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

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bank reportedly spent $1 billion acquiring those positions. 1275
Despite the enormous size of
those transactions and the hundreds of millions of dollars they generated, the bank did not alert
the OCC to the trading activity and the OCC did not inquire into the source of the gain.
1276
In hindsight, the OCC characterized the trading profits as “outsized” and due to an
“idiosyncratic” trade that the CIO should not have been making, especially since the American
Airlines loss protection had no link to any credit exposure at the bank. 1277 Given that the bank
admitted that the “CDX[.]HY positions were set up to take advantage of [a] key bankruptcy
credit related event[],” 1278
this $400 million gain was a red flag signaling high risk, proprietary
trading by the CIO, but it was a red flag that, again, was missed by the OCC.
C. 2012: Dodging OCC Oversight While SCP Losses Mount
In its initial years of operation, the Synthetic Credit Portfolio did not attract OCC notice,
in part because the CIO did not name the portfolio in any of its submissions to the agency. In
January 2012, the CIO named the SCP in a written document for the first time to the OCC, only
to inform the OCC that it was planning to reduce the portfolio. Despite that representation, in
the first three months of the year, the CIO tripled the size of the SCP, buying tens of billions of
dollars of a high-risk mix of short and long credit derivatives in credit derivatives, only to see
their value crash, resulting in mounting losses. As the OCC later described it: “SCP was
obscure but not hidden as it went from operating outside of control limits in 2011 to operating
out of control in 2012.” 1279
Until the SCP’s losses escalated, the CIO minimized the data it
provided to the OCC about the SCP, leaving the OCC misinformed and therefore blind to the
portfolio’s excesses. In addition, the OCC failed to take notice of or act on the CIO’s multiple,
sustained risk limit breaches.
(1) Misinforming OCC that SCP Book to be Reduced
In the last week of January 2012, OCC examiners set up a standard quarterly meeting
with the CIO’s Chief Financial Officer John Wilmot to review the prior quarter and get an update
on the CIO’s plans for the new quarter. 1280
One of the OCC examiners who attended the meeting
prepared notes summarizing what was discussed and circulated them among OCC staff with CIO
1275 OCC data analysis derived from DTCC data for JPMorgan Chase, described in “JPMC-CIO timeline of
Significant Events and OCC Discovery,” prepared by the OCC, OCC-SPI-00038895, at 6 [Sealed Exhibit]; see also
10/26/2012 OCC Confidential Supervisory Report, Appendix 11 at PSI-OCC-13-0000113 [Sealed Exhibit].
1276
5/31/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “QA,” OCC-SPI-00026410.
1277
Subcommittee interview of Fred Crumlish, OCC (8/29/2012); 10/26/2012 OCC Memorandum from Sally
Belshaw, OCC, to Michael Brosnan, OCC, “Review of Events Surrounding Losses at CIO and Lessons Learned,”
PSI-OCC-13-000003 [Sealed Exhibit] (identifying the American Airlines gain as an “outsize gain” that OCC should
have “investigate[d].”).
1278
12/2011 “Chief Investment Office Executive Management Report,” JPMorgan Chase, OCC-SPI-00033116 at
117.
1279
10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000020 [Sealed Exhibit].
1280
See 1/24/3012 email from James Hohl, OCC, to Jaymin Berg, OCC, “CIO meeting,” OCC-00004746;
Subcommittee interview of Jaymin Berg, OCC (8/31/2012).