United States Senate 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Committee on Homeland Security and Governmental Affairs

Carl Levin, Chairman

John McCain, Ranking Minority Member

JPMORGAN CHASE WHALE TRADES:

A CASE HISTORY OF DERIVATIVES

RISKS AND ABUSES

MAJORITY AND MINORITY

STAFF REPORT

PERMANENT SUBCOMMITTEE

ON INVESTIGATIONS

UNITED STATES SENATE

RELEASED IN CONJUNCTION WITH THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

MARCH 15, 2013 HEARING
SENATOR CARL LEVIN

Chairman

SENATOR JOHN McCAIN

Ranking Minority Member

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

ELISE J. BEAN

Staff Director and Chief Counsel

ALLISON F. MURPHY

Counsel

ZACHARY I. SCHRAM

Senior Counsel

ELIZABETH V. BALTZAN

Former Congressional Fellow

ERIC S. WALKER

Former Detailee

HENRY J. KERNER

Staff Director and Chief Counsel to the Minority

BRAD M. PATOUT

Senior Policy Advisor to the Minority

STEPHANIE HALL

Counsel to the Minority

SCOTT D. WITTMANN

Research Assistant to the Minority

FERAS SLEIMAN

Law Clerk

TODD PHILLIPS

Law Clerk

ADAM HENDERSON

Professional Staff Member

MARY D. ROBERTSON

Chief Clerk

4/11/13

 Permanent Subcommittee on Investigations

199 Russell Senate Office Building – Washington, D.C. 20510 

Majority: 202/224-9505 – Minority: 202/224-3721

Web Address: http://www.hsgac.senate.gov/subcommittees/investigations
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JPMORGAN CHASE WHALE TRADES:

A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY ................................................. 2

A. Subcommittee Investigation. . . . .......................................... 2

B. Overview . . . .......................................................... 3

(1) Increasing Risk. . . . ................................................. 3

(2) Hiding Losses. . . ................................................... 5

(3) Disregarding Risk .................................................. 7

(4) Avoiding and Conducting OCC Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

(5) Misinforming Investors, Regulators, and the Public . . . . . . . . . . . . . . . . . . . . . . . . 10

C. Whale Trade Case History ............................................... 14

D. Findings of Facts . ..................................................... 15

(1) Increased Risk Without Notice to Regulators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

(2) Mischaracterized High Risk Trading as Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . 15

(3) Hid Massive Losses ................................................. 15

(4) Disregarded Risk ................................................... 15

(5) Dodged OCC Oversight .............................................. 15

(6) Failed Regulatory Oversight .......................................... 16

(7) Mischaracterized the Portfolio ......................................... 16

E. Recommendations ...................................................... 16

(1) Require Derivatives Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

(2) Require Contemporaneous Hedge Documentation . . . . . . . . . . . . . . . . . . . . . . . . . 16

(3) Strengthen Credit Derivative Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

(4) Investigate Risk Limit Breaches ....................................... 17

(5) Investigate Models That Substantially Lower Risk . . . . . . . . . . . . . . . . . . . . . . . . . 17

(6) Implement Merkley-Levin Provisions ................................... 17

(7) Enhance Derivative Capital Charges .................................... 17

II. BACKGROUND .......................................................... 18

A. JPMorgan Chase & Company ............................................ 18

B. Chief Investment Office ................................................. 21

C. Office of the Comptroller of the Currency .................................. 25

D. Capital Requirements ................................................... 27

E. Credit Derivatives ...................................................... 29

III. INCREASING RISK ...................................................... 35

A. Origins of the Synthetic Credit Portfolio ................................... 36

B. Purpose of the Synthetic Credit Portfolio: Undocumented, Unclear, and 

Subject to Change ...................................................... 42
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C. SCP Trading .......................................................... 49

(1) The Early Years: 2006 to 2010 ........................................ 49

(2) 2011 SCP Expansion ................................................ 50

(3) 2011 SCP Profit From Bankruptcies .................................... 53

(4) SCP Size and Revenues .............................................. 56

(5) SCP Trader Compensation ............................................ 57

(6) 2012 Opens with Order to Reduce RWA ................................ 60

(7) Eastman Kodak Default .............................................. 64

(8) Credit Market Rally Devalues SCP ..................................... 65

(9) Four Options to Reshape the SCP ...................................... 67

(10) Decision to Go Long ................................................ 72

(11) Adoption of 2012 Trading Strategy ..................................... 73

D. SCP’s Increasing Risk and Losses ......................................... 75

(1) January 2012 ...................................................... 76

(2) February 2012 ..................................................... 78

(3) March 2012 ....................................................... 81

(4) Phones Down ...................................................... 85

E. Unmasking JPMorgan Chase ............................................ 90

F. Dismantling the SCP .................................................... 92

G. Analysis .............................................................. 94

IV. HIDING LOSSES ......................................................... 96

A. Background ........................................................... 99

(1) Valuing Derivatives In General ........................................ 99

(2) Valuing Derivatives at JPMorgan Chase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

B. Mismarking the CIO Credit Derivatives ................................... 106

 (1) Mismarking Begins ................................................. 106

(2) Mismarking Peaks .................................................. 110

(3) Increasing the Reported Losses ........................................ 115

(4) Trading Stopped .................................................... 123

(5) Accusing the Investment Bank......................................... 124

(6) Mismarking Continued .............................................. 129

C. Ending the Mismarking ................................................. 136

D. Reviewing the SCP Valuations ........................................... 139

E. Admitting the Mismarking ............................................... 149

F. Analysis .............................................................. 151

V. DISREGARDING RISK ................................................... 153

A. Background ........................................................... 154

B. Risk Management Structure at CIO ....................................... 157

C. CIO Risk Management Personnel ......................................... 159

D. Disregarding CIO Risk Metrics ........................................... 164

(1) Disregarding the VaR Limit ........................................... 165
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(a) Background .................................................... 165

(b) Developing a New VaR Model ..................................... 167

(c) Breaching the VaR Limit .......................................... 171

(d) Raising the VaR Limit Temporarily ................................. 176

(e) Winning Approval of the New VaR Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

(f) Using the New VaR Model to Increase Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

(g) Failing to Lower the VaR Limit ..................................... 182

(h) Operating and Implementation Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

(2) Ignoring Comprehensive Risk Measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

(a) Background .................................................... 186

(b) Challenging the CRM Results ...................................... 187

(c) Gaming the CRM Model .......................................... 191

(3) Ignoring Repeated Breaches of Credit Spread Risk Limits . . . . . . . . . . . . . . . . . . . 196

(a) Breaching CS01 Risk Limit ........................................ 197

(b) Breaching CSW10% Risk Limit .................................... 203

(4) Overlooking Stress Loss Limit Breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

(5) Disregarding Stop Loss Advisories ..................................... 207

(6) Missing Concentration Limits ......................................... 209

D. Responding to the Risk Limit Failures ..................................... 212

E. Analysis .............................................................. 214

VI. AVOIDING AND CONDUCTING OCC OVERSIGHT ......................... 215

A. Overview of OCC’s Oversight Role ....................................... 217

B. Pre-2012: Avoiding OCC Oversight As the SCP Develops ..................... 219

(1) 2006-2009: Minimizing OCC Oversight As SCP Expands . . . . . . . . . . . . . . . . . . 220

(2) 2010: Resisting OCC Examination Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

(3) 2011: Missing SCP Red Flags ........................................ 225

C. 2012: Dodging OCC Oversight While SCP Losses Mount ..................... 226

(1) Misinforming OCC that SCP Book to be Reduced . . . . . . . . . . . . . . . . . . . . . . . . . 227

(2) Failing to Provide OCC With CIO Data ................................. 229

(3) Failing to Investigate Risk Limit Breaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

(4) Miscasting Long Acquisitions As Risk Reducing . . . . . . . . . . . . . . . . . . . . . . . . . . 234

D. 2012: Resisting OCC Oversight Even After Whale Trades Became Public ...... 235

(1) Providing OCC with Limited or Incorrect Information . . . . . . . . . . . . . . . . . . . . . . 236

(2) Updating OCC Only When Losses About to Become Public . . . . . . . . . . . . . . . . . 240

(3) Hiding Problems With the Marks ...................................... 243

E. OCC Aftermath ........................................................ 245

F. Analysis ............................................................. 250

VII. MISINFORMING INVESTORS, REGULATORS, AND THE PUBLIC ........... 251

A. Public Disclosure of Whale Trades and SCP ................................ 254

B. Securities Laws ........................................................ 261

(1) Rule 10b-5 ........................................................ 262

(2) Section 17(a) of the Securities Act of 1933 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
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C. Disclosures and Key Omissions Raising Concerns ........................... 264

(1) Mischaracterizing the Involvement of Firmwide Risk Managers . . . . . . . . . . . . . . 264

(2) Mischaracterizing SCP as “Fully Transparent to the Regulators” . . . . . . . . . . . . . . 267

(3) Mischaracterizing SCP Decisions as “Made on a Very Long-Term Basis” . . . . . . 269

(4) Mischaracterizing SCP Whale Trades As Hedges . . . . . . . . . . . . . . . . . . . . . . . . . . 272

(5) Asserting SCP Trades Were Consistent With the Volcker Rule . . . . . . . . . . . . . . . 285

(6) Omitting VaR Model Change ......................................... 288

D. Analysis .............................................................. 299

# # #
JPMORGAN CHASE WHALE TRADES:

A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES

March 15, 2013

JPMorgan Chase & Company is the largest financial holding company in the United 

States, with $2.4 trillion in assets. It is also the largest derivatives dealer in the world and the 

largest single participant in world credit derivatives markets. Its principal bank subsidiary, 

JPMorgan Chase Bank, is the largest U.S. bank. JPMorgan Chase has consistently portrayed 

itself as an expert in risk management with a “fortress balance sheet” that ensures taxpayers have 

nothing to fear from its banking activities, including its extensive dealing in derivatives. But in 

early 2012, the bank’s Chief Investment Office (CIO), which is charged with managing $350 

billion in excess deposits, placed a massive bet on a complex set of synthetic credit derivatives 

that, in 2012, lost at least $6.2 billion. 

The CIO’s losses were the result of the so-called “London Whale” trades executed by 

traders in its London office – trades so large in size that they roiled world credit markets. 

Initially dismissed by the bank’s chief executive as a “tempest in a teapot,” the trading losses 

quickly doubled and then tripled despite a relatively benign credit environment. The magnitude 

of the losses shocked the investing public and drew attention to the CIO which was found, in 

addition to its conservative investments, to be bankrolling high stakes, high risk credit derivative 

trades that were unknown to its regulators. 

The JPMorgan Chase whale trades provide a startling and instructive case history of how 

synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. 

banking system. They also demonstrate how inadequate derivative valuation practices enabled 

traders to hide substantial losses for months at a time; lax hedging practices obscured whether 

derivatives were being used to offset risk or take risk; risk limit breaches were routinely 

disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory 

oversight was too easily dodged or stonewalled; and derivative trading and financial results were 

misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks 

lose big, may be required to finance multi-billion-dollar bailouts. 

The JPMorgan Chase whale trades provide another warning signal about the ongoing 

need to tighten oversight of banks’ derivative trading activities, including through better 

valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, 

more accurate risk models, and improved regulatory oversight. The derivatives overhaul 

required by the Dodd-Frank Wall Street Reform and Consumer Protection Act is intended to 

provide the regulatory tools needed to tackle those problems and reduce derivatives-related risk, 

including through the Merkley-Levin provisions that seek to implement the Volcker Rule’s 

prohibition on high risk proprietary trading by federally insured banks, even if portrayed by 

banks as hedging activity designed to lower risk.
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I. EXECUTIVE SUMMARY

A. Subcommittee Investigation

The JPMorgan Chase whale trades first drew public attention in April 2012. Beginning 

that same month, Senator Carl Levin’s office made preliminary inquiries into what happened and 

subsequently received a series of briefings from JPMorgan Chase. On June 13, 2012, the U.S. 

Senate Committee on Banking, Housing, and Urban Affairs held a hearing in which JPMorgan 

Chase’s Chief Executive Officer Jamie Dimon testified and answered questions about the whale 

trades.

1

 On June 19, 2012, Mr. Dimon appeared at a second hearing before the U.S. House 

Committee on Financial Services.2

In July 2012, the U.S. Senate Permanent Subcommittee on Investigations initiated a 

bipartisan investigation into the trades. Over the course of the next nine months, the 

Subcommittee collected nearly 90,000 documents, reviewed and, in some cases transcribed, over 

200 recorded telephone conversations and instant messaging exchanges,3 and conducted over 25

interviews of bank and regulatory agency personnel. The Subcommittee also received over 25

briefings from the bank and its regulators, including the Office of the Comptroller of the 

Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), and consulted with

government and private sector experts in financial regulation, accounting practices, derivatives 

trading, and derivatives valuation.

The materials reviewed by the Subcommittee included JPMorgan Chase filings with the 

Securities and Exchange Commission (SEC), documents provided to and by the OCC, JPMorgan 

Chase board and committee minutes, internal memoranda, correspondence, and emails, 

chronologies of trading positions, records of risk limit utilizations and breaches, audio recordings

and instant messaging exchanges, legal pleadings, and media reports. In addition, JPMorgan 

Chase briefed the Subcommittee about the findings of an internal investigation conducted by a 

task force headed by Michael Cavanagh, a senior bank official who is a member of the firm’s 

Executive and Operating Committees. That investigation released its results to the public in a 

report on January 16, 2013.4

 1 See “A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?” U.S. Senate Committee on 

Banking, Housing, and Urban Affairs, S. Hrg. 112-715 (June 13, 2012).

Bank representatives also read to the Subcommittee portions of 

notes taken during interviews conducted by the JPMorgan Chase Task Force of CIO personnel, 

including traders, who were based in London. In addition to bank materials, the Subcommittee 

reviewed documents prepared by or sent to or from banking and securities regulators, including 

bank examination reports, analyses, memoranda, correspondence, emails, OCC Supervisory 

Letters, and Cease and Desist Orders. Those materials included nonpublic OCC examination 

2

 See “Examining Bank Supervision and Risk Management in Light of JPMorgan Chase’s Trading Loss,” U.S. 

House of Representatives Committee on Financial Services, Serial No. 112-136 (June 19, 2012). 3 The British regulator, the Financial Services Authority, requires telephone calls regarding trading to be taped, 

including with respect to all financial transactions likely to result in a trade. See Conduct of Business Sourcebook 

(Recording of Telephone Conversations and Electronic Communications) Instrument 2008, FSA 2008/6 (U.K.). 4 See 1/16/2013 “Report of JPMorgan Chase & Co. Management Task Force Regarding 2012 CIO Losses,” 

prepared by JPMorgan Chase, http://files.shareholder.com/downloads/ONE/2288197031x0x628656/4cb574a0-0bf5-

4728-9582-625e4519b5ab/Task_Force_Report.pdf.
3

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.

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-13-000014-126 [Sealed Exhibit]. 
4

not only ended up increasing the portfolio’s size, risk, and RWA, but also, by taking the portfolio 

into a net long position, eliminated the hedging protections the SCP was originally supposed to 

provide. 

In the first quarter of 2012, the CIO traders went on a sustained trading spree, eventually 

increasing the net notional size of the SCP threefold from $51 billion to $157 billion. By March, 

the SCP included at least $62 billion in holdings in a U.S. credit index for investment grade 

companies; $71 billion in holdings in a credit index for European investment grade companies; 

and $22 billion in holdings in a U.S. credit index for high yield (non-investment grade) 

companies. Those holdings were created, in part, by an enormous series of trades in March, in 

which the CIO bought $40 billion in notional long positions which the OCC later characterized 

as “doubling down” on a failed trading strategy. By the end of March 2012, the SCP held over 

100 different credit derivative instruments, with a high risk mix of short and long positions, 

referencing both investment grade and non-investment grade corporations, and including both 

shorter and longer term maturities. JPMorgan Chase personnel described the resulting SCP as 

“huge” and of “a perilous size” since a small drop in price could quickly translate into massive 

losses.

At the same time the CIO traders were increasing the SCP’s holdings, the portfolio was 

losing value. The SCP reported losses of $100 million in January, another $69 million in 

February, and another $550 million in March, totaling at quarter-end nearly $719 million. A 

week before the quarter ended, on March 23, 2012, CIO head Ina Drew ordered the SCP traders 

to “put phones down” and stop trading. 

In early April, the press began speculating about the identity of the “London Whale” 

behind the huge trades roiling the credit markets, eventually unmasking JPMorgan Chase’s Chief 

Investment Office. Over the next three months, the CIO’s credit derivatives continued to lose 

money. By May, the Synthetic Credit Portfolio reported losing $2 billion; by the end of June, the 

losses jumped to $4.4 billion; and by the end of the year, the total reached at least $6.2 billion. 

JPMorgan Chase told the Subcommittee that the SCP was not intended to function as a 

proprietary trading desk, but as insurance or a “hedge” against credit risks confronting the bank. 

While its original approval document indicated that the SCP was created with a hedging function 

in mind, the bank was unable to provide documentation over the next five years detailing the 

SCP’s hedging objectives and strategies; the assets, portfolio, risks, or tail events it was supposed 

to hedge; or how the size, nature, and effectiveness of its hedges were determined. The bank was 

also unable to explain why the SCP’s hedges were treated differently from other types of hedges 

within the CIO. 

While conducting its review of the SCP, some OCC examiners expressed skepticism that 

the SCP functioned as a hedge at all. In a May 2012 internal email, for example, one OCC 

examiner referred to the SCP as a “make believe voodoo magic ‘composite hedge.’” When he 

was asked about the Synthetic Credit Portfolio, JPMorgan Chase CEO Jamie Dimon told the 

Senate Banking Committee that, over time, the “portfolio morphed into something that rather 

than protect the firm, created new and potentially larger risks.” Mr. Dimon has not 

acknowledged that what the SCP morphed into was a high risk proprietary trading operation.
5

(2) Hiding Losses

In its first four years of operation, the Synthetic Credit Portfolio produced positive 

revenues, but in 2012, it opened the year with sustained losses. In January, February, and March, 

the days reporting losses far exceeded the days reporting profits, and there wasn’t a single day 

when the SCP was in the black. To minimize its reported losses, the CIO began to deviate from 

the valuation practices it had used in the past to price credit derivatives. In early January, the 

CIO had typically established the daily value of a credit derivative by marking it at or near the 

midpoint price in the daily range of prices (bid-ask spread) offered in the marketplace. Using 

midpoint prices had enabled the CIO to comply with the requirement that it value its derivatives 

using prices that were the “most representative of fair value.” But later in the first quarter of 

2012, instead of marking near the midpoint, the CIO began to assign more favorable prices 

within the daily price range (bid-ask spread) to its credit derivatives. The more favorable prices 

enabled the CIO to report smaller losses in the daily profit/loss (P&L) reports that the SCP filed

internally within the bank. 

The data indicates that the CIO began using more favorable valuations in late January and 

accelerated that practice over the next two months. By March 15, 2012, two key participants, 

Julien Grout, a junior trader charged with marking the SCP’s positions on a daily basis, and his 

supervisor, Bruno Iksil, head trader in charge of the SCP, were explicit about what they were 

doing. As Mr. Grout told Mr. Iksil in a recorded telephone conversation: “I am not marking at 

mids as per a previous conversation.” The next day, Mr. Iksil expressed to Mr. Grout his 

concerns about the growing discrepancy between the marks they were reporting versus those 

called for by marking at the midpoint prices: “I can’t keep this going .... I think what he’s [their 

supervisor, Javier Martin-Artajo] expecting is a re-marking at the end of the month .... I don’t 

know where he wants to stop, but it’s getting idiotic.” 

