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

44
CIO’s International unit – Achilles Macris, who oversaw the Synthetic Credit Portfolio – claimed
it was meant to hedge the international component of the AFS book. 244 Former CIO head Ina
Drew even told the Subcommittee at one point that every CIO trader had a book that it was
hedging, including the SCP traders, yet the Subcommittee has found no evidence to support that
assertion. 245
246
It is possible the SCP may have been meant to hedge all of the above at some point.
Ms. Drew explained that the SCP originally hedged the bank’s entire balance sheet. 247 However,
after the financial crisis intensified in 2008, the CIO’s Available-For-Sale (AFS) portfolio
expanded, acquired greater credit risk, and became a more obvious candidate for hedging. 248
The OCC Examiner-in-Charge at JPMorgan Chase agreed with that analysis, noting that the
CIO’s AFS portfolio grew from $70 billion to $350 billion after 2008, acquiring substantial
credit risk along the way. 249 Mr. Wilmot, former CIO CFO, told the Subcommittee that the SCP
was meant to hedge the CIO’s own AFS book, but could have also been used for other risks on
the bank’s balance sheet, albeit not all of the structural risk in the firm. 250
While it is possible
that the portfolio the SCP was meant to hedge changed over time; the absence of SCP
documentation is inadequate to establish whether that was, in fact, the case.
At the same time, the CIO’s most senior quantitative analyst, Patrick Hagan, who joined
the CIO in 2007 and spent about 75% of his time on SCP projects, told the Subcommittee that he
was never asked at any time to analyze another portfolio of assets within the bank, as would be
251
necessary to use the SCP as a hedge for those assets. In fact, he told the Subcommittee that he
was never permitted to know any of the assets or positions held in other parts of the bank. 252
Given the lack of precision on the assets to be hedged, JPMorgan Chase representatives
have admitted to the Subcommittee, that calculating the size and nature of the hedge was “not
253 254 255
that scientific” and “not linear.” According to Ms. Drew, it was a “guesstimate.” She
told the Subcommittee that there was “broad judgment” about how big the hedge should be, and
that she used her “partners” as “sounding boards” if she later wanted to deviate from what had
been agreed to. 256
According to the OCC, on April 16, 2012, JPMorgan Chase told the OCC that
Olson, CIO (9/14/2012). Several OCC officials also expressed this view. Subcommittee interviews of Elwyn
Wong, OCC (8/20/2012); Michael Kirk, OCC (8/22/2012); Mike Sullivan, OCC (8/30/2012).
244
2/2012 “CIO February 2012 Business Review,” JPM-CIO-PSI 0001940, at 950 (“The credit derivatives portfolio
seeks to efficiently provide mark-to-market stress offset to the CIO Int’l credit investments activity.”).
245
Subcommittee interview of Ina Drew, CIO (9/7/2012).
246
Subcommittee interview of Michael Kirk, OCC (8/22/2012). Mr. Kirk told the Subcommittee that the SCP was
initially a hedge against the AFS book but underwent a metamorphosis.
247
Subcommittee interview of Ina Drew, CIO (9/7/2012).
248
Id.
249
Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).
250
Subcommittee interview of John Wilmot, JPMorgan Chase (9/11/2012).
251
Subcommittee interview of Patrick Hagan, CIO (2/7/2013).
252
Id.
253
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss).
254
Id.
255
Subcommittee interview of Ina Drew, CIO (9/7/2012).
256 Id.