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

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disputes narrowed, it meant that the bank’s marks were getting closer to their counterparties’ marks (and closer to the midpoints of the bid-offer spreads where the values had historically been marked). As shown in the chart below, the collateral disputes did narrow in early May, apparently due to a re-emphasis on the CIO marks at the request of the bank’s CEO. 138
139 Chief Investment Office Collateral Disputes - April 20-May 23, 2012 Date Total of CIO Collateral Disputes Largest Counterparty Difference Counterparty of Largest Dispute 4/20/2012 784 $ 520 million $ 115 million Morgan Stanley 05/02/2012 785 $ 182 million $ 55 million Morgan Stanley 05/03/2012 786 $ 194 million $ 57 million Morgan Stanley 05/04/2012 787 $ 203 million $ 61 million Morgan Stanley 05/07/2012 788 $ 212 million $ 61 million Morgan Stanley 05/08/2012 789 $ 144 million $ 54 million Morgan Stanley 05/09/2012 790 $ 120 million $ 58 million Morgan Stanley 05/10/2012 791 $ 66 million $ 46 million Morgan Stanley 05/11/2012 792 $ 69 million $ 27 million Morgan Stanley 05/14/2012 793 $ 156 million $ 46 million Morgan Stanley 05/15/2012 794 $ 152 million $ 110 million DBKAG 05/17/2012 795 $ 42 million $ 27 million Morgan Stanley 05/21/2012 796 $ 25 million $ 32 million Morgan Stanley 05/23/2012 797 ($ 29) million $ 17 million Morgan Stanley 05/24/2012 798 ($ 29) million $ 17 million Morgan Stanley 05/25/2012 799 $ 25 million $ 39 million Morgan Stanley Source: JPMorgan Chase and OCC documents cited in the above footnotes. 784 See 4/20/2012 email from John Hogan to Douglas Braunstein, JPMorgan Chase, “Collateral Disputes,” JPM-CIO 0003597, at 3598. The largest disputed position was the iTraxx Main S09 10 year 22-100 tranche. 785 See 5/6/2012 email from Paul Bates, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Thursday 3 rd ,” JPM- CIO-PSI 0014195. 786 See 5/6/2012 email from Paul Bates, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Thursday 3 rd ,” JPM- CIO-PSI 0014195. 787 See 5/7/2012 email from Paul Bates, JPMorgan Chase, to Phil Lewis, CIO, and others, “CIO Credit Collateral differences as of COB Friday 4 th ,” JPM-CIO-PSI 0008878. 788 See 5/8/2012 email from Paul Bates, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Monday 7 th ,” JPM-CIO- PSI 0014779. 789 See 5/9/2012 email from Hema Coombes, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB [Tues]day 8 th including 2 day differences against Morgan Stanley,” JPM-CIO-PSI-H 0002712-717. 790 See 5/10/2012 email from Hema Coombes, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, Ina Drew, JPMorgan Chase, and others, “CIO Credit Collateral differences as of COB Wednesday 9 th May,” JPM- CIO-PSI 0014797. 791 See 5/11/2012 email from Phil Lewis, CIO, to Jamie Dimon, Douglas Braunstein, John Hogan, Ina Drew, JPMorgan Chase, and others, “CIO Credit Collateral differences as of COB Thursday 10 th May,” JPM-CIO-PSI 0017989. 792 See 5/14/2012 email from Phil Lewis, CIO, to Jamie Dimon, Douglas Braunstein, John Hogan, Ina Drew, JPMorgan Chase, and others, “CIO Credit Collateral differences as of COB Friday 11 th May,” JPM-CIO-PSI 0032235. 793 See 5/15/2012 email from Phil Lewis, CIO, to Jamie Dimon, Douglas Braunstein, John Hogan, Ina Drew, JPMorgan Chase, and others, “CIO Credit Collateral differences as of COB Monday 14 th May,” JPM-CIO-PSI 0018281. 794 See 5/16/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00114068, at 11. 795 See 5/22/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089239, at 15. 796 See 5/23/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089295, at 18. 797 See 5/24/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00088644, at 18. Negative number implies that JPM marks are too low. Positive number implies that the marks are too high. 798 See 5/25/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089351, at 18. Negative number implies that JPM marks are too low. Positive number implies that the marks are too high. 799 See 5/29/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089407, at 18.
