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

mitigating hedging activities,” meaning hedging activities that reduce, rather than increase, a
bank’s risk of losses.
287
The basis for Mr. Braunstein’s prediction that the SCP’s trading activities would be found
to be “consistent with” the Volcker Rule is unclear. When the Subcommittee asked JPMorgan
Chase if it had any legal opinion examining how the Volcker Rule would affect the bank’s
business, including the SCP, it responded that no such analysis had been performed. 1603 At the
time Mr. Braunstein made his statement on April 13, the Volcker Rule’s implementing
regulation was still in draft form. Earlier in the year, on February 2, 2012, representatives of the
bank had met with the OCC to voice the bank’s views on the draft regulation. 1604 According to
both the bank and the OCC, at no point did the discussion turn to the Synthetic Credit Portfolio,
so the regulators could not have given the bank any guidance on the effect of the Volcker Rule
on the SCP during that meeting. 1605 On February 13, 2012, the bank submitted an official
comment letter to the OCC and other bank regulators criticizing the draft regulation
implementing the Volcker Rule and offering recommendations for changes. 1606 Among other
criticisms, JPMorgan Chase’s comment letter expressed concern that the Volcker Rule’s
proposed regulation might not permit the CIO to continue to manage the Synthetic Credit
Portfolio. The comment letter stated: “Under the proposed rule, this activity [i.e., credit
derivatives] could have been deemed prohibited proprietary trading.” 1607
This analysis directly
contradicts Mr. Braunstein’s statement during the earnings call that the bank had concluded that
the SCP would be found to be “consistent with” the Volcker Rule.
In addition, when Ina Drew provided briefing materials to Mr. Braunstein the day before
the earnings call, she provided no support for the notion that the synthetic credit trades would be
permitted under the Volcker Rule. She sent him a “Questions and Answers” document, and with
respect to the Volcker rule, wrote:
“[Question:] In your view, could this trading fall afoul of Volcker under a
narrow definition (or even a broad one)?
[Answer:] As Barry Zubrow pointed out in our comments to the Regulators in
February, the language in Volcker is unclear as it pertains to anticipatory hedging
needs on the ALM side. The condition for the hedging exception appears to have
1603
See Subcommittee briefing by JPMorgan Chase (8/23/2012) (Neila Radin and Greg Baer).
1604
“Chronology of JPMC Regulator Meetings,” table provided by JPMorgan Chase at Subcommittee briefing by
JPMorgan Chase (8/23/2012) (attended by Greg Baer, Ina Drew, Irvin Goldman, Neila Radin, John Wilmot and
Barry Zubrow).
1605
Subcommittee interview of Michael Sullivan, OCC (8/30/2012) (stating that there was no mention of the
synthetic credit portfolio).
1606
2/13/2012 letter from JPMorgan Chase, to Department of the Treasury, Board of Governors of the Federal
Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Office of the
Comptroller of the Currency, “Comment Letter on the Notice of Proposed Rulemaking Implementing Section 619 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act,” JPM-CIO-PSI 0013270.
1607
Id. at JPM-CIO-PSI 0013326 (indicating that “the use of credit derivatives,” that is, the Synthetic Credit
Portfolio, was among the bank’s “ALM activities that were crucial during the financial crisis [that] would have been
endangered by the proposed rule.”).