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

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that it was clear the CIO traders were “gaming the system.” 827 The OCC indicated that, by the
end of March, the CIO traders were marking virtually all of the SCP positions at the very edge of
“what they could get away with” and were booking “fictitious profits.” 828
Yet neither the VCG
nor the special assessment raised any objection to the SCP marks. The OCC disagreed that the
SCP marks accurately reflected the fair market value of the SCP’s credit derivatives.
The sole purpose of the Controller’s special assessment was to ensure that the CIO was
accurately reporting the value of its derivative holdings, since those holdings helped determine
the bank’s overall financial results. As part of its assessment, the Controller approved of the
CIO’s failing to include $512 million in losses, which would have led to a 70% increase in the
$719 million in SCP losses that the CIO did report. 829
That the Controller concluded that the
SCP’s losses could legitimately be reported at anywhere between $719 million and $1.2 billion
at the end of March exposes the imprecise, malleable, and potentially biased nature of the credit
derivative valuation process.
The same prices upheld by the Controller had been privately disparaged by the CIO
trader who played a key role in the marking process. In March 2012, Bruno Iksil called the SCP
marks “idiotic.” 830 At another point, he said that his supervisor would have to “decide[ ] what
we show. [B]ecause me, I don’t know anymore.” 831
That type of undisciplined pricing process
should not have received the bank’s seal of approval.
The bank’s Controller could have but did not criticize the CIO’s valuation process or
modify the reported derivative values, 832 based upon the “aggressive” nature of the prices, their
failure to reflect the prices used in executed trades, or their role in minimizing the SCP losses.
Instead, the bank’s Controller found that the CIO’s actions were “consistent with industry
practices” and acceptable under bank policy. 833
The Controller’s conclusion is all the more
perplexing in light of the fact that the original authorization for the CIO to trade in derivatives
indicated that the CIO would follow the Investment Bank’s lead on prices, since it was often a
market-maker. If the CIO had done so, it would have effectively used the midpoint prices, and
the price deviation between the CIO and Investment Bank would have been effectively
eliminated. The Controller also failed to note that the CIO was not using the Investment Bank’s
marks, contrary to the authorizing document, and that the two lines of business had very different
valuations for the same credit derivatives.
827 Subcommittee interview of Michael Kirk, OCC (8/22/2012).
828 Id.
829 JPMorgan Chase later restated its financial results to attribute $660 million in additional losses to the SCP by the
end of March. See 7/13/2012 “Form 8-K,” JPMorgan Chase & Co., at 2,
http://files.shareholder.com/downloads/ONE/2261741819x0xS1193125-12-301391/19617/filing.pdf.
830 3/16/2012 transcript of a recorded telephone conversation between Julien Grout, CIO, and Bruno Iksil, CIO,
JPM-CIO-PSI-A 0000162.
831 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Julien Grout, CIO, JPM-CIO 0003515-541,
at 541.
832 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 8,
JPM-CIO 0003637-654, at 644 (“any difference between front office mark and the mid-market price may be
adjusted, at CIO VCG’s discretion”).
833 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at JPM-CIO-
0003646. See also 2013 JPMorgan Chase Task Force Report, at 55, 74.