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

F. Analysis
251
The whale trades provide a striking case history of how a major bank, with 65 bank
examiners on site, can keep a multi-billion-dollar derivatives portfolio off the radar screen of its
regulator for years, at least until it begins to lose money. For nearly six years, JPMorgan Chase
failed to disclose key information to its primary regulator about the CIO’s Synthetic Credit
Portfolio, even though the bank claimed it played an important role in hedging the bank’s credit
risk. The bank failed to report the existence of the portfolio to the OCC when it was created,
during a 2010 examination of CIO investment portfolios, when it expanded in size by tenfold in
2011, and when it produced approximately $400 million in 2011 profits. Along the way, at
times, bank personnel lectured OCC examiners about being overly intrusive. The bank first
reported the SCP to the OCC in January 2012, when it began breaching the bank’s VaR limit and
incurring losses, but even then the bank misinformed the OCC about its significance by
describing plans to reduce its size. As SCP losses mounted during the first few months of 2012,
the bank failed to include information about the SCP in routine reports to the OCC. When the
CIO repeatedly breached internal risk and stress limits, the bank downplayed their significance
and allowed the breaches to continue. After the whale trades attracted media attention, the bank
still resisted providing detailed SCP information to the OCC, disclosing the extent of the SCP
losses only when it was legally compelled to disclose its financial results in an SEC filing. The
OCC’s repeated requests were often ignored and not adequately enforced.
The questionable bank practices that came to light when the whale trades were disclosed
includes the CIO’s creation of a high risk trading portfolio using bank deposits, using valuation
practices to hide losses, disregarding breaches of risk limits, manipulating risk and capital
models to artificially lower the portfolio’s risk profile, and dodging OCC oversight. Because
JPMorgan Chase provided such limited information about the SCP, the OCC remained in the
dark about the size and risks of the portfolio for years. When losses began rolling in, it had to
exercise oversight on the basis of incomplete, inaccurate, and misleading information. The
bank’s practices impeded the OCC’s ability to detect and stop unsafe and unsound derivatives
trading practices.
At the same time, not all the fault should be laid at the foot of the bank. Over the past
two years, the OCC failed to notice or investigate bank reports of CIO risk limit breaches, failed
to realize when monthly CIO reports weren’t delivered, failed to insist on detailed trading data
from the CIO needed for effective oversight, and failed to take firm action when the bank
delayed or denied its requests for information. The OCC tolerated resistance by JPMorgan
Chase to regulatory requests and failed to establish a regulatory relationship that mandated the
bank’s prompt cooperation with OCC oversight efforts. The new Comptroller appears to be
taking actions to correct that fundamental oversight problem. In its 2012 examinations of the
CIO, for example, the OCC adopted a “clean slate” approach, requiring the bank to produce
basic information about the CIO from the ground up to support all assertions about its
operations. 1434
The question is whether the OCC can recalibrate its regulatory relationship to
achieve effective oversight, not only with JPMorgan Chase, but also other large financial
institutions.
1434 Subcommittee interview of Fred Crumlish, OCC (8/28/2012).