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

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concluded, in particular, that the so-called “whale trades” had been conducted in an unsafe and
unsound manner. 1211 More broadly, the OCC told the Subcommittee that the OCC’s internal
review had concluded that internal control groups – both in the CIO risk management function as
well as in bankwide valuation, risk, and audit functions – were ineffective; that the bank’s
executive management “undercut” the effectiveness of the CIO’s risk limits; that the CIO VaR
model change was not implemented with proper review; and that the bank used unapproved
internal capital models. 1212
The OCC also initiated a review to determine whether similarly risky activities were
being conducted in the asset management functions at other banks, but found “no activity similar
to the scale or complexity” of the credit derivatives trading that took place at JPMorgan
1213
Chase.
B. Pre-2012: Avoiding OCC Oversight As the SCP Develops
Prior to 2012, the OCC had very little understanding of the strategies, size, or risk profile
of the CIO’s Synthetic Credit Portfolio (SCP). The OCC’s lack of understanding was due
primarily to a lack of disclosure by the bank about the SCP when it was established, when it
delivered unexpected revenues, or when it began to increase in size and risk in 2011. The OCC
told the Subcommittee that, in 2010, as part of an examination of the SCP’s investment
portfolios, the examination staff had a vague understanding that a CIO portfolio had been
established to provide stress loss protection for the bank and earn some profit, 1214 as the CIO had
done in the financial crisis, but did not know the portfolio’s name, the extent of its derivatives
trading, or its risk profile. While the OCC, in hindsight, identified occasional references to a
“core credit portfolio” in bank materials, it determined that the earliest explicit mention of the
SCP as a CIO portfolio was when it was mentioned in a routine bankwide Value-at-Risk (VaR)
report on January 27, 2012. 1215 That report identified the SCP for the first time as a distinct
portfolio accounting for over 90% of the CIO’s VaR. 1216
The lack of bank disclosures
essentially made it more difficult for OCC to effectively oversee this high risk portfolio in its
early years.
1211 Subcommittee interviews of Scott Waterhouse, OCC (9/17/2012), Fred Crumlish, OCC (8/28/2012) (describing
a fundamental breakdown in basic OCC safety and soundness requirements, including inadequate risk management,
auditing, reporting, and oversight by senior management), and Michael Kirk, OCC (8/22/2012). See also OCC
Supervisory Letters issued to JPMorgan Chase, described below.
1212 10/26/2012 Confidential Supervisory Report, OCC at PSI-OCC-13-000014 [Sealed Exhibit].
1213 Testimony of Thomas J. Curry, Comptroller of the Currency, “Implementing Wall Street Reform: Enhancing
Bank Supervision and Reducing Systemic Risk,” before the Senate Committee on Banking, Housing, and Urban
Affairs, S.Hrg 112-__, (June 6, 2012), at 27 (“Beyond JPMC, we have directed OCC examiners to evaluate the risk
management strategies and practices in place at other large banks, and examiners have reported that there is no
activity similar to the scale or complexity of JPMC. However, this is a continuing focus of our supervision.”).
1214 See 12/31/2010 OCC Report of Examination, OCC-SPI-00036145, at 6163 [Sealed Exhibit] (“As part of its
business mandate, the CIO is allowed to take discretionary positions within approved limits to manage economic
returns. Appropriate limits are used to measure and control the risks in MTM positions.”).
1215 10/26/2012 Confidential Supervisory Report, OCC at PSI-OCC-13-000025 [Sealed Exhibit].
1216 10/26/2012 Confidential Supervisory Report, OCC at PSI-OCC-13-000025 [Sealed Exhibit]; Subcommittee
interview of Doug McLaughlin and Michael Sullivan, OCC (8/30/2012) (stated by Mr. McLaughlin).