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

66
declined, the SCP book also lost value. 418 As the OCC explained it to the Subcommittee, general
market movements went against the CIO in January 2012. 419
The result was that the SCP experienced nine straight days of losses in the second half of
420
January. The OCC told the Subcommittee that the ratio of days with losses versus days with
profits was already “ugly” at that point – long before credit positions added in February and
March accelerated the SCP losses. 421 Under U.S. generally accepted accounting principles
(GAAP), the value of derivatives, including credit derivatives, has to be recorded at their fair
market value – “marked to market” – at the close of each business day. 422 That meant the
decreased value of the SCP’s short position had to be recorded on the CIO’s books, even if no
derivative instruments were actually traded during the day. In a January 26, 2012 email, the
head trader in charge of the SCP book prepared a report for CIO managers indicating that the
SCP book has already lost $100 million and predicting further losses of $300 million. 423
It was while these losses were piling up that critical decisions were made that ultimately
resulted in the much more massive SCP losses JPMorgan experienced. According to Javier
Martin-Artajo, head of the CIO’s equity and credit trading operation, it was then that the head of
the CIO’s International Office, Achilles Macris, told him that the SCP book was no longer
needed to hedge tail risk at the bank and should be reshaped, primarily to put a stop to the losses
424
it was experiencing. Mr. Martin-Artajo later told the JPMorgan Chase Task Force
investigation that, despite Mr. Macris’s comment, he still viewed the SCP book as a hedge. 425
any event, the issue in late January was whether to sell off the short positions; take no action
when positions naturally expired; purchase long positions; or take some other action to reshape
the SCP.
The evidence indicates that CIO management gave only cursory attention to the option of
leaving the SCP book as-is, since the book would have continued to lose value during the credit
426
market rally, as was the case for hedges and short positions generally. According to Mr.
418 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot); Subcommittee interview of Michael
Sullivan, OCC (8/30/2012). See also 2013 JPMorgan Chase Task Force Report, at 26 (stating that in the fourth
quarter of 2011, the SCP held an overall net short position).
419 Subcommittee interview of Michael Sullivan, OCC (11/7/2012).
420 See Synthetic Credit Profit and Loss, OCC-SPI-00000298, and chart tracking the SCP’s daily profit and loss
reports in Chapter 4.
421 Subcommittee interview of Michael Kirk, OCC (8/22/2012).
422 See Section 3.3: Securities and Derivatives of the FDIC Risk Management Manual of Examination Policies, at 6
and 16. http://www.fdic.gov/regulations/safety/manual/section3-3.pdf.
423 1/26/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “credit book last version,”conveying “Core Credit
Book Highlights,” JPM-CIO-PSI 0000161.
424
JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to Subcommittee on
9/6/2012). Irvin Goldman, the CIO’s Chief Risk Officer, told the Subcommittee that the decision to stop using the
SCP as a hedge was actually made in December 2011. Subcommittee of Irvin Goldman, CIO (9/15/2012). See also
JPMorgan Chase Task Force Report, at 29 (indicating CIO trader was told that the“focus in managing the [SCP] at
that point should be on profits and losses”).
425
JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to Subcommittee on
9/6/2012).
426
Hedges, like insurance, cost money to keep in place. The CIO traders, however, appeared unwilling to absorb the
cost of this “insurance,” trying instead to position the SCP book to produce gains rather than reflect the costs of
maintaining credit loss protection.
In