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

More documents

Recommendations

Info

260 executives were specifically told how the portfolio’s largest position would take 10-15 days of selling at 100% trading volume to exit, so the executives knew that exiting some of the portfolio’s positions would take weeks or months. 1463 Messrs. Dimon, Braunstein, and other executives were also informed that the SCP had switched its overall position from short to long, 1464 a direction inconsistent with its purported hedging purpose, as discussed further below. Since the head of the CIO and member of the bank’s operating committee, Ina Drew, had forbidden additional trading in the portfolio on March 23, its positions were locked in. 1465 In addition, by that date, all of the risk limits governing the SCP had been breached. 1466 On March 30, 2012, Achilles Macris, who supervised the SCP trading, told the bank’s Chief Risk officer that he had “lost confidence” in his team. 1467 Also on March 30, the bank’s internal audit department issued a report criticizing CIO’s risk management department, with copies sent to Mr. Braunstein, Mr. Hogan, and others. 1468 Finally, the SCP had undergone three straight months of escalating losses, which worsened dramatically in March. None of these facts relating to the SCP’s size, risk profile, or losses were mentioned in the April 13 earnings call. After the earnings call, the bank sought to reduce the risk and losses of the SCP, but did not share any information publicly about those efforts until it filed its required 10-Q form with the SEC on May 10, finalizing its first quarter results. In the midst of preparing for that disclosure, on May 2, Ms. Drew wrote a note about the bank’s internal deliberations: “We are working through the 10-Q disclosure and Doug [Braunstein] and Jamie [Dimon] are weighing the risk reward to the communication plan around a press release and anal[y]st meet[]ing and the 1469 potential impact on the market and our ability to reduce this position.” Her note indicated received data on the growth of the positions in the SCP over the first quarter. On or about April 9, he asked for “some history relative to current positions (long and shorts).” 4/9/2012 email from John Wilmot, JPMorgan Chase, to Ina Drew, CIO and others, “Deliverables for meeting tomorrow,” JPM-CIO-PSI 0001646. Later that day, Mr. Macris sent Mr. Braunstein a presentation that included a chart of the notional amounts of trade positions as of January, February, March, and the current date. See 4/9/2012 email from Achilles Macris, CIO, to Douglas Braunstein, JPMorgan Chase, and Ina Drew, CIO, “Synthetic Credit Presentation,” JPM-CIO-PSI-H 0002204, at 212. On April 12, Ms. Drew sent Mr. Braunstein and other members of senior management an email with a simplified version of the information, showing position increases from January to the current date. 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, “Synthetic Credit Materials,” JPM-CIO-PSI 0001100, at 103. 1463 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit information,” JPM-CIO-PSI 0001701, at 702; see also Chapter V discussion, citing Subcommittee interviews of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) and Douglas Braunstein, JPMorgan Chase (9/12/2012). Mr. Hogan and Mr. Braunstein each explained to the Subcommittee that, while it is theoretically possible to trade 100% of the average daily volume of an instrument in a single day, it is economically unwise to do so, since a single party trading that volume in a day would cause significant adverse movements in the prices of the instruments. 1464 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI 0000539. 