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

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primarily credit tranches in “off-the run” – or older – credit indices. As the CIO CFO John
Wilmot explained to Mr. Dimon and Mr. Braunstein:
“Credit Tranche markets have always been considered less liquid (compared to
Index markets) and Liquidity reserves are therefore computed and taken.
However, in the past, the Liquidity Reserve associated with these 6 Series-9
Tranche positions was not taken because their markets were deemed sufficiently
liquid. The additional +$155 Million Liquidity Reserve was taken due to the
inclusion of these 6 Series-9 tranche positions; this reflects the market’s reduced
liquidity.” 838
When asked about the reserve, CIO head Ina Drew professed not to know its purpose.
She told the Subcommittee that in December 2011, a “$30 million reserve was taken by finance
at year-end against the position. I don’t know what kind of reserve it was, exactly. There hadn’t
been reserves previously. This was probably a liquidity reserve.” 839
The CIO’s Valuation Control Group (VCG) had the initial responsibility for calculating
the CIO’s liquidity and concentration reserves and monitoring them to ensure their adequacy,
taking into account such factors as whether the CIO maintained “significant” or “concentrated”
positions and did so in markets that were “less liquid.” 840 Mr. Braunstein, by virtue of his
position as Chief Financial Officer, had the responsibility for approving the establishment and
size of the reserves. 841
Liquidity and concentration reserves have a direct impact on financial results, since they
subtract, dollar for dollar, from reported revenues. The size of the SCP reserve would, thus,
presumably be of interest to CIO and bank management, since it would reduce the CIO and
bank’s reported revenues. The fivefold increase in the SCP’s liquidity reserve in April 2012, for
example, would have increased the CIO’s losses by more than $150 million.
When the OCC was asked about the SCP liquidity reserve, one OCC examiner told the
Subcommittee that even the increased amount in April 2012 was “wholly inadequate,” noting
that the reserve had risen to “over $700 million” by August 2012. 842 Another OCC examiner
noted that the bank had not set up any “concentration reserve” for the SCP, even though the SCP
held highly concentrated positions, including over $80 billion in one credit index. 843
838 4/9/2012 email from John Wilmot, CIO, to Jamie Dimon and Douglas Braunstein , JPMorgan Chase, “Series 9
forward tranche liquidity reserves,” JPM-CIO-PSI 0000960.
839 Subcommittee interview of Ina Drew, CIO (9/7/2012). OCC examiner Elwyn Wong told the Subcommittee that
the $33 million reserve had been a “severe underestimate.” Subcommittee interview of Elwyn Wong, OCC
(8/20/2012).
840 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 6.
841 See 4/6/2012 email from Douglas Braunstein, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, “Follow up,”
JPM-CIO 0000547 (proposing $155 million increase in SCP liquidity reserve due to less liquid market for IG9 credit
tranches). See also 4/6/2012 email from John Wilmot, CIO, to Jamie Dimon and Douglas Braunstein, JPMorgan
Chase, copy to Ina Drew, CIO, “synthetic credit tranche reserve,” JPM-CIO 0000576; 4/9/2012 email from John
Wilmot, CIO, to Douglas Braunstein and Jamie Dimon, JPMorgan Chase, “Series 9 tranche liquidity reserves,”
JPM-CIO 0000987; Subcommittee interview of Elwyn Wong, OCC (8/20/2012).
842 Subcommittee interview of Michael Kirk, OCC (8/22/2012).
843 Subcommittee interview of Elwyn Wong, OCC (8/20/2012).