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

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apparent in contemporaneous bank documents is that the CIO’s motive for purchasing IG long
credit derivatives in January 2012, was not just to offset the CIO’s short positions, but also to
generate cash premiums, or “carry,” which it could then use to finance the purchase of still more
high yield shorts. 1325 As 2012 wore on, another motive for acquiring long derivatives was to use
the incoming cash premiums to offset the daily mark-to-market losses the CIO was having to
record for the SCP. 1326
The OCC told the Subcommittee that its examination team was not aware that the CIO
was purchasing IG longs, in part, to produce carry that could be used to purchase additional high
1327
yield shorts and offset SCP reported losses. The OCC told the Subcommittee that its
examiners had believed the bank’s assertion that the IG longs were acquired to offset the risks of
its high yield shorts. 1328
As late as September 2012, the OCC’s chief counsel, Julie Williams, was under the
impression that the purpose of the IG longs was to offset the risks of the SCP’s high yield shorts
1329
– in other words, to lower risk. When drafting an internal OCC memorandum explaining the
SCP, for example, Ms. Williams wrote: “[T]he IG trades initially appear to have been designed
was the reason that JPMCB began selling IG 9 CDSs; going long IG9 credit risk (selling CDSs) would neutralize
some of the short high yield credit risk position (long CDSs).”); 5/11/2012 email from Elwyn Wong, OCC, to Scott
Waterhouse, OCC, “CDX IG Series 18 vs. CDX HY vs. CDX IG 9,” OCC SPI 00081266 (“Based on my
understanding, CIO was trying to pare down their long protection (short credit risk) in HY. To do so, they would
sell protection (long credit risk). ... [T]hey took the basis risk by continuing to be long HY protection and short IG
protection as a proxy.”); 5/16/2012 email from Fred Crumlish, OCC, to Elwyn Wong, OCC, “here is redline and
new final,” OCC-00003507, at 508 (attaching talking points, signed off by Mike Brosnan, head of OCC Large Bank
Supervision, indicating: “As the economy improved, in late 2011 and early 2012 executive management felt that the
credit cycle was less risky and made the strategic decision to reduce the high yield debt credit protection position.
However, … the markets for high yield indices were not, according to the bank, liquid enough to use to unwind the
existing short credit protection position. Consequently, the bank looked for alternatives to offset the positions via
other instruments that were presumed to have offsetting risk characteristics. ... The bank began selling IG 9 credit
default swaps – going long on IG 9 credit risk (selling CDS) – to neutralize some of its short high yield credit risk
position (the original credit default swaps).”). It is important to note, however, that purchasing longs to offset the
SCP’s own shorts did not position the SCP as a whole to act as a hedge for bank credit losses outside the confines of
the Synthetic Credit Portfolio. In fact, the CIO’s continued acquisition of long positions eventually converted the
SCP from a net short to a net long posture, eliminating its ability to hedge loan or other credit losses incurred by the
bank. For more information, see Chapters III and VII.
1325 See discussion in Chapter III; 2013 JPMorgan Chase Task Force Report, at 30 (“The traders, in late January,
also added to their long positions …. Those long positions generated premiums, and … would help to fund highyield
short positions ….”); 1/26/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “credit book last version,”
JPM-CIO-PSI 0000159, at 170 (showing estimated carry produced by key long positions).
1326 See discussion in Chapter III; JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (9/6/2012)
(partial readout) (“We can lose money on a daily basis, but correct with carry of the book. Month-end is not as
important as quarter-end.”); 2/22/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, and others, “core
credit latest version,” JPM-CIO-PSI 0001784, at 800 (showing carry produced by three positions: iTraxx: 500,276;
cdx ig: 891,954; cdx hy: -825,139, with the positive carry for cdx ig, which was generally a long position, barely
offsetting the negative carry of the cdx hy, which was generally a short position); 3/16/2012 email from Bruno Iksil,
CIO, to Javier Martin-Artajo and Julien Grout, CIO, “strategy for core,” JPM-CIO-PSI-H 0006017 (“IG trades will
improve the carry[.]”).
1327 Subcommittee interview of Mike Sullivan, OCC (11/7/2012).
1328 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).
1329 Subcommittee interview of Julie Williams, OCC (9/17/2012).