For five days, from March 12 to 16, 2012, Mr. Grout prepared a spreadsheet tracking the 

differences between the daily SCP values he was reporting and the values that would have been 

reported using midpoint prices. According to the spreadsheet, by March 16, 2012, the Synthetic 

Credit Portfolio had reported year-to-date losses of $161 million, but if midpoint prices had been 

used, those losses would have swelled by another $432 million to a total of $593 million. CIO 

head Ina Drew told the Subcommittee that it was not until July 2012, after she had left the bank,

that she became aware of this spreadsheet and said she had never before seen that type of 

“shadow P&L document.” 

On March 23, Mr. Iksil estimated in an email that the SCP had lost about $600 million 

using midpoint prices and $300 million using the “best” prices, but the SCP ended up reporting 

within the bank a daily loss of only $12 million. On March 30, the last business day of the 

quarter, the CIO internally reported a sudden $319 million daily loss. But even with that

outsized reported loss, a later analysis by the CIO’s Valuation Control Group (VCG) noted that, 

by March 31, 2012, the difference in the CIO’s P&L figures between using midpoint prices 

versus more favorable prices totaled $512 million.

On April 10, 2012, the CIO initially reported an estimated daily loss of $6 million, but 90 

minutes later, after a confrontation between two CIO traders, issued a new P&L report estimating 
6

a loss of $400 million. That change took place on the first trading day after the whale trades 

gained public attention; one CIO trader later said CIO personnel were “scared” at the time to 

hide such a large loss. As a result, the SCP internally reported year-to-date losses of about $1.2 

billion, crossing the $1 billion mark for the first time.

One result of the CIO’s using more favorable valuations was that two different business 

lines within JPMorgan Chase, the Chief Investment Office and the Investment Bank, assigned 

different values to identical credit derivative holdings. Beginning in March 2012, as CIO 

counterparties learned of the price differences, several objected to the CIO’s values, resulting in 

collateral disputes peaking at $690 million. In May, the bank’s Deputy Chief Risk Officer 

Ashley Bacon directed the CIO to mark its books in the same manner as the Investment Bank, 

which used an independent pricing service to identify the midpoints in the relevant price ranges. 

That change in valuation methodology resolved the collateral valuation disputes in favor of the 

CIO’s counterparties and, at the same time, put an end to the mismarking. 

On May 10, 2012, the bank’s Controller issued an internal memorandum summarizing a 

special assessment of the SCP’s valuations from January through April. Although the 

memorandum documented the CIO’s use of more favorable values through the course of the first 

quarter, and a senior bank official even privately confronted a CIO manager about using 

“aggressive” prices in March, the memorandum generally upheld the CIO valuations. The bank 

memorandum observed that the CIO had reported about $500 million less in losses than if it had

used midpoint prices for its credit derivatives, and even disallowed and modified a few prices 

that had fallen outside of the permissible price range (bid-ask spread), yet found the CIO had 

acted “consistent with industry practices.”

The sole purpose of the Controller’s special assessment was to ensure that the CIO had 

accurately reported the value of its derivative holdings, since those holdings helped determine 

the bank’s overall financial results. The Controller determined that the CIO properly reported a 

total of $719 million in losses, instead of the $1.2 billion that would have been reported if 

midpoint prices had been used. That the Controller essentially concluded the SCP’s losses could 

legitimately fall anywhere between $719 million and $1.2 billion exposes the subjective, 

imprecise, and malleable nature of the derivative valuation process. 

The bank told the Subcommittee that, despite the favorable pricing practices noted in the 

May memorandum, it did not view the CIO as having engaged in mismarking until June 2012, 

when its internal investigation began reviewing CIO recorded telephone calls and heard CIO 

personnel disparaging the marks they were reporting. On July 13, 2012, the bank restated its 

first quarter earnings, reporting additional SCP losses of $660 million. JPMorgan Chase told the 

Subcommittee that the decision to restate its financial results was a difficult one, since $660 

million was not clearly a “material” amount for the bank, and the valuations used by the CIO did 

not clearly violate bank policy or generally accepted accounting principles. The bank told the 

Subcommittee that the key consideration leading to the restatement of the bank’s losses was its 

determination that the London CIO personnel had not acted in “good faith” when marking the 

SCP book, which meant the SCP valuations had to be revised.
7

The ability of CIO personnel to hide hundreds of millions of dollars of additional losses

over the span of three months, and yet survive internal valuation reviews, shows how imprecise, 

undisciplined, and open to manipulation the current process is for valuing credit derivatives. 

This weak valuation process is all the more troubling given the high risk nature of synthetic 

credit derivatives, the lack of any underlying tangible assets to stem losses, and the speed with 

which substantial losses can accumulate and threaten a bank’s profitability. The whale trades’ 

bad faith valuations exposed not only misconduct by the CIO and the bank’s violation of the 

derivative valuation process mandated in generally accepted accounting principles, but also a 

systemic weakness in the valuation process for all credit derivatives.

(3) Disregarding Risk

In contrast to JPMorgan Chase’s reputation for best-in-class risk management, the whale 

trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk 

metrics were frequently criticized or downplayed, and risk evaluation models were targeted by 

bank personnel seeking to produce artificially lower capital requirements. 

The CIO used five key metrics and limits to gauge and control the risks associated with 

its trading activities, including the Value-at-Risk (VaR) limit, Credit Spread Widening 01 (CS01)

limit, Credit Spread Widening 10% (CSW10%) limit, stress loss limits, and stop loss advisories. 

During the first three months of 2012, as the CIO traders added billions of dollars in complex 

credit derivatives to the Synthetic Credit Portfolio, the SCP trades breached the limits on all five 

risk metrics. In fact, from January 1 through April 30, 2012, CIO risk limits and advisories were 

breached more than 330 times. 

In January 2012, the SCP breached the VaR limit for both the CIO and the bank as a 

whole. That four-day breach was reported to the bank’s most senior management, including 

CEO Jamie Dimon. In the same month, the SCP repeatedly breached the CS01 limit, exceeding 

the limit by 100% in January, by 270% in early February, and by more than 1,000% in midApril. In February 2012, a key risk metric known as the Comprehensive Risk Measure (CRM) 

warned that the SCP risked incurring a yearly loss of $6.3 billion, but that projection was 

dismissed at the time by CIO personnel as “garbage.” In March 2012, the SCP repeatedly 

breached the CSW10% limit, as well as stress loss limits signaling possible losses in adverse 

market conditions, and stop loss advisories that were supposed to set a ceiling on how much 

money a portfolio was allowed to lose over a specified period of time. Concentration limits that 

could have prevented the SCP from acquiring outsized positions were absent at the CIO despite 

being commonplace for the same instruments at JPMorgan Chase’s Investment Bank.

The SCP’s many breaches were routinely reported to JPMorgan Chase and CIO 

management, risk personnel, and traders. The breaches did not, however, spark an in-depth 

review of the SCP or require immediate remedial actions to lower risk. Instead, the breaches 

were largely ignored or ended by raising the relevant risk limit. 

In addition, CIO traders, risk personnel, and quantitative analysts frequently attacked the 

accuracy of the risk metrics, downplaying the riskiness of credit derivatives and proposing risk 

measurement and model changes to lower risk results for the Synthetic Credit Portfolio. In the 
8

case of the CIO VaR, after analysts concluded the existing model was too conservative and 

overstated risk, an alternative CIO model was hurriedly adopted in late January 2012, while the 

CIO was in breach of its own and the bankwide VaR limit. The bank did not obtain OCC 

approval as it should have to use the model for the SCP. The CIO’s new model immediately 

lowered the SCP’s VaR by 50%, enabling the CIO not only to end its breach, but to engage in 

substantially more risky derivatives trading. Months later, the bank determined that the model 

was improperly implemented, requiring error-prone manual data entry and incorporating formula

and calculation errors. On May 10, the bank backtracked, revoking the new VaR model due to 

its inaccuracy in portraying risk, and reinstating the prior model.

In the case of the bank’s CRM risk metric and model, CIO quantitative analysts, traders, 

and risk managers attacked it for overstating risk compared to their own far more optimistic 

analysis. The CIO’s lead quantitative analyst also pressed the bank’s quantitative analysts to 

help the CIO set up a system to categorize the SCP’s trades for risk measurement purposes in a 

way designed to produce the “optimal” – meaning lowest – Risk Weighted Asset total. The CIO 

analyst who pressed for that system was cautioned against writing about it in emails, but received 

sustained analytical support from the bank in his attempt to construct the system and artificially 

lower the SCP’s risk profile. 

The head of the CIO’s London office, Achilles Macris, once compared managing the 

Synthetic Credit Portfolio, with its massive, complex, moving parts, to flying an airplane. The 

OCC Examiner-in-Charge at JPMorgan Chase told the Subcommittee that if the Synthetic Credit 

Portfolio were an airplane, then the risk metrics were the flight instruments. In the first quarter 

of 2012, those flight instruments began flashing red and sounding alarms, but rather than change 

course, JPMorgan Chase personnel disregarded, discounted, or questioned the accuracy of the 

instruments instead. The bank’s actions not only exposed the many risk management 

deficiencies at JPMorgan Chase, but also raise systemic concerns about how many other 

financial institutions may be disregarding risk indicators and manipulating models to artificially 

lower risk results and capital requirements. 

(4) Avoiding and Conducting OCC Oversight

Prior to media reports of the whale trades in April 2012, JPMorgan Chase provided 

minimal information about the CIO’s Synthetic Credit Portfolio to its primary regulator, the 

Office of the Comptroller of the Currency (OCC), despite the SCP’s supposedly important role 

in offsetting the bank’s credit risks, its rapid growth in 2011 and 2012, and its increasingly risky 

credit derivatives. While the OCC, in hindsight, has identified occasional references to a “core 

credit portfolio” in bank materials, and the bank has produced copies of some emails sent to the 

OCC with routine risk information and occasional similar references, the OCC told the 

Subcommittee that the earliest explicit mention of the SCP did not appear until January 27, 2012, 

in a routine VaR report. 

Because the OCC was unaware of the risks associated with the SCP, it conducted no 

reviews of the portfolio prior to 2012. Both the OCC and JPMorgan Chase bear fault for the 

OCC’s lack of knowledge – at different points, the bank was not forthcoming and even provided 

incorrect information, and at other points the OCC failed to notice and follow up on red flags 
9

signaling increasing CIO risk in the reports it did receive from the bank. During 2011, for 

example, the notional size of the SCP grew tenfold from about $4 billion to $51 billion, but the 

bank never informed the OCC of the increase. At the same time, the bank did file risk reports 

with the OCC disclosing that the CIO repeatedly breached its stress limits in the first half of 

2011, triggering them eight times, on occasion for weeks at a stretch, but the OCC failed to 

follow up with the bank. Later in 2011, the CIO engaged in a $1 billion high risk, high stakes 

credit derivatives bet that triggered a payout of roughly $400 million to the CIO. The OCC 

learned of the $400 million gain, but did not inquire into the reason for it or the trading activity 

behind it, and so did not learn of the extent of credit derivatives trading going on at the CIO.

In January 2012, in its first quarterly meeting with the OCC, the CIO downplayed the 

portfolio’s importance by misinforming the OCC that it planned to reduce the SCP. Instead, 

over the course of the quarter, the CIO tripled the notional size of the SCP from $51 billion to 

$157 billion, buying a high risk mix of short and long credit derivatives with varying reference 

entities and maturities. The increase in the SCP’s size and risk triggered a breach of the CIO’s 

and bankwide VaR limits, which the bank disclosed to the OCC in routine risk reports at the 

time, but which did not trigger an agency inquiry. Also in January, the bank sent routine risk 

management notices which informed the OCC of the bank’s implementation of a new VaR 

model for the CIO that would dramatically lower the SCP’s risk profile, but the OCC did not 

inquire into the reasons for the model change, its impact on risk, or how the CIO was able to 

reduce its risk results overnight by 50%. 

In February and March, the bank began to omit key CIO performance data from its 

standard reports to the OCC, while simultaneously failing to provide timely copies of a new CIO 

management report. The OCC failed to notice the missing reports or request the new CIO 

management report until after the April 6 press articles exposed the CIO’s risky trades. By

minimizing the CIO data it provided to the OCC about the CIO and SCP, the bank left the OCC 

misinformed about the SCP’s risky holdings and growing losses. 

Beginning in January and continuing through April 2012, the SCP’s high risk 

acquisitions triggered multiple breaches of CIO risk limits, including its VaR, credit spread, 

stress loss, and stop loss limits. Those breaches were disclosed on an ongoing, timely basis in

standard risk reports provided by the bank to the OCC, yet produced no reaction at the time from 

the agency. The Subcommittee found no evidence that the OCC reviewed the risk reports when 

received, analyzed the breach data, or asked any questions about the trading activity causing the 

breaches to occur.

On April 6, 2012, when media reports unmasked the role of JPMorgan Chase in the

whale trades, the OCC told the Subcommittee that it was surprised to read about the trades and 

immediately directed inquiries to the bank for more information. The OCC indicated that it 

initially received such limited data about the trades and such blanket reassurances from the bank 

about them that, by the end of April, the OCC considered the matter closed. 
10

It was not until May 2012, a few days before the bank was forced to disclose $2 billion in 

SCP losses in its public SEC filings, that the OCC learned of the problems besetting the 

portfolio. On May 12, OCC staff told staff for a Senate Banking Committee member that the 

whale trades would have been allowed under the draft Volcker Rule, an assessment that, a few 

days later, the OCC disavowed as “premature.” At the instruction of the OCC’s new 

Comptroller, Thomas Curry, the OCC initiated an intensive inquiry into the CIO’s credit 

derivatives trading activity. Even then, the OCC told the Subcommittee that obtaining 

information from JPMorgan Chase was difficult, as the bank resisted and delayed responding to

OCC information requests and sometimes even provided incorrect information. For example, 

when the OCC inquired into whether the CIO had mismarked the SCP book, the bank’s Chief 

Risk Officer initially denied it, and the bank delayed informing the OCC of later evidence 

indicating that CIO personnel had deliberately understated the SCP losses.

On January 14, 2013, the OCC issued a Cease and Desist order against the bank, on top 

of six Supervisory Letters it issued in 2012, detailing 20 “Matters Requiring Attention” that 

required corrective action by the bank. In addition, the OCC conducted a review of its own 

missteps and regulatory “lessons learned,” described in an internal report completed in October 

2012. Among multiple failures, the OCC internal report concluded that the OCC had failed to 

monitor and investigate multiple risk limit breaches by the CIO and improperly allowed 

JPMorgan Chase to submit aggregated portfolio performance data that obscured the CIO’s 

involvement with derivatives trading.

The JPMorgan Chase whale trades demonstrate how much more difficult effective 

regulatory oversight is when a bank fails to provide routine, transparent performance data about 

the operation of a large derivatives portfolio, its related trades, and its daily booked values. They 

also demonstrate the OCC’s failure to establish an effective regulatory relationship with 

JPMorgan Chase founded on the bank’s prompt cooperation with OCC oversight efforts. 

JPMorgan Chase’s ability to dodge effective OCC oversight of the multi-billion-dollar Synthetic 

Credit Portfolio until massive trades, mounting losses, and media reports exposed its activities, 

demonstrates that bank regulators need to conduct more aggressive oversight with their existing 

tools and develop more effective tools to detect and stop unsafe and unsound derivatives trading. 

(5) Misinforming Investors, Regulators, and the Public

To ensure fair, open and efficient markets for investors, federal securities laws impose 

specific disclosure obligations on market participants. Public statements and SEC filings made 

by JPMorgan Chase in April and May 2012 raise questions about the timeliness, completeness, 

and accuracy of information presented about the CIO whale trades.

The CIO whale trades were not disclosed to the public in any way until April 2012, 

despite more than $1 billion in losses and widespread problems affecting the CIO and the bank, 

as described in this Report. On April 6, 2012, media reports focused public attention on the 

whale trades for the first time; on April 10, which was the next trading day, the SCP reported 

internally a $415 million loss. The bank’s communications officer and chief investor liaison 

circulated talking points and, that same day, April 10, met with reporters and analysts to deliver 

reassuring messages about the SCP. Their primary objectives were to communicate, among 

other matters, that the CIO’s activities were “for hedging purposes” and that the regulators were 
11

“fully aware” of its activities, neither of which was true. The following day, April 11, one of the 

traders told Ms. Drew, “The bank’s communications yesterday are starting to work,” suggesting

they were quieting the markets and resulting in reduced portfolio losses.

At the end of the week, on April 13, 2012, JPMorgan Chase filed an 8-K report with the 

SEC with information about the bank’s first quarter financial results and hosted an earnings call. 

On that call, JPMorgan Chase Chief Financial Officer Douglas Braunstein reassured investors, 

analysts, and the public that the SCP’s trading activities were made on a long-term basis, were 

transparent to regulators, had been approved by the bank’s risk managers, and served a hedging 

function that lowered risk and would ultimately be permitted under the Volcker Rule whose 

regulations were still being developed. CEO Jamie Dimon dismissed the media reports about the 

SCP as a “complete tempest in a teapot.” 

A month later, in connection with its May 10, 2012 10-Q filing finalizing its first quarter 

financial results, the bank announced that the SCP had lost $2 billion, would likely lose more, 

and was much riskier than earlier portrayed. The 10-Q filing stated: “Since March 31, 2012, 

CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio 

has proven to be riskier, more volatile and less effective as an economic hedge than the Firm 

previously believed.” Though the markets had not reacted against JPMorgan Chase’s stock after 

the reassuring April 13 8-K filing and earnings call, the bank’s stock did drop after the May 10 

10-Q filing and call, as well as its announcement on May 15, that Ina Drew was departing the 

bank, declining from $40.74/share on May 10 to $33.93/share one week later on May 17, 

representing a drop of 17%. The stock continued to decline to $31/share on June 4, representing 

an overall decline of 24%.

Given the information that bank executives possessed in advance of the bank’s public 

communications on April 10, April 13, and May 10, the written and verbal representations made 

by the bank were incomplete, contained numerous inaccuracies, and misinformed investors, 

regulators, and the public about the CIO’s Synthetic Credit Portfolio.

More than a Tempest in a Teapot. In the April 13 earnings call, in response to a 

question, Mr. Dimon dismissed media reports about the SCP as a “complete tempest in a teapot.” 

While he later apologized for that comment, his judgment likely was of importance to investors 

in the immediate aftermath of those media reports. The evidence also indicates that, when he 

made that statement, Mr. Dimon was already in possession of information about the SCP’s 

complex and sizeable portfolio, its sustained losses for three straight months, the exponential 

increase in those losses during March, and the difficulty of exiting the SCP’s positions. 

Mischaracterizing Involvement of Firmwide Risk Managers. Mr. Braunstein stated on 

the April 13 earnings call that “all of those positions are put on pursuant to the risk management 

at the firm-wide level.” The evidence indicates, however, that in 2012, JPMorgan Chase’s 

firmwide risk managers knew little about the SCP and had no role in putting on its positions. 

