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

SCP’s RWA total might be better – that is, lower – than anticipated. 404
Her comments also
underscored her reluctance to incur the costs associated with unwinding the SCP.
64
According to the bank, it ultimately decided to require the CIO to meet its original RWA
405
reduction target by the end of 2012, and no more.
(7) Eastman Kodak Default
Another key development early in 2012, was a declaration of bankruptcy by still another
U.S. corporation, Eastman Kodak. This time, however, instead of producing profits, the
bankruptcy resulted in the SCP’s losing money – an outcome contrary to the SCP’s purported
function of providing loss protection against precisely that type of default. The loss also ended
up reinforcing the CIO’s decision to increase rather than decrease the size of the SCP.
The Eastman Kodak loss had its roots in a December 2011 decision to reduce the CIO’s
net short position. JPMorgan Chase told the Subcommittee that in December 2011, 406 some
short credit protection instruments held in the SCP book expired, which “opened up default
exposure,” meaning it exposed the SCP to possible losses if certain corporations were to default,
since the SCP held the long side of several credit index tranches that tracked individual
companies. 407 Notwithstanding the instruction to reduce RWA and to maintain less protection
due to the improving economic environment, the CIO traders decided to buy short credit
protection to replace most, but not all, of the instruments expiring in December. As an internal
JPMorgan Chase presentation later explained in part: “In preparation for large expiry of HY
[high yield] short risk positions in Dec’11 ... the HY short risk position [was] increased.” 408
While the CIO traders acquired the new short credit instruments in December and early
409
January, they did not replace all of the expiring shorts due to the instruction to lower the
SCP’s RWA and reduce its size due to the improving macroeconomic climate. By January 10,
404 1/10/2012 email from Ina Drew, CIO, to Javier Matin-Artajo, CIO, “International Credit Consolidated P&L 09-
Jan-2012,” JPM-CIO-PSI 0000075. Ms. Drew told the Subcommittee that, in January 2012, Mr. Dimon and Mr.
Braunstein had not yet decided how much capital reduction would be sought from the CIO. Subcommittee
interview of Ina Drew, CIO (9/7/2012).
405 2013 JPMorgan Chase Task Force Report, at 28. It is unclear, however, what the ultimate RWA target was for
the CIO in 2012, since different documents specified different targets, varying from $30 billion to $20 billion. See,
e.g., id. (specifying $30 billion RWA reduction); JPMorgan Chase Task Force interview of Bruno Iksil, (partial
readout to Subcommittee on 8/27/2012) (specifying $25 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 (specifying
$20 billion). According to Mr. Martin-Artajo, the purpose of the RWA reduction had been to free up capital to
enable the firm to buy back its stock from the marketplace. He indicated that the firm ultimately could not buy back
as much stock as had been anticipated, which created less pressure to lower the CIO’s RWA by unwinding the SCP
book. See also JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to
Subcommittee on 9/6/2012).
406 Subcommittee briefing by JPMorgan Chase (9/4/2012) (Jeanette Boot).
407 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to Subcommittee on 8/28/2012).
For more information on credit indices, see Chapter 2.
408 See 5/2012 “JPM CIO Synthetic Credit Presentation,” at 2, JPM-CIO-PSI-H 0000546.
409 See, e.g., 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Breach of firm var,”
JPM-CIO-PSI 0000142 (indicating purchases of short risk positions from December 21 through January 19).