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

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56 credit protection did not serve as an offset for any bank loan losses involving American Airlines. 356 The CIO’s Chief Risk Officer, Irvin Goldman, also told the Subcommittee that the CIO’s own $350 billion Available-for-Sale portfolio did not have single-name credit exposure, 357 would not have sustained losses from any individual corporate bankruptcy, and so was not using the SCP’s 2011 trading strategy as a hedge. In the view of the OCC capital markets examiner responsible for JPMorgan Chase, the 2011 gain was “outsized,” based on an “idiosyncratic trade,” and the CIO “shouldn’t have been 358 doing this.” In light of the disconnect between the credit derivative trading that took place and any credit risk or loss to the bank, the 2011 profit-taking appears to have been an example of proprietary trading intended to make money for the bank, rather than protect it from loss. (4) SCP Size and Revenues From its inception in 2006, until 2011, the Synthetic Credit Portfolio generated uneven, but sometimes substantial revenues for the bank. 359 The year with the highest revenues was 2009, when the SCP generated over $1 billion for the bank; the next highest year was 2011 when the American Airlines bankruptcy resulted in year-end revenues of about $450 million. In 2012, the CIO produced an internal chart tracking both SCP revenues and SCP trader compensation, indicating that the SCP produced the following revenues from 2008 to 2011. CIO Synthetic Credit Portfolio Revenues 2008-2011 Year SPC Revenue 2008 $ 170 million 2009 $ 1.05 billion 2010 $ 149 million 2011 $ 453 million Total $ 1.772 billion Source: 6/21/2012 presentation entitled, “CIO Compensation,” chart entitled, “Synthetic Credit Book Comparison: Revenue and SCB Trader Incentive (2008-2011),” JPM-CIO-PSI-H 0002746-2792, at 2749. When 2007 is added to those years, other internal CIO documents indicate that the total revenues produced by the SCP, prior to 2012, was around $2.5 billion. 360 356 Subcommittee interview of Ina Drew, CIO (12/11/2012). 357 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 358 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 359 See “CIO Compensation – Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 0002749. Ms. Drew told the Subcommittee that JPMorgan Chase did not establish any specific goals on the amount of return expected from the SCP book. Subcommittee interview of Ina Drew, CIO (9/7/2012). 360 See 4/5/2012 email from Ina Drew to Jamie Dimon and other members of the Operating Committee, “CIO,” JPM-CIO-PSI 0000539 (SCP has been “extremely profitable for the company (circa $2.5 billion) over the last several years”); “CIO February 2012 Business Review, CIO International Core Credit: Tail Risk Book,” JPM-CIO 0000225-268, at 247 (“This is a tail risk book that … from 2007-2011 has generated US$2.4bln total return.”); Subcommittee interview of Michael Sullivan, OCC (11/7/2012). But see 2013 JPMorgan Chase Task Force Report, at 25 (indicating the SCP “generated roughly $2 billion in gross revenues” from its inception until late 2011).
57 (5) SCP Trader Compensation SCP compensation records from its early years also provide evidence about whether the SCP functioned as a hedge or a proprietary trading operation. As the JPMorgan Task Force Report noted: “Incentive-based compensation systems are premised on the basic assumption that one of the factors that influence individuals’ performance and conduct is financial reward.” 361 Compensation that rewarded effective risk management would suggest that the SCP functioned as a hedge, while compensation that rewarded profitmaking would suggest that the SCP functioned more as a proprietary trading operation. The compensation history for key employees with responsibility for SCP trading suggests that the bank rewarded them for financial gain and risk-taking more than for effective risk management. In June 2012, as part of its analysis of the SCP, the bank reviewed the compensation awarded, from 2009 to 2011, to three key CIO employees involved with SCP trading, Achilles Macris, Javier Martin-Artajo, and Bruno Iksil. The bank prepared a summary chart which is reprinted below: 361 2012 JPMorgan Chase Task Force Report, at 91.
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United States Senate PERMANENT SUBC
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JPMORGAN CHASE WHALE TRADES: A CASE
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(a) Background ....................
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JPMORGAN CHASE WHALE TRADES: A CASE
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materials and reports on the whale
Page 11 and 12: (2) Hiding Losses 5 In its first fo
Page 13 and 14: 7 The ability of CIO personnel to h
Page 15 and 16: 9 incorrect information, and at oth
Page 17 and 18: 11 “fully aware” of its activit
Page 19 and 20: 13 activities to continue, includin
Page 21 and 22: 15 Senior bank management was also
Page 23 and 24: 17 specified level; and requiring d
Page 25 and 26: 19 principal bank subsidiaries are
Page 27 and 28: to assuming that post in February 2
Page 29 and 30: consisted of stressed or distressed
Page 31 and 32: 25 commuted to his job in London. 8
Page 33 and 34: 27 banks’ deposits, the OCC is th
Page 35 and 36: 29 holding down interest rates, the
Page 37 and 38: 31 combine them into a single dolla
Page 39 and 40: 33 index known as the “XO” inde
Page 41 and 42: III. INCREASING RISK 35 In 2005, JP
Page 43 and 44: 37 derivatives was unusual for a CI
Page 45 and 46: 39 provide information to the agenc
Page 47 and 48: Source: Replication of Subcommittee
Page 49 and 50: 43 costly if they do occur. 234 JPM
Page 51 and 52: 45 the SCP was expected to gain $1
Page 53 and 54: 47 bank in those scenarios. 275 Tha
Page 55 and 56: 49 would not function as a hedge at
Page 57 and 58: earish. 308 According to Mr. Macris
Page 59 and 60: 53 Subcommittee for more complete R
Page 61: 55 until after the OCC began examin
Page 65 and 66: The compensation data for both Mr.