JPMorgan Chase’s Chief Risk Officer John Hogan told the Subcommittee, for example, that, 

prior to the April press reports, he had been unaware of the size and nature of the SCP, much less 

its mounting losses. Virtually no evidence indicates that he, his predecessor, or any other 

firmwide risk manager played any role in designing or approving the SCP positions acquired in 

2012, until well after the April 13 earnings call when the bank’s risk managers effectively took 
12

over management of the SCP. In addition, Mr. Braunstein’s statement omitted any mention of 

the across-the-board risk limit breaches triggered by the SCP during the first quarter of 2012, 

even though those breaches would likely have been of interest to investors. 

Mischaracterizing SCP as “Fully Transparent to the Regulators.” In the bank’s 

April 13 earnings call, Mr. Braunstein said that the SCP positions were “fully transparent to the 

regulators,” who “get information on those positions on a regular and recurring basis as part of 

our normalized reporting.” In fact, the SCP positions had never been disclosed to the OCC in 

any regular bank report. The bank had described the SCP’s positions to the OCC for the first 

time, in a general way, only a few days earlier and failed to provide more detailed information 

for more than a month. Mr. Braunstein’s statement also omitted the fact that JPMorgan Chase 

had dodged OCC oversight of the SCP for years by failing to alert the agency to the 

establishment of the portfolio, and failing to provide any portfolio-specific information in CIO 

reports. During the April 13 call, the bank led investors to believe that the SCP operated under 

close OCC supervision and oversight, when the truth was that the bank had provided barely any 

SCP data for the OCC to review. 

Mischaracterizing SCP Decisions as “Made on a Very Long-Term Basis.” On the 

bank’s April 13 earnings call, Mr. Braunstein also stated that with regard to “managing” the 

stress loss positions of the Synthetic Credit Portfolio, “[a]ll of the decisions are made on a very 

long-term basis.” In fact, the CIO credit traders engaged in daily derivatives trading, and the 

bank conceded the SCP was “actively traded.” An internal CIO presentation in March 2012, 

provided to the bank’s executive committee a month before the earnings call, indicated that the 

SCP operated on a “short” time horizon. In addition, many of the positions producing SCP 

losses had been acquired just weeks or months earlier. Mr. Braunstein’s characterization of the 

SCP as making long-term investment decisions was contrary to both the short-term posture of the 

SCP, as well as how it actually operated in 2011 and 2012. His description was inaccurate at 

best and deceptive at worst.

Mischaracterizing SCP Whale Trades As Providing “Stress Loss Protection.” 

During the April 13 call, Mr. Braunstein indicated that the SCP was intended to provide “stress 

loss protection” to the bank in the event of a credit crisis, essentially presenting the SCP as a 

portfolio designed to lower rather than increase bank risk. But in early April, days before the 

earnings call, Ms. Drew told the bank’s executive committee that, overall, the SCP was “long” 

credit, a posture that multiple senior executives told the Subcommittee was inconsistent with 

providing protection against a credit crisis. Moreover, a detailed analysis reviewed by senior 

management two days before the April 13 earnings call showed that in multiple scenarios 

involving a deterioration of credit, the SCP would lose money. While the bank may have sought 

to reassure investors that the SCP lowered the bank’s credit risk, in fact, as then configured, the 

SCP would have amplified rather than reduced the bank’s losses in the event of a credit crisis. 

The bank’s description of the SCP was simply erroneous.

Asserting SCP Trades Were Consistent With the Volcker Rule. The final point made 

in the April 13 earnings call by Mr. Braunstein was: “[W]e believe all of this is consistent with 

what we believe the ultimate outcome will be related to Volcker.” The Volcker Rule is intended 

to reduce bank risk by prohibiting high risk proprietary trading activities by federally insured 

banks, their affiliates, and subsidiaries. However, the Volcker Rule also allows certain trading 

activities to continue, including “risk-mitigating hedging activities.” Mr. Braunstein’s statement 
13

gave the misimpression that the SCP was “hedging” risk. When the Subcommittee asked the 

bank for any legal analyses regarding the Volcker Rule and the SCP, the bank responded that 

none existed. On the day prior to the earnings call, Ina Drew wrote to Mr. Braunstein that “the 

language in Volcker is unclear,” a statement that presumably refers to the fact that the 

implementing regulation was then and still is under development. In addition, the bank had 

earlier written to regulators expressing concern that the SCP’s derivatives trading would be 

“prohibited” by the Volcker Rule. The bank omitted any mention of that analysis to investors, 

when essentially asserting that the CIO would be permitted under the law to continue operating 

the SCP as before.

Omitting VaR Model Change. Near the end of January, the bank approved use of a 

new CIO Value-at-Risk (VaR) model that cut in half the SCP’s purported risk profile, but failed 

to disclose that VaR model change in its April 8-K filing, and omitted the reason for returning to 

the old model in its May 10-Q filing. JPMorgan Chase was aware of the importance of VaR risk 

analysis to investors, because when the media first raised questions about the whale trades, the 

bank explicitly referred analysts to the CIO’s VaR totals in its 2011 annual 10-K filing, filed on 

February 29, 2012. Yet, days later, on April 13, the bank’s 8-K filing contained a misleading 

chart that listed the CIO’s first quarter VaR total as $67 million, only $3 million more than the 

prior quarter, without also disclosing that the new figure was the product of a new VaR model 

that calculated a much lower VaR profile for the CIO than the prior model. An analyst or 

investor relying on the disclosed VaRs for the end of 2011 and the first quarter of 2012 would 

likely have believed that the positions underlying those VaRs were similar, since the VaR totals 

were very similar. The change in the VaR methodology effectively masked the significant 

changes in the portfolio. 

When asked in a May 10 call with investors and analysts why the VaR model was 

changed, Mr. Dimon said the bank made “constant changes and updates to models, always trying 

to get them better,” but did not disclose that the bank had reinstated the old CIO VaR model 

because the “update[d]” CIO VaR had understated risk by a factor of two, was error prone, and 

suffered from operational problems. The May 10-Q filing included a chart showing a revised 

CIO VaR for the first quarter of $129 million, which was twice the VaR amount initially 

reported for the first quarter, and also twice the average amounts in 2011 and 2010. The only

explanation the May 10-Q filing provided was that the revised VaR “was calculated using a 

methodology consistent with the methodology used to calculate CIO’s VaR in 2011.” 

Together, these misstatements and omissions about the involvement of the bank’s risk 

managers in putting on SCP positions, the SCP’s transparency to regulators, the long-term nature 

of its decisionmaking, its VaR totals, its role as a risk-mitigating hedge, and its supposed 

consistency with the Volcker Rule, misinformed investors, regulators, and the public about the 

nature, activities, and riskiness of the CIO’s credit derivatives during the first quarter of 2012. 
14

C. Whale Trade Case History

By digging into the details of the whale trades, the Subcommittee investigation has 

uncovered systemic problems in how synthetic derivatives are traded, recorded, and managed for 

risk, as well as evidence that the whale trades were not the acts of rogue traders, but involved 

some of the bank’s most senior managers. 

Previously undisclosed emails and memoranda showed that the CIO traders kept their 

superiors informed of their trading strategies. Detailing the Synthetic Credit Portfolio showed

how credit derivatives, when purchased in massive quantities, with multiple maturities and 

reference entities, produced a high risk portfolio that even experts couldn’t manage. Internal 

bank documents revealed that the SCP was not managed as a hedge and, by March 2012, was not 

providing credit loss protection to the bank. Systemic weaknesses in how some hedges are 

documented and managed also came to light. In addition, the investigation exposed systemic 

problems in the derivative valuation process, showing how easily the SCP books were 

manipulated to hide massive losses. Recorded telephone calls, instant messages, and the Grout 

spreadsheet disclosed how the traders booking the derivative values felt pressured and were 

upset about mismarking the book to minimize losses. Yet an internal assessment conducted by 

the bank upheld the obviously mismarked prices, declaring them to be “consistent with industry 

practices.”

While the bank claimed that the whale trade losses were due, in part, to a failure to have 

the right risk limits in place, the Subcommittee investigation showed that the five risk limits

already in effect were all breached for sustained periods of time during the first quarter of 2012. 

Bank managers knew about the breaches, but allowed them to continue, lifted the limits, or 

altered the risk measures after being told that the risk results were “too conservative,” not 

“sensible,” or “garbage.” Previously undisclosed evidence also showed that CIO personnel 

deliberately tried to lower the CIO’s risk results and, as a result, lower its capital requirements, 

not by reducing its risky assets, but by manipulating the mathematical models used to calculate 

its VaR, CRM, and RWA results. Equally disturbing is evidence that the OCC was regularly 

informed of the risk limit breaches and was notified in advance of the CIO VaR model change 

projected to drop the CIO’s VaR results by 44%, yet raised no concerns at the time.

Still another set of previously undisclosed facts showed how JPMorgan Chase

outmaneuvered its regulator, keeping the high risk Synthetic Credit Portfolio off the OCC’s radar

despite its massive size and three months of escalating losses, until media reports pulled back the 

curtain on the whale trades. In a quarterly meeting in late January 2012, the bank told the OCC 

that it planned to reduce the size of the SCP, but then increased the portfolio and its attendant 

risks. Routine bank reports that might have drawn attention to the SCP were delayed, detailed

data was omitted, blanket assurances were offered when they should not have been, and 

requested information was late or not provided at all. Dodging OCC oversight went to the head 

of the CIO, Ina Drew, a member of the bank’s Operating Committee, who criticized the OCC for 

being overly intrusive. 
15

Senior bank management was also involved in the inaccurate information conveyed to 

investors and the public after the whale trades came under the media spotlight. Previously 

undisclosed documents showed that senior managers were told the SCP was massive, losing 

money, and had stopped providing credit loss protection to the bank, yet downplayed those

problems and kept describing the portfolio as a risk-reducing hedge, until forced by billions of 

dollars in losses to admit disaster.

The whale trades case history offers another example of a financial institution engaged in 

high risk trading activity with federally insured deposits attempting to divert attention from the 

risks and abuses associated with synthetic derivatives. The evidence uncovered by the 

Subcommittee investigation demonstrates that derivatives continue to present the U.S. financial 

system with multiple, systemic problems that require resolution. 

D. Findings of Fact

Based upon the Subcommittee’s investigation, the Report makes the following findings 

of fact.

(1) Increased Risk Without Notice to Regulators. In the first quarter of 2012, without 

alerting its regulators, JPMorgan Chase’s Chief Investment Office used bank 

deposits, including some that were federally insured, to construct a $157 billion

portfolio of synthetic credit derivatives, engaged in high risk, complex, short term

trading strategies, and disclosed the extent and high risk nature of the portfolio to its 

regulators only after it attracted media attention.

(2) Mischaracterized High Risk Trading as Hedging. JPMorgan Chase claimed at 

times that its Synthetic Credit Portfolio functioned as a hedge against bank credit 

risks, but failed to identify the assets or portfolios being hedged, test the size and 

effectiveness of the alleged hedging activity, or show how the SCP lowered rather 

than increased bank risk. 

(3) Hid Massive Losses. JPMorgan Chase, through its Chief Investment Office, hid over 

$660 million in losses in the Synthetic Credit Portfolio for several months in 2012, by 

allowing the CIO to overstate the value of its credit derivatives; ignoring red flags 

that the values were inaccurate, including conflicting Investment Bank values and 

counterparty collateral disputes; and supporting reviews which exposed the SCP’s 

questionable pricing practices but upheld the suspect values.

(4) Disregarded Risk. In the first three months of 2012, when the CIO breached all five 

of the major risk limits on the Synthetic Credit Portfolio, rather than divest itself of 

risky positions, JPMorgan Chase disregarded the warning signals and downplayed the 

SCP’s risk by allowing the CIO to raise the limits, change its risk evaluation models, 

and continue trading despite the red flags.

(5) Dodged OCC Oversight. JPMorgan Chase dodged OCC oversight of its Synthetic 

Credit Portfolio by not alerting the OCC to the nature and extent of the portfolio; 
16

failing to inform the OCC when the SCP grew tenfold in 2011 and tripled in 2012; 

omitting SCP specific data from routine reports sent to the OCC; omitting mention of 

the SCP’s growing size, complexity, risk profile, and losses; responding to OCC 

information requests with blanket assurances and unhelpful aggregate portfolio data; 

and initially denying portfolio valuation problems.

(6) Failed Regulatory Oversight. The OCC failed to investigate CIO trading activity 

that triggered multiple, sustained risk limit breaches; tolerated bank reports that 

omitted portfolio-specific performance data from the CIO; failed to notice when some 

monthly CIO reports stopped arriving; failed to question a new VaR model that 

dramatically lowered the SCP’s risk profile; and initially accepted blanket assurances 

by the bank that concerns about the SCP were unfounded. 

(7) Mischaracterized the Portfolio. After the whale trades became public, JPMorgan 

Chase misinformed investors, regulators, policymakers and the public about its 

Synthetic Credit Portfolio by downplaying the portfolio’s size, risk profile, and 

losses; describing it as the product of long-term investment decisionmaking to reduce 

risk and produce stress loss protection, and claiming it was vetted by the bank’s risk 

managers and was transparent to regulators, none of which was true.

E. Recommendations

Based upon the Subcommittee’s investigation and findings of fact, the Report makes the 

following recommendations.

(1) Require Derivatives Performance Data. Federal regulators should require banks to 

identify all internal investment portfolios containing derivatives over a specified 

notional size, and require periodic reports with detailed performance data for those 

portfolios. Regulators should also conduct an annual review to detect undisclosed 

derivatives trading with notional values, net exposures, or profit-loss reports over 

specified amounts.

(2) Require Contemporaneous Hedge Documentation. Federal regulators should 

require banks to establish hedging policies and procedures that mandate detailed 

documentation when establishing a hedge, including identifying the assets being 

hedged, how the hedge lowers the risk associated with those assets, how and when the 

hedge will be tested for effectiveness, and how the hedge will be unwound and by 

whom. Regulators should also require banks to provide periodic testing results on the 

effectiveness of any hedge over a specified size, and periodic profit and loss reports 

so that hedging activities producing continuing profits over a specified level can be 

investigated.

(3) Strengthen Credit Derivative Valuations. Federal regulators should strengthen 

credit derivative valuation procedures, including by encouraging banks to use 

independent pricing services or, in the alternative, prices reflecting actual, executed 

trades; requiring disclosure to the regulator of counterparty valuation disputes over a 
17

specified level; and requiring deviations from midpoint prices over the course of a 

month to be quantified, explained, and, if appropriate, investigated. 

(4) Investigate Risk Limit Breaches. Federal regulators should track and investigate

trading activities that cause large or sustained breaches of VaR, CS01, CSW10%, 

stop loss limits, or other specified risk or stress limits or risk metrics.

(5) Investigate Models That Substantially Lower Risk. To prevent model 

manipulation, Federal regulators should require disclosure of, and investigate, any 

risk or capital evaluation model which, when activated, materially lowers the 

purported risk or regulatory capital requirements for a trading activity or portfolio.

(6) Implement Merkley-Levin Provisions. Federal financial regulators should 

immediately issue a final rule implementing the Merkley-Levin provisions of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the 

Volcker Rule, to stop high risk proprietary trading activities and the build-up of high 

risk assets at federally insured banks and their affiliates.

(7) Enhance Derivative Capital Charges. Federal financial regulators should impose 

additional capital charges for derivatives trading characterized as “permitted 

activities” under the Merkley-Levin provisions, as authorized by Section 13(d)(3) of 

the Bank Holding Company Act.6

 In addition, when implementing the Basel III 

Accords, Federal financial regulators should prioritize enhancing capital charges for 

trading book assets.

 6 Section 13(d)(3), which was added by Section 619 of the Dodd Frank Act, states: “CAPITAL AND 

QUANTITATIVE LIMITATIONS.--The appropriate Federal banking agencies, the Securities and Exchange 

Commission, and the Commodity Futures Trading Commission shall, as provided in subsection (b)(2), adopt rules 

imposing additional capital requirements and quantitative limitations, including diversification requirements, 

regarding the activities permitted under this section if the appropriate Federal banking agencies, the Securities and 

Exchange Commission, and the Commodity Futures Trading Commission determine that additional capital and 

quantitative limitations are appropriate to protect the safety and soundness of banking entities engaged in such 

activities.”
18

II. BACKGROUND

This section provides background information on JPMorgan Chase, its Chief Investment 

Office, the Office of the Comptroller of the Currency, capital requirements for banks, and credit 

derivatives.

A. JPMorgan Chase & Company 

JPMorgan Chase & Co. (JPMorgan Chase) is a leading global financial services firm

incorporated under Delaware law and headquartered in New York City.

7

 On the New York 

Stock Exchange (NYSE), it is listed under the ticker symbol “JPM” and is a component of the 

Dow Jones Industrial Average.8

 In addition to being the largest financial holding company in the 

United States, the firm conducts operations in more than 60 countries, employs more than 

240,000 people, maintains 5,500 bank branches, and as of December 31, 2012, has more than $2 

trillion in assets.

9

 

The JPMorgan Chase & Co. of today began as JPMorgan, a commercial bank, in the 19th

century.10 Subsequently, it grew into a complex, diversified firm through a series of acquisitions 

and mergers that have included Chase Manhattan, a commercial bank; Bear Stearns, an 

investment bank; and the banking operations of Washington Mutual, a thrift institution.11 In

January 2013, JPMorgan Chase & Co. reported a 2012 record net income of $21.3 billion, on 

revenue of $99.9 billion.

12

JPMorgan Chase & Co. engages in a wide variety of financial services, including 

banking, mortgage lending, securities, credit card issuance, commodities trading, and asset 

management.13 It also serves as a primary dealer in U.S. Government securities.14

 7 1/9/2013 Form 8-K, JPMorgan Chase & Co., at 1, (hereinafter “1/9/2013 JPMorgan Form 8-K”), 

http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=8650849; see also “Financial Highlights,” JPMorgan 

Chase & Co., 

The firm’s

http://files.shareholder.com/downloads/ONE/2156230184x0x556141/09bf5025-eea2-413d-a0af96820dd964f6/JPMC_2011_annual_report_finhighlights.pdf. 8 “JPMorgan Chase & Co.,” New York Stock Exchange, http://www.nyse.com/about/listed/jpm.html. 

9 JPMorgan is the largest bank holding company by asset size. See “Top 50 Holding Companies (HCs) as of 

9/30/2012,” Federal Reserve System, National Information Center, 

http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx; 2/28/2013 Form 10-K (Annual Report), JPMorgan Chase 

& Co., at 1, http://files.shareholder.com/downloads/ONE/2275559219x0xS19617-13-221/19617/filing.pdf; see 

“About Us,” JPMorgan Chase & Co., http://www.jpmorganchase.com/corporate/About-JPMC/about-us.htm; see 

also “Financial Highlights,” JPMorgan Chase & Co., 

http://files.shareholder.com/downloads/ONE/2156230184x0x556141/09bf5025-eea2-413d-a0af96820dd964f6/JPMC_2011_annual_report_finhighlights.pdf. 10 See “The History of JPMorgan Chase & Co.,” JPMorgan Chase & Co., 

http://www.jpmorganchase.com/corporate/About-JPMC/document/shorthistory.pdf. 11 See “History of Our Firm,” JPMorgan Chase & Co., http://www.jpmorganchase.com/corporate/AboutJPMC/jpmorgan-history.htm. 12 1/16/2013 JPMorgan Chase & Co. press release, “JPMorgan Chase Reports Fourth-Quarter 2012 Net Income of 

$5.7 Billion, or $1.39 Per Share, on Revenue of $24.4 Billion,” at 1, 

http://files.shareholder.com/downloads/ONE/2275559219x0x628669/0de76d99-815a-4a63-b14dc9f41ed930a3/JPM_News_2013_1_16_Current.pdf. 13 5/10/2012 JPMorgan Form 10-Q, at 4-5. 
19

principal bank subsidiaries are JPMorgan Chase Bank, N.A., a national bank with U.S. branches 

in 23 states, and Chase Bank USA, N.A., a national bank specializing in credit cards.

