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

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Buy protection on the tightening move: The presentation proposed essentially buying
credit protection when it was less expensive. 472
As noted above, when credit markets are
improving, credit insurance becomes less costly.
Turn the position over to monetize volatility: The presentation proposed selling SCP
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positions to take advantage of changing prices and locking in any profits. Coupled
with the purchase of protection “on the tightening move,” the presentation was essentially
proposing to buy low and sell high. 474
Go long risk on some belly tranches: The reference to “belly tranches” is unclear. Most
likely, belly tranches are credit index tranches which contain less risk than the equity
475
tranches but more than the super senior tranches. The presentation appears to propose
buying the long side of those credit instruments.
Use indices and add to existing position: The presentation noted that the SCP already
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had some long credit index positions on the books, and proposed expanding those
holdings.
In addition to advocating those particular trading strategies, the presentation contained a
warning about possible losses. In a section entitled, “Adverse scenarios and possible
drawdowns,” the proposal stated that if unanticipated defaults occurred, they could impose costs
of $200 million “upfront,” and if prices failed to behave as expected, additional losses of $300
477
million were possible. In other words, the proposal warned from the beginning that its trading
strategies could result in losses totaling $500 million.
The Subcommittee has not identified any formal approval document, but the ISMG
apparently approved the proposed trading strategies, since the CIO traders immediately began
implementing them in late January, in particular by buying substantial amounts of the IG9 credit
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derivative index on the long side. This trading strategy would prove, however, in the words of
Mr. Dimon, to have been “poorly conceived and vetted.” 479
D. SCP’s Increasing Risk and Losses
As the CIO traders implemented the new trading strategy and began acquiring more long
positions in late January, the SCP exploded in size, complexity, and, consequently, risk. In
contrast to its earlier years when the Synthetic Credit Portfolio produced positive revenues for
472 Id.
473 Id.
474 Id.
475 For more information on these credit index tranches, see Chapter 2.
476 Subcommittee interview of Michael Sullivan, OCC (8/30/2012).
477 1/26/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, “credit book last version,” conveying “Core
Credit Book Highlights,” (January 2012), prepared by Mr. Iksil, at JPM-CIO-PSI 0000165.
478 See 2013 JPMorgan Chase Task Force Report, at 31 (stating that by the end of January, the CIO traders had
purchased about a $20 billion long position in the 10-year IG9 credit index and another $12 billion long position in
the 5-year IG9 credit index).
479 Testimony of Jamie Dimon, “A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?”
before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, S.Hrg. 112-715 (June 13, 2012).