1465 Subcommittee interviews of Ina Drew, CIO (9/7/2012, 12/11/2012). Mr. Dimon told the Subcommittee that he was not aware at the time that Ms. Drew had ordered the trading to stop. See Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1466 See Chapter V, describing the breaches of CIO VaR, CS01, and CSW10%, among other risk limits. 1467 3/30/2012 email from Achilles Macris, CIO, to John Hogan, JPMorgan Chase, “synthetic credit- crisis action plan,” JPM-CIO-PSI 0001220. 1468 See 3/30/2012 email from William McManus, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, and others, “Audit Report: EMEA CIO Credit- Market Risk and Valuation Practices (Rating Needs Improvement),” JPM-CIO-PSI 0009289. Mr. Braunstein told the Subcommittee that he did not recall reading the report at this time. Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1469 5/2/1012 email from Ina Drew, CIO, to Ina Drew, CIO, [no subject], JPM-CIO-PSI 0001212-214, at 214.
261 that bank executives were evaluating the consequences of public disclosures related to the SCP, including the financial fallout upon releasing damaging information about the SCP. Despite the bank’s increasing grasp of the SCP’s concentrated, complex, and deteriorating positions, after the April 13 earnings call the bank did not publicly discuss the SCP again until nearly a month later, on May 10, 2012, when the bank filed its 10-Q form with the SEC finalizing its first quarter financial results. That day, it also held a “business update” call with analysts, investors, the media, and others. In contrast to the views provided on April 13, 2012, the 10-Q filing and call presented a much more negative picture of the SCP. JPMorgan Chase reported that the SCP had incurred a $2 billion loss in the second quarter, and additional losses were expected. 1470 In addition, the 10-Q provided a chart on the CIO’s VaR totals, showing a revised quarter-end VaR total that was nearly double the earlier reported figure. 1471 During the business update call, Mr. Dimon spoke at length about the SCP: “We are also amending a disclosure in the first quarter press release about CIO’s VAR, Value-at-Risk. We’d shown average VAR at 67. It will now be 129. In the first quarter, we implemented a new VAR model, which we now deemed inadequate. And we went back to the old one, which had been used for the prior several years, which we deemed to be more adequate. … Regarding what happened, the synthetic credit portfolio was a strategy to hedge the Firm’s overall credit exposure, which is our largest risk overall …. We’re reducing that hedge. But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective [an] economic hedge than we thought. … We have more work to do, but it’s obvious at this point that there are many errors, sloppiness and bad judgment. I do remind you that none of this has anything to do with clients. … [W]e’ve already changed some policies and procedures, as we’ve gone along. In addition you should know that all appropriate corrective actions will be taken, as necessary, in the future. … The portfolio still has a lot of risk and volatility going forward. … It could cost us as much as $1 billion or more. … These were grievous mistakes, they were self inflicted, we were accountable and we happened to violate our own standards and principles by how we want to 1470 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 1-2, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf. 1471 See 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 73, http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=19617-12-213.
Page 1 and 2:
United States Senate PERMANENT SUBC
Page 3 and 4:
JPMORGAN CHASE WHALE TRADES: A CASE
Page 5 and 6:
(a) Background ....................
Page 7 and 8:
JPMORGAN CHASE WHALE TRADES: A CASE
Page 9 and 10:
materials and reports on the whale
Page 11 and 12:
(2) Hiding Losses 5 In its first fo
Page 13 and 14:
7 The ability of CIO personnel to h
Page 15 and 16:
9 incorrect information, and at oth
Page 17 and 18:
