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

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Synthetic Credit Portfolio’s trading strategies sought, among other things, to take advantage of
changes in the relative prices (the ‘basis’) among different [credit] indices and tranche
instruments,” a description more in keeping with profitmaking investments than risk
management. 226 The SCP was also housed in the CIO’s Tactical Asset Allocation portfolio,
formerly known as the Discretionary Trading Book. According to the former co-head of the
JPMorgan Chase Investment Bank, Bill Winters, “discretionary” risk is risk the bank does not
have to undertake to operate prudently, and discretionary trading is proprietary trading. 227 In
addition, one OCC official who reviewed the SCP told the Subcommittee that the SCP reflected
“classic prop trading,” 228 a view buttressed by the fact that the CIO had no client-facing
customers 229 or client-facing activity. 230
Instead, all of the SCP trades were made by the bank’s
own traders for the bank’s own purposes, and the resulting profits and losses affected the bank’s
own bottom line, rather than the bottom line of any client.
B. Purpose of the Synthetic Credit Portfolio: Undocumented, Unclear,
and Subject to Change
JPMorgan Chase told the Subcommittee that the SCP was originally established to
function as insurance or a “hedge” against certain credit risks confronting the bank. In its 2013
report, the JPMorgan Task Force charged with investigating the whale trades wrote: “The
Synthetic Credit Portfolio managed by CIO was intended generally to offset some of the credit
risk that JPMorgan faces, including in its CIO investment portfolio and in it capacity as a
lender.” 231
While some evidence supports that view of the SCP, there is a dearth of
contemporaneous SCP documentation establishing what exact credit risks, potential losses, or
tail risks were supposedly being hedged by the SCP; how its hedges were sized, targeted, and
tested for effectiveness; and why SCP “hedges” were treated so differently from other types of
hedges within the CIO.
As noted above, the 2006 New Business Initiative (NBI) that formally authorized the CIO
to engage in credit trading said the purpose was to address the bank’s “cyclical exposure to
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credit.” In particular, according to JPMorgan Chase senior officials, the SCP was intended to
provide the bank with protection during the financial crisis: it was a “macro” “anticipatory”
hedge against “tail events.” 233
Tail events are developments viewed as highly unlikely, but very
226 2013 JPMorgan Chase Task Force Report, at 24, footnote 23.
227 Subcommittee interview of Bill Winters, JPMorgan Chase (9/11/2012).
228 Subcommittee interview of Mike Sullivan, OCC (8/30/2012); see also Subcommittee interview of James Hohl,
OCC (9/6/2012) (describing the Tactical Asset Allocation as a discretionary portfolio that took on positions to
enhance income).
229 Subcommittee interview of Mike Sullivan, OCC (8/30/2012).
230 Subcommittee interviews of Jaymin Berg, OCC (8/31/2012) and Michael Cavanagh, JPMorgan Chase
(12/11/2012).
231 2013 JPMorgan Chase Task Force Report, at 2. See also id., at 22 (SCP “was generally intended to protect the
Firm against adverse credit scenarios”).
232 5/22/2008 “Chief Investment Office New Business Initiative Approval,” prepared by CIO, on “Credit and Equity
Capability,” OCC-SPI-00081631, at 1; Subcommittee interview of Mike Sullivan, OCC (8/30/2012).
233 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/19/2012) and Michael Cavanagh, JPMorgan
Chase (12/12/2012); Subcommittee briefing by JPMorgan Chase (Greg Baer) (8/15/2012).