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

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Despite the extent and number of these collateral disputes generating questions about the
CIO’s valuation process in March and April 2012, Ms. Drew and other JPMorgan personnel told
the Subcommittee that the bank remained unaware at that time of the deliberate mismarking of
the CIO’s books.
On April 27, 2012, JPMorgan Chase sent its Deputy Chief Risk Officer Ashley Bacon to
the London CIO office to examine the marks in the SCP book. Mr. Bacon told the
Subcommittee that, sometime in May, he required the CIO to mark its positions at the midpoint
and to use the same independent service used by the Investment Bank to value its derivative
positions. 800 This change in valuation methodology erased the differences between the CIO and
Investment Bank valuations and ultimately resolved the collateral disputes with Morgan Stanley
and other counterparties by the end of May. 801
D. Reviewing the SCP Valuations
The Valuation Control Group (VCG) of the Chief Investment Office was charged with
reviewing the accuracy of the CIO’s marks at both month-end and quarter-end. In April 2012,
the CIO VCG conducted its regular review of the SCP book as of the last day in March. 802 That
same month, the bank conducted a special, four-month assessment of the CIO’s P&L figures,
from January to April 2012, essentially reviewing the VCG’s work. According to the bank, this
special assessment was performed by “a combination of individuals from CIO Finance, the
Firm’s internal accounting department, valuation experts from the Investment Bank, and
others.” 803 The effort was headed by the bank’s Controller, Shannon Warren. 804
The assessment
uncovered evidence that the CIO, rather than marking at the midpoint, had used more
“advantageous” prices, had exceeded some variance limits, and used increasingly “aggressive”
marks over the course of the quarter. It also reported that, by the end of the quarter, the CIO had
reported $512 million less in losses than it would have reported using midpoint prices. At the
same time, because the CIO had generally used prices that fell within the relevant bid-ask spread
for the derivatives being valued, the Controller validated the CIO’s quarter-end credit derivative
marks as “consistent with industry practices” and acceptable under bank policy, and offered no
criticism of its valuation practices.
VCG Deficiencies. At the time that the VCG conducted its regular review of the SCP
prices and the Controller’s office conducted its special assessment, the CIO VCG itself was
under criticism. On March 30, 2012, JPMorgan Chase’s internal audit group released a report
criticizing the VCG, noting among other problems that it was using unreviewed risk models,
unsupported and undocumented pricing thresholds, inadequate procedures for evaluating pricing
800
Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).
801
Id. See also Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012) (Mr. Braunstein:
“Ashley Bacon abandoned the traders marks in early May because we directed them to mark at the mid. The
collateral disputes were noise in the markets that could be problematic.”).
802
See 2013 JPMorgan Chase Task Force Report, at 54.
803
Id. at 73.
804
Ms. Warren issued the memorandum summarizing the assessment. See 5/10/2012 JPMorgan Chase Controllers
special assessment of CIO’s marks, January to April 2012, JPM-CIO 0003637-654.