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

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told the Subcommittee that a few years earlier, the TAA portfolio had been called the
“Discretionary Trading” portfolio. 1227 Moreover, the CIO told the Subcommittee that in January
2012, it merged the TAA with another portfolio of mark-to-market assets called the Strategic
Asset Allocation portfolio, and called the product of that merger the “MTM Overlay”
portfolio. 1228 Ms. Drew said the frequent name changes and portfolio reconfigurations were
made for business reasons and not to evade regulatory oversight. 1229
According to the OCC, it was very unusual for a bank to do what JPMorgan Chase did
with the SCP – use its excess deposits to engage in short term credit derivatives trading – an
1230
approach no other major U.S. bank employs. JPMorgan Chase later claimed that the SCP
represented a “successful” way to hedge the bank’s credit risks. 1231 The bank was unable to
explain, however, why it failed for years to notify its primary regulator of that new and effective
hedge, generate documents laying out the SCP’s hedging objectives and strategies, or accumulate
hedging related performance data. 1232 The bottom line is that the bank did not disclose and the
OCC did not learn of the extent and associated risks of the CIO’s growing Synthetic Credit
Portfolio until media reports on April 6, 2012 described the book’s outsized credit derivative
holdings. 1233
(2) 2010: Resisting OCC Examination Results
In 2010, as part of its routine examination process, the OCC conducted a detailed review
of the CIO’s investment activities, focusing in particular on the $350 billion Available for Sale
portfolio, and warned that the CIO needed to do a better job documenting portfolio decisions and
managing the risks associated not only with that investment portfolio but with several others as
well.
On December 8, 2010, after concluding its examination of the CIO’s investment
activities, the OCC sent a Supervisory Letter to CIO head Ina Drew with its findings,
requirements, and recommendations. 1234
The Supervisory Letter included a Matter Requiring
Attention (MRA) – meaning a matter that required corrective action by the bank – stating that
positioning its investments “tactically to complement the core investment portfolio. One example is a synthetic (or
derivative) credit position established in 2008 to protect the Firm from the anticipated impact of a deteriorating
credit environment.” Id. at 6.
1227
See Subcommittee interviews of Jaymin Berg, OCC (8/31/2012) and Ina Drew, CIO (9/7/2012); but see 1/2011
Executive Management Report, OCC-SPI-00000250 (still reporting the TAA portfolio as “Discretionary” even after
the name had changed.).
1228
Subcommittee interview of Ina Drew, CIO (9/7/2012).
1229
Id.
1230
Subcommittee interview of Fred Crumlish OCC (8/28/2012); 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.
1231
2/13/2012 letter from Barry Zubrow, JPMorgan Chase, to Department of the Treasury, Board of Governors of
the Federal Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and
Office of the Comptroller of the Currency, “Comment Letter on the Notice of Proposed Rulemaking Implementing
Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” at 56-57,
http://www.sec.gov/comments/s7-41-11/s74111-267.pdf.
1232
For more information on the bank’s description of the SCP as a hedge, see Chapter III.
1233
Subcommittee interview of Doug McLaughlin and Michael Sullivan, OCC (8/30/2012).
1234
See 12/8/2010 Supervisory Letter JPM-2010-80, OCC-SPI-00011201 [Sealed Exhibit].