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

68
$40.3 billion, while under the CIO model it was $20.9 billion. 435 The CIO’s Chief Market Risk
Officer told the Subcommittee that the new CIO model was a “shadow model” 436 that had been
developed by the CIO’s quantitative expert, Patrick Hagan. Mr. Hagan told the Subcommittee
that he had not developed a fully functioning, alternative RWA model for the CIO at that time,
but acknowledged that he had worked on the major contributors to the RWA model and had
provided the $20.9 billion estimate used in the presentation. 437
Mr. Iksil’s presentation indicated
that as of mid-January, implementing the CIO’s shadow RWA model would have had the effect
of reducing the SCP’s apparent RWA by almost 50%.
At the time the presentation was prepared, the Synthetic Credit Portfolio had already
grown to enormous size. The presentation described just three of its credit derivative holdings as
follows:
Credit Index IG9 – $278 billion in gross notional value;
Credit Index HY10 and 11 – $115 billion in gross notional value; and
Main iTraxx S9 – $90 billion in gross notional value. 438
Those credit positions were inherently higher risk, due to their synthetic nature which meant that
no real economic asset lay behind the positions to stem any losses. The GAAP requirement that
the positions’ fair value be recorded on the SCP’s books each day also contributed to SCP price
volatility. In addition, the huge size of the holdings meant that even a small drop in price
resulted in substantial losses. The complexity of the holdings also meant that they interacted in
unpredictable ways. The higher risk nature of these positions on top of their huge size all
boosted the SCP’s RWA.
The next day, January 19, 2012, to follow up on the prior day’s meeting, Mr. Martin-
Artajo sent Ms. Drew an email describing four scenarios for reducing the SCP’s RWA that had
been discussed during the meeting:
“Ina,
[A]s a follow up from yesterday[’]s conversation regarding the tranche book I
would like to further clarify the different scenarios and assumptions for each of
them.
The first scenario is the one discussed when you were in London an[d] is a
scenario that we reduce our book to the agreed [RWA] target at year end 2012 of
435 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” JPM-CIO-
PSI 0000098-104, conveying presentation entitled, “Core Credit Book Highlights.”
436 Subcommittee interview of Peter Weiland, CIO (8/29/2012).
437 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). For more information about RWA, see Chapter II;
for more information about the CIO’s efforts to produce an alternative RWA model, see Chapter V.
438 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” conveying
presentation entitled, “Core Credit Book Highlights” (January 2012), at JPM-CIO-PSI 0000101. The IG9 tracked
125 investment grade companies in the United States; the HY10 and 11 each tracked 100 companies at higher risk of
default; the Main ITraxx S9 tracked 125 investment companies in Europe. For more information on credit indices,
see Chapter 2.