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

usiness. 922
165
As a result, bank management had placed itself in an inadequate position to assess
the CIO trading problems.
It its review of the CIO, the JPMorgan Task Force summarized the many shortcomings in
the CIO’s risk management efforts as follows:
“CIO Risk Management lacked the personnel and structure necessary to manage
the risks of the Synthetic Credit Portfolio. … More broadly, the CIO Risk
function had been historically understaffed, and some of the CIO risk personnel
lacked the requisite skills. With respect to structural issues, the CIO Risk
Committee met only infrequently, and its regular attendees did not include
personnel from outside CIO. As a result, the CIO Risk Committee did not
effectively perform its intended role as a forum for constructive challenge of
practices, strategies and controls. Furthermore, at least some CIO risk managers
did not consider themselves sufficiently independent from CIO’s business
operations and did not feel empowered to ask hard questions, criticize trading
strategies or escalate their concerns in an effective manner to Firm-wide Risk
Management. And finally, the Task Force has concluded that CIO management,
along with Firm-wide Risk Management, did not fulfill their responsibilities to
ensure that CIO control functions were effective or that the environment in CIO
was conducive to their effectiveness.” 923
The fact that these systemic risk management failures at the CIO, which controlled a
$350 billion portfolio, the second largest at JPMorgan Chase, became known to bank
management, regulators, policymakers, and investors more or less by chance – when the SCP’s
enormous whale trades attracted media attention – exposes not only the fact that good banks can
have poor quality risk controls, but also that lax risk management practices are too often neither
detected nor prevented by bank regulators.
D. Disregarding CIO Risk Metrics
JPMorgan Chase, like all major financial institutions today, uses various risk metrics and
mathematical models to measure, track, and evaluate the risks presented by its trading activities.
Those activities typically involve numerous, complex financial instruments around the globe,
with different time horizons, risk characteristics, and potential interactions. They also often
feature daily trading and quick asset turnovers. The models needed to track and analyze the risks
posed by those trading activities and the resulting financial instruments are usually designed by
quantitative analysts with doctorates in mathematics, finance, or even physics. For example,
Patrick Hagan, head of quantitative analytics at the CIO, received a B.S. and Ph.D. in Applied
Mathematics from the California Institute of Technology. Before entering finance, Mr. Hagan
helped design chemical reactors for Exxon, was a scientist for Los Alamos's Theory and
Computer Research & Applications groups, and was the Deputy Director for the Los Alamos
922 Id.
923 2013 JPMorgan Chase Task Force Report, at 12-13.