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

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JPMorgan Chase told the Subcommittee that the SCP was not intended to function as a
proprietary trading desk, but as insurance or a “hedge” against credit risks confronting the bank.
While its original approval document indicated that the SCP was created with a hedging function
in mind, the bank was unable to provide documentation over the next five years detailing the
SCP’s hedging objectives and strategies; the assets, portfolio, risks, or tail events it was supposed
to hedge; or how the size, nature, and effectiveness of its hedges were determined. The bank was
also unable to explain why the SCP’s hedges were treated differently from other types of hedges
within the CIO.
While conducting its review of the SCP, some OCC examiners expressed skepticism that
the SCP functioned as a hedge at all. In a May 2012 internal email, for example, one OCC
examiner referred to the SCP as a “make believe voodoo magic ‘composite hedge.’” When he
was asked about the Synthetic Credit Portfolio, JPMorgan Chase CEO Jamie Dimon told the
Senate Banking Committee that, over time, the “portfolio morphed into something that rather
than protect the firm, created new and potentially larger risks.” Mr. Dimon has not
acknowledged that what the SCP morphed into was a high risk proprietary trading operation.
A. Origins of the Synthetic Credit Portfolio
Traditionally, the CIO had invested the bank’s excess deposits in very safe instruments,
an approach typical among large banks. 184 Those instruments included, for example, U.S.
treasury bonds, municipal bonds, corporate securities, high grade corporate bonds, and high
grade mortgage-backed securities. 185 At a Senate hearing, Mr. Dimon stated: “the bulk of CIO’s
responsibility is to manage [its] portfolio in a conservative manner,” noting that the average
credit rating for its investment holdings was AA+. 186
The OCC told the Subcommittee that, over time, the CIO also began to invest in higher
risk corporate bonds to balance out its portfolio and achieve a higher investment return with a
187
“decent” risk profile. The CIO also diversified its portfolio with a mix of instruments to avoid
concentrating its investments in one type of instrument. 188
In 2006, CIO hired a new trader, David Olson, to diversify the excess deposits investment
189
portfolio by purchasing credit products. According to the OCC, purchasing synthetic credit
184
Subcommittee interview of Mike Sullivan, OCC (8/30/2012).
185
1/16/2013 “Report of JPMorgan Chase & Co. Management Task Force Regarding 2012 CIO Losses,”
http://files.shareholder.com/downloads/ONE/2288197031x0x628656/4cb574a0-0bf5-4728-9582-
625e4519b5ab/Task_Force_Report.pdf (hereinafter “2013 JPMorgan Chase Task Force Report”), at 22; Levin
Office Briefing by JPMorgan Chase, (5/22/2012) (Greg Baer); 2/8/2012 email from Jaymin Berg, OCC, to Fred
Crumlish, OCC, OCC-SPI-00022351 (describing the portfolio as “36 percent US government and agency
securities,” with the remainder primarily in mortgage backed securities).
186
Testimony of Jamie Dimon, “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://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=32db0782-9ccf-42fd-980e-
00ab870fd0d9.
187
Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).
188
Id.
189
Subcommittee interview of David Olson, CIO (9/14/2012).