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

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Subcommittee for more complete RWA records, the bank responded that such records were not
prepared and were not available, although a former CIO employee who worked on RWA models
recalled that monthly RWA reports for CIO and SCP did exist. 328
In any event, when Mr. Macris was asked about the 2011 effort to reduce the SCP’s
RWA, he told the JPMorgan Chase Task Force investigation that, as a result of the trading
strategy to reduce the RWA, by August 30, 2011, the SCP had “a long front leg and a short back
329
leg,” adding further complexity to the Synthetic Credit Portfolio. Mr. Macris also told the
investigation that the traders – and he – knew they were using “dangerous” instruments. 330
(3) 2011 SCP Profit From Bankruptcies
In late 2011, the CIO engaged in a series of short term credit index tranche trades that
ended up producing a large payoff for the bank. The trading strategy behind this gain was
intended from its inception to last no more than four months, in sharp contrast to the type of long
term, conservative investments often attributed to the CIO.
According to the OCC and an internal CIO audit report, during the fall of 2011, the CIO
placed a massive bet on a high yield credit index that tracked credit default swaps for 100 higher
risk companies. 331 Beginning in September 2011, the CIO, through its trader Bruno Iksil, began
to purchase the short side of several tranches of the index, building a short position that would
pay off only if at least two companies declared bankruptcy or otherwise defaulted before the
position expired on December 20, 2011. 332
As the short party, the CIO was required to pay premiums to its counterparties, but the
amounts required were not viewed by the CIO traders as significant since the position was
expiring in less than four months. In addition, to offset the initial cost of buying the position as
well as the cost of the ongoing premiums, the CIO purchased the long side of another credit
index, the CDX.NA.IG9 which tracked investment grade companies. By taking the long side on
that index, the CIO became the recipient of the premiums paid by its short counterparties and
could use those incoming cash premium payments to offset other SCP costs.
CIO RWA at start of 2012 was about $43 billion); 1/19/2012 email from Achilles Macris, CIO, to Ina Drew, CIO,
and others, “Credit book Decision Table – Scenario clarification,” JPM-CIO-PSI 0000152 (indicating CIO RWA at
start of 2012 was $43 billion).
328
Subcommittee interview of Patrick Hagan, CIO (2/7/2013). The Subcommittee also located some RWA data in
the monthly Executive Management Reports prepared by the bank. See, e.g., December 2011 “Chief Investment
Office – Executive Management Report,” OCC-SPI-00033116 at 8, 10; April 2012 “Chief Investment Office –
Executive Management Report,” OCC-SPI-00033162 at 4.
329
JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to Subcommittee on 8/28/2012).
330
Id.
331
Subcommittee interview of Doug McLaughlin, OCC (8/30/2012); 2011 CA Quarterly Summary: Global Chief
Investment Office 4 th Quarter CA summary,” OCC-SPI-00002483. See also JPMorgan Corporate Sector Executive
Management Report (Full Year 2011 Actuals), JPM-CIO-PSI 0018046, at 26.
332
For more information on credit index tranches, see Chapter 2.