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

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Mr. Iksil’s comment may have meant that he did not want to use a mark that was too far from the
midpoint of the bid-ask spread, since another party would be contesting the validity of the mark.
Mr. Buraya commented in part: “I can imagine the next headline ‘JP Morgan is hoarding
cash. They are not marking the stuff in the right place.’ I can see it happening.” Mr. Iksil
replied in part: “and if they want us to line 500 [million] lower, so be it. So be it. Right?
There’s nothing wrong with it.” 772
Mr. Iksil’s response demonstrates, again, the malleable
nature of the bank’s credit derivative valuation process in which he viewed a half a billion dollar
downward adjustment of the SCP book’s value as a possible outcome if management wanted it.
C. Ending the Mismarking
The CIO’s mismarking of the SCP appears to have finally ended in May 2012, as part of
a concerted effort by JPMorgan Chase to resolve a series of collateral valuation disputes with
CIO counterparties that began in March and intensified throughout April. 773
The disputes
apparently arose, in part, as the CIO’s counterparties became aware that the CIO was marking
the value of its derivative holdings using much more favorable numbers than JPMorgan Chase’s
Investment Bank did for the same derivatives. In May, JPMorgan Chase ordered the CIO to
begin using the same valuation methodology as the Investment Bank for its credit derivatives.
That change in valuation methodology erased the difference between the CIO and Investment
Bank marks, validated the complaints of the counterparties, and led to the CIO’s resolving the
collateral disputes with dollar adjustments in the favor of those counterparties.
Collateral disputes arise when there is disagreement between parties over the value of a
derivative position, especially when the parties have agreed to post cash collateral based upon
the fluctuating value of a position in which each holds the opposite side. Ina Drew told the
marking where we see it. We give it to Jason. So we prove that 10 days before month end, we were where we were
saying we were. Yeah? … It would be nice … otherwise I can tell you, they might actually, without us saying
anything, they might actually come and ask on Monday ‘ok, we want to see where the market is and what you guys
have.’” Mr. Iksil: “Yeah, that’s why, that’s why we need to be not too stretched on the marks, you know, so that
whatever adjustments there are, we can do it, you see? But they have to provide, you know, marks with a proper
data, you see?” Mr. Buraya: “No I mean, exactly. I totally agree. That’s, that’s why it is important to agree with
Jason …. Better to be prepared and not diplomatically correct.” Mr. Iksil: “…and if they want us to line 500
[million] lower, so be it. So be it. Right? There’s nothing wrong with it. But we have to address the problem,
right?”). See also “JPMorgan restates first-quarter results, citing trader marks,” Reuters (7/13/2012)
http://www.reuters.com/article/2012/07/13/us-jpmorgan-loss-restatement-idUSBRE86C0FR20120713.
772 Id.
773 See 4/20/2012 email from Mark Demo, JPMorgan Chase, “Largest OTC Collateral Call Dispute Report plus
Update on Collateral Disputes Reported to Supervisors,” JPM-CIO 0003590-596, at 592. See also 4/20/2012 email
from Mark Demo, JPMorgan Chase, to John Wilmot, CIO, and others, “Largest OTC Collateral Call Dispute Report
plus Update on Collateral Disputes Reported to Supervisors,” JPM-CIO-PSI-H 0000141-0151, at 0142 (“This is a
weekly report that we in IB Collateral produce that reflects the 10 largest collateral disputes for the week. You
should know that in our top 10 this week, we have quite a few disputes that are largely driven by mtm [mark to
market] differences on CIO London trades. If I look at the total mtm differences across the CIO book facing the G-
15 – the mtm difference totals over $500MM. … The collateral team also provided a time series which shows the
overall difference growing through March to approx[imately] $500mm at March month end. March month end was
tested as satisfactory by VCG.”). This email was forwarded to Ina Drew and Irvin Goldman, CIO, on 4/23/2012.
See also 4/23/2012 email from Ina Drew to Irvin Goldman, CIO, “Largest OTC Collateral Call Dispute Report plus
Update on Collateral Disputes Reported to Supervisors,” JPM-CIO-PSI-H 0000141-151, at 141.