11 “fully aware” of its activit
Page 19 and 20:
13 activities to continue, includin
Page 21 and 22:
15 Senior bank management was also
Page 23 and 24:
17 specified level; and requiring d
Page 25 and 26:
19 principal bank subsidiaries are
Page 27 and 28:
to assuming that post in February 2
Page 29 and 30:
consisted of stressed or distressed
Page 31 and 32:
25 commuted to his job in London. 8
Page 33 and 34:
27 banks’ deposits, the OCC is th
Page 35 and 36:
29 holding down interest rates, the
Page 37 and 38:
31 combine them into a single dolla
Page 39 and 40:
33 index known as the “XO” inde
Page 41 and 42:
III. INCREASING RISK 35 In 2005, JP
Page 43 and 44:
37 derivatives was unusual for a CI
Page 45 and 46:
39 provide information to the agenc
Page 47 and 48:
Source: Replication of Subcommittee
Page 49 and 50:
43 costly if they do occur. 234 JPM
Page 51 and 52:
45 the SCP was expected to gain $1
Page 53 and 54:
47 bank in those scenarios. 275 Tha
Page 55 and 56:
49 would not function as a hedge at
Page 57 and 58:
earish. 308 According to Mr. Macris
Page 59 and 60:
53 Subcommittee for more complete R
Page 61 and 62:
55 until after the OCC began examin
Page 63 and 64:
57 (5) SCP Trader Compensation SCP
Page 65 and 66:
The compensation data for both Mr.
Page 67 and 68:
the CIO to protect its $350 billion
Page 69 and 70:
63 that CIO would exit the syntheti
Page 71 and 72:
2012, Mr. Iksil reported internally
Page 73 and 74:
67 Martin-Artajo, Mr. Macris did no
Page 75 and 76:
69 20.5 Bln but the current model u
Page 77 and 78:
71 Of the four scenarios laid out i
Page 79 and 80:
73 during a market rally so, accord
Page 81 and 82:
75 Buy protection on the tightening
Page 83 and 84:
77 asked the OCC about those losses
Page 85 and 86:
79 derivatives and incurring even m
Page 87 and 88:
81 Drew he wanted to wait until the
Page 89 and 90:
83 2012, Mr. Iksil warned his super
Page 91 and 92:
poor the SCP recordkeeping was, but
Page 93 and 94:
87 The order to stop trading preven
Page 95 and 96:
Source: See 07/16/2012 FDIC present
Page 97 and 98:
positions in newly issued credit in
Page 99 and 100:
93 In another context, Mr. Dimon wa
Page 101 and 102:
95 order to be substantiated. In ad
Page 103 and 104:
97 agitation over underreporting SC
Page 105 and 106:
A. Background 99 (1) Valuing Deriva
Page 107 and 108:
which it holds a concentrated block
Page 109 and 110:
103 market making groups in the Inv
Page 111 and 112:
105 provide his judgment and estima
Page 113 and 114:
107 of the last 16 business days --
Page 115 and 116:
109 The SCP had never before experi
Page 117 and 118:
111 Evidence indicates that the CIO
Page 119 and 120:
113 showed that the unreported loss
Page 121 and 122:
115 that the bank’s internal inve
Page 123 and 124:
117 daily loss of $43 million and a
Page 125 and 126:
119 On the same call, Mr. Martin-Ar
Page 127 and 128:
121 Mr. Martin-Artajo: “No, no, n
Page 129 and 130:
123 showing the losses, Ms. Drew to
Page 131 and 132:
125 trades using the Investment Ban
Page 133 and 134:
127 Mr. Macris: “… Javier has,
Page 135 and 136:
129 Mr. Pinto: “Ok. And you think
Page 137 and 138:
131 to the portfolio’s enormous s
Page 139 and 140:
133 “In terms of the worse case s
Page 141 and 142:
135 point in the year. The cumulati
Page 143 and 144:
137 Subcommittee that the CIO did n
Page 145 and 146:
139 Chief Investment Office Collate
Page 147 and 148:
sources, and inadequate procedures
Page 149 and 150:
143 CDX.NA.IG 0-3% S09 10Y 60.750 6
Page 151 and 152:
145 million before adjustment to th
Page 153 and 154:
147 “The Firm believes that its v
Page 155 and 156:
149 That the bank’s Controller fo
Page 157 and 158:
E. Admitting the Mismarking 151 Som
Page 159 and 160:
153 The bank told the Subcommittee
Page 161 and 162:
155 In the case of the bank’s CRM
Page 163 and 164:
157 The bank’s reliance on Ms. Dr
Page 165 and 166:
