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

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That the bank’s Controller found the SCP valuations permissible under bank policy,
industry practice, and generally accepted accounting principles demonstrates how imprecise and
open to manipulation the current process is for valuing credit derivatives. The Controller’s
support for the CIO’s pricing practices, which was further backed by the JPMorgan Chase Task
Force Report, indicates that all of JPMorgan Chase’s lines of business are free to use those same
derivatives pricing practices, without censure. 834
On May 11, 2012, the day after the Controller’s assessment was issued and JPMorgan
Chase disclosed that the SCP’s losses had climbed to $2 billion, the SCP reported internally a
daily loss of another $570 million. 835 That $570 million was the largest single daily loss
reported by the SCP up to that point in 2012. While it may have reflected negative market
developments following the bank’s public filing, it is also possible the CIO used an inflated mark
to take into account the $512 million in unreported losses that had been identified in the
Controller’s assessment. During the May 10 call in which Mr. Dimon disclosed the $2 billion
loss, he stated that he was “not going to make calls every time the number moves around, by
$0.5 billion,” 836
and, in fact, he did not disclose publicly the next day’s loss, even though it
increased the SCP’s reported losses after a single day by another 25%. In July 2012, JPMorgan
Chase restated the SCP’s first quarter losses, pushing the $660 million in losses that would have
been reported in the second quarter back to the first quarter instead.
Liquidity and Concentration Reserves. Even before completing its special assessment
of the SCP marks, in April 2012, the bank’s Chief Financial Officer increased the CIO’s liquidity
reserve fivefold from $33 million to $186 million. 837
The bank told the Subcommittee that it
expanded the reserve, because the SCP had increased its holdings of illiquid credit derivatives,
834
In its 2013 report, the JPMorgan Chase Task Force did not criticize either the CIO VCG or the Controller’s
special assessment for upholding the original SCP marks, explaining: “Individuals working on the review
understood that, although the March 30 trader marks for the Synthetic Credit Portfolio were aggressive, they were
predominantly within the VCG thresholds.” 2013 JPMorgan Chase Task Force Report, at 74. See also id. at 55. In
other words, presuming that the CIO personnel making the marks acted in good faith, the bank viewed the SCP
marks as acceptable, even though they deviated from the midpoint prices by hundreds of millions of dollars and
were used to minimize the CIO’s losses. The Task Force found no fault with either the size of the pricing deviation,
the use of prices at the extreme edge of the bid-ask spread, or the consistent bias in favor of the bank. The Task
Force did criticize the bank for failing “to ensure that the CIO VCG price-testing procedures – a important financial
control – were operating effectively,” noting such “operational deficiencies” as the VCG’s failure to document its
price-testing thresholds and its use of time-consuming manual input procedures. Id., at 96-97. See also id., at 55-
56. The Task Force report also announced formation of a new “CIO Valuation Governance Forum” responsible for
“understanding and managing the risks arising from valuation activities within the CIO and for escalating key issues
to a Firm-wide VCF,” established in 2012 to strengthen the bank’s valuation activities. Id. at 108. But the report
contains no acknowledgement of any of the problems inherent in the derivatives valuation process itself which, in
the case of the whale trades, was easily manipulated to hide substantial losses.
835 See OCC spreadsheet, OCC-SPI-00000298, printed as a Subcommittee chart earlier in this chapter. Numbers do
not reflect restated P&L figures.
836
5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 8, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf.
837
See 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, JPM-
CIO 0003637-654, at 645-646; 4/13/2012 CIO Valuation Summary Memo, March 2012 Month-End Results, OCC-
SPI-00021381-388, at 386 (“For March month end the level of the Liquidity Reserve, which represents the
illiquidity of off-the run positions, was $(186.4)mm.”).