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

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Subcommittee that the bank’s assertion that the SCP was a “dedicated hedge” had actually raised
“alarm bells” for the OCC, because it should have been, but was not reported as such, like other
instruments in the CIO that served a “dedicated hedge” function, such as the hedges against
Mortgage Servicing Rights and interest rate risk. 1351
The OCC was unable to explain why it did
not, at that point, confront the bank with its analysis that the SCP was not, in fact, a hedge.
The OCC also told the Subcommittee that it later determined that the CIO’s April 16
1352
presentation contained “material misrepresentations,” including a misrepresentation that the
2012 first quarter SCP losses totaled $580 million, 1353 when first quarter losses had actually been
internally reported as $719 million. 1354 More significantly, at the time the bank briefed the OCC
in April, the SCP losses were more than double the $580 million figure provided by the bank; the
bank should have told the OCC that the losses by then totaled $1.25 billion. 1355 OCC told the
Subcommittee that the bank’s presentation also included “unrealistic scenarios” for the second
quarter, promising overly optimistic future recovery of the SCP assets’ value. 1356 The OCC told
the Subcommittee that, at the time it received the presentation in April, it had viewed the
presentation as providing additional information “in good faith.” 1357
Risk and Stress Limit Breaches. A few days later, on April 19, the OCC asked the
bank, for what appears to be the first time since the beginning of 2012, about the significance of
information that the SCP had breached several risk and stress loss limits. After receiving
reassurances from the bank regarding these breaches, the OCC let the matter drop instead of
investigating the trading activities that caused the breaches.
In the OCC’s initial inquiry on April 19, 2012, an OCC examiner asked the CIO Market
Risk Officer for additional information about data indicating that the CIO had breached three of
the bank’s primary risk limits:
“Would you have any color around some observations about the CIO VaR
[Value-at-Risk], CSBPV [Credit Spread Basis Point Value, also known as the
CS01 risk limit] and stress results? I received the following from another
examiner this morning. Thanks.
[‘]The increase in the Firm’s Var is primarily driven by CIO Synthetic Credit
portfolio.
1351
Subcommittee interview of Fred Crumlish, OCC (8/28/3012).
1352
Subcommittee interview of Michael Kirk, OCC (9/22/2012).
1353
4/16/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, and others,
“materials for Fed/OCC/FDIC call at noon today,” OCC-SPI-00009712, at 724.
1354
See OCC spreadsheet, OCC-SPI-00000298, printed as a Subcommittee chart in Chapter IV. Numbers do not
reflect restated P&L figures.
1355
SCP losses were internally reported to be $1.25 billion on April 13, a Friday, the last trading day before the
April 16 briefing, which was a Monday. Id.
1356
Subcommittee interview of Michael Kirk, OCC (9/22/2012).
1357
Subcommittee interview of Fred Crumlish, OCC (8/28/3012).