15 The 

firm’s principal non-bank subsidiary is JPMorgan Securities LLC.16 The bank and non-bank 

subsidiaries of the firm operate nationally as well as through overseas branches and subsidiaries, 

representative offices, and subsidiary foreign banks.17 

The holding company’s activities are organized into six major lines of business or 

business segments: (1) Retail Financial Services, (2) Card Services and Automobile Loans, (3) 

Commercial Banking, (4) Investment Banking, (5) Treasury and Securities Services, and (6) 

Asset Management.

18 In addition, JPMorgan Chase & Co. maintains an internal group called

“Corporate/Private Equity,” which houses its internal treasury function, a private equity group, 

and the Chief Investment Office (CIO).

19 JPMorgan Chase has highlighted its focus on risk 

management and often refers to its “fortress balance sheet.”20

JPMorgan Chase is also the largest derivatives dealer in the United States, active in 

derivatives markets involving commodities, credit instruments, equities, foreign currencies, and 

interest rates.21 Four U.S. banks dominate the U.S. derivatives markets, of which the credit 

derivatives market is the third largest, representing about 6% of all derivatives activities.22 

JPMorgan Chase is the largest U.S. derivatives dealer in the credit markets.23

James (Jamie) Dimon is Chairman of the Board of Directors and Chief Executive Officer

(CEO) of JPMorgan Chase & Co.

24 In his capacity as CEO of the holding company, Mr. Dimon 

certifies the accuracy of required regulatory filings with the Securities and Exchange 

Commission (SEC), such as the Company’s Forms 10-K and 10-Q.

25

 14 “Primary Dealer List,” Federal Reserve Bank of New York, 

http://www.newyorkfed.org/markets/pridealers_current.html. 15 5/10/2012 JPMorgan Form 10-Q, at 4. 16 Id. 17 Id. 18 Id., at 4-5.

19 Id., at 4; JPMorgan Chase & Co. 2011 annual report at 107 (hereinafter “2011 JPMorgan annual report”), 

http://files.shareholder.com/downloads/ONE/2265496134x0x556139/75b4bd59-02e7-4495-a84c06e0b19d6990/JPMC_2011_annual_report_complete.pdf.

20 See, e.g., testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., before the U.S. Senate 

Committee on Banking, Housing and Urban Affairs, S. Hrg. 112-715 (June 13, 2012), at 2, 

http://files.shareholder.com/downloads/ONE/2156234165x0x577097/c0734566-d05f-4b7a-9fa4-

ec12a29fb2da/JPM_News_2012_6_13_Current.pdf; see also 1/13/2012 “2011 Business Results,” JPMorgan Chase 

& Co. press release, at 2, http://files.shareholder.com/downloads/ONE/2156234165x0x533390/4026b17b-89d6-

4ada-be00-9548c93ff325/4Q11_JPM_EPR_FINAL.pdf. 21 See “OCC’s Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012,” Office of 

Comptroller of Currency, at Tables 1-5 and Graph 3, http://www2.occ.gov/topics/capital-markets/financialmarkets/trading/derivatives/dq212.pdf. 22 Id., at 9, Graphs 3 and 4. 23 Id., at Tables 11 and 12. 24 Mr. Dimon became Chairman of the Board on December 31, 2006, and has been Chief Executive Officer since 

December 31, 2005. See “Members of the Board,” JPMorgan Chase & Co., 

http://www.jpmorganchase.com/corporate/About-JPMC/board-of-directors.htm#dimon. 25 2/29/2012 “Form 10-K,” JPMorgan Chase & Co., at 342, 

http://files.shareholder.com/downloads/ONE/2204603745x0xS19617-12-163/19617/filing.pdf; 11/8/2012, “Form 
20

Douglas Braunstein served as JPMorgan Chase & Co.’s Chief Financial Officer (CFO) 

from July 2010 to December 2012. He was also a member of the firm’s Executive and Operating 

Committees.

26 In November 2012, JPMorgan Chase announced that Mr. Braunstein would step 

down from that post at the end of the year, and he has since become a Vice Chairman of the 

holding company.

27 In his capacity as CFO, Mr. Braunstein was charged with overseeing and 

certifying the accuracy of the firm’s financial reporting, and ensuring adequate capital and 

liquidity, among other duties.

28 

John Hogan currently serves as JPMorgan Chase’s Chief Risk Officer, having taken that 

position in January 2012. Before that, he served as the Chief Risk Officer in the Investment 

Bank.29 His predecessor was Barry Zubrow, who served as the firm’s Chief Risk Officer from 

November 2007 to January 2012, after which he was appointed head of Corporate and 

Regulatory Affairs.

30 In October 2012, Mr. Zubrow announced he would retire.31

Stephen Cutler serves as JPMorgan Chase’s general counsel.32 Greg Baer is a managing 

director and deputy general counsel in charge of corporate and global regulatory affairs since 

September 2010.

33 Prior to that, Mr. Baer worked in a similar position at Bank of America.34

James E. (Jes) Staley served as Chairman and CEO of the Corporate and Investment 

Bank, capping a career of more than 30 years at JPMorgan Chase.

35 He was also a member of 

the firm’s Executive and Operating Committees. In January 2013, Mr. Staley left JPMorgan to 

become a managing partner at BlueMountain Capital Management, a hedge fund.

36 

C.S. Venkatakrishnan is the head of the holding company’s Model Risk and 

Development office which oversees development of risk and capital models and metrics. Prior 

 

10-Q,” JPMorgan Chase & Co., at 230, http://files.shareholder.com/downloads/ONE/2204603745x0xS19617-12-

308/19617/filing.pdf. 26 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 27 The current Chief Financial Officer of the holding company is Marianne Lake. 1/16/2013 “Report of JPMorgan 

Chase & Co. Management Task Force Regarding 2012 CIO Losses,” 

http://files.shareholder.com/downloads/ONE/2288197031x0x628656/4cb574a0-0bf5-4728-9582-

625e4519b5ab/Task_Force_Report.pdf" (hereinafter “2013 JPMorgan Chase Task Force Report”), at 18.

28 Subcommittee interview of Douglas Braunstein, JPMorgan Chase & Co. (9/12/2012); see also 12/4/2012 “Form 

8-K,” JPMorgan Chase & Co., at 3, http://files.shareholder.com/downloads/ONE/2204603745x0xS1193125-12-

489964/19617/filing.pdf. 29 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4//2012). 30 2013 JPMorgan Chase Task Force Report, at 19. 31 Id. 32 “About Us: Leadership Team – Operating Committee,” JPMorgan Chase & Co., 

http://www.jpmorganchase.com/corporate/About-JPMC/operating-committee.htm. 33 “JPM Chase Hires B of A’s Gregory Baer,” American Banker, Rob Blackwell (9/9/2010), 

http://www.americanbanker.com/issues/175_173/jpm-chase-hires-bofa-greg-baer-1025302-1.html. 34 Id. 35 “JP Morgan’s Staley Quits to Join BlueMountain Hedge Fund,” Bloomberg, Mary Childs and Dawn Kopecki 

(1/8/2013), http://www.bloomberg.com/news/2013-01-08/jpmorgan-s-staley-quits-to-join-bluemountain-hedgefund.html. 36 Id.
21

to assuming that post in February 2012, he was head of the Investment Bank Structuring and 

Pricing Direct office.37

Michael Cavanagh has served as Co-CEO of the Corporate and Investment Bank since 

July 2012, and is a member of the firm’s Executive and Operating Committees.

38 Prior to that 

position, he served as CEO of the firm’s Treasury and Securities Services from June 2010 to July 

2012.39 Before that, Mr. Cavanagh served as the firm’s Chief Financial Officer from September 

2004 to June 2010.40 In May 2012, Mr. Cavanagh became head of the JPMorgan Chase & Co. 

Management Task Force established to conduct an internal investigation of the CIO losses.41

Daniel Pinto is currently the other Co-CEO of the Corporate and Investment Bank.42

B. Chief Investment Office

The Chief Investment Office (CIO) is located within JPMorgan Chase’s 

Corporate/Private Equity division.

43 It has a staff of about 425, including 140 traders, and 

maintains offices in several locations, including New York and London.44

According to JPMorgan Chase, the CIO’s predominant purpose is to maintain an 

investment portfolio to manage the bank’s excess deposits.45 JPMorgan Chase explained to the 

Subcommittee that the CIO’s excess deposits portfolio results from an “enduring mismatch” that 

the bank experiences between customer deposits, which it treats as a liability since the bank must 

repay them upon demand, and bank loans, which the bank treats as an asset since they must be 

repaid to the bank with interest.

46 According to JPMorgan Chase, the deposits managed by the 

CIO are “mostly uninsured corporate deposits,” but also include some insured deposits.47

Ina Drew, who headed the CIO from 2005 to May 2012, told the Subcommittee that,

during the 2008 financial crisis, about $100 billion in new deposits were added to the bank by

depositors seeking a safe haven for their assets,48

 37 2013 JPMorgan Chase Task Force Report, at 21.

effectively doubling the CIO’s pool of excess 

38 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012); see also “Michael J. Cavanagh,” 

Bloomberg Businessweek Executive Profile, 

http://investing.businessweek.com/research/stocks/people/person.asp?personId=170434&ticker=JPM. 39 “Michael J. Cavanagh,” Bloomberg Businessweek Executive Profile, 

http://investing.businessweek.com/research/stocks/people/person.asp?personId=170434&ticker=JPM. 40 Id.; Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). 41 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012); 2013 JPMorgan Chase Task Force 

Report, at 1, footnote 1. 

42 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). 43 2011 JPMorgan annual report at 107; Subcommittee briefing by JPMorgan Chase (5/22/2012) (Greg Baer). 44 2013 JPMorgan Chase Task Force Report, at 21; Levin Office briefing by JPMorgan Chase, (5/25/2012) (Greg

Baer).

45 2013 JPMorgan Chase Task Force Report, at 21; Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg 

Baer).

46 Levin Office briefing by JPMorgan Chase (5/22/2012) (Greg Baer). 47 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer). 48 Subcommittee interview of Ina Drew, CIO (9/7/2012); see also 2/13/2012 letter from JPMorgan Chase to U.S. 

Department of the Treasury and others, “Comment Letter on the Notice of Proposed Rulemaking Implementing 

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” JPM-CIO-PSI-0013270, at 57 

(“As the crisis unfolded, JPMorgan experienced an unprecedented inflow of deposits (more than $100 billion) 

reflecting a flight to quality.”).
22

deposits.49 By 2012, the CIO was managing a portfolio of approximately $350 billion, a historic 

high.50 According to the OCC, the enormous size of this $350 billion portfolio would make the 

CIO alone the seventh largest bank in the country.51

The CIO was formerly part of the bank’s internal treasury function, but was split off into 

a stand-alone office in 2005.52 According to JPMorgan Chase, its Treasury office and the CIO 

perform similar tasks in terms of managing the bank’s assets, but the Treasury office focuses 

more on shorter-term asset liability management.53 In 2012, JPMorgan Chase’s proxy statement 

described the CIO and its Treasury office as follows: “The Chief Investment Office and 

Corporate Treasury are responsible for managing the Firm’s liquidity, interest rate and foreign 

exchange risk, and other structural risks.”54 A March 2012 internal JPMorgan Chase 

presentation on “CIO 2012 Opportunities and Challenges,” prepared by the CIO, stated that the 

CIO’s “key mandate” was to: “[o]ptimize and protect the firm’s balance sheet from potential 

losses, and create and preserve economic value over the longer-term.”55

CIO Investment Portfolios. In its March 2012 presentation, the CIO described 

managing nine investment portfolios spanning an investment horizon that extended from the 

shorter term to the longer term.

 

56 At the short end of the horizon, the CIO indicated that it 

maintained “North America” and “International” portfolios, whose assets were “mainly in mark 

to market accounts.”57 In the medium-term, the CIO presentation indicated that the CIO had a 

“Strategic Asset Allocation” portfolio, which was a portfolio used to “manage the Firm’s 

structural risk exposures” using assets that were “[m]ainly available-for-sale.”58 Also included 

in the medium-term horizon were portfolios of assets used to hedge the bank’s activities relating 

to foreign exchange and mortgage servicing rights.59 On the longer-term investment horizon, the 

CIO presentation indicated that the CIO maintained a portfolio to fund the bank’s retirement 

plans; a portfolio to maximize “tax advantaged investments of life insurance premiums”; and a 

private equity portfolio that, by 2012, was characterized as “in run-off mode.”60

 49 Subcommittee interview of Ina Drew, CIO (9/7/2012).

 A final 

component of the CIO’s longer term horizon was a portfolio of “Special Investments,” which 

50 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 51 Id. 52 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss). 53 Id. 54 5/15/2012 JPMorgan Chase 2012 Proxy Statement, “Board’s Role in Risk Oversight,” at 11, 

http://files.shareholder.com/downloads/ONE/2265496134x0x556146/e8b56256-365c-45aa-bbdb3aa82f0d07ea/JPMC_2012_proxy_statement.pdf.

55 Mar. 2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” prepared by Ina Drew 

and Irvin Goldman, CIO, JPM-CIO-PSI 0015015. 56 Id. 57 Id. 58 Id. 

59 Id. 60 Id. Subcommittee interview of Fred Crumlish, OCC (8/28/2012). According to Ina Drew, the private equity 

portfolio was added to the CIO in 2010, at the request of Mr. Dimon. Subcommittee interview of Ina Drew, CIO 

(9/7/2012).
23

consisted of stressed or distressed investment opportunities “related to undervalued or 

underperforming loans” on the bank’s balance sheet.61

Altogether, the CIO’s March 2012 internal presentation identified nine separate 

investment portfolios, yet made no explicit mention of the Synthetic Credit Portfolio, despite its

then massive size and alleged importance in hedging the bank’s overall credit risk. Ms. Drew 

told the Subcommittee that the SCP was part of the Tactical Asset Portfolio which, in turn, was 

part of the International portfolio identified as having a shorter term investment horizon.

62

The OCC capital markets examiner responsible for JPMorgan Chase told the 

Subcommittee that, while Ms. Drew viewed the CIO as providing “special” asset management 

functions, he viewed the CIO as providing typical asset-liability management services for the 

bank, combined with private equity and pension management arms.

 

63

Ina Drew served as the bank’s Chief Investment Officer and head of the CIO from 

February 2005, when it was first spun off as a stand-alone office, until May 2012.

64 Ms. Drew

reported directly to Mr. Dimon and was a member of JPMorgan Chase’s Executive and 

Operating Committees.

65 Prior to taking the helm at the CIO, Ms. Drew had headed the holding 

company’s Global Treasury office.

66 On May 14, 2012, about a month after media reports on

the trading losses in the CIO’s Synthetic Credit Portfolio, the firm announced that Ms. Drew had 

decided to retire.67 She was replaced initially by Matthew Zames, from May to September 2012,

and then by Craig Delaney.68

Other senior CIO management included the CIO’s Chief Financial Officer, a position 

held by Joseph Bonocore from late 2000 until November 2010; and by John Wilmot from

January 2011 until May 2012.

69 He was then replaced by Marie Nourie.70 The CIO’s most 

senior risk officer was Peter Weiland from 2008 until 2012; then Irvin Goldman from January 

2012 until he resigned in July 2012.

71

 61 Mar. 2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” prepared by Ina Drew 

and Irvin Goldman, CIO, JPM-CIO-PSI 0015015. Ms. Drew told the Subcommittee that this portfolio was also 

added to the CIO at the request of Mr. Dimon. Subcommittee interview of Ina Drew, CIO (9/7/2012). 

 He was replaced by Chetan Bhargiri who now serves as 

62 Subcommittee interview of Ina Drew, CIO (9/7/2012). 63 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). See also FDIC presentation, “JPMC & 

COMPANY CIO Synthetic Credit Portfolio,” FDICPROD-0001783, at 2 (“As far back as 2006, CIO’s mandate was 

to act as a traditional ALM function with multiple priorities, including investing the firm’s excess cash, managing 

the firm’s pension fund and capital hedging (mitigating stress events).”). 64 Subcommittee interview of Ina Drew, CIO (9/7/2012). 65 Id. See also 4/2012 JPMorgan Chase & Co. internal presentation to Subcommittee entitled, “Chief Investment 

Office – Organization,” JPM-CIO-PSI 0001875. 66 Subcommittee interview of Ina Drew, CIO (9/7/2012). 67 5/14/2012 “JPMorgan Chase Announces Management Changes; Ina Drew to Retire; Matt Zames Named New 

CIO,” JPMorgan Chase & Co. press release, 

http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?ReleaseID=673037. 68 Mr. Zames is now co-Chief Operating Officer of JPMorgan Chase & Co., and Mr. Delaney reports to him. 2013 

JPMorgan Chase Task Force Report, at 15, 107.

69 Subcommittee interviews of Joseph Bonocore, JPMorgan Chase (9/11/2012) and John Wilmot, CIO (9/11/2012); 

2013 JPMorgan Chase Task Force Report, at 20. 

70 2013 JPMorgan Chase Task Force Report, at 15. 71 Subcommittee interviews of Peter Weiland (8/29/2012) and Irvin Goldman (9/15/2012); 2013 JPMorgan Chase 

Task Force Report, at 19-20. Mr. Weiland resigned in October 2012. Id., at 20. 
24

Chief Risk Officer for the CIO as well as the bank’s Treasury and Corporate offices.

72 Since 

2007, Patrick Hagan served as the CIO’s chief quantitative analyst.73

The International Chief Investment Officer was Achilles Macris, who joined the CIO in 

2006, rose quickly to management, and served as Ms. Drew’s top deputy in the CIO’s London

office.

74 He oversaw management of the Synthetic Credit Portfolio. Prior to working at the 

CIO, Mr. Macris worked for Dresdner Kleinwort Wasserstein, a British investment bank, as a 

proprietary trader.75 Mr. Macris is a Greek national and U.S. citizen.

Javier Martin-Artajo joined the CIO in 2007, as the head of Credit and Equity Trading.

76 

He worked in the CIO’s London office, reported to Mr. Macris, and directly oversaw the 

Synthetic Credit Portfolio.77 He had earlier worked for Mr. Macris at Dresdner Kleinwort

Wasserstein.

78 Mr. Martin-Artajo is a Spanish national living in London.79

Bruno Iksil was a trader in the CIO’s London office and reported to Mr. Martin-Artajo.80 

Mr. Iksil joined the CIO in 2005, and served as the head trader managing the Synthetic Credit 

Portfolio from January 2007 until April 2012.

81 Prior to joining JPMorgan Chase, Mr. Iksil 

worked as a proprietary trader at Banque Populaire and later as head of Credit Derivatives at 

Natixis, a French investment bank.82

 72 2013 JPMorgan Chase Task Force Report, at 15.

