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

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problems in early May, only days before it disclosed such losses publicly as part of its 10-Q filing. 1522 270 By telling investors that the Synthetic Credit Portfolio positions were “fully transparent” to regulators, the bank likely sought to reassure investors about the risky whale trades that the 1523 media had characterized as large enough to “driv[e] prices in the $10 trillion market.” It would be reasonable for investors to want to know if such large positions were known to the bank’s regulators. Investors might have reasoned that such trades, if known to regulators, could not have been overly risky; but if hidden, investors might have worried they were high risk transactions that regulators might otherwise have challenged. (3) Mischaracterizing SCP Decisions as “Made on a Very Long-Term Basis” On the April 13, 2012 earnings call, Mr. Braunstein indicated that the SCP book provided stress loss protection against credit risk and that with regard to “managing” the stress loss positions, “[a]ll of those decisions are made on a very long-term basis.” 1524 His statement suggested that the SCP had no short-term trading strategies or tactics to guide the portfolio. In fact, however, many of the SCP trading strategies and tactics employed a short time horizon, changing on a monthly or even day-to-day basis. Mr. Braunstein’s statement was inconsistent with both the overall short-term posture of the portfolio, as well as the portfolio’s decisionmaking since at least 2011. It was contrary to the facts. In general, the Synthetic Credit Portfolio did not have a “long-term” investment horizon. To the contrary, since at least 2010, CIO head Ina Drew’s presentations to her colleagues at the bank, including Mr. Braunstein, showed that the Synthetic Credit Portfolio, which was part of the larger Tactical Asset Allocation portfolio, had the shortest investment horizon of all of the 1525 portfolios in the CIO. One of those presentations by Ms. Drew, reprinted below, took place in March 2012, just a month before the earnings call. 1526 1522 See discussion in Chapter VI, citing, e.g., 5/4/2012 email from Scott Waterhouse, OCC, to Fred Crumlish, OCC, CIO Synthetic Position, OCC-SPI-00013763 (“Doug Braunstein and John Hogan called to provide an update on the CIO position. . . . Current losses are approximately $1.6 billion.”) 1523 “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg, Stephanie Ruhle, Bradley Keoun & Mary Childs (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-todistort-credit-indexes.html (“A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said.”). 1524 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 0001151 (stated by Douglas Braunstein). 1525 See, e.g., 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” presentation prepared by Ina Drew and Irvin Goldman, CIO, JPM-CIO-PSI 0015015; 2/28/2012 email from John Wilmot, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and others, “CIO Business Review Materials,” JPM-CIO- PSI 0001940, at 8; 9/2010 “Chief Investment Office Presentation to the Directors Risk Policy Committee,” presentation prepared by Ina Drew, CIO, OCC-SPI-000032575, at 576 (showing an earlier version of the same page regarding short-to-long term investment horizon, with “Tactical Investing,” which included the Synthetic Credit Portfolio, as the portfolio in CIO with the shortest investment horizon). 1526 See 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” presentation prepared by Ina Drew and Irvin Goldman, at CIO, JPM-CIO-PSI 0015016.
Synthetic Credit Portfolio was in “International” 271 Source: 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” presentation prepared by Ina Drew and Irvin Goldman, CIO, JPM-CIO-PSI 0015016.
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United States Senate PERMANENT SUBC
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JPMORGAN CHASE WHALE TRADES: A CASE
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(a) Background ....................
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JPMORGAN CHASE WHALE TRADES: A CASE
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materials and reports on the whale
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(2) Hiding Losses 5 In its first fo
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7 The ability of CIO personnel to h
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9 incorrect information, and at oth
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11 “fully aware” of its activit
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13 activities to continue, includin
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15 Senior bank management was also
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17 specified level; and requiring d
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19 principal bank subsidiaries are
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to assuming that post in February 2
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consisted of stressed or distressed
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25 commuted to his job in London. 8
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27 banks’ deposits, the OCC is th
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29 holding down interest rates, the
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31 combine them into a single dolla
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33 index known as the “XO” inde
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III. INCREASING RISK 35 In 2005, JP
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37 derivatives was unusual for a CI
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39 provide information to the agenc
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Source: Replication of Subcommittee
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43 costly if they do occur. 234 JPM
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45 the SCP was expected to gain $1
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47 bank in those scenarios. 275 Tha
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49 would not function as a hedge at
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earish. 308 According to Mr. Macris
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53 Subcommittee for more complete R
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55 until after the OCC began examin
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57 (5) SCP Trader Compensation SCP
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The compensation data for both Mr.
