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

282
The three scenarios he referenced, numbered 4, 5, and 6, above, considered what would
happen in the event of a “New Financial Crisis,” if the “Status Quo” continued, or if a “Central
Scenario” took place. But contrary to Mr. Braunstein’s statement, all three scenarios indicated
that the SCP book had stopped providing stress loss protection and would likely lose money.
Scenario 4, labeled “New Financial Crisis,” considered what would happen if credit
spreads widened by 25%, and projected that, in that scenario, the SCP would lose $250 million.
Several JPMorgan Chase officials had told the Subcommittee that a financial crisis continued to
be the “tail event” that the book was meant to hedge. 1575 Mr. Dimon explained that it was the
original purpose of the hedge, 1576 and that the SCP had made money for JPMorgan Chase during
the 2008 financial crisis as a hedge against credit widening. 1577
Yet by April 11, 2012, the bank
projected that the SCP would lose money in just such a scenario, a projection inconsistent with a
book intended to provide protection against stress loss from credit risk.
Scenario 5 considered what would happen under the “Status Quo.” In this scenario, as
the name indicated, credit spreads did not tighten or widen, yet the SCP was projected to lose
$150 million. In fact, the narrative below the chart indicated that, under this scenario, the SCP
would lose $300 million, but those losses would be partially offset by the book’s positive carry –
that is, the premiums the book would take in from having sold long credit protection to short
1578
parties.
Scenario 6 considered what would happen under the so-called “Central Scenario.” In this
scenario, credit spreads tightened by 15%, and the SCP book was projected to make a profit of
$350 million. In other words, the SCP book would make money during a bull market when the
credit environment improved. That is the opposite of what Ms. Drew had described as the
purpose of the book – that when it was a hedge, the book provided protection against credit
1579
spread widening events.
These three scenarios in the April 11 presentation indicated that when the credit
environment improved, the SCP would make money, and that when credit deteriorated (or stayed
the same), the SCP would lose money. Far from indicating that the SCP provided stress loss
protection associated with credit risk, the April 11 presentation showed that the SCP book held
the same long position as the bank and did not support Mr. Braunstein or Mr. Dimon’s
descriptions of the SCP as an offset of the bank’s other credit exposures or as stress loss
protection.
1575
Subcommittee briefing by JPMorgan Chase (8/15/2012) (stated by Gregg Gunselman).
1576
Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “A Breakdown in Risk Management:
What Went Wrong at JPMorgan Chase?” before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, S.Hrg. 112-715 (June 13, 2012), http://www.cq.com/doc/congressionaltranscripts-4105471 (“[W]hat I'm
told is they thought what they were doing is a more cost-efficient way to reduce the exposure and maintain some of
hedge against back-tail events.”).
1577
As Ina Drew herself pointed out to Mr. Braunstein and other members of the operating committee a week before
the earnings call: “Going into the [financial] crisis we used the book to hedge ... credit widening.” See 4/5/2012
email from Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, “CIO,” JPM-CIO-PSI 0000539.
1578
See 4/11/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “updated,” JPM-CIO-
PSI 0001077, with chart entitled “Synthetic Credit Summary,” at 078 (“-300MM due to ‘duration extension’ as we
project that the short-dated short risk duration in IG will contract as expiry approaches”).
1579
4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI
0000539.