Mr. Iksil is a French national who lived outside of Paris 

73 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 74 Subcommittee interview of Ina Drew, CIO (9/7/2012); 4/2012 JPMorgan Chase & Co. internal presentation to 

Subcommittee entitled, “Chief Investment Office – Organization,” JPM-CIO-PSI 0001875, at 876, 879. 75 See “JPMorgan Said to Transform Treasury to Prop Trading,” Bloomberg, Erik Schatzker, Christine 

Harper, and Mary Childs (4/13/2012), http://www.bloomberg.com/news/2012-04-13/jpmorgan-said-to-transformtreasury-to-prop-trading.html. 76 Apr. 2012 JPMorgan Chase & Co. internal presentation to Subcommittee entitled, “Chief Investment Office –

Organization,” JPM-CIO-PSI 0001875, at 880. See also “JPMorgan Said to Transform Treasury to Prop Trading,” 

Bloomberg, Erik Schatzker, Christine Harper, and Mary Childs (4/13/2012), 

http://www.bloomberg.com/news/2012-04-13/jpmorgan-said-to-transform-treasury-to-prop-trading.html. 77 Subcommittee interview of Ina Drew, CIO (9/7/2012); see also “At J.P. Morgan, Whale & Co. Go,” Wall Street 

Journal, Dan Fitzpatrick and Gregory Zuckerman (7/13/2012); “JPMorgan Said to Transform Treasury to Prop 

Trading,” Bloomberg, Erik Schatzker, Christine Harper, and Mary Childs (4/13/2012), 

http://www.bloomberg.com/news/2012-04-13/jpmorgan-said-to-transform-treasury-to-prop-trading.html. 78 Subcommittee interview of Ina Drew, CIO (9/7/2012); see also “JPMorgan Said to Transform Treasury to Prop 

Trading,” Bloomberg, Erik Schatzker, Christine Harper, and Mary Childs (4/13/2012), 

http://www.bloomberg.com/news/2012-04-13/jpmorgan-said-to-transform-treasury-to-prop-trading.html. 79 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012). 80 Apr. 2012 JPMorgan Chase & Co. internal presentation to Subcommittee entitled, “Chief Investment Office –

Organization,” JPM-CIO-PSI 0001875, at 880. 81 Subcommittee interview of Ina Drew, CIO (9/7/2012); see also “‘London Whale’ Rattles Debt Market,” Wall 

Street Journal, Gregory Zuckerman and Katy Burne (4/6/2012), 

http://online.wsj.com/article/SB10001424052702303299604577326031119412436.html; “JPMorgan Trader Iksil 

Fuels Prop-Trading Debate with Bets,” Bloomberg, Sharron D. Harrington, Bradley Keoun, and Christine Harper 

(4/9/2012), http://www.bloomberg.com/news/2012-04-09/jpmorgan-trader-iksil-fuels-prop-trading-debate-withbets.html. 82 See “Ten Questions to be Answered on ‘London Whalegate,’” Financial News (5/11/2012), 

http://www.efinancialnews.com/story/2012-05-11/10-questions-jp-morgan-scandal-iksil; “JPMorgan Trader Iksil 

Fuels Prop-Trading Debate With Bets,” Bloomberg, Shannon D. Harrington and Christine Harper (4/9/2012), 

http://www.bloomberg.com/news/2012-04-09/jpmorgan-trader-iksil-fuels-prop-trading-debate-with-bets.html. 
25

and commuted to his job in London.83 In April 2012, the media reported that Mr. Iksil, trading 

on behalf of JPMorgan Chase, had been dubbed the “London Whale” by industry insiders

because of the CIO’s large trades in the credit markets.

84 He oversaw several other CIO traders 

including Julien Grout.85 

In July 2012, JPMorgan Chase fired Messrs. Macris, Martin-Artajo, and Iksil, and 

suspended Mr. Grout.

86 On July 13, 2012, the bank announced that “all CIO managers based in 

London with responsibility for [the] Synthetic Credit Portfolio have been separated from the 

Firm,” that JPMorgan Chase would withhold all severance payments and 2012 incentive 

compensation from them, and that it would “claw back compensation from each individual.”87 

The bank told the Subcommittee that it had obtained the maximum recovery permitted under its 

employment policies from Ms. Drew and Messrs. Marcis, Martin-Artajo, Iksil, and Grout,

through a combination of canceling outstanding incentive awards and obtaining repayment of 

awards previously paid.88 The bank indicated the recovered amounts were roughly equal to two 

years’ worth of the person’s total compensation.89 At the time of her departure, Ms. Drew 

forfeited approximately $21.5 million.90

C. Office of the Comptroller of the Currency

The OCC is an independent bureau of the U.S. Department of Treasury charged with 

supervising federally chartered banks (also called “national” banks), U.S. Federal branches of 

foreign banks, and Federal savings associations.

91 Under the Dodd-Frank Act, the OCC has also 

become the primary regulator of federally chartered thrift institutions.92

 83 See “Who Is the London Whale? Meet JPMorgan's ‘Humble’ Trader Bruno Iksil – Daily Intel,” 

 The OCC maintains

New York

Magazine, Joe Coscarelli (5/11/2012), http://nymag.com/daily/intelligencer/2012/05/jpmorgan-london-whale-brunoiskil-2-billion-loss.html. 84 See, e.g., “‘London Whale’ Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne 

(4/6/2012), http://online.wsj.com/article/SB10001424052702303299604577326031119412436.html. 85 Apr. 2012 JPMorgan Chase & Co. internal presentation to Subcommittee entitled, “Chief Investment Office –

Organization,” JPM-CIO-PSI 0001875, at 880. 86 Subcommittee interview of Michael Cavanagh (12/12/2012). See also 7/12/2012 letter from JPMorgan Chase to 

Achilles Macris, JPM-CIO-PSI-H 0002742-743, at 742; 7/12/2012 letter from JPMorgan Chase to Javier MartinArtajo, JPM-CIO-PSI-H 0002744-745, at 744; 7/12/2012 letter from JPMorgan Chase to Bruno Iksil, JPM-CIO-PSIH 0002740-741, at 740. Mr. Grout subsequently resigned from the bank on December 20, 2012. 87 7/13/2012 “CIO Task Force Update,” JPMorgan Chase & Co., at 22, Exhibit 99.3 to JPMorgan Chase 7/13/2012 

Form 8-K, http://files.shareholder.com/downloads/ONE/2204603745x0x582869/df1f2a5a-927e-4c10-a6a5-

a8ebd8dafd69/CIO_Taskforce_FINAL.pdf. 88 1/16/2013 email from JPMorgan Chase counsel to Subcommittee, “CIO clawbacks,” PSI-JPMC-33-000001.

89 2013 JPMorgan Chase Task Force Report, at 106.

90 Id. See also “JPMorgan Chase Executive Resigns in Trading Debacle,” New York Times, Nelson D. Schwartz 

and Jessica Silver-Greenberg (5/13/2012), http://www.nytimes.com/2012/05/14/business/jpmorgan-chase-executiveto-resign-in-trading-debacle.html?pagewanted=all; “JPMorgan’s Drew Forfeits 2 Years’ Pay as Managers Ousted,” 

Bloomberg, Dawn Kopecki (7/13/2012), http://www.businessweek.com/news/2012-07-13/dimon-says-ina-drewoffered-to-return-2-years-of-compensation. 91 “Agency Profile and History,” Office of the Comptroller of the Currency, Annual Report, FY 2011, at i, 

http://occ.gov/publications/publications-by-type/annual-reports/2011AnnualReport.pdf; “About the OCC,” Office of 

the Comptroller of the Currency, http://occ.gov/about/what-we-do/mission/index-about.html. 92 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), P.L. 111-203, codified at 12 

U.S.C. § 5412 (b)(2)(B) (2010). 
26

four district offices plus an office in London.

93 The head of the OCC, the Comptroller of the 

Currency, is also a member of the Financial Stability Oversight Council and of the board of the 

Federal Deposit Insurance Corporation (FDIC).94 The current OCC head is Thomas J. Curry, 

who took office in April 2012, just days after the whale trade stories broke.

95 

The OCC is charged with ensuring the safety and soundness of the financial institutions it 

oversees, and is authorized to conduct examinations, identify problems, and require corrective 

action.

96 Safety and soundness examinations are organized around a rating system called 

CAMELS, an acronym for the six components that are evaluated. The CAMELS rating system 

evaluates a financial institution’s: (C) capital adequacy, (A) asset quality, (M) management 

effectiveness, (E) earnings, (L) liquidity, and (S) sensitivity to market risk. One consequence of

a poor CAMELS rating is a higher fee assessment the bank must pay to the Deposit Insurance 

Fund of the FDIC. The OCC can impose a range of enforcement measures and penalties, 

including issuing cease and desist orders, banning personnel from the banking industry, imposing 

fines, and, in an extreme case, revoking a bank’s charter.97 The OCC can also lower a bank’s 

CAMELS rating and order it to take specific actions to correct unsafe or unsound practices or 

eliminate high risk or inappropriate assets. 

The OCC has structured its supervision activities into three categories: a Large Bank 

program, covering banks with assets of $50 billion or more; a Midsize Bank program, covering

banks with assets generally ranging from $10 billion to $50 billion; and a Community Bank 

program, focusing on banks with under $10 billion in assets.

98 The OCC maintains a continuous 

on-site presence at each of the 19 largest banks under its supervision.99 An Examiner-in-Charge 

(EIC) leads each bank’s on-site team of examiners.100 National banks and Federal savings 

associations must submit regular reports to the OCC covering a wide range of safety and 

soundness factors.

101 

Although the Federal Reserve oversees U.S. financial holding companies, because 

JPMorgan Chase’s banks hold federal charters and the Chief Investment Office invests the 

banks’ deposits, the OCC is the primary prudential regulator of JPMorgan Chase Bank and its

 93 “About the OCC,” Office of the Comptroller of the Currency, http://occ.gov/about/what-we-do/mission/indexabout.html. 94 Id. See also “Financial Stability Oversight Council: About the FSOC,” U.S. Department of the Treasury, 

http://www.treasury.gov/initiatives/fsoc/about/Pages/default.aspx. 95 “Biography: Thomas J. Curry, Comptroller of Currency,” U.S. Department of Treasury, 

http://www.occ.gov/about/who-we-are/comptroller-of-the-currency/bio-thomas-curry-print.pdf. 96 “About the OCC,” Office of the Comptroller of the Currency, http://occ.gov/about/what-we-do/mission/indexabout.html. 97 Id. See also “Section Five – Licensing and Enforcement Measures,” Office of the Comptroller of the Currency, 

Annual Report, FY 2011, http://occ.gov/publications/publications-by-type/annual-reports/2011AnnualReport.pdf. 98 Testimony of Thomas J. Curry, Comptroller of the Currency, before the House Committee on Financial Services, 

(June 19, 2012), at 2, http://www.occ.gov/news-issuances/congressional-testimony/2012/pub-test-2012-91-

written.pdf. 99 Id., at 3; “OCC at-a-glance,” Office of the Comptroller of the Currency, Annual Report, FY 2011, 

http://occ.gov/publications/publications-by-type/annual-reports/2011AnnualReport.pdf. 100 Testimony of Thomas J. Curry, Comptroller of the Currency, before the House Committee on Financial Services, 

(6/19/2012), at 3, http://www.occ.gov/news-issuances/congressional-testimony/2012/pub-test-2012-91-written.pdf. 101 “About the OCC,” Office of the Comptroller of the Currency, http://occ.gov/about/what-we-do/mission/indexabout.html.
27

subsidiaries, including the CIO.

102 The OCC’s supervisory team includes approximately 65 onsite examiners who are responsible for reviewing nearly every facet of JPMorgan Chase’s

activities and operations.103 Several OCC examiners were responsible for overseeing the CIO.104

D. Capital Requirements

One key regulatory tool for limiting risk at federally insured banks and ensuring banks 

meet their financial obligations involves requiring banks to meet minimum capital standards. 

Banks that are well capitalized can withstand losses without endangering deposits, collapsing, or 

seeking a taxpayer bailout. Banks that fail to maintain minimum capital levels can be deemed to 

be operating in an unsafe and unsound manner and required to take corrective action.105

Federal bank regulators have long required U.S. banks to maintain a minimum amount of 

capital, meaning money raised primarily from shareholders and retained earnings, adjusting the 

required level according to the amount and type of activities engaged in by the individual

bank.106 In general, the regulations require banks to maintain less of a capital cushion for safer 

activities, such as investing in Treasury bonds, and more of a capital cushion for riskier 

activities, such as trading synthetic credit derivatives. To carry out that approach, the regulations 

generally assign greater “risk weights” or “capital charges,” to riskier assets.107

United States capital requirements reflect the Basel Accords, a set of international 

standards on bank capital requirements issued by the Basel Committee on Banking 

Supervision.

 

108 Over time, the Basel Committee has issued four sets of capital standards. Basel 

I, issued in 1988, provided the first international capital standards; Basel II, issued in 1999, 

revised the first Accord, and was finalized in 2004; Basel 2.5, issued in 2009, strengthened

capital standards related to securitizations and trading book exposures in response to the 

financial crisis; and Basel III, issued in 2010, provided a broader set of reforms.

109

 102 See Testimony of Thomas J. Curry, Comptroller of the Currency, before the U.S. House of Representatives 

Committee on Financial Services, (June 19, 2012), at 11-12, 

 Basel III 

http://www.occ.gov/news-issuances/congressionaltestimony/2012/pub-test-2012-91-written.pdf. 103 Id., at 11. 104 For more information about OCC oversight of the CIO, see Chapter VI. 105 See, e.g., OCC enforcement authority codified at 12 C.F.R. § 3.14, and the Federal Deposit Insurance 

Corporation (FDIC) enforcement authority codified at 12 C.F.R. Part 325.

106 See, e.g., OCC minimum capital requirements, 12 C.F.R. Part 3, including Appendices A-C. 107 See, e.g., OCC minimum capital requirements, 12 C.F.R. Part 3, Appendix A, and FDIC minimum capital 

requirements, 12 C.F.R. Part 325, Appendix C.

108 The Basel Committee on Banking Supervision (BCBS), first established in 1974, is an international body 

composed of representatives from countries with major banking centers, including the United States and the G-20 

countries. See “Basel Committee on Banking Supervision,” Basel Committee on Banking Supervision, Bank for 

International Settlements, http://www.bis.org/bcbs/index.htm. The Basel Committee’s recommendations do not 

have the force of law, but must be implemented by individual member countries using national laws and regulations. 

See “History of the Basel Committee and its Membership,” Basel Committee on Banking Supervision, Bank for 

International Settlements, http://www.bis.org/bcbs/history.htm. The BCBS is part of the Bank for International 

Settlements, an international organization, located in Basel, Switzerland, which supports and facilitates collaboration 

among central banks around the world. See “About BIS,” Bank for International Settlements, 

http://www.bis.org/about/index.htm. 109 See “Basel Committee on Banking Supervision,” Basel Committee on Banking Supervision, Bank for 

International Settlements, http://www.bis.org/bcbs/index.htm (summarizing history of Basel Accords); October 2011 
28

increased minimum capital requirements and introduced a new set of bank liquidity standards to 

“improve the banking sector's ability to absorb shocks arising from financial and economic 

stress, ... improve risk management and governance, [and] strengthen banks’ transparency and 

disclosures.”110 Among other provisions, Basel III increased the minimum amount of capital 

that had to be raised from common equity.

111

To determine the amount of capital required at a particular bank, the Basel Accords 

recommend, and U.S. bank regulators require, calculation of the bank’s “Risk Weighted 

Assets.”112 Risk Weighted Assets (RWA) are a dollar measure of a bank’s total assets, adjusted 

according to the assets’ risk.

113 U.S. bank regulators provide detailed guidance on the required 

components of the mathematical model used to calculate RWA, but do not mandate the use of a 

specific model.

114 Instead, individual banks are allowed, within regulatory parameters and 

subject to regulatory approval and oversight, to develop their own model to calculate RWA.

115

The bank’s aggregate RWA is then used to calculate its required minimum capital, with a greater 

ratio of equity-based capital required for banks with higher RWA.116 

Risk-based capital requirements offer a powerful tool to discourage overly risky bank 

activities and safeguard against losses from such activities. Some commentators worry, 

however, that when combined with Federal Reserve policies that lower capital costs for banks by 

holding down interest rates, they may also create a perverse temptation for banks to engage in 

 

“Progress report on Basel III implementation,” Basel Committee on Banking Supervision, Bank for International 

Settlements, http://www.bis.org/publ/bcbs203.pdf. 110 “International regulatory framework for banks (Basel III),” Basel Committee on Banking Supervision, Bank for 

International Settlements, http://www.bis.org/bcbs/basel3.htm (providing general information about Basel III). See 

also October 2011 “Progress report on Basel III implementation,” Basel Committee on Banking Supervision, Bank 

for International Settlements, http://www.bis.org/publ/bcbs203.pdf . In January 2013, the BCBS weakened the 

liquidity standards issued in 2010, and delayed their implementation date. See January 2013 “Basel III: Liquidity 

Coverage Ratio and liquidity risk management tools,” prepared by BCBS, http://www.bis.org/publ/bcbs238.htm.

111 “Basel III overview table,” Basel Committee on Banking Supervision, Bank for International Settlements, 

http://www.bis.org/bcbs/basel3/b3summarytable.pdf (table summarizing Basel III reforms). For information about 

what qualifies as capital and common equity, see December 2011 “Basel III definition of capital – Basel III 

Frequently Asked Questions,” Basel Committee on Banking Supervision, Bank for International Settlements, 

http://www.bis.org/publ/bcbs211.htm?ql=1. U.S. regulators have yet to fully implement Basel III; regulations have 

been proposed to implement its new capital requirements and additional, proposed regulations are being developed 

to implement its new liquidity requirements. 

112 See, e.g., OCC minimum capital requirements, 12 C.F.R. Part 3, Appendices A-B; “Revisiting Risk-Weighted 

Assets,” IMF Working Paper No. WP/12/90, Vanessa Le Leslé and Sofiya Avramova (March 2012); June 2011 

“Basel III: A global regulatory framework for more resilient banks and banking system,” prepared by BCBS, 

http://www.bis.org/publ/bcbs189.pdf (revised version 2011). 113 See, e.g., “Revisiting Risk-Weighted Assets,” IMF Working Paper No. WP/12/90, Vanessa Le Leslé and Sofiya 

Avramova (March 2012); 2013 JPMorgan Chase Task Force Report, at 26; 12 C.F.R. Part 3, Appendix A (“Riskweighted assets means the sum of total risk-weighted balance sheet assets and the total of risk-weighted off-balance 

sheet credit equivalent amounts. Risk-weighted balance sheet and off-balance sheet assets are calculated in 

accordance with section 3 of this appendix A.”). 114 See, e.g., OCC minimum capital requirements, 12 C.F.R. Part 3, Appendices A-B. 115 Subcommittee briefing by OCC (3/4/2013); 12 C.F.R. Part 3, Appendices A-B. 116 See, e.g,, OCC’s minimum capital requirements, 12 C.F.R. Part 3, Appendix A (“A bank’s risk-based capital 

ratio is obtained by dividing its capital base (as defined in section 2 of this appendix A) by its risk-weighted assets 

(as calculated pursuant to section 3 of this appendix A).” ).
29

riskier activities than if capital were more expensive.117 During the several years before the 

whale trades, the Federal Reserve initiated a series of actions that lowered capital costs for 

banks, and also lowered the returns on such safe investments as Treasury bonds, making them 

less attractive investments for banks. Those Federal Reserve policies may have inadvertently

encouraged banks to engage in riskier, higher return activities like the derivatives trading that led 

to the whale trades. 

E. Credit Derivatives

The trading activity that is the focus of this Report revolves around complex credit 

derivatives, including credit default swaps, credit indices, and credit index tranches. 

