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

models.” 1648
300
Had the same VaR information been disclosed in April, it would likely have been
of interest then, as well.
In explaining the VaR to the Subcommittee, Mr. Dimon downplayed its importance to
investors as a risk measure, characterizing it as “deceptive,” but he also admitted that a VaR of
1649
$150 million would have caused investors to possibly “ask about it.” The OCC Examiner-In-
Charge at JPMorgan Chase, Scott Waterhouse, also thought that a big VaR change would have
triggered questions. As Mr. Waterhouse explained, a change in VaR from $69 million to $67
million is not important, but a change from $69 million to $129 million would have led him to
“ask questions: Why did it go up? Did the model change? Did they buy something?” 1650
JPMorgan Chase’s April 13 VaR disclosure – coming on the heels of the media reports about the
whale trades – masked the risk increase in the CIO in a way that likely fended off potential
questions from investors.
D. Analysis
As 2012 unfolded, the losses associated with the Synthetic Credit Portfolio continued to
mount. When asked why its April statements were so positive in light of the ongoing, serious
problems with the SCP, multiple senior JPMorgan Chase executives told the Subcommittee that
the bank, like the traders, initially believed the SCP positions would “mean revert,” that is, return
to their prior profitability. 1651 Bank representatives explained that the credit derivative markets
were not behaving in line with historic norms, and it was likely that the norms would return, and
with them, the SCP gains. 1652 The markets, however, were not behaving in line with historic
norms, in large part because the CIO traders had distorted them by engaging in massive trades
and accumulating massive positions of synthetic instruments in markets with few
participants. 1653 When the CIO traders finally stopped buying and started to exit their positions,
changes in the value of the very indices that the CIO had overwhelmed made it even more
difficult to exit them without incurring huge losses. 1654
1648
5/14/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10-
Q call - Buyside and sellside comments (10),” JPM-CIO-PSI 0018241.
1649
Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).
1650
Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).
1651
See, e.g., Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012); 2013 JPMorgan Chase
Task Force Report, at 5, 65 n.79, 68, 71, & 89. Some bank representatives also explained that the bank was
sensitive to providing position information that could be used against it in the marketplace, but that reasoning offers
no defense to volunteering misleading information to investors. “Rule 10b-5(b) do[es] not create an affirmative duty
to disclose any and all material information. Disclosure is required under th[is] provision only when necessary ‘to
make …statements made, in light of the circumstances under which they were made, not misleading …. Even with
respect to information that a reasonable investor might consider material, companies can control what they have to
disclose under these provisions by controlling what they say to the market.” Matrixx Initiatives, Inc. v. Siracusano,
131 S. Ct. 1309, 1321-21 (2011).
1652
Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9/12/2012) and Michael Cavanagh,
JPMorgan Chase (12/12/2012).
1653
See discussion in Chapter III. For example, an April 2012 analysis stated that, at the end of March, the SCP held
an $82 billion long position in the IG9 index alone, which comprised nearly half the market in that index. See
DTCC presentation to Subcommittee (9/27/2012) at 2, PSI-DTCC-01-000001 (showing total CDX IG9 untranched
trading to total approximately $150 billion).
1654
A chart prepared by the bank shows a general decline in credit spreads for the IG9 credit index from January
2012 until March 23, 2012, the day Ina Drew told the traders to stop trading, after which the prices began to