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

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the bank, beginning in January 2012, the SCP began incurring sustained losses. The CIO traders
expressed increasing concern about the losses, which they were unable to stem, in part because
of dropping market values, the large size of the portfolio which meant that even small price
drops cascaded into large losses, and the small number of credit market participants willing to
purchase the positions held by the SCP at an acceptable price. Even after the CIO traders
stopped all SCP trading, the SCP book incurred escalating losses for the rest of the year.
(1) January 2012
As noted above, in June 2011, the CIO began to increase the size of the Synthetic Credit
Portfolio in anticipation of deteriorating credit markets associated with Europe. By August 30,
2011, the SCP included forward trades in the form of a “long front leg” and a “short back leg” in
the IG9 credit index. 480 JPMorgan Chase told the Subcommittee that the CIO chose the IG9
index, because it referenced credit default swaps for only investment grade companies, which
were less likely to default and provided a solid foundation for a trading strategy that involved
selling credit protection (going “long risk”). 481
The Iksil presentation on January 26, 2012, proposed, not to unwind, but to increase the
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size of the SCP book of assets. After the ISMG meeting, the CIO traders did just that, buying
and selling credit protection across a wide variety of high yield and investment grade purchases,
but in general, buying more credit protection against high yield defaults and selling more
protection for investment grade companies. 483 The traders thus increased the size of both legs of
their existing trades – the high yield and investment grade – incurring more risk along the
way. 484
The CIO appears to have adopted the Iksil trading strategy even though he had warned
that the book had already lost $100 million and the new strategy could, if it didn’t go well, result
485
in losses of another $500 million. One trader explained the losses as the result of a
combination of factors: the high-yield short positions losing more value than expected and the
investment-grade long positions gaining less value than expected. 486
When the Subcommittee
480
JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to Subcommittee on 9/6/2012).
481
Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot). JPMorgan Chase told the
Subcommittee that the SCP used the IG9 index on both sides of its forward trades, with the “short leg” (buying
credit protection) maturing in December 2012, and the “long leg” (selling credit protection) maturing in 2017. Id.
The trade meant the CIO was both liable for and protected against defaults in investment grade companies through
December 2012, but thereafter was liable for only defaults in investment grade companies through December 2017.
See, e.g., 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit
information,” conveying presentation, at 5, JPM-CIO-PSI-0001706 (describing the “roll-off” of protection in
December 2012). This characterization pertains to the IG9 forward trade and does not necessarily reflect the sum
total of the CIO’s positions.
482
1/26/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, “credit book last version,” conveying “Core
Credit Book Highlights,” (1/2012), prepared by Mr. Iksil, at JPM-CIO-PSI 0000161.
483
Subcommittee interview of John Wilmot, JPMorgan Chase (9/11/12).
484
JPMorgan Chase Task Force interview of Javier Martin-Artajo, JPMorgan Chase (9/6/2012) (partial read out).
485
1/26/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, “credit book last version,” conveying “Core
Credit Book Highlights,” (1/2012), prepared by Mr. Iksil, at JPM-CIO-PSI 0000162 (explaining “credit book has a
YTD P&L of -100M,” unanticipated defaults could impose costs of $200 million “upfront,” and if prices failed to
behave as expected, additional losses of $300 million were possible).
486
See 2013 JPMorgan Chase Task Force Report, at 33.