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

earish. 308 According to Mr. Macris, Ms. Drew thought there would be more defaults. 309
Together, these signs suggested that more rather than less credit protection was needed.
51
The CIO credit traders began to re-evaluate the SCP’s trading strategy. According to Mr.
310
Iksil, the CIO wanted to have a “smart short,” meaning one that did not cost much, but
provided effective protection against corporate defaults. Mr. Martin-Artajo later told the
JPMorgan Chase Task Force investigation that he proposed doing a combination of long and
short trades, similar to a strategy he had proposed, and the CIO had used, earlier that year to
benefit the CIO if there were defaults. 311
More specifically, beginning in mid-2011, the CIO traders began to buy credit protection
against defaults by purchasing short credit derivatives referencing “high yield” or higher risk
companies; at the same time, they sold credit protection against defaults by purchasing long
312
credit derivatives referencing “investment grade” or lower risk companies. Greg Baer, a
deputy general counsel at the bank, explained that the traders were essentially selling insurance
on the lower risk investment grade indices and using the insurance premiums they received to
buy insurance on the higher risk, high yield indices. 313 In a later email sent by Ina Drew to
senior JPMorgan Chase management describing the SCP book’s trading strategy, she wrote that
selling protection or insurance on investment grade companies generated “carry” or cash income
from the premiums received from counterparties, which reduced the CIO’s cost of buying high
yield credit protection. 314 Some current and former JPMorgan Chase personnel referred to that
strategy as the long positions “financing” the short positions. 315
Due to the new trading strategy requiring the purchase of both long and short credit
instruments, and the addition of some distressed securities, the SCP expanded rapidly in size. At
the beginning of 2011, the SCP’s notional size was $4 billion; by the end of 2011, it was $51
316
billion, a more than tenfold increase. Most of this growth occurred in the first half of 2011.
308
JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to Subcommittee on
9/6/2012).
309
JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to Subcommittee on 8/28/2012).
310
JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to Subcommittee on
9/6/2012).
311
Id. Mr. Martin-Artajo proposed doing “forward trades,” a type of trade that includes short and long positions.
Forward trades are discussed in more detail below.
312
Levin Office briefing by JPMorgan Chase (5/22/2012) (Greg Baer), Levin briefing by JPMorgan Chase (Greg
Baer and Harry Weiss) (6/27/2012).
313
Levin Office briefing by JPMorgan Chase (5/22/2012) (Greg Baer). See also 2013 JPMorgan Chase Task Force
Report, at 30.
314
4/12/2012 email from Ina Drew, CIO, to Jamie Dimon and others, “Synthetic Credit Materials,” JPM-CIO-PSI
0001101 (“to balance the negative carry cost of the High yield Book overtime [we have] been using Investment
Grade strategies that gave us some carry or buying optionality ... to offset the directionality of the High Yield
Book”).
315
Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9/12/2012) and Irvin Goldman, CIO
(9/15/2012); JPMorgan Chase Task Force interview of Bruno Iksil, CIO (8/27/2012); JPMorgan Chase Task Force
interview of Javier Martin-Artajo, CIO (partial readout to Subcommittee on 9/6/2012).
316
See “Summary of Positions by Type,” prepared by JPMorgan Chase in response to a Subcommittee request,
JPM-CIO-PSI 0037609. See also 2013 JPMorgan Chase Task Force Report, at 25.