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

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When asked in a May 10 call with investors and analysts why the VaR model was
changed, Mr. Dimon said the bank made “constant changes and updates to models, always trying
to get them better,” but did not disclose that the bank had reinstated the old CIO VaR model
because the “update[d]” CIO VaR had understated risk by a factor of two, was error prone, and
suffered from operational problems. The May 10-Q filing included a chart showing a revised
CIO VaR for the first quarter of $129 million, which was twice the VaR amount initially
reported for the first quarter, and also twice the average amounts in 2011 and 2010. The only
explanation the May 10-Q filing provided was that the revised VaR “was calculated using a
methodology consistent with the methodology used to calculate CIO's VaR in 2011.”
Together, these misstatements and omissions about the involvement of the bank’s risk
managers in putting on SCP positions, the SCP’s transparency to regulators, the long-term nature
of its decision-making, its VaR results, its role as a risk-mitigating hedge, and its supposed
consistency with the Volcker Rule, misinformed investors, regulators, and the public about the
nature, activities, and riskiness of the CIO’s credit derivatives during the first quarter of 2012.
A. Public Disclosure of Whale Trades and SCP
Prior to the media reports in early April 2012, the Synthetic Credit Portfolio (SCP) had
not been mentioned by name in any JPMorgan Chase public filing; over the next month, the SCP
received sustained attention in the bank’s public filings, investor calls, and media
communications. In response to media inquiries, the bank initially characterized the SCP as
engaged in long-term, risk-reducing hedging activities that were known to its risk managers and
regulators, and downplayed its losses. A month later, the bank completely revised its description
of the SCP, characterizing it as having “morphed” into a risky trading activity that was poorly
conceived and vetted, and which had caused billions of dollars in losses with more to follow.
The earliest evidence identified by the Subcommittee of information about the SCP in the
public sphere is an April 5, 2012, internal bank email which informed bank management that
reporters from Bloomberg and the Wall Street Journal were planning to publish news articles
about trades involving the Synthetic Credit Portfolio and the Chief Investment Office (CIO).
JPMorgan Chase’s chief spokesperson, Joe Evangelisti, managing director and head of
worldwide corporate communications and media relations, sent the email warning bank
executives, including Jamie Dimon, that the media stories “are saying that JPMorgan basically
has a large proprietary trading shop hidden in its CIO …. [and] that with increased capital rules
and the upcoming Volcker Rule, these activities could come under pressure.” 1436
He
recommended that the bank convey the following message about the SCP and CIO:
“I’d like us to hit hard the points that the CIO’s activities are for hedging purposes
and that the regulators are fully aware of our activities. I’d like to give them the
following on the record:
• The Chief Investment Office is responsible for managing and hedging the
firm’s liquidity, foreign exchange, interest rate and other structural risks.
• Gains in the CIO offset and hedge losses in other parts of the firm.
1436 4/5/2012 email from Joseph Evangelisti, JPMorgan Chase, to Ina Drew, CIO, Douglas Braunstein, JPMorgan
Chase, and others, “WSJ/Bloomberg CIO Stories,” JPM-CIO-PSI 0000543, at 544.