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

By the end of January, these problems converged, and the traders came up with a
solution that they believed would address both problems.
tension.” 450
(10) Decision to Go Long
72
In the second half of January 2012, the CIO traders were confronted with a series of
complex objectives: to stem the losses in its credit portfolio, reduce the SCP’s RWA, and
maintain default protection to take advantage of any large corporate defaults. 451
The traders had
also received permission to reduce the SCP’s RWA opportunistically, rather than immediately.
The traders decided against simply unwinding the SCP book by disposing of its assets, in
part because the trading costs associated that type of broad “unwind” of the portfolio was
452
expected to be $590 million. In addition, removing short positions would have made it
impossible to prevent Eastman Kodak-style losses or obtain American Airlines-style gains. The
CIO traders decided instead to advocate buying more credit positions that were “long” on risk,
that is, where the CIO was essentially selling insurance against future credit defaults.
The SCP already had some long credit positions on its book, but its longstanding overall
position was to be net short. In other words, most of the SCP’s credit assets would produce gains
only when a referenced entity declared bankruptcy or defaulted on its debts. Since the original
function of the SCP was to provide the bank with insurance against credit risks such as loan
losses, bankruptcies, or tail risks, it seems contradictory for a hedge book that was meant to
protect a bank against credit risk to decide to sell protection against credit risk.
The CIO traders apparently reasoned, however, that, just as buying protection required
CIO to pay a premium, selling protection would allow the CIO to collect premiums, which they
often referred to as “carry.” 453 It could then use this carry both to finance other credit trades and
offset losses. 454 In addition, the CIO traders expressed the view that the CIO could use the new
credit assets to reduce the SCP’s RWA, by balancing the long positions against its short
Still another benefit was that the value of the long credit protection would increase
positions. 455
450
Levin Office briefing of JPMorgan Chase (6/26/2012) (Harry Weiss).
451
The JPMorgan Chase Task Force later criticized CIO management for establishing “competing and inconsistent
priorities” for the SCP “without adequately exploring or understanding how the priorities would be simultaneously
addressed.” 2013 JPMorgan Chase Task Force Report, at 10.
452
See 1/19/2012 email from Javier Martin-Artajo to Ina Drew, CIO, and others, “Credit book Decision Table –
Scenario Clarification,” at JPM-CIO-PSI 0000106.
453
Subcommittee briefing by JPMorgan Chase (10/4/2012) (Olivier Vigneron).
454
According to JPMorgan Chase’s then CFO, Douglas Braunstein, the “long positions helped pay for the carry” for
the short positions. Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). CIO’s former
CFO, John Wilmot, agreed: the traders “earned” carry on the credit products where they “took risk” – that is, where
they were exposed to risk by selling credit protection that would have to pay up if a specified credit event occurred.
Subcommittee interview of John Wilmot CIO (9/11/2012). The SCP even included $30 million in the SCP budget
for 2012, as the estimated amount of carry the traders expected to produce from selling credit protection. Id. See
also 2013 JPMorgan Chase Task Force Report, at 30-31.
455
See 12/22/2011 email from Bruno Iksil to Achilles Macris and Javier Martin-Artajo, CIO, “urgent -----: Rwa,”
JPM-CIO-PSI 0001227 (stating Mr. Iksil had reduced RWA in the past by selling protection). The CIO’s former
CFO, Joseph Bonocore, told the Subcommittee that he agreed it was possible to reduce RWA by taking offsetting
positions, although the positions would have to be in the same instruments. Subcommittee interview of Joseph
Bonocore, CIO (9/11/2012). C.S. Venkatakrishnan, a risk expert at the bank, concurred, telling the Subcommittee