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

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296 The “VaR Highlights” section explained that an “[e]nhanced VaR methodology ... [is] helping to reduce VaR and RWA usage” at the CIO. 1631 It also provided a line graph showing the trend in the CIO’s “Global” VaR totals, as reported in its 10-Q filings going back to January 2011. The line graph showed the VaR total peaking in January 2012 at $120 million, followed by a precipitous decline. 1632 That decline was the result of the new VaR model which had reduced the CIO’s risk rating by 50%. Mr. Dimon told the Subcommittee that he did not specifically recall the February 1633 meeting, but stipulated that he saw the presentation. Mr. Braunstein told the Subcommittee that he attended the February Business Review, but that attendees usually did not go over every page of the presentation at the meeting and he did not recall the VaR highlights section. 1634 However, Irvin Goldman, then Chief Risk Officer for the CIO, told the Subcommittee that he specifically remembered going over the implementation of the new VaR methodology at the February meeting, and that there were no questions on it. 1635 No public disclosure of the January 27 change in CIO VaR methodology was made until May 10, 2012, the day that JPMorgan Chase also disclosed that the SCP had lost nearly $2 billion and was expected to lose more. On that date, Mr. Dimon described the change in the VaR models during a business update call. 1631 Id. 1636 On that same day, JPMorgan Chase filed its 10-Q quarterly report, finalizing its first quarter financial results. The 10-Q report included a chart, reprinted below, with revised VaR results for the CIO during the first quarter, but unlike the business update call, did not publicly disclose and explain the CIO VaR model changes. 1632 Id. 1633 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012) (describing the “CIO February 2012 Business Review,” JPM-CIO-PSI 0000289). 1634 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1635 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 1636 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2-3, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf (Mr. Dimon: “We are also amending a disclosure in the first quarter press release about CIO’s VAR, Value-at-Risk. We’d shown average VAR at 67. It will now be 129. In the first quarter, we implemented a new VAR model, which we now deemed inadequate. And we went back to the old one, which had been used for the prior several years, which we deemed to be more adequate.”).
297 The May 10 10-Q reported that average 1st Quarter CIO VaR was $129 million, double the average 2011 VaR of $60 million. Source: 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 73 [emphasis added with text box and outline of footnote to denote CIO VaR information]. In the chart, JPMorgan Chase disclosed a revised first quarter CIO VaR of $129 million, stating in a footnote that “CIO VaR presented above ... supersedes the Firm’s VaR disclosures included in its Form 8-K filed on April 13, 2012.” 1637 The revised first quarter CIO VaR in the 10-Q was nearly double in size from what had been reported in the April 8-K filing, which had reported CIO VaR totals of $69 million in the first quarter of 2012, and $67 million in the fourth quarter of 2011. 1638 The 10-Q filing contained only a limited explanation for the revised CIO VaR results. A footnote provided an opaque statement that the new total was “calculated using a methodology consistent with the methodology used to calculate CIO’s VaR in 2011.” In addition, using language that did not appear in prior quarterly reports, the 10-Q filing stated: “The Firm’s VaR models are continuously evaluated and enhanced in response to changes in the composition of 1637 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 73, http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=19617-12-213. 1638 4/13/2012 JPMorgan Chase & Co., Form 8-K, at 42, http://files.shareholder.com/downloads/ONE/2063348229x0xS1193125-12-161533/19617/filing.pdf. See also 2/29/2012, JPMorgan Chase & Co., Form 10-K, at 160, http://files.shareholder.com/downloads/ONE/2275559219x0xS19617-12-163/19617/filing.pdf (disclosing CIO average VaR in 2011 to be $57 million, and in 2010, $61 million).
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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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219 experts. 1201 During the period
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221 (1) 2006-2009: Minimizing OCC O
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223 CIO management needed to “doc
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225 risk personnel criticized the O
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227 bank reportedly spent $1 billio
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229 understanding: “We were infor
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231 basic reports on a timely basis
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233 report provided the OCC with we
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235 apparent in contemporaneous ban
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237 (1) Providing OCC with Limited
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239 Subcommittee that the bank’s
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241 breaching its risk limits. In a
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243 that the CIO may have been over
Page 251 and 252: 245 On May 9, 2012, the OCC held a
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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
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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 and 276: 269 (2) Mischaracterizing SCP as
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Page 279 and 280: 273 had increased in size since Jan
Page 281 and 282: 275 respond to regulators’ questi
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Page 285 and 286: 279 Source: 2/2012 “CIO February
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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
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Page 305 and 306: 299 was not, included in the bank
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JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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