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

E. Admitting the Mismarking
151
Sometime in May 2012, after the memorandum summarizing the Controller’s special
assessment was issued, JPMorgan Chase’s Chief Market Risk Officer Ashley Bacon ordered the
CIO to begin using the Markit independent pricing service to value its credit derivatives. 844
That
change meant that CIO derivative positions would generally be valued at or near the midpoint in
the relevant bid-ask spread. It also meant that the CIO could no longer manipulate its marks to
minimize its losses.
The bank told the Subcommittee that, due in part to the Controller’s special assessment in
May, it had viewed the SCP marks as acceptable, even though they deviated by half a billion
dollars from the relevant midpoint prices. The bank told the Subcommittee that its view of the
marks did not change until early June, when the internal investigation being conducted by the
JPMorgan Chase Task Force began reviewing CIO recorded telephone calls and listened to the
traders criticizing the very marks they were reporting. 845 Michael Cavanagh, the Task Force
head, told the Subcommittee that he was convinced the traders thought they had a winning
trading strategy, viewed the market as “wrong” in how it was valuing the SCP credit derivative
positions, and believed the SCP positions would recover their value. He also indicated that he
was convinced that the London CIO personnel, with varying degrees of culpability, had
deliberately mismarked the value of the SCP positions. 846 In its 2013 report, the JPMorgan
Chase Task Force wrote: “From at least mid-March through at least March 30, the traders did
not provide good-faith estimates of the exit prices for all the positions in the Synthetic Credit
Portfolio.” 847
On July 13, 2012, JPMorgan Chase & Co., the holding company for JPMorgan Chase
Bank, reported that it was restating its first quarter 2012 financial results and reduced the bank’s
previously-reported total net revenue by $660 million, 848
an amount which it said fell to $459
million after taxes. The bank blamed the reduced earnings on inappropriate SCP valuations by
the CIO:
“JPMorgan Chase & Co. … restated its previously-filed interim financial
statements for the quarterly period ended March 31, 2012. The restatement
related to valuations of certain positions in the synthetic credit portfolio held by
the Firm’s Chief Investment Office (“CIO”) and reduced the Firm’s reported net
income by $459 million for the three months ended March 31, 2012.” 849
844
Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) (Ashley Bacon).
845
Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). See also 2013 JPMorgan Chase
Task Force Report, at 75, 89.
846
Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012).
847
2013 JPMorgan Chase Task Force Report, at 89.
848
7/13/2012 “Form 8-K,” JPMorgan Chase & Co., at 2,
http://files.shareholder.com/downloads/ONE/2261741819x0xS1193125-12-301391/19617/filing.pdf.
849
JPMorgan Chase & Co. 10-Q filing with the SEC for the second quarter of 2012, at 4,
http://www.sec.gov/Archives/edgar/data/19617/000001961712000264/jpm-2012063010q.htm.