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

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the SCP was expected to gain $1 billion to $1.5 billion in value to offset $5 to $8 billion in firm
wide losses. 257
The OCC capital markets examiner with responsibility for JPMorgan Chase told the
Subcommittee that a distinction should be made among hedges, protection, and stress loss
258
protection. He explained that a dedicated hedge meant that “x” hedges “y” and is reported
accordingly. An example is buying the short side of a credit default swap that names a specific
company and using that short position to hedge a bank loan to that same company. 259
If the
company later declared bankruptcy and defaulted on its loans, the credit default swap would
provide a countervailing payment to offset the loan loss incurred by the bank. Another example
is identifying an interest rate exposure and buying an interest swap with the opposite exposure to
offset any change in the interest rate. Such hedges have a direct correlation with the credit risk
they are meant to offset.
The OCC examiner explained that, in contrast, “protection” and “stress loss protection”
were more general concepts that often cannot be linked to a specific credit risk. He explained
that credit protection should be viewed as more like providing insurance against a variety of
possible losses, while stress loss protection should be viewed as providing protection against
260
severe losses which are unlikely, but can happen, a so-called tail event. In his view,
JPMorgan Chase did not need a “top of the house” credit hedge – meaning a credit hedge for
JPMorgan Chase as a whole. Instead, he said that credit risk should be managed by the
individual lines of business. 261 For example, the Subcommittee was told that JPMorgan Chase’s
Investment Bank already managed its own credit risk and did not look to the CIO for that
purpose. 262
JPMorgan Chase’s counsel told the Subcommittee that, while the descriptions of the
purpose of the SCP have not always been consistent, the common element was that the SCP was
263
intended to provide credit loss protection against tail risk, risks that were unlikely but could be
costly if they occurred. The OCC capital markets examiner told the Subcommittee, however,
that the bank was unable to explain exactly how this stress loss protection worked. 264 In other
words, just as the bank has had difficulty identifying the portfolio the SCP was meant to hedge, it
has had difficulty identifying the nature of the tail risk the SCP was supposed to offset. At some
points, bank officials described it as hedging against a Eurozone crisis. 265 They also described it
as hedging against a U.S. financial crisis. 266
In his Senate testimony, Mr. Dimon pointed to both
risks, saying the Synthetic Credit Portfolio’s “original intent was to protect or hedge the
257
See 4/17/2012 email from Fred Crumlish, OCC, to Mike Brosnan, OCC, and others, “JPM CIO/IG9 ‘whale’
trade,” OCC-SPI-00010490.
258
Subcommittee interview of Fred Crumlish, OCC (8/28/2012).
259
Id.
260
Id.
261
Id.
262
Subcommittee interview of John Wilmot, JPMorgan Chase (9/11/2012).
263
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss).
264
Subcommittee interview of Fred Crumlish, OCC (8/28/2012).
265
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Barghiri; Harry Weiss; Gregg Gunselman).
266
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Gregg Gunselman).