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

chief market risk officer in London, informed the CIO’s Chief Risk Officer, Irvin Goldman,
about what was happening:
179
“CIO is over its temporary limit, and could cause the Firm to do the same. ... VaR
has increased by +3mm [million], to $107.6mm driven by increase in CDX IG S9
10Y index long risk 1000 .... This is consistent w/ the VaR increases of the last
several days ... wherein the VaR increases approx 1mm per billion of notional in
IG9 10y. ... We anticipate approval on Monday [January 30], and that the *new
methodology should become the official firm submission from Monday, for
27 Jan COB [close of business].* Limit issues should therefore cease beginning
from Monday.” 1001
In his email, Mr. Stephan explained that for every billion-dollar increase in the size of the SCP’s
notional holdings of the IG9 long positions, its VaR score was increasing by $1 million. He also
disclosed that the SCP’s long purchases had already caused a breach of the CIO’s temporarily
increased VaR limit and was threatening to breach the new bankwide VaR limit as well. In
addition, Mr. Stephan explained that the anticipated approval of the CIO’s new VaR model on
Monday, January 30, which was intended to apply to the most recent trading day, January 27,
should put an end to the VaR “limit issues.” 1002
By the end of the day on January 27, the SCP’s VaR totaled $125.7 million, 1003 breaching
the CIO’s temporary VaR limit of $105 million 1004 but not yet the bankwide limit of $140
million. The CIO traders continued their trading spree, expanding the size of the SCP and CIO’s
VaR. As the CIO’s VaR continued to climb, the documentation produced to the Subcommittee
contains few emails, messages, or telephone calls asking whether the CIO’s trading strategy
made sense. On January 28, 2012, Barry Zubrow, former Chief Risk Officer for JPMorgan
Chase, did send an email to the CIO Chief Risk Officer Irvin Goldman and the bank Chief Risk
Officer John Hogan asking: “Why is the CIO VAR so elevated?” but took no further action to
evaluate the CIO trading strategy causing the VaR increase. 1005
Even if the existing VaR model
was viewed as overstating the risk, at a minimum the precipitous upward trend in the CIO’s VaR
PSI 0037501. See also 1/27/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Update on
*old/current methodology VaR* increase for COB 27 Jan,” JPM-CIO-PSI 0000177.
1000
“CDX IG S9 10Y” and “IG9 10y” refer to credit derivative indices in which the SCP was invested. For more
information about these indices, see Chapter II.
1001
1/27/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Update on *old/current
methodology VaR* increase for COB 27 Jan,” JPM-CIO-PSI 0000177, at 178. [emphasis in the original]
1002
JPMorgan Chase has explained that the purpose of the long positions was to offset the shorts and thereby reduce
risk, in lieu of unwinding the short positions. However, according to JPMorgan Chase’s own internal documents,
the purchases of the long positions at the end of January themselves raised the VaR instead of lowering it.
Therefore, it is difficult to see how JPMorgan Chase could have believed the long positions were in fact able to
offset the risk associated with the short positions.
1003
See 5/2012 JPMorgan Chase spreadsheet of VaR levels in the Synthetic Credit Portfolio, FDICPROD-0024286.
1004
1/23/2012 email from Ina Drew to MRM Reporting, and others, “ACTION NEEDED: CIO Global 10Q VaR
Limit One-off Limit Approval,” JPM-CIO-PSI-H 0002880.
1005
1/28/2012 email from Barry Zubrow, JPMorgan Chase, to John Hogan, JPMorgan Chase and Irvin Goldman,
CIO, “JPMC Firmwide VaR – Daily Update – COB 01/26/2012,” JPM-CIO-PSI-H 0002897.