Page 67 and 68: the CIO to protect its $350 billion
Page 69 and 70: 63 that CIO would exit the syntheti
Page 71 and 72: 2012, Mr. Iksil reported internally
Page 73 and 74: 67 Martin-Artajo, Mr. Macris did no
Page 75 and 76: 69 20.5 Bln but the current model u
Page 77 and 78: 71 Of the four scenarios laid out i
Page 79 and 80: 73 during a market rally so, accord
Page 81 and 82: 75 Buy protection on the tightening
Page 83 and 84: 77 asked the OCC about those losses
Page 85 and 86: 79 derivatives and incurring even m
Page 87 and 88: 81 Drew he wanted to wait until the
Page 89 and 90: 83 2012, Mr. Iksil warned his super
Page 91 and 92: poor the SCP recordkeeping was, but
Page 93 and 94: 87 The order to stop trading preven
Page 95 and 96: Source: See 07/16/2012 FDIC present
Page 97 and 98: positions in newly issued credit in
Page 99 and 100: 93 In another context, Mr. Dimon wa
Page 101 and 102: 95 order to be substantiated. In ad
Page 103 and 104: 97 agitation over underreporting SC
Page 105 and 106: A. Background 99 (1) Valuing Deriva
Page 107 and 108: which it holds a concentrated block
Page 109 and 110: 103 market making groups in the Inv
Page 111 and 112: 105 provide his judgment and estima
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107 of the last 16 business days --
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109 The SCP had never before experi
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111 Evidence indicates that the CIO
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113 showed that the unreported loss
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115 that the bank’s internal inve
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117 daily loss of $43 million and a
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119 On the same call, Mr. Martin-Ar
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121 Mr. Martin-Artajo: “No, no, n
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123 showing the losses, Ms. Drew to
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125 trades using the Investment Ban
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127 Mr. Macris: “… Javier has,
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129 Mr. Pinto: “Ok. And you think
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131 to the portfolio’s enormous s
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133 “In terms of the worse case s
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135 point in the year. The cumulati
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137 Subcommittee that the CIO did n
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139 Chief Investment Office Collate
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sources, and inadequate procedures
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143 CDX.NA.IG 0-3% S09 10Y 60.750 6
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145 million before adjustment to th
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147 “The Firm believes that its v
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149 That the bank’s Controller fo
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E. Admitting the Mismarking 151 Som
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153 The bank told the Subcommittee
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155 In the case of the bank’s CRM
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157 The bank’s reliance on Ms. Dr
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159 For both the bank and its busin
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161 breaches, bank documents indica
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163 “[Mr. Zubrow] bears significa
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usiness. 922 165 As a result, bank
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167 period of time to a certain deg
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169 management team in London. 941
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171 Assets (RWA) results for the CI
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173 Portfolio “maintained its ups
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175 On January 16, 2012, the CIO’
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177 The Subcommittee could identify
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chief market risk officer in London
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181 In addition, the Subcommittee w
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Value-at-Risk 183 Value-at-Risk for
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185 At the end of 2011, the SCP con
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187 The newest VaR model “resulte
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189 As discussed earlier and as out
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191 Irvin Goldman, and Peter Weilan
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“Hoping that the model is somehow
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Mr. Bangia: Um hum. 195 Mr. Hagan:
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197 allowed to categorize them in o
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199 derivatives have to be marked-t
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201 The email included a chart, exc
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203 According to the JPMorgan Chase
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205 of several months, exceeding th
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207 CIO Mark-to-Market CSW10% Breac
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209 In early December 2011 these st
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211 advisories, or simply not doing
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213 have in the IB [Investment Bank
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management. 1195 215 While each of
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217 Beginning in January and contin
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219 experts. 1201 During the period
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221 (1) 2006-2009: Minimizing OCC O
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223 CIO management needed to “doc
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225 risk personnel criticized the O
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227 bank reportedly spent $1 billio
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229 understanding: “We were infor
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231 basic reports on a timely basis
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233 report provided the OCC with we
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235 apparent in contemporaneous ban
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237 (1) Providing OCC with Limited
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239 Subcommittee that the bank’s
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241 breaching its risk limits. In a
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243 that the CIO may have been over
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245 On May 9, 2012, the OCC held a
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247 losses, litigation etc).” 140
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249 Secondly, the OCC examination t
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F. Analysis 251 The whale trades pr
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y the bank were incomplete, contain
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255 When asked in a May 10 call wit
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257 of the Volcker Rule, quoting le
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259 reporting. All of those positio
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261 that bank executives were evalu
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(1) Rule 10b-5 263 Materiality. Dis
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265 (2) Section 17(a) of the Securi
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267 At the same time, as described
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269 (2) Mischaracterizing SCP as
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Synthetic Credit Portfolio was in
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273 had increased in size since Jan
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275 respond to regulators’ questi
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277 Scenario Analysis Showed SCP Wa
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279 Source: 2/2012 “CIO February
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281 Source: 4/11/2012 email from Jo
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283 During his interview, the Subco
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285 “The synthetic credit book, a
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mitigating hedging activities,” m
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289 (6) Omitting VaR Model Change A
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291 recast the CIO’s VaR-95 total
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293 and accompanying earnings call
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295 Source: 2/2012 presentation sli
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297 The May 10 10-Q reported that a
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299 was not, included in the bank
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301 When the SCP’s massive trades
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JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

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