breaching its risk limits. In a
Page 249 and 250:
243 that the CIO may have been over
Page 251 and 252:
245 On May 9, 2012, the OCC held a
Page 253 and 254:
247 losses, litigation etc).” 140
Page 255 and 256:
249 Secondly, the OCC examination t
Page 257 and 258:
F. Analysis 251 The whale trades pr
Page 259 and 260:
y the bank were incomplete, contain
Page 261 and 262:
255 When asked in a May 10 call wit
Page 263 and 264:
257 of the Volcker Rule, quoting le
Page 265 and 266:
259 reporting. All of those positio
Page 267 and 268:
261 that bank executives were evalu
Page 269 and 270:
(1) Rule 10b-5 263 Materiality. Dis
Page 271 and 272:
265 (2) Section 17(a) of the Securi
Page 273 and 274:
267 At the same time, as described
Page 275 and 276:
269 (2) Mischaracterizing SCP as
Page 277 and 278:
Synthetic Credit Portfolio was in
Page 279 and 280:
273 had increased in size since Jan
Page 281 and 282:
275 respond to regulators’ questi
Page 283 and 284:
277 Scenario Analysis Showed SCP Wa
Page 285 and 286:
279 Source: 2/2012 “CIO February
Page 287 and 288:
281 Source: 4/11/2012 email from Jo
Page 289 and 290:
283 During his interview, the Subco
Page 291 and 292:
285 “The synthetic credit book, a
Page 293 and 294:
mitigating hedging activities,” m
Page 295 and 296:
289 (6) Omitting VaR Model Change A
Page 297 and 298:
291 recast the CIO’s VaR-95 total
Page 299 and 300:
293 and accompanying earnings call
Page 301 and 302:
295 Source: 2/2012 presentation sli
Page 303 and 304:
297 The May 10 10-Q reported that a
Page 305 and 306:
299 was not, included in the bank
Page 307:
301 When the SCP’s massive trades
show all

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

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?