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

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The newest VaR model “resulted in a reduction to average fixed income VaR of $26
million, average Total IB [Investment Bank] VaR of $26 million, average CIO VaR of
$17 million, and average Total VaR of $36 million” for the third quarter of 2012. 1051
Bank officials told the Subcommittee that the new VaR model had the effect of reducing
the bank’s overall VaR by 20%. 1052
This action by the bank indicates that lowering VaR
results by changing the VaR model is part of an ongoing pattern at JPMorgan Chase.
(2) Ignoring Comprehensive Risk Measure
The VaR was not the only risk metric that flagged the increasing risk in the Synthetic
Credit Portfolio; nor was it the only risk metric that was disregarded. Another example of a risk
metric that was triggered but disregarded by CIO traders, risk personnel, and management alike
is the Comprehensive Risk Measure, or CRM. After the SCP exploded in size at the beginning
of 2012, the portfolio’s CRM projected, at the end of February 2012, that the SCP risked losses
totaling $6.3 billion. A key CIO risk manager immediately dismissed the CRM figure as
“difficult for us to imagine” and “garbage.” The CIO’s senior risk analyst also attacked the
CRM model as inaccurate and sought to game the method used to determine which SCP assets
would be subjected to that model in order to produce the “optimal” – meaning lowest possible –
CRM and RWA totals for the SCP.
(a) Background
CRM, like VaR, produces a dollar figure representing potential losses. While VaR
quantifies possible losses over the course of day in the context of ordinary markets, CRM
quantifies possible losses over the course of a year in markets undergoing a high level of stress.
As the bank’s top quantitative analyst told the Subcommittee, CRM represents how much money
a portfolio can lose in a worst case scenario over the course of a year, with a 99% level of
confidence. 1053
Along with VaR and several other risk metrics, CRM is a key component used to
calculate a bank’s overall Risk Weighted Assets (RWA) which, in turn, is used to determine how
much capital the bank is required to have on its books to absorb any losses generated by those
assets. 1054 The CRM metric was created by Basel 2.5, “a complex package of international rules
that imposes higher capital charges on banks for the market risks they run in their trading books,
particularly credit-related products.” 1055
Basel 2.5 established four new risk measures to help
calculate RWA:
1051 Id. at 98.
1052 Subcommittee briefing by JPMorgan Chase (1/28/13) (Neila Radin).
1053 Subcommittee interview of C. S. Venkatakrishnan, JPMorgan Chase (10/25/2012). A new federal regulation,
that took effect on January 1, 2013, defines CRM as a measure of risk “over a one-year time horizon at a one-tail,
99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of
constant positions.” See 8/30/2012, Joint Final Rule, “Risk-Based Capital Guidelines: Market Risk,” Federal
Register, at 53106, http://www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-16759.pdf.
1054 Subcommittee briefing by JPMorgan Chase (8/15/2012).
1055 5/14/2012 “Basel 2.5 Increases The Squeeze On Investment Banking Returns,” Standard & Poors publication,
https://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245334380388.