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United States Senate PERMANENT SUBC
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JPMORGAN CHASE WHALE TRADES: A CASE
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(a) Background ....................
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JPMORGAN CHASE WHALE TRADES: A CASE
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materials and reports on the whale
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(2) Hiding Losses 5 In its first fo
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7 The ability of CIO personnel to h
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9 incorrect information, and at oth
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11 “fully aware” of its activit
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13 activities to continue, includin
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15 Senior bank management was also
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17 specified level; and requiring d
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19 principal bank subsidiaries are
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to assuming that post in February 2
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consisted of stressed or distressed
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25 commuted to his job in London. 8
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27 banks’ deposits, the OCC is th
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29 holding down interest rates, the
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31 combine them into a single dolla
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33 index known as the “XO” inde
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III. INCREASING RISK 35 In 2005, JP
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37 derivatives was unusual for a CI
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39 provide information to the agenc
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Source: Replication of Subcommittee
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43 costly if they do occur. 234 JPM
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45 the SCP was expected to gain $1
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47 bank in those scenarios. 275 Tha
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49 would not function as a hedge at
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earish. 308 According to Mr. Macris
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53 Subcommittee for more complete R
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55 until after the OCC began examin
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57 (5) SCP Trader Compensation SCP
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The compensation data for both Mr.
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the CIO to protect its $350 billion
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63 that CIO would exit the syntheti
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2012, Mr. Iksil reported internally
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67 Martin-Artajo, Mr. Macris did no
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69 20.5 Bln but the current model u
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71 Of the four scenarios laid out i
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73 during a market rally so, accord
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75 Buy protection on the tightening
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77 asked the OCC about those losses
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79 derivatives and incurring even m
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81 Drew he wanted to wait until the
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83 2012, Mr. Iksil warned his super
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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 and 112: 105 provide his judgment and estima
Page 113 and 114: 107 of the last 16 business days --
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: 137 Subcommittee that the CIO did n
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
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189 As discussed earlier and as out
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191 Irvin Goldman, and Peter Weilan
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“Hoping that the model is somehow
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Mr. Bangia: Um hum. 195 Mr. Hagan:
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197 allowed to categorize them in o
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199 derivatives have to be marked-t
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201 The email included a chart, exc
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203 According to the JPMorgan Chase
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205 of several months, exceeding th
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207 CIO Mark-to-Market CSW10% Breac
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209 In early December 2011 these st
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211 advisories, or simply not doing
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213 have in the IB [Investment Bank
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management. 1195 215 While each of
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217 Beginning in January and contin
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219 experts. 1201 During the period
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221 (1) 2006-2009: Minimizing OCC O
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223 CIO management needed to “doc
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225 risk personnel criticized the O
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227 bank reportedly spent $1 billio
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229 understanding: “We were infor
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231 basic reports on a timely basis
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233 report provided the OCC with we
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235 apparent in contemporaneous ban
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237 (1) Providing OCC with Limited
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239 Subcommittee that the bank’s
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241 breaching its risk limits. In a
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243 that the CIO may have been over
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245 On May 9, 2012, the OCC held a
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247 losses, litigation etc).” 140
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249 Secondly, the OCC examination t
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F. Analysis 251 The whale trades pr
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y the bank were incomplete, contain
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255 When asked in a May 10 call wit
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257 of the Volcker Rule, quoting le
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259 reporting. All of those positio
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261 that bank executives were evalu
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(1) Rule 10b-5 263 Materiality. Dis
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265 (2) Section 17(a) of the Securi
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267 At the same time, as described
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269 (2) Mischaracterizing SCP as
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Synthetic Credit Portfolio was in
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273 had increased in size since Jan
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275 respond to regulators’ questi
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277 Scenario Analysis Showed SCP Wa
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279 Source: 2/2012 “CIO February
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281 Source: 4/11/2012 email from Jo
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283 During his interview, the Subco
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285 “The synthetic credit book, a
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mitigating hedging activities,” m
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289 (6) Omitting VaR Model Change A
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291 recast the CIO’s VaR-95 total
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293 and accompanying earnings call
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295 Source: 2/2012 presentation sli
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297 The May 10 10-Q reported that a
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299 was not, included in the bank
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301 When the SCP’s massive trades
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JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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