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

materials and reports on the whale trades and on the OCC’s own oversight efforts. 5
The
Subcommittee also spoke with and received materials from firms that engaged in credit
derivative trades with the CIO.
3
JPMorgan Chase has cooperated fully with the Subcommittee’s inquiry, as have the
regulatory agencies. However, several former JPMorgan Chase employees located in London
declined Subcommittee requests for interviews and, because they resided outside of the United
States, were beyond the Subcommittee’s subpoena authority. Those former employees, Achilles
Macris, Javier Martin-Artajo, Bruno Iksil, and Julien Grout, played key parts in the events at the
center of this inquiry; their refusal to provide information to the Subcommittee meant that this
Report had to be prepared without their direct input. The Subcommittee relied instead on their
internal emails, recorded telephone conversations and instant messages, internal memoranda and
presentations, and interview summaries prepared by the bank’s internal investigation, to
reconstruct what happened.
B. Overview
The Subcommittee’s investigation has determined that, over the course of the first quarter
of 2012, JPMorgan Chase’s Chief Investment Office used its Synthetic Credit Portfolio (SCP) to
engage in high risk derivatives trading; mismarked the SCP book to hide hundreds of millions of
dollars of losses; disregarded multiple internal indicators of increasing risk; manipulated models;
dodged OCC oversight; and misinformed investors, regulators, and the public about the nature of
its risky derivatives trading. The Subcommittee’s investigation has exposed not only high risk
activities and troubling misconduct at JPMorgan Chase, but also broader, systemic problems
related to the valuation, risk analysis, disclosure, and oversight of synthetic credit derivatives
held by U.S. financial institutions.
(1) Increasing Risk
In 2005, JPMorgan Chase spun off as a separate unit within the bank its Chief Investment
Office (CIO), which was charged with investing the bank’s excess deposits, and named as its
head Ina Drew who served as the bank’s Chief Investment Officer. In 2006, the CIO approved a
proposal to trade in synthetic credit derivatives, a new trading activity. In 2008, the CIO began
calling its credit trading activity the Synthetic Credit Portfolio.
Three years later, in 2011, the SCP’s net notional size jumped from $4 billion to $51
billion, a more than tenfold increase. In late 2011, the SCP bankrolled a $1 billion credit
derivatives trading bet that produced a gain of approximately $400 million. In December 2011,
JPMorgan Chase instructed the CIO to reduce its Risk Weighted Assets (RWA) to enable the
bank, as a whole, to reduce its regulatory capital requirements. In response, in January 2012,
rather than dispose of the high risk assets in the SCP – the most typical way to reduce RWA –
the CIO launched a trading strategy that called for purchasing additional long credit derivatives
to offset its short derivative positions and lower the CIO’s RWA that way. That trading strategy
5 See 10/26/2012 Confidential Supervisory Report, OCC, PSI-OCC-13-000014 [Sealed Exhibit].