Derivatives are financial instruments that derive their value from another asset.118 Credit 

derivatives derive their value from the creditworthiness of a specified financial instrument such 

as a corporate bond or stock, or from the creditworthiness of a referenced entity such as a 

corporation or sovereign nation.

119 In essence, credit derivatives place bets on whether, during a 

specified period of time, the referenced financial instruments or entities will experience a 

negative “credit event,” such as a bankruptcy, default, or failure to pay.120 Parties taking the 

“long” side of the bet wager that no credit event will occur;

121 parties taking the “short” side of 

the bet wager that the negative credit event will occur.

122 These credit instruments are often 

described as “synthetic,” because they do not contain any tangible assets such as a loan or bond; 

they simply reference the financial instrument or entity whose credit quality is at issue.

123

Credit Default Swaps. The simplest type of credit derivative, which also dominates the 

credit derivative markets,

 

124 is a credit default swap (CDS).125

 117 See. e.g., “The Soviet Banking System – And Ours,” Wall Street Journal (7/24/2012), Judy Shelton, 

http://online.wsj.com/article/SB10000872396390444025204577545522816187642.html. 

 A credit default swap is a 

contract between two parties placing opposite bets on the creditworthiness of a specified 

financial instrument or entity. A “single name” credit default swap references a single financial 

instrument or a single entity. Other credit default swaps can reference a specified pool of

instruments or entities.

118 Markit Credit Indices: A Primer (October 2012), Appendix 4 at 32, (hereinafter “Markit Credit Indices: A 

Primer”), http://www.markit.com/assets/en/docs/products/data/indices/credit-indexannexes/Credit_Indices_Primer_Oct_2012.pdf. 119 See, e.g., H.P. Kravitt & Edmund Parker, Securitization of Financial Assets § 20.02 (2012). 120 See Markit Credit Indices: A Primer, at 4-5 (“Investors take a view on deterioration or improvement of credit 

quality of a reference credit.”).

121 Markit Credit Indices: A Primer, Appendix 4, at 34. 122 Id., at 37. 123 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 9, PSI-JPM-30-000001. 124 See “OCC’s Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012,” at 8, 

http://www2.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq212.pdf. 125 See, e.g., 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO 

Briefing,” at 15-19, PSI-JPM-30-000001.
30

Traders often analogize credit default swaps to insurance contracts.126 The long party is 

essentially selling insurance, or “credit protection,” against the occurrence of a negative credit 

event, while the short party is essentially buying that insurance or credit protection.

127 To buy 

the credit protection, the short party typically makes a payment upfront and then additional 

periodic payments to the long party, analogous to insurance premiums.128 Those periodic 

payments are sometimes referred to as “premiums,” “coupon” payments, or the “credit 

spread.”129 In exchange for receiving those payments, the seller, that is, the long party, is 

obligated, if a credit event like a default takes place during the covered period, to make the 

buyer, that is, the short party, whole.

130

The value of a CDS is typically related to the premium amount or “credit spread” that the 

long party has to pay.

 

131 The premium amount or credit spread typically increases when a 

default is perceived to be more likely, because the insurance or credit protection becomes more 

valuable.

132

In most cases, credit default swaps are entered into between a swap dealer and an 

institutional investor like a hedge fund, insurance company, or other financial institution.

 When the premium amount increases, traders often describe the increase as the 

credit spread “widening.” When the premium amount falls, traders often refer to the decrease as 

the credit spread “narrowing.” To ensure payment of the amounts owed, the parties often require 

each other to post cash collateral, with the amount of collateral changing over time in line with 

the changing value of the credit default swap. 

133 The 

parties typically use standardized documentation developed by the International Swaps and 

Derivatives Association to make it easier to trade the swap after the initial transaction.

134 Parties 

may enter into a credit default swap either to offset or “hedge” a particular credit risk or to 

engage in a proprietary bet on the credit quality of a financial instrument or entity.135

Credit Indices. A more complicated form of credit derivative involves a credit index. 

Credit indices were first invented by JPMorgan Chase and Morgan Stanley in 2001.

 

136 Each 

credit index references a basket of selected credit instruments, typically credit default swaps or 

other types of credit instruments.137

 126 See, e.g., 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO 

Briefing,” at 18, PSI-JPM-30-000001 (“The Basic Contract: A Credit Default Swap”); see also Markit Credit 

Indices: A Primer, at 4. 

 The value of the index is typically determined by 

calculating the value of each constituent credit instrument and using a mathematical formula to 

127 Markit Credit Indices: A Primer, at 4. 128 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 16, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 4.

129 Markit Credit Indices: A Primer, Appendix 4, at 30. 130 Markit Credit Indices: A Primer, at 4. 131 Id., at 6. 132 Id. 133 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 17, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 4. 134 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 19, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 7. 135 Markit Credit Indices: A Primer, at 5. 136 Id., at 7. 137 Markit Credit Indices: Fact Sheet, at 1, http://www.markit.com/assets/en/docs/fact-sheets/MKT_Credit_

Indices_factsheet.pdf
31

combine them into a single dollar value for the entire basket.138 Parties then enter into swaps 

that reference the index value.139 The long party bets the index value will increase;

140 the short 

party bets it will fall.141

Investing in a credit index, whose value reflects multiple credit instruments, can be 

analogized to investing in a portfolio of bonds or loans.

142 The short buyer of a credit index, as 

with a credit default swap, typically makes an upfront payment reflecting the value of the index

and then makes fixed periodic payments to the long party over a specified timeframe.143 Those 

periodic payments are, again, typically referred to as premiums, coupon payments, or credit 

spreads.144 When the instrument matures or expires, or a trade otherwise closes, the short party 

may be required to make a final payment reflecting the change in the value of the instrument.145 

On the other hand, if a credit event takes place during the covered time period, it triggers a 

typically substantial payout by the long party to the short party.

146 After the credit event, the 

defaulting credit instrument is effectively eliminated from the index.147

Credit index transactions are typically entered into “over the counter” (meaning outside 

of a regulated exchange) between a licensed swap dealer and an investor, using standardized 

documents.

148 Once the initial index swap is executed, as the value changes, either party can 

trade or unwind its side of the bet. The index’s changing value typically reflects the initial index 

price or premium amount, which is also called the credit spread.149 The parties holding a swap 

when the referenced index expires are typically required to make a final payment reflecting the 

value of the index at the time of expiration.150

IG9, HY, and iTraxx Indices. The CIO traded a variety of credit indices. CIO profitloss reports indicate that, by March 2012, the CIO held more than 100 different types of credit 

derivative instruments.151 Its largest holdings involved indices administered by the Markit

Group, Ltd., a global financial information services company that administers multiple index 

products.152 Markit owns and operates the indices, and performs a variety of services related to

them, including calculating the index values and publishing the daily index prices on its 

website.

153

 138 Markit Credit Indices: A Primer, at 12-13.

139 Id., at 11. 140 Id., Appendix 4, at 34. 141 Id., Appendix 4, at 36. 142 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 16, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 11. 143 Markit Credit Indices: A Primer, at 11. 144 Markit Credit Indices: A Primer, Appendix 4, at 30. 145 Id., at 11. 146 Id., at 13. 147 Id., at 14. 148 Id., at 11.

149 Id. 150 Id. 151 See, e.g., 4/10/2012 email from Julien Grout, CIO, to “CIO Credit Positions” email group, “CIO CORE Credit 

Positions: 10-Apr-12,” JPM-CIO-PSI 0023061 (estimating the fair value of numerous credit derivative positions). 152 See Markit Credit Indices: A Primer, Appendix 1, at 19-21; see also 4/10/2012 email from Julien Grout to “CIO 

Credit Positions” email group, “CIO CORE Credit Positions: 10-Apr-12,” JPM-CIO-PSI 0023061. 153 Markit Credit Indices: A Primer, at 7. The prices are freely accessible to the public at www.markit.com. Id., at 

12. 
32

Markit’s two primary credit index groups are the CDX, which is a group of indices 

referencing corporations in North America and Emerging Markets; and the iTraxx, which is a 

group of indices referencing corporations in Europe and Asia.154 One key index traded by the

CIO is the CDX.NA.IG.9.155 “CDX” refers to credit index. “NA” refers to North America.156 

“IG” refers to “investment grade,” because the index tracks credit default swaps (CDS) for 125 

investment grade companies in North America.

157 Each year, Markit issues two series of this

index, updating it every six months with a revised reference list of 125 constituent CDS.

158 The 

number “9” in “IG9” denotes the relevant series of the index. The IG9 series was issued in 

2007.159

Parties can bet on the index by entering into standardized swap agreements that reference 

the IG9 series, providing varying maturities. For example, “IG9 5year” indicates that the swap

referencing the IG9 index will expire in 2012, five years after the IG9 index was issued. “IG9 

10year” indicates that the swap will expire in 2017, 10 years after the IG9 index was issued. 

Parties can trade the IG9 swaps until the relevant expiration date. Long parties essentially bet 

that the value of the IG9 will increase; short parties bet that the value will fall. If an investor is 

“long” the index, and a “credit event,” such as a bankruptcy or failure to pay, occurs at one of the 

referenced companies during the covered period, the long party will have to make a payment to

the short party holding the credit protection.

160

The CIO also traded the CDX.NA.HY.161 “HY” refers to High Yield, because the index 

tracks credit default swaps naming 100 North American companies that pose higher credit risks 

and so produce higher returns to investors.162 These companies are often rated as HY companies 

because they carry non-investment grade or “junk bond” ratings.163 A third index that was 

traded by the CIO is the iTraxx Europe which tracks credit default swaps for 125 investment 

grade companies in Europe.

164

 154 See 2013 JPMorgan Chase Task Force Report, at 24.

 The iTraxx group of indices also had a high yield index known as

155 See, e.g., 4/10/2012 email from Julien Grout, CIO, to “CIO Credit Positions” email group, “CIO CORE Credit 

Positions: 10-Apr-12,” JPM-CIO-PSI 0023061. 156 See, e.g., 3/16/2007 “CDS IndexCo and Markit Announce Official Name Change for New Series of CDX 

Indices,” Markit, http://www.markit.com/en/media-centre/pressreleases/detail.page?dcr=/markit/PressRelease/data/2007/03/2007-03-16. 157 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 24, PSI-JPM-30-000001; Markit Credit Indices: A Primer, at 20; see also David Mengle, Credit Derivatives: An 

Overview, Federal Reserve Bank of Atlanta Economic Review, Fourth Quarter 2007, at 3. 158 Markit Credit Indices: A Primer, at 21. Although each index starts with 125 companies, if a company 

experiences a “credit event,” such as a bankruptcy, the company’s weight in the index will be changed to zero, 

effectively deleting it from the index. Id., at 14.

159 See 2013 JPMorgan Chase Task Force Report, at 24. 160 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 17-18, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 5. The amount of the payment will 

depend upon a market auction that sets the recovery rate on the company’s debt. Id. 161 See, e.g., 4/10/2012 email from Julien Grout to “CIO Credit Positions” email group, “CIO CORE Credit 

Positions: 10-Apr-12,” JPM-CIO-PSI 0023061. 162 Markit Credit Indices: A Primer, at 20. 163 See “Junk Bond,” OCC February 2008 Comptroller’s Handbook: Leveraged Lending – Appendix B, at 63, 

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/_pdf/leveragedlending.pdf. 164 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 25, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, at 19.
33

the “XO” index.165 As with the CDX indices, Markit issues a new series of the iTraxx indices

every six months, with revised reference lists and varying maturities.

166

When a new credit index series is issued, it is referred to as the “on-the-run” series.167 

Earlier series of the index are then referred to as “off-the-run.”168 They continue to trade until 

their maturity dates, but are typically less actively traded.169

The CDX and iTraxx indices typically required an initial payment upfront that reflected

the value of the index at the time of acquisition; four quarterly fixed “coupon” payments on 

March 20, June 20, September 20, and December 20; and a final payment reflecting the value of 

the index at the close of the trade.170 

Credit Index Tranches. A third, still more complicated type of credit derivative 

involves credit tranches. The credit tranches that were traded by the CIO typically related to 

Markit credit indices.171 Each of the Markit credit indices tracked the value of a specified basket 

of credit instruments.172 Instead of requiring bets on the creditworthiness of the entire basket, for 

some credit indices, Markit offered instruments that enabled parties to place bets on just a

portion of the basket, offering four tranches with different degrees of vulnerability to default.173 

The riskiest tranche, called the “equity tranche,” was immediately affected by any default at any 

company in the basket.174 The next tranche, called the “mezzanine,” was affected only by losses 

that exceeded 15% of the loss distribution.175 Those losses usually required one or more defaults 

to take place. The next tranche, called the “senior” tranche, was affected only by losses that 

exceeded 25% of the loss distribution.176 The last and most secure tranche, the “super senior 

tranche,” was affected only by losses that exceeded 35% of the loss distribution.177 Those losses 

typically required multiple defaults to take place.

Credit tranche instruments, like other credit derivatives, typically required the short party 

to make an upfront payment and periodic payments during the covered time period, although the 

riskiest tranches often did not require any premiums.

178

 165 See 2013 JPMorgan Chase Task Force Report, at 24.

 These instruments also typically 

required the parties to make a final payment when the swap expired or the trade otherwise 

166 See 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” 

at 23-25, PSI-JPM-30-000001; Markit Credit Indices: A Primer, at 19. 167 Markit Credit Indices: A Primer, at 9. 168 Id., Appendix 4, at 35. One JPMorgan Chase document used a more restrictive definition, defining “off-the-run” 

indices as “any index older than 4 series – for example, the current on the run CDX series are 13, therefore, all 

indices series 9 and older are considered off the run”). 5/21/2010 “CIO-VCG Procedure: Valuation Process,” OCCSPI-00052685, at 15.

169 Id., at 9; see also 2013 JPMorgan Chase Task Force Report, at 24-25. 170 Markit Credit Indices: A Primer, at 9, 11. 171 See 4/10/2012 email from Julien Grout to “CIO Credit Positions” email group, “CIO CORE Credit Positions: 

10-Apr-12,” JPM-CIO-PSI 0023061. 172 Markit Credit Indices: A Primer, Appendix 1, at 18-21. 173 Id., at 15. 174 Id., at 15, Appendix 4, at 37. 175 Id. 176 Id. 177 Id. 178 Id., at 28.
34

closed.179 CIO documents show that the CIO traded credit tranches as well as credit indices and 

credit default swaps.

180

Thinly Traded Market. Due to the complexity and riskiness of credit derivative 

transactions, the credit derivative market has relatively few participants and, as a result, is thinly 

traded. Markit identifies only 14 banks in the world that buy and sell its credit indices.181 

Markets with a limited number of participants pose special risks, due to the relative paucity of 

buyers and sellers. While buyers are often able to buy credit derivatives easily, selling them can 

be difficult. A seller may have to dramatically reduce the price of a credit derivative to attract a 

buyer. If the seller wants to dispose of a large number of credit derivatives, even a slightly lower 

price can translate into large losses.

OCC data shows that, of the commercial banks it tracks, just four U.S. banks account for 

more than 90% of credit derivative trading and holdings, with JPMorgan Chase as the largest 

participant by far.

182 The resulting market is so small that, when the CIO reported a $3.7 billion 

loss to the OCC in June 2012, those losses caused overall credit derivative trading revenues for 

all U.S. commercial banks to decline by 372% from the prior year; it also caused their derivative 

trading revenues as a whole to drop by 73%.

183

 179 Id., at 15.

 

180 See 4/10/2012 email from Julien Grout, CIO, to “CIO Credit Positions” email group, “CIO CORE Credit 

Positions: 10-Apr-12,” JPM-CIO-PSI 0023061. 181 See “Markit CDX Contributing Banks,” Markit website, http://www.markit.com/en/products/data/indices/creditand-loan-indices/cdx/contributing-banks.page; “Markit iTraxx Contributing Banks,” Markit website, 

http://www.markit.com/en/products/data/indices/credit-and-loan-indices/itraxx/contributing-banks.page?. 182 See OCC Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012, at 1, Graph 1 and 4, 

Tables 11 and 12, http://www2.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq212.pdf. 183 OCC Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012, at 1-2, 

http://www2.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq212.pdf. Holding companies 

tracked by the OCC saw a decline of 126% in their credit derivatives trading revenues and a drop of 46% in their 

overall derivatives trading revenues, compared to the year before. Id., at 3. 
35

III. 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 (SCP). 

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, after American Airlines declared bankruptcy, produced revenues 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 not only ended up increasing the portfolio’s size, 

risk, and RWA, but also, by taking the portfolio into a net long position, eliminated the hedging 

protections the SCP was originally supposed to provide. 

In the first quarter of 2012, the CIO traders went on a sustained trading spree, eventually 

increasing the net notional size of the SCP threefold from $51 billion to $157 billion. By March, 

the SCP included at least $62 billion in holdings in a U.S. credit index for investment grade 

companies; $71 billion in holdings in a credit index for European investment grade companies; 

and $22 billion in holdings in a U.S. credit index for high yield (non-investment grade) 

companies. Those holdings were created, in part, by an enormous series of trades in March, in 

which the CIO bought $40 billion in notional long positions, which the OCC later characterized 

as “doubling down” on a failed trading strategy. By the end of March, the SCP held over 100 

different credit derivative instruments, with a high risk mix of short and long positions, 

referencing both investment grade and non-investment grade corporations, and including both 

shorter and longer term maturities. JPMorgan Chase personnel described the resulting SCP as 

“huge” and of “a perilous size” since a small drop in price could quickly translate into massive 

losses.

At the same time the CIO traders were increasing the SCP’s holdings, the portfolio was 

losing value. The SCP reported internally losses of $100 million in January, another $69 million 

in February, and another $550 million in March, totaling at quarter-end nearly $719 million. A 

week before the quarter ended, on March 23, 2012, CIO head Ina Drew ordered the SCP traders 

to “put phones down” and stop trading. 

In early April, the press began speculating about the identity of the “London Whale” 

behind the huge trades roiling the credit markets, eventually unmasking JPMorgan Chase’s Chief 

Investment Office. Over the next three months, the CIO’s credit derivatives continued to lose 

money. By May, the Synthetic Credit Portfolio reported losing $2 billion; by the end of June, 

losses jumped to $4.4 billion; and by the end of the year, the total reached at least $6.2 billion. 
36

JPMorgan Chase told the Subcommittee that the SCP was not intended to function as a 

proprietary trading desk, but as insurance or a “hedge” against credit risks confronting the bank. 

While its original approval document indicated that the SCP was created with a hedging function 

in mind, the bank was unable to provide documentation over the next five years detailing the 

SCP’s hedging objectives and strategies; the assets, portfolio, risks, or tail events it was supposed 

to hedge; or how the size, nature, and effectiveness of its hedges were determined. The bank was 

also unable to explain why the SCP’s hedges were treated differently from other types of hedges 

within the CIO. 

While conducting its review of the SCP, some OCC examiners expressed skepticism that 

the SCP functioned as a hedge at all. In a May 2012 internal email, for example, one OCC 

examiner referred to the SCP as a “make believe voodoo magic ‘composite hedge.’” When he 

was asked about the Synthetic Credit Portfolio, JPMorgan Chase CEO Jamie Dimon told the 

Senate Banking Committee that, over time, the “portfolio morphed into something that rather 

than protect the firm, created new and potentially larger risks.” Mr. Dimon has not 

acknowledged that what the SCP morphed into was a high risk proprietary trading operation.

A. Origins of the Synthetic Credit Portfolio

Traditionally, the CIO had invested the bank’s excess deposits in very safe instruments, 

an approach typical among large banks.184 Those instruments included, for example, U.S. 

treasury bonds, municipal bonds, corporate securities, high grade corporate bonds, and high 

grade mortgage-backed securities.

