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

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increase in notional value in turn resulted in a higher hypothetical stress loss when
the Firm ran the Synthetic Credit Portfolio through its various stress scenarios.
The stress loss excessions were reported in the first weekly stress report that
followed, on April 6, 2012. CIO’s mark-to-market stress limit continued to be
exceeded throughout April. By then, however, the trading that precipitated the
losses in the Synthetic Credit portfolio had ceased.” 1156
When the SCP exceeded its stress loss limit, the CIO should have reconfigured the
SCP to end the breach; instead, the CIO allowed the breach to continue unabated for a
month. With the breach of the CIO’s stress limits, the SCP had caused the breach of all
of the Level 1 and Level 2 risk limits used by the bank to monitor the portfolio.
Mr. Macris analogized managing the Synthetic Credit Portfolio to flying a plane. Mr.
Dimon’s public statements suggested that the flight alarms didn’t sound until too late. 1157 But
the risk metrics tell a different story. The VaR and CS01 alarms sounded in January; the CRM
sounded in early March; the CSW10% sounded three weeks later, and the stress loss limits
sounded a week after that. An internal bank document listing the many breaches of the CIO’s
risk limits is nine pages long. 1158
But no one in the CIO or JPMorgan Chase risk management
function heeded the multiple warnings and took action to exit the offending positions. It wasn’t
an instrument failure that caused the portfolio to crash; it was the pilots’ decision to ignore the
instruments.
(5) Disregarding Stop Loss Advisories
The risk metrics discussed above are based on projections of how a portfolio will perform
under certain market conditions. In contrast, stop loss advisories are risk limits established on
the basis of actual daily profit and loss reports for a portfolio. A stop loss advisory sets a limit on
how much money a portfolio is allowed to lose over a specified period of time, typically one,
five, or twenty days. An advisory also sets a threshold for increased risk monitoring. If one of
the advisories is breached, in theory, the portfolio exceeding the advisory should receive
increased monitoring and attention from senior management. Stop loss advisories are a
longstanding, easy to understand, and effective risk limit.
The CIO had one, five, and twenty day stop loss advisories in place during the
accumulation of the credit index positions in the Synthetic Credit Portfolio that produced the
losses incurred by the bank. Over the course of the period under review, the one, five, and
twenty-day loss advisories were set at the same level, a decision regulators would later question.
1156
2013 JPMorgan Chase Task Force Report, at 82-83.
1157
See, e.g., 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.
(“CIO had its own limits around credit risk and exposure. At one point, in March, some of those limits were
triggered.”)
1158
05/04/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information needed,” JPM-
CIO-PSI-H 0000627-36.