159 For both the bank and its busin
Page 167 and 168:
161 breaches, bank documents indica
Page 169 and 170:
163 “[Mr. Zubrow] bears significa
Page 171 and 172:
usiness. 922 165 As a result, bank
Page 173 and 174:
167 period of time to a certain deg
Page 175 and 176:
169 management team in London. 941
Page 177 and 178:
171 Assets (RWA) results for the CI
Page 179 and 180:
173 Portfolio “maintained its ups
Page 181 and 182:
175 On January 16, 2012, the CIO’
Page 183 and 184:
177 The Subcommittee could identify
Page 185 and 186:
chief market risk officer in London
Page 187 and 188:
181 In addition, the Subcommittee w
Page 189 and 190:
Value-at-Risk 183 Value-at-Risk for
Page 191 and 192:
185 At the end of 2011, the SCP con
Page 193 and 194:
187 The newest VaR model “resulte
Page 195 and 196:
189 As discussed earlier and as out
Page 197 and 198:
191 Irvin Goldman, and Peter Weilan
Page 199 and 200:
“Hoping that the model is somehow
Page 201 and 202:
Mr. Bangia: Um hum. 195 Mr. Hagan:
Page 203 and 204:
197 allowed to categorize them in o
Page 205 and 206:
199 derivatives have to be marked-t
Page 207 and 208:
201 The email included a chart, exc
Page 209 and 210:
203 According to the JPMorgan Chase
Page 211 and 212:
205 of several months, exceeding th
Page 213 and 214:
207 CIO Mark-to-Market CSW10% Breac
Page 215 and 216: 209 In early December 2011 these st
Page 217 and 218: 211 advisories, or simply not doing
Page 219 and 220: 213 have in the IB [Investment Bank
Page 221 and 222: management. 1195 215 While each of
Page 223 and 224: 217 Beginning in January and contin
Page 225 and 226: 219 experts. 1201 During the period
Page 227 and 228: 221 (1) 2006-2009: Minimizing OCC O
Page 229 and 230: 223 CIO management needed to “doc
Page 231 and 232: 225 risk personnel criticized the O
Page 233 and 234: 227 bank reportedly spent $1 billio
Page 235 and 236: 229 understanding: “We were infor
Page 237 and 238: 231 basic reports on a timely basis
Page 239 and 240: 233 report provided the OCC with we
Page 241 and 242: 235 apparent in contemporaneous ban
Page 243 and 244: 237 (1) Providing OCC with Limited
Page 245 and 246: 239 Subcommittee that the bank’s
Page 247 and 248: 241 breaching its risk limits. In a
Page 249 and 250: 243 that the CIO may have been over
Page 251 and 252: 245 On May 9, 2012, the OCC held a
Page 253 and 254: 247 losses, litigation etc).” 140
Page 255 and 256: 249 Secondly, the OCC examination t
Page 257 and 258: F. Analysis 251 The whale trades pr
Page 259 and 260: y the bank were incomplete, contain
Page 261 and 262: 255 When asked in a May 10 call wit
Page 263 and 264: 257 of the Volcker Rule, quoting le
Page 265: 259 reporting. All of those positio
Page 269 and 270: (1) Rule 10b-5 263 Materiality. Dis
Page 271 and 272: 265 (2) Section 17(a) of the Securi
Page 273 and 274: 267 At the same time, as described
Page 275 and 276: 269 (2) Mischaracterizing SCP as
Page 277 and 278: Synthetic Credit Portfolio was in
Page 279 and 280: 273 had increased in size since Jan
Page 281 and 282: 275 respond to regulators’ questi
Page 283 and 284: 277 Scenario Analysis Showed SCP Wa
Page 285 and 286: 279 Source: 2/2012 “CIO February
Page 287 and 288: 281 Source: 4/11/2012 email from Jo
Page 289 and 290: 283 During his interview, the Subco
Page 291 and 292: 285 “The synthetic credit book, a
Page 293 and 294: mitigating hedging activities,” m
Page 295 and 296: 289 (6) Omitting VaR Model Change A
Page 297 and 298: 291 recast the CIO’s VaR-95 total
Page 299 and 300: 293 and accompanying earnings call
Page 301 and 302: 295 Source: 2/2012 presentation sli
Page 303 and 304: 297 The May 10 10-Q reported that a
Page 305 and 306: 299 was not, included in the bank
Page 307: 301 When the SCP’s massive trades
show all

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

Create successful ePaper yourself

Delete template?

Save as template?