185 At a Senate hearing, Mr. Dimon stated: “the bulk of CIO’s 

responsibility is to manage [its] portfolio in a conservative manner,” noting that the average 

credit rating for its investment holdings was AA+.186

The OCC told the Subcommittee that, over time, the CIO also began to invest in higher 

risk corporate bonds to balance out its portfolio and achieve a higher investment return with a

“decent” risk profile.

 

187 The CIO also diversified its portfolio with a mix of instruments to avoid 

concentrating its investments in one type of instrument.

188

In 2006, CIO hired a new trader, David Olson, to diversify the excess deposits investment 

portfolio by purchasing credit products.189 According to the OCC, purchasing synthetic credit 

derivatives was unusual for a CIO-type asset-liability management function.190

 184 Subcommittee interview of Mike Sullivan, OCC (8/30/2012).

 While banks 

185 2013 JPMorgan Chase Task Force Report, at 22; Levin Office Briefing by JPMorgan Chase, (5/22/2012) (Greg 

Baer); 2/8/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, OCC-SPI-00022351 (describing the 

portfolio as “36 percent US government and agency securities,” with the remainder primarily in mortgage backed 

securities).

186 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); 

http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=32db0782-9ccf-42fd-980e00ab870fd0d9. 187 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 188 Id.

189 Subcommittee interview of David Olson, CIO (9/14/2012).

190 Subcommittee interview of Elwyn Wong, OCC (8/20/2012).
37

often trade in credit derivatives, the OCC has testified that no other large bank uses them to 

hedge credit risk.

191 However, JPMorgan Chase told the Subcommittee that it viewed the CIO’s 

use of synthetic credit derivatives to be similar to buying insurance: the CIO was paying a 

premium for protection against credit risk.192

In May 2006, the CIO formally approved a request by Achilles Macris, soon to become 

head of its International Office, to establish a “credit trading” program under a “New Business 

Initiative” (NBI) at the CIO.

193 According to the internal CIO approval document for the NBI, 

JPMorgan Chase had “cyclical exposure to credit, which is the single largest risk concentration 

from the operating businesses,” and the new credit trading program could help counter that 

risk.

194 The NBI generally authorized the CIO to trade in credit derivative indices and broad 

credit default swaps that were not limited to a single corporation.

195

The new credit trading program was presented as a risk reduction effort, and, perhaps for 

that reason, the NBI contained no discussion of how synthetic credit instruments themselves 

could pose market, credit, and counterparty risk. The NBI approval document did, however, 

state: “Credit trading is essentially a new business and therefore requires a new limits 

infrastructure comprising both VaR and non-statistical measures.”

 

196 In 2006, the portfolio was 

assigned an initial “Value-at-Risk” (VaR) limit of $5 million,

197 which meant that if the 

portfolio’s potential loss calculation was more than that amount on a given day, the traders 

would have to either reduce their holdings to end the breach or ask management to increase the 

limit.198

In 2007, to carry out the credit trading portion of the New Business Initiative, CIO began 

a program to purchase “ABX and TABX protection.”

 

199 At that time, the ABX and TABX were 

new credit derivative indices that “serve[d] as liquid instruments for trading subprime credit 

risk.”200

In November 2007, JPMorgan Chase’s internal audit group conducted an audit of “CIO 

Global Credit Trading,” characterizing it as a “First Time Review of New Business, Product or 

 Neither had a track record, making their risk profiles unknown. 

 191 Testimony of Thomas J. Curry, Comptroller of the Currency, “Implementing Wall Street Reform: Enhancing 

Bank Supervision and Reducing Systemic Risk,” before the Senate Committee on Banking, Housing, and Urban 

Affairs, S. Hrg 112-714, (June 6, 2012), at 27; see also Subcommittee interview of Michael Sullivan, OCC 

(8/30/2012).

192 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer). 193 5/10/2006 “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).

194 5/10/2006 “Chief Investment Office New Business Initiative Approval,” prepared by CIO, on “Credit and Equity 

Capability,” OCC-SPI-00081631, at 1.

195 Subcommittee interview of Michael Sullivan, OCC (8/30/2012); 5/22/2008 “Chief Investment Office New 

Business Initiative Approval,” prepared by CIO, on “Credit and Equity Capability,” OCC-SPI-00081631, at 8.

196 5/10/2006 “Chief Investment Office New Business Initiative Approval,” prepared by CIO, on “Credit and Equity 

Capability,” OCC-SPI-00081631, at 10.

197 Id.; Subcommittee interview of Michael Sullivan, OCC (8/30/2012).

198 See, e.g., 2011 JPMorgan Chase Annual Report, at 162.

199 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “Synthetic Credit 

Materials,” JPM-CIO-PSI 0001101. 200 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, “CDO Briefing,” at 

21, PSI-JPM-30-000001.
38

Service.”201 The audit report stated: “Chief Investment Office (CIO) credit trading activities 

commenced in 2006 and are proprietary position strategies executed on credit and asset backed 

indices.” The audit made no mention of hedging or credit stress loss protection, and contained 

no analysis of the credit trading activity in terms of lowering bank risk. It also did not identify 

any assets or portfolios that were being hedged by the credit derivatives. The audit rated the 

CIO’s “control environment” as “Satisfactory,” but noted, among other matters, that the CIO’s 

Valuation Control Group committed multiple “calculation errors” when testing the prices of the 

credit derivatives.202

In July 2008, the CIO started a credit derivative trading program intended to “benefit 

from large defaults on High Yield names.”203 “High Yield names” referred to individual 

corporations perceived to be at higher risk of default, often signaled by carrying a junk bond 

rather than investment grade bond rating.

204 Credit default swaps or “High Yield” credit indices 

naming these non-investment grade corporations generally required the payment of higher 

premiums by the short parties, but also promised large payoffs if the named corporations

defaulted.

205 Each of these derivatives, under generally accepted accounting principles, was

subject to mark-to-market accounting, which meant their value had to be calculated and booked 

on a daily basis.206

Despite credit trades and a formal approval document dating from 2006, it is difficult to 

establish when the credit trading program actually coalesced into the Synthetic Credit Portfolio 

(SCP). The 2007 internal bank audit stated that the credit trading commenced in 2006, although

Ms. Drew told the Subcommittee that the SCP was established in June 2007.

 

207 The OCC 

determined that the SCP acquired its current name in 2008.208

The timing is somewhat unclear due to a lack of documentation regarding the SCP during 

its first five years of operation. Even though the Synthetic Credit Portfolio involved higher risk 

instruments that were unusual for an asset-liability management function, the Subcommittee has 

uncovered no evidence that the CIO alerted the OCC to the establishment of the SCP or briefed

the OCC about SCP trading activities. The OCC told the Subcommittee that it expects banks to

provide information to the agency in a forthcoming, transparent way so the regulator can focus 

its resources on areas of higher risk. But according to the OCC, while the CIO created a formal 

 201 11/29/2007 “CIO Global Credit Trading,” JPMorgan Chase & Co. Audit Department Report, JPM-CIO-PSI-H 

0006022-023. 202 Id. 203 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “Synthetic Credit 

Materials,” JPM-CIO-PSI 0001101. 204 See “Junk Bond,” OCC February 2008 Comptroller’s Handbook: Leveraged Lending – Appendix B, at 63, 

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/_pdf/leveragedlending.pdf. 205 For more information on the HY credit index, see Chapter 2. 206 See 5/22/2008 “Chief Investment Office New Business Initiative Approval,” prepared by CIO, on “Credit and 

Equity Capability,” OCC-SPI-00081631, at 11. 207 Subcommittee interview of Ina Drew, CIO (9/7/2012); see also 4/12/2012 email from Ina Drew, CIO, to Jamie 

Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, “Synthetic Credit Materials,” JPMCIO-PSI 0001100-106, at 104 (“The Chief Investment Office has utilized the ‘synthetic credit portfolio,’ which is a 

portfolio of credit derivatives, to construct a hedge against other risks on JPMC’s balance sheet. This activity has 

been part of the CIO portfolio construction and risk management since 2007.”). 208 See Subcommittee interview of Doug McLaughlin and Mike Sullivan, OCC (8/30/2012).
39

NBI approval document to initiate credit trading in 2006, the CIO did not update or amend that 

NBI when its traders began purchasing more complex credit derivative products, such as credit 

index tranches,209 and engaging in larger volumes of trades.210

The OCC has since determined that, in 2008, the bank violated OCC notification 

requirements by adding credit index tranche positions to the SCP without notifying the agency of

that “new product” which represented “a substantial change in business strategy.”

 

211 The OCC 

also determined that those credit derivatives had been moved from what was then called the 

“Proprietary Positions Book” in the Investment Bank when that Proprietary Positions Book 

closed down, but the bank failed to notify the OCC, in contravention of its notice obligations.212 

According to the OCC, the first time the SCP was even mentioned in a written communication to 

the OCC was on January 27, 2012, in a routine VaR report,213 and the first time the OCC became 

aware of the portfolio’s size and high risk nature was after it attracted media attention in April 

2012.214

JPMorgan Chase has acknowledged to the Subcommittee that, despite more than five 

years of operation, the CIO never detailed the purpose or workings of the SCP in any formal 

document nor issued any specific policy or mandate setting out its parameters or hedging 

strategies.

 

215 The bank did not undertake that effort even though OCC regulations state that, in 

connection with calculating its risk-based capital requirements, a bank “must have clearly 

defined trading and hedging strategies for its trading positions” and each hedging strategy “must 

articulate for each portfolio of trading positions the level of market risk the bank is willing to 

accept and must detail the instruments, techniques, and strategies the bank will use to hedge the

risk of the portfolio.”216

There is also a lack of documentation regarding where the Synthetic Credit Portfolio was 

housed within the CIO, since it was generally not named in internal bank presentations or reports 

discussing the CIO’s investment portfolios. Ina Drew, David Olson, and OCC examiners told 

the Subcommittee that the SCP was part of the CIO’s “Tactical Asset Allocation” (TAA) 

 

 209 For more information on credit tranches, see Chapter II. 210 Subcommittee interview of Mike Sullivan, OCC (8/30/2012); 5/22/2008 “Chief Investment Office New Business 

Initiative Approval,” prepared by CIO, on “Credit and Equity Capability,” OCC-SPI-00081631, at 6. A part of the 

NBI form called “Post-Implementation Review” which was “to be completed at the time of approval” was left 

blank. Id., at 19. 211 10/26/2012 Confidential Supervisory Report, OCC, at PSI-OCC-13-000104 [Sealed Exhibit]. 212 Id. When asked by the Subcommittee about the OCC’s determination, however, the bank disputed that any 

derivatives in the Proprietary Positions Book were ever moved to the CIO.

213 Subcommittee interview of Doug McLaughlin, OCC (8/30/2012). The SCP was mentioned in a routine CIO 

Value-at-Risk report. See also 10/26/2012 Confidential Supervisory Report, OCC, at 12, PSI-OCC-13-000025 

[Sealed Exhibit].

214 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 215 Levin Office briefing by JPMorgan Chase (8/15/2012) (Greg Baer). 216 12 C.F.R. Part 3, Appendix B, Section 3(a)(2) (“(2) Trading and hedging strategies. A bank must have clearly 

defined trading and hedging strategies for its trading positions that are approved by senior management of the bank.

(i) The trading strategy must articulate the expected holding period of, and the market risk associated with, 

each portfolio of trading positions.

(ii) The hedging strategy must articulate for each portfolio of trading positions the level of market risk the 

bank is willing to accept and must detail the instruments, techniques, and strategies the bank will use to 

hedge the risk of the portfolio.”).
40

portfolio, earlier known as the “Discretionary Trading Book.”217 Ms. Drew told the 

Subcommittee that the TAA portfolio was a book of assets managed on a short term basis.218 

Chetan Bhargiri, the CIO’s Chief Risk Officer since May 2012, told the Subcommittee that the 

TAA was an “idea” book that could be used to test new strategies.219 A number of internal CIO 

documents referred to the SCP as the “Core Credit Book,”220 but Ms. Drew clarified that the 

Core Credit Book was only one part of the SCP, which also had a “tactical piece.”221 In 2012, 

the TAA book was subsumed under a new name, “MTM Overlay.”222 Ms. Drew said that 

multiple terms evolved over time to refer to various portfolios within the CIO, but that the 

changing terminology was for business reasons and not to be evasive.223

Whether established in 2006, June 2007, or somewhat later, the SCP joined a complex set 

of investment portfolios already in existence at the CIO. When asked about how the SCP fit into 

the broader CIO investment structure, Ms. Drew indicated that the following chart approximated

the placement of key portfolios in the CIO at the beginning of 2012:

 

 217 Subcommittee interviews of Mike Sullivan, OCC (8/30/2012), Jaymin Berg, OCC (8/31/2012); and David Olson, 

CIO (9/14/2012). Ms. Drew told the Subcommittee that the terms TAA and Discretionary Trading Book were used 

interchangeably and that the SCP was part of the TAA. Subcommittee interview of Ina Drew, CIO (9/7/2012).

218 Subcommittee interview of Ina Drew, CIO (9/7/2012).

219 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Bhargiri, CIO). 220 For example, Bruno Iksil’s presentations on the synthetic credit portfolio were sometimes entitled “Core Credit 

Book Highlights.” See, e.g., JPM-CIO-PSI 0000099; JPM-CIO-PSI 00000160. Another presentation entitled “CIO 

Synthetic Credit Update” (JPM-CIO-PSI 0001247-258) is a discussion of the “Core Credit Book.” (JPM-CIO-PSI 

0001249).

221 Subcommittee interview of Ina Drew, CIO (9/7/2012). 222 Id.; 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” prepared by Ina Drew 

and Irvin Goldman, Chief Investment Office, JPM-CIO-PSI 0015016. 223 Subcommittee interview of Ina Drew, CIO (9/7/2012).
41

Source: Replication of Subcommittee hand-drawing approved by Ina Drew during her Subcommittee interview 

(9/7/2012).

The seven investment portfolios identified in this chart differ from a list of nine portfolios 

described in a CIO internal presentation in March 2012; it remains unclear how the two lists 

relate to each other.

224

Another issue is whether the SCP evolved over time to function as a proprietary trading 

effort. The 2007 internal bank audit described the CIO’s “Global Credit Trading” portfolio as 

involving “proprietary position strategies.”225

 224 Compare chart with 3/2012 presentation entitled, “Directors Risk Policy Committee – CIO 2012 Opportunities 

and Challenges,” prepared by Ina Drew and Irvin Goldman, CIO, JPM-CIO-PSI 0015016 (listing the following nine 

investment portfolios: Private Equity, Retirement Plan, Special Investments, COLI-BOLI, Strategic Asset 

Allocation, FX Hedging, MSR Hedging, North America, and International). In 2010, after reviewing the CIO’s 

investment portfolios, the OCC had directed CIO management to do a better job “document[ing] investment policies 

and portfolio decisions” and managing the related risks. See 12/8/2010 OCC Supervisory Letter, JPM-2010-80, 

OCC-SPI-00011201(Matter Requiring Attention) [Sealed Exhibit]. For more information about the OCC review, 

see Chapter VI.

 In 2013, the JPMorgan Chase Task Force wrote: 

225 11/29/2007 “CIO Global Credit Trading,” JPMorgan Chase & Co. Audit Department Report, JPM-CIO-PSI-H 

0006022-023.
42

“The 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 

customers229 or client-facing activity.

230

B. Purpose of the Synthetic Credit Portfolio: Undocumented, Unclear, 

 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.

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 Chase 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 its capacity as a 

lender.”231

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 

credit.”

 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.

232 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

 226 2013 JPMorgan Chase Task Force Report, at 24, footnote 23. 

 Tail events are developments viewed as highly unlikely, but very 

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 (8/15/2012) (Greg Baer).
43

costly if they do occur.234 JPMorgan Chase told the Subcommittee that during the financial 

crisis the key tail event that the SCP was insuring against was an unexpectedly large number of 

corporate defaults.235

JPMorgan Chase CEO Jamie Dimon testified before the U.S. Senate that the purpose of 

the SCP was to make “a little money” in a benign environment and more substantial returns for 

the bank if there was a credit crisis, so that those returns would offset other losses.

236 In a March 

2012 internal presentation, Ms. Drew described the CIO’s key mandate as follows: “Optimize 

and protect the Firm’s balance sheet from potential losses, and create and preserve economic 

value over the long term.”237

Despite these and other descriptions of the SCP as a “hedge” or “protection” against 

potential bank losses, in over five years, no CIO document spelled out exactly what the SCP was 

meant to hedge. The initial 2006 NBI approval document stated that the credit trading activities

would be used to “manage corporate credit exposures,”238 but the Subcommittee found no CIO 

document that went beyond that generalization to identify the precise credit exposures intended 

to be offset. The former CIO Chief Financial Officer, John Wilmot, told the Subcommittee that

the assets hedged against by the SCP were not specifically defined in writing.

239 One JPMorgan 

Chase legal counsel stated that the SCP’s hedging function was described differently in different 

places, but was unable to point the Subcommittee to helpful documents.

240

When asked – despite the lack of contemporaneous documentation – to identify the assets 

or portfolio that the SCP was intended to hedge, CIO and other bank officials gave inconsistent 

answers. Some said they understood that the SCP was meant to hedge the firm’s balance sheet

as a whole.

241 Others explained that it was meant to mitigate losses on the firm’s balance sheet 

as opposed to hedging the whole balance sheet.

242 Still others stated that the SCP was meant to 

hedge the CIO’s own $350 billion Available-For-Sale (AFS) book of assets.

243

 234 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss); Subcommittee interview of Jamie 

Dimon, JPMorgan Chase (9/19/2012). See also 2013 JPMorgan Chase Task Force Report, at 38, footnote 49 

(defining a “tail event” as “generally understood to be one that arises when the market environment moves more 

than three standard deviations from the mean based on predictions from a normal distribution of historical prices”).

The head of 

235 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer). 236 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) (“We 

took a position in them. And if you look at the position, what it was meant to do was to earn, in benign 

environments make a little money, but if there was a crisis, like Lehman, like Eurozone, it would actually reduce this 

dramatically by making money.”) 

237 Subcommittee interview of Ina Drew, CIO (9/7/2012), relying on 3/2012 “Directors Risk Policy Committee –

CIO 2012 Opportunities and Challenges,” prepared by Ina Drew and Irv Goldman, Chief Investment Office, JPMCIO-PSI 0015016. 238 5/22/2008 “Chief Investment Office New Business Initiative Approval,” prepared by CIO, on “Credit and Equity 

Capability,” OCC-SPI-00081631 at 1.

239 Subcommittee interview of John Wilmot, CIO (9/11/2012). 240 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss). 241 Subcommittee interviews of Ina Drew, CIO (9/7/2012); John Hogan, JPMorgan Chase (9/4/2012); Irvin 

Goldman, CIO (9/15/2012). 242 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Barghiri; Jay Balacek). 243 Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9/12/2012); John Wilmot, CIO (9/11/2012); 

Irvin Goldman, CIO (9/15/2012) (Goldman explained that the SCP had different hedge targets over time); David 
44

CIO’s International unit – Achilles Macris, who oversaw the Synthetic Credit Portfolio – claimed

it was meant to hedge the international component of the AFS book.

244 Former CIO head Ina

Drew even told the Subcommittee at one point that every CIO trader had a book that it was 

hedging, including the SCP traders, yet the Subcommittee has found no evidence to support that 

assertion.

