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

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“The synthetic credit book, as a dedicated hedge to our credit longs, continues to
be short HY. In Q4 [2011], we decided to neutralize the risk profile of this
book for two reasons: a) the large realized gains around the AMR [American
Airlines bankruptcy] events, and b) given our large investment program in cash
credit securities and related view.” 1594
In other words, while the SCP book continued to have some short, high yield positions, the
addition of over $100 billion in investment grade longs “neutralized” the SCP book, and resulted
1595
in the portfolio’s becoming, as Ina Drew indicated in her April 5 email, net long.
Those longs were also purchased by the SCP to produce “carry” from the short parties in
order to help offset the losses being incurred by the portfolio. Mr. Wilmot, the CIO CFO,
another person from whom Mr. Braunstein said that he gathered information, explained to Mr.
Braunstein that the long positions were purchased for carry, that is, profit. 1596 Mr. Hogan, the
bank’s Chief Risk Officer, emailed a similar explanation to Mr. Dimon: “I would say they just
wanted to improve the carry on the book by selling protection [i.e. long positions] and taking in
some premium.” 1597 Ms. Drew also informed both Mr. Braunstein and Mr. Dimon that the
“Investment Grade strategies” were to provide “some carry.” 1598
Nowhere, however, in the
bank’s press statements, earnings call commentary, or SEC filings did the bank disclose this
trading strategy to investors – that the SCP was purchasing long credit derivatives in part to
produce carry and offset short term losses from its high yield short positions.
Finally, the rest of the April 11 presentation does not support Mr. Braunstein’s claim that
the SCP was a hedge. The presentation examined the SCP’s holdings relating to individual
corporations, but did not identify or assess any offsetting exposures at the bank that were being
1594 4/8/2012 email from Achilles Macris, CIO, to Ina Drew, CIO and others, JPMorgan Chase, “Synthetic Credit
Summary,” JPM-CIO-PSI 0001588 (emphasis added).
1595 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, “CIO,” JPM-CIO-PSI
0000539.
1596 On the day before the earnings call, in response to a question by Mr. Braunstein as to why the CIO had not
simply reduced its high yield positions instead of adding the IG9 long positions, the CIO’s Chief Financial Officer
John Wilmot answered that the book sought to produce “carry (ie associated p&l).” 4/9/2012 email from John
Wilmot, CIO, to Ina Drew, CIO and others, “Deliverables for meeting tomorrow,” JPM-CIO-PSI 0001646. In other
words, the CIO bought the $100 billion in long positions in part to generate “carry” or premiums from the short
parties which the CIO could then use to offset some of the losses being incurred by the book’s other positions.
1597 4/13/2012 email from John Hogan, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, “CIO,” JPM-CIO-PSI
0001753.
1598 See 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and others,
“Synthetic Credit Materials,” JPM-CIO-PSI 0001100, at 101 (“The way that we at CIO have book-run the Core
book to balance the negative carry cost of the High yield Book overtime has been using Investment Grade strategies
that gave us some carry or buying optionality (or both) ….”). In other words, Ms. Drew’s email indicated that the
SCP book was purchasing IG9 tranches, not to hedge a bank credit risk, but to produce “carry” or premiums to
finance the purchase of some of the short positions in the High Yield credit indices. Mr. Braunstein told the
Subcommittee that he was familiar with that paragraph of her email. Mr. Braunstein conceded in his interview that
the investment grade long positions “helped pay for the carry for the high yield positions” and that they may also
have been used to “cover” the high yield short positions. He also said that the purpose “may have both and it
depends when.” Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).