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

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At the same time, as described in Chapter V, the CIO had allowed the SCP to repeatedly
breach the risk limits and metrics it had in place. Rather than react to those breaches by reducing
the risky trading activities and assets in the SCP, the CIO traders instead reacted to the breaches
– of Value-at-Risk, Comprehensive Risk Measure, CS01, CSW10%, and stop loss limits – by
disregarding the limit or metric, raising the relevant limit to end the breach, or changing the
model evaluating the risk to lower the SCP’s risk profile. 1506 In one case, the CIO’s risk officers
allowed the CIO to breach a credit spread risk limit by more than 1,000% for over two
months. 1507
In addition to problems with its risk limits and metrics, the CIO had an overdue Matter
Requiring Attention from the OCC from 2010, regarding its need to document its portfolio
1508
decision-making process, and had recently been told in an Internal Audit report that its asset
valuation practices “need[ed] improvement.” 1509 Two days before the April 13 earnings call,
Chief Risk Officer John Hogan emailed Mr. Braunstein and others about the discrepancy
between CIO’s risk management procedures and the more robust Investment Bank (IB) system:
“This is the governance used in the IB to control what is currently going on in CIO. We
(obviously) need to implement this in CIO as soon as possible.” 1510
In the April 13 8-K filing and earnings call, Mr. Braunstein made no mention of the CIO
or SCP risk deficiencies or the many risk limit breaches triggered by the SCP during the first
quarter of 2012, even though investors likely would have wanted to know that the whale trades
had breached all of the relevant risk limits during the first quarter, and many of those breaches
were ongoing. That information would have certainly weighed against the false impression that
Mr. Braunstein imparted: that the whale trades were known to and had been approved by the
bank’s risk managers.
A month later, in the May 10 10-Q business update call, Mr. Dimon admitted serious risk
management failings in connection with the SCP. 1511
That those risk management deficiencies
were of interest to investors and analysts was shown, not only by the questions asked during the
May 10 call, but also in later communications with the bank. JPMorgan Chase emails show that,
required only annually, as opposed to semi-annually. Notwithstanding this requirement, prior to May 2011, the last
review of all CIO limits was conducted by CIO in 2009.”).
1506
See Chapter V, “Disregarding CIO Risk Metrics” section.
1507
See 4/19/2012 email from Peter Weiland, CIO, to James Hohl, OCC, “Info on VaR, CSBPV, and stress status
and limits,” OCC-SPI-00022340 (In response to a CSBPV breach of 1074% over 71 days, Mr. Weiland told the
OCC: “We are working on a new set of limits for synthetic credit and the current CS01 will be replaced by
something more sensible and granular.”).
1508
See 12/8/2010 Supervisory Letter JPM-2010-80, OCC-SPI-00011201 [Sealed Exhibit]. The letter was copied to
Jamie Dimon, Douglas Braunstein, Barry Zubrow, Stephen Cutler, and others. For more information about this
letter, see Chapter VI.
1509
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 that time.
Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). He also noted that the CIO wasn’t
given the lowest rating that it could have been given on the Internal Audit’s rating spectrum. Id.
1510
4/11/2012 email from John Hogan, JPMorgan Chase, to Jes Staley, IB, Douglas Braunstein, JPMorgan Chase,
and others, “Credit risk limits,” JPM CIO PSI 0001086.
1511
See 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 4,
http://i.mktw.net/_newsimages/pdf/jpm-conference-call.pdf.