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

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“CIO's strategy for reducing the synthetic credit portfolio was poorly conceived
and vetted. In hindsight, the CIO traders did not have the requisite understanding
of the new risk they took. The risk limits for the synthetic credit portfolio should
have been specific to that portfolio and much more granular, i.e. only allowing
lower limits of risk on each specific risk being taken. CIO particularly, the
synthetic credit portfolio should have gotten more scrutiny from both senior
management, and I include myself in that, and the firm wide risk control
function.” 860
Later in the same hearing, in response to a question by Committee Chairman Tim Johnson about
specific risk limits, Mr. Dimon stated:
“CIO had its own limits around credit risk and exposure. At one point, in March,
some of those limits were triggered. The CIO at that point did ask the traders to
reduce taking risk and [Ms. Drew] started to look very heavily into the area which
would be the proper thing to do, sometimes triggers on limits do get hit. And
what should happen afterwards is people focus on it, think about it, and decide
what to do about it.” 861
While it may be true that additional risk limits and greater scrutiny from senior
management would have helped, Mr. Dimon's testimony belies the fact that the Synthetic Credit
Portfolio did, in fact, cause multiple breaches of both CIO and bankwide risk limits during the
first three months of 2012. Senior management, at times including Mr. Dimon, were notified of
those breaches but did not initiate an effective investigation into the nature of the risk facing the
bank. Despite JPMorgan Chase's reputation for careful risk management, in the case of the CIO
losses, the warning signs were clear, but they were disregarded or rationalized. Even Mr. Dimon
acknowledges that it was not until March that the CIO instructed the traders to stop taking on
additional positions.
The Chief Investment Office, which managed a $350 billion investment portfolio
consisting, in part, of federally insured deposits, had an inadequate risk management function.
The CIO did not have a Chief Risk Officer until far too late, and even before then the seniormost
risk officer viewed it as his responsibility merely to observe and report risk, not to lower it.
The person most responsible for managing the CIO’s risk profile, Chief Investment Officer Ina
Drew, was afforded great deference by Mr. Dimon and the bank's operating committee. 862
her office, the traders were much more influential than the risk managers. At the same time,
policing risk conflicted with her interest in generating gains.
860 Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “A Breakdown in Risk Management:
What Went Wrong at JPMorgan Chase?” before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, S.Hrg. 112-715 (June 13, 2012), http://www.cq.com/doc/congressionaltranscripts-4105471.
861 Id.
862 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/19/2012) and Michael Cavanagh, JPMorgan
Chase (12/12/2012). See also 2013 JPMorgan Chase Task Force Report, at 22.
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