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

216
VI. AVOIDING AND CONDUCTING OCC OVERSIGHT
Prior to media reports of the whale trades in April 2012, JPMorgan Chase provided
almost no information about the CIO’s Synthetic Credit Portfolio to its primary regulator, the
Office of the Comptroller of the Currency (OCC), despite the SCP’s supposedly important role
in offsetting the bank’s credit risks, its rapid growth in 2011 and 2012, and its increasingly risky
credit derivatives. While the OCC, in hindsight, has identified occasional references to a “core
credit portfolio” in bank materials, the OCC told the Subcommittee that the earliest explicit
mention of the SCP did not appear until January 27, 2012, in a routine VaR report. By then, the
SCP had already lost nearly $100 million. The lack of prior bank disclosures essentially
precluded effective OCC oversight of the portfolio’s high risk excesses and unsafe and unsound
practices.
Because the OCC was unaware of the risks associated with the SCP, it conducted no
reviews of the portfolio prior to 2012. Both the OCC and JPMorgan Chase bear fault for the
OCC’s lack of knowledge – at different points, the bank was not forthcoming and even provided
incorrect information, and at other points the OCC failed to notice and follow up on red flags
signaling increasing CIO risk in the reports it did receive from the bank. During 2011, for
example, the notional size of the SCP grew tenfold from about $4 billion to $51 billion, but the
bank never informed the OCC of the increase. At the same time, the bank did file risk reports
with the OCC disclosing that the SCP repeatedly breached the CIO’s stress limits in the first half
of 2011, triggering them eight times, on occasion for weeks at a time, but the OCC failed to
follow up with the bank. Later in 2011, the CIO engaged in a $1 billion high risk, high stakes
credit derivatives bet that resulted in a payout of roughly $400 million to the CIO. The OCC
learned of the $400 million gain, but did not inquire into the reason for it or the trading activity
behind it, and so did not learn of the extent of credit derivatives trading going on at the CIO.
In January 2012, in its first quarterly meeting with the OCC after disclosing the existence
of the SCP, the CIO downplayed the portfolio’s importance by misinforming the OCC that it
planned to reduce the SCP. Instead, over the course of the quarter, the CIO tripled the notional
size of the SCP from $51 billion to $157 billion, buying a high risk mix of short and long credit
derivatives with varying reference entities and maturities. The increase in the SCP’s size and
risk triggered a breach of the CIO’s and bankwide VaR limits, which the bank disclosed to the
OCC in routine risk reports at the time, but which did not trigger an inquiry by the agency. Also
in January, the bank sent routine risk management notices which informed the OCC of the
bank’s implementation of a new VaR model for the CIO that would dramatically lower the
SCP’s risk profile, but the OCC did not inquire into the reasons for the model change, its impact
on risk, or how the CIO was able to reduce its risk results overnight by 50%.
In February and March, the bank began to omit key CIO performance data from its
standard reports to the OCC, while simultaneously failing to provide timely copies of a new CIO
management report. The OCC failed to notice the missing reports or request the new CIO
management report until after the April 6 press articles exposed the CIO’s risky trades. By
minimizing the CIO data it provided to the OCC about the CIO and SCP, the bank left the OCC
misinformed about the SCP’s risky holdings and growing losses.