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the CIO to protect its $350 billion
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63 that CIO would exit the syntheti
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2012, Mr. Iksil reported internally
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67 Martin-Artajo, Mr. Macris did no
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69 20.5 Bln but the current model u
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71 Of the four scenarios laid out i
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73 during a market rally so, accord
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75 Buy protection on the tightening
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77 asked the OCC about those losses
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79 derivatives and incurring even m
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81 Drew he wanted to wait until the
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83 2012, Mr. Iksil warned his super
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poor the SCP recordkeeping was, but
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87 The order to stop trading preven
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Source: See 07/16/2012 FDIC present
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positions in newly issued credit in
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93 In another context, Mr. Dimon wa
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95 order to be substantiated. In ad
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97 agitation over underreporting SC
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A. Background 99 (1) Valuing Deriva
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which it holds a concentrated block
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103 market making groups in the Inv
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105 provide his judgment and estima
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107 of the last 16 business days --
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109 The SCP had never before experi
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111 Evidence indicates that the CIO
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113 showed that the unreported loss
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115 that the bank’s internal inve
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117 daily loss of $43 million and a
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119 On the same call, Mr. Martin-Ar
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121 Mr. Martin-Artajo: “No, no, n
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123 showing the losses, Ms. Drew to
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125 trades using the Investment Ban
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127 Mr. Macris: “… Javier has,
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129 Mr. Pinto: “Ok. And you think
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131 to the portfolio’s enormous s
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133 “In terms of the worse case s
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135 point in the year. The cumulati
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137 Subcommittee that the CIO did n
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139 Chief Investment Office Collate
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sources, and inadequate procedures
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143 CDX.NA.IG 0-3% S09 10Y 60.750 6
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145 million before adjustment to th
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147 “The Firm believes that its v
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149 That the bank’s Controller fo
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E. Admitting the Mismarking 151 Som
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153 The bank told the Subcommittee
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155 In the case of the bank’s CRM
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157 The bank’s reliance on Ms. Dr
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159 For both the bank and its busin
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161 breaches, bank documents indica
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163 “[Mr. Zubrow] bears significa
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usiness. 922 165 As a result, bank
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167 period of time to a certain deg
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169 management team in London. 941
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171 Assets (RWA) results for the CI
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173 Portfolio “maintained its ups
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175 On January 16, 2012, the CIO’
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177 The Subcommittee could identify
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chief market risk officer in London
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181 In addition, the Subcommittee w
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Value-at-Risk 183 Value-at-Risk for
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185 At the end of 2011, the SCP con
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187 The newest VaR model “resulte
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189 As discussed earlier and as out
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191 Irvin Goldman, and Peter Weilan
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“Hoping that the model is somehow
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Mr. Bangia: Um hum. 195 Mr. Hagan:
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197 allowed to categorize them in o
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199 derivatives have to be marked-t
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201 The email included a chart, exc
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203 According to the JPMorgan Chase
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205 of several months, exceeding th
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207 CIO Mark-to-Market CSW10% Breac
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209 In early December 2011 these st
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211 advisories, or simply not doing
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213 have in the IB [Investment Bank
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management. 1195 215 While each of
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217 Beginning in January and contin
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Page 227 and 228: 221 (1) 2006-2009: Minimizing OCC O
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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
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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 and 266: 259 reporting. All of those positio
Page 267 and 268: 261 that bank executives were evalu
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: 269 (2) Mischaracterizing SCP as
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
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JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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