245

It is possible the SCP may have been meant to hedge all of the above at some point.

246

Ms. Drew explained that the SCP originally hedged the bank’s entire balance sheet.

247 However, 

after the financial crisis intensified in 2008, the CIO’s AFS portfolio expanded, acquired greater 

credit risk, and became a more obvious candidate for hedging.

248 The OCC Examiner-in-Charge

at JPMorgan Chase agreed with that analysis, noting that the CIO’s AFS portfolio grew from $70

billion to $350 billion after 2008, acquiring substantial credit risk along the way.249 Mr. Wilmot, 

former CIO CFO, told the Subcommittee that the SCP was meant to hedge the CIO’s own AFS 

book, but could have also been used for other risks on the bank’s balance sheet, albeit not all of 

the structural risk in the firm.250

At the same time, the CIO’s most senior quantitative analyst, Patrick Hagan, who joined 

the CIO in 2007 and spent about 75% of his time on SCP projects, told the Subcommittee that he 

was never asked at any time to analyze another portfolio of assets within the bank, as would be 

necessary to use the SCP as a hedge for those assets.

While it is possible that the portfolio the SCP was meant to 

hedge changed over time, the absence of SCP documentation is inadequate to establish whether 

that was, in fact, the case.

251 In fact, he told the Subcommittee that he 

was never permitted to know any of the assets or positions held in other parts of the bank.252

Given the lack of precision on the assets to be hedged, JPMorgan Chase representatives 

have admitted to the Subcommittee, that calculating the size and nature of the hedge was “not 

that scientific”253 and “not linear.”254 According to Ms. Drew, it was a “guesstimate.”255 She 

told the Subcommittee that there was “broad judgment” about how big the hedge should be, and 

that she used her “partners” as “sounding boards” if she later wanted to deviate from what had 

been agreed to.256

 Olson, CIO (9/14/2012). Several OCC officials also expressed this view. Subcommittee interviews of Elwyn 

Wong, OCC (8/20/2012); Michael Kirk, OCC (8/22/2012); Mike Sullivan, OCC (8/30/2012).

According to the OCC, on April 16, 2012, JPMorgan Chase told the OCC that 

244 2/2012 “CIO February 2012 Business Review,” JPM-CIO-PSI 0001940-984, at 950 (“The credit derivatives 

portfolio seeks to efficiently provide mark-to-market stress offset to the CIO Int’l credit investments activity.”). 245 Subcommittee interview of Ina Drew, CIO (9/7/2012). 246 Subcommittee interview of Michael Kirk, OCC (8/22/2012). Mr. Kirk told the Subcommittee that the SCP was 

initially a hedge against the AFS book but underwent a metamorphosis. 247 Subcommittee interview of Ina Drew, CIO (9/7/2012). 248 Id.

249 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 250 Subcommittee interview of John Wilmot, CIO (9/11/2012). 251 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 252 Id. 253 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss). 254 Id. 255 Subcommittee interview of Ina Drew, CIO (9/7/2012). 256 Id.
45

the SCP was expected to gain $1 billion to $1.5 billion in value to offset $5 to $8 billion in firm 

wide losses.257

The OCC capital markets examiner with responsibility for JPMorgan Chase told the

Subcommittee that a distinction should be made among hedges, protection, and stress loss 

protection.

 

258 He explained that a dedicated hedge meant that “x” hedges “y” and is reported 

accordingly. An example is buying the short side of a credit default swap that names a specific 

company and using that short position to hedge a bank loan to that same company.

259

The OCC examiner explained that, in contrast, “protection” and “stress loss protection” 

were more general concepts that often cannot be linked to a specific credit risk. He explained

that credit protection should be viewed as more like providing insurance against a variety of 

possible losses, while stress loss protection should be viewed as providing protection against

severe losses which are unlikely, but can happen, a so-called tail event.

 If the 

company later declared bankruptcy and defaulted on its loans, the credit default swap would 

provide a countervailing payment to offset the loan loss incurred by the bank. Another example 

is identifying an interest rate exposure and buying an interest swap with the opposite exposure to 

offset any change in the interest rate. Such hedges have a direct correlation with the credit risk 

they are meant to offset. 

260 In his view, 

JPMorgan Chase did not need a “top of the house” credit hedge – meaning a credit hedge for 

JPMorgan Chase as a whole. Instead, he said that credit risk should be managed by the 

individual lines of business.261 For example, the Subcommittee was told that JPMorgan Chase’s 

Investment Bank already managed its own credit risk and did not look to the CIO for that 

purpose.262

JPMorgan Chase’s counsel told the Subcommittee that, while the descriptions of the 

purpose of the SCP have not always been consistent, the common element was that the SCP was 

intended to provide credit loss protection against tail risk,

263 risks that were unlikely but could be 

costly if they occurred. The OCC capital markets examiner told the Subcommittee, however, 

that the bank was unable to explain exactly how this stress loss protection worked.

264 In other 

words, just as the bank has had difficulty identifying the portfolio the SCP was meant to hedge, it

has had difficulty identifying the nature of the tail risk the SCP was supposed to offset. At some

points, bank officials described it as hedging against a Eurozone crisis.

265 They also described it 

as hedging against a U.S. financial crisis.

266

 257 See 4/17/2012 email from Fred Crumlish, OCC, to Mike Brosnan, OCC, and others, “JPM CIO/IG9 ‘whale’ 

trade,” OCC-SPI-00010490.

 In his Senate testimony, Mr. Dimon pointed to both 

risks, saying the Synthetic Credit Portfolio’s “original intent was to protect or hedge the 

258 Subcommittee interview of Fred Crumlish, OCC (8/28/2012).

259 Id. 260 Id. 261 Id. 262 Subcommittee interview of John Wilmot, CIO (9/11/2012). 263 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss). 264 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 265 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Barghiri; Harry Weiss; Gregg Gunselman). 266 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Gregg Gunselman).
46

company against a systemic event like the financial crisis or the euro zone situation.”267 In his 

interview with the Subcommittee, Mr. Dimon indicated that, given a range of scenarios where 

credit spreads widened, his focus was on a severe situation in which credit spreads widened by 

50%.

268

To clarify the risk that the SCP was intended to address, at one point on April 2012, 

according to an internal bank email, Mr. Dimon asked the CIO for the correlation between the 

SCP and the portfolio the SCP was meant to hedge.

269 Mr. Dimon told the Subcommittee that he 

did not recall if he received a response.

270 Ms. Drew explained that, even though the request had

been made by the CEO, so many events were unfolding at the time, that she did not recall if the 

correlation analysis was sent to him.271 The bank has been unable to produce that analysis, and 

the Subcommittee found no evidence this analysis was completed. In an email around the same 

time, the bank’s firmwide Chief Risk Officer told CIO personnel that on a call with regulators 

the next day “we should have a discussion of what we believe the correlation is.”272 There is no 

documentation, however, of such a discussion. The OCC told the Subcommittee that it asked for 

documentation of what was being hedged by the SCP and repeated this request a number of 

times, but JPMorgan Chase never produced the information.

273

Also of interest is an internal CIO presentation created to help prepare senior JPMorgan 

Chase executives for a public earnings call in April 2012, which included multiple charts 

indicating the SCP was no longer performing a hedging function.

274

 267 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).

 The charts depicted several 

scenarios in which the bank suffered credit losses, including one involving a new “financial 

crisis,” and projected that, rather than offset those losses, the SCP would also lose money for the 

268 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).

269 See 4/11/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “updated,” JPM-CIOPSI 0001077 (“[w]e are working on Jamie’s request for [c]orrelation of the credit book against the portfolio”).

270 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 271 Subcommittee interview of Ina Drew, CIO (12/11/2012). 272 4/10/2012 email from John Hogan, JPMorgan Chase, to John Wilmot, CIO, and others, “Materials for FED/OCC 

Questions,” JPM-CIO-PSI 0001021. 273 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). See also Subcommittee interview of Michael 

Kirk, OCC (8/22/1012); 4/10/2012 email from Michael Kirk, OCC, to Fred Crumlish, OCC, and others, “CIO info 

on elephant trade,” OCC-00004730 (Mr. Kirk: “What would be helpful would be to see the stress scenarios without 

these assets, and with these assets so one can understand the impact. ... It would also be helpful if the CIO could 

provide some indication of a present target level they are trying to achieve, and hence the change of activity that 

resulted in the same (in other words results prior to and after recent trades.)” Mr. Crumlish: “In my response on 

JPM email .... I also said it would be useful if they provided analytics or a summary that recapped the hedge 

strategy, such as the expected impact of the hedge on the projected stress loss identified. I asked for this on the call 

as well.”); 4/10/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, and others, “JPM CIO trades,” 

OCC-00004087 (“We asked the bank for a number of items yesterday that reflect details on the trades and support 

the stress loss hedge rationale associated with this particular strategy.”). For more information on the OCC’s 

oversight of the SCP, see Chapter VI. 

274 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit 

information,” JPM-CIO 0001151 (“attached please find a presentation on the synthetic credit book that was 

reviewed this afternoon with Doug, Jes, Ina, Barry, and John. It covers the relevant data requests from the past 

several days.”).
47

bank in those scenarios.

275

Other CIO Hedges. The ambiguity surrounding the objectives, size, and effectiveness

of the purported hedge to be provided by the SCP stands in stark contrast to the discipline with 

which other hedges were handled within the CIO. Specifically, one of the primary tasks 

undertaken by the CIO was to hedge risks associated with the bank’s mortgage servicing rights

and interest rates.

 That April 11, 2012 analysis flatly contradicted the SCP’s status as a 

hedge.

276 To hedge risks associated with its mortgage servicing rights (MSR), the 

mortgage servicing line of business calculated the amount of credit risk that needed to be hedged, 

provided the total or a range to the CIO, and the CIO constructed an MSR hedge accordingly.277

The MSR hedges appear to have been routinely documented.278 With respect to interest rate 

hedging, JPMorgan Chase’s Corporate Treasury gathered interest rate data from the relevant 

lines of business, aggregated the data using a standard industry model that quantified risk, and 

then provided the information to the CIO to establish the hedge.

279 Information about the MSR

and interest rate hedges was also provided to CIO managers and the bank’s Chief Financial 

Officer Douglas Braunstein on a weekly basis.280 In contrast, no line of business calculated the 

size of the credit risk to be offset by the CIO or provided a specific number or range to CIO to 

construct the SCP hedge, and the CIO did not provide routine information about the SCP 

“hedge” to either CIO managers or the Chief Financial Officer. According to JPMorgan Chase, 

the SCP’s “credit” hedge “did not have that level of discipline.”281

In addition, a number of CIO hedges were recorded, tracked, and tested for hedge 

effectiveness, in part to qualify for favorable accounting treatment, but SCP hedges were not. 

For example, in the case of a hedge involving the conversion of a fixed rate asset into a floating 

rate asset, hedge effectiveness was tested every reporting period.

 

282 At the time the instrument 

was issued, it was identified as a hedge, and recorded a notional amount and maturity date.

283 In

contrast, for the SCP, the CIO had no standardized method or documentation in place for

identifying what was being hedged, recording a notional amount or maturity date, or testing the 

hedge effectiveness.284 Ms. Drew told the Subcommittee that SCP performance was evaluated in 

relation to the underlying asset that it was trying to hedge,

285

 275 See id., at JPM-CIO 0001158. For a more detailed discussion of this presentation, see Chapter VII.

however, neither she nor the bank 

identified or produced any documentation supporting that assertion.

276 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss). 277 Subcommittee interview of Michael Sullivan, OCC (8/30/2012); Levin Office briefing by JPMorgan Chase 

(8/15/2012) (Greg Baer).

278 See 4/20/2012 “CIO MSR POSITION SUMMARY – OAS MODEL,” JPM-CIO-PSI 0005996. The MSR hedge 

is also now documented in monthly Executive Management Reports. See, e.g., Chief Investment Office – Executive 

Management Report (April 2012), OCC-SPI-00033169. See also, e.g., 1/20/2012 “CIO Weekly Performance 

Summary,” JPM-CIO-PSI-H 0001577-1587.

279 Levin Office briefing by JPMorgan Chase (6/4/2012) (Greg Baer). 280 See 1/20/2012 “CIO Weekly Performance Summary,” JPM-CIO-PSI-H 0001577-1587. 281 Levin Office briefing by JPMorgan Chase (6/15/2012) (Greg Baer). 282 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Bhargiri). 283 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Gregg Gunselman). 284 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 285 Subcommittee interview of Ina Drew, CIO (9/7/2012).
48

If the SCP had used credit derivatives as dedicated hedges, it should have triggered the 

bank’s standard hedging documentation procedures, at least in later years. JPMorgan Chase’s 

2011 annual report stated, for example, that the bank had a detailed set of internal procedures for 

tracking derivatives used as hedges:

“For a derivative to be designated as a hedge, the risk management objective and 

strategy must be documented. Hedge documentation must identify the derivative 

hedging instrument, the asset or liability or forecasted transaction and type of risk 

to be hedged, and how the effectiveness of the derivative is assessed prospectively 

and retrospectively. To assess effectiveness, the Firm uses statistical methods 

such as regression analysis, as well as nonstatistical methods including dollarvalue comparisons of the change in the fair value of the derivative to the change 

in the fair value or cash flows of the hedged item. The extent to which a 

derivative has been, and is expected to continue to be, effective at offsetting 

changes in the fair value or cash flows of the hedged item must be assessed and 

documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by 

which the gain or loss on the designated derivative instrument does not exactly 

offset the change in the hedged item attributable to the hedged risk) must be 

reported in current-period earnings.”286

Those procedures were used by the bank to qualify its hedges for favorable accounting treatment, 

but the annual report does not indicate that those procedures applied only to those types of 

hedges that received favorable accounting treatment. At the same time, despite this detailed 

description, JPMorgan Chase has not identified any CIO documentation indicating that credit 

derivatives in the SCP were subjected to any of the analysis or documentation described above. 

Macro Hedge. A number of bank representatives told the Subcommittee that the SCP 

was intended to provide, not a dedicated hedge, but a macro-level hedge to offset the CIO’s $350 

billion investment portfolio against credit risks during a stress event.

287 In a letter to the OCC 

and other agencies, JPMorgan Chase even contended that taking away the bank’s ability to 

establish that type of hedge would undermine the bank’s ability to ride out a financial crisis as it 

did in 2009.288 The bank also contended that regulators should not require a macro or portfolio 

hedge to have even a “reasonable correlation” with the risks associated with the portfolio of 

assets being hedged.

289

 286 JPMorgan Chase 2011 Annual Report, at 202-203.

 The counter to this argument is that the investment being described 

287 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer, Chetan Bhargiri); Subcommittee interview 

of Jamie Dimon, JPMorgan Chase (9/19/2012) (stating that the synthetic credit portfolio was a “fat tail hedge” 

against the CIO’s investment portfolio, which would also benefit the bank generally); Subcommittee interview of

Ina Drew, CIO (9/7/2012) (explaining that the SCP’s purpose when it was established was to hedge firmwide risk, 

but then changed to hedge the CIO’s investment portfolio against credit risks during a stress event); Subcommittee 

interview of John Wilmot, CIO (9/11/2012); Subcommittee interview of Douglas Braunstein, JPMorgan Chase 

(9/12/2012); Subcommittee interview of John Hogan, JPMorgan Chase (9/5/2012) (characterizing the SCP as a 

hedge against macro credit risk).

288 See 2/13/2012 letter from JPMorgan Chase, to Department of the Treasury, Board of Governors of the Federal 

Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Office of the 

Comptroller of the Currency, “Comment Letter on the Notice of Proposed Rulemaking Implementing Section 619 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act,” at 56-57.

289 Id., at 25.
49

would not function as a hedge at all, since all hedges, by their nature, must offset a specified risk

associated with a specified position.

290

Given the size and constantly changing nature of the SCP, the absence of basic 

documentation over time about its hedging objectives and strategies; the assets, portfolio, risks, 

or tail events it was supposed to hedge; and how the size, nature, and effectiveness of its hedges 

were to be determined, suggests that the SCP did not, in fact, function as a hedge. After 

briefings by the bank, some OCC examiners expressed skepticism that the SCP functioned as a 

hedge at all, given the lack of specificity over what was being offset,

 Without that type of specificity and a reasonable 

correlation between the hedge and the position being offset, the hedge could not be sized or 

tested for effectiveness. Rather than act as a hedge, it would simply function as an investment 

designed to take advantage of a negative credit environment. That the OCC was unable to 

identify any other bank engaging in this type of general, unanchored “hedge” suggests that this 

approach is neither commonplace nor useful.

291 and the fact that, by 

March, the SCP held a net long position rather than the short position typical of a hedge. In a

May 2012 internal email following a discussion with JPMorgan Chase in which the bank

defended the SCP trading strategy as a loss-reducing hedge, one OCC examiner referred to the

SCP as a “make believe voodoo magic ‘composite hedge.’”292

C. SCP Trading

Whether or not it functioned as a hedge at any point in time, the facts are clear that the 

Synthetic Credit Portfolio underwent profound change from its inception in 2006, to its demise 

in 2012. The change was most dramatic in the first three months of 2012, when the portfolio 

exploded in size, complexity, and risk, with little or no notice to the bank’s senior risk managers 

or its regulators.

(1) The Early Years: 2006 to 2010

When first approved by JPMorgan Chase in 2006, the CIO was authorized to trade in 

credit default swaps and indices and had an initial VaR limit of $5 million, signifying a relatively 

small portfolio. According to Ms. Drew, the SCP expanded as CIO traders gained experience 

and credibility within the bank, and credit derivative instruments became more liquid and more 

viable as investment vehicles.

293 In addition, during the financial crisis, after the bank 

purchased Bear Stearns and Washington Mutual Bank, took in more funds, and the CIO’s 

portfolio expanded as a whole, Ms. Drew said the SCP also grew.

294

 290 See, e.g., OCC definition of a hedge, 12 C.F.R. Part 3, Appendix B, Section 2 (“Hedge means a position or 

positions that offset all, or substantially all, of one or more material risk factors of another position.”).

 

291 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). The OCC Examiner-in-Charge told the 

Subcommittee that the SCP hedge was at best “conceptual,” and that a “conceptual hedge that is undocumented is 

not good.”

292 5/18/2012 email from Elwyn Wong, OCC, to Michael Kirk, OCC, “CIO Call with Mike Brosnan,” OCC-SPI 

00021602.

293 Subcommittee interview of Ina Drew, CIO (9/7/2012).

294 Id. See also JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 

8/27/2012).
50

According to an internal CIO chart, in 2008, the SCP produced revenues totaling about 

$170 million.295 By March 2009, according to CIO trader Bruno Iksil, the SCP had grown again, 

and the book’s “value at risk” (VaR) was “high.”296 In June 2009, according to Mr. Iksil, 

General Motors filed for bankruptcy, the SCP book gained value, and the CIO cashed in certain

SCP positions for “profit taking.”297 By the end of 2009, SCP revenues had increased fivefold 

over the prior year, producing $1 billion in revenues for the bank.298

In 2010, as the financial crisis began to ease, the credit landscape changed and the SCP 

began to contract.

 

299 One reason was that the profit-taking after the General Motors bankruptcy 

reduced the size of the SCP book of assets. In addition, the CIO’s Chief Market Risk Officer 

told the Subcommittee that the overall strategy was to increase protection when people were 

worried but decrease it when people are not worried, like insurance;300 as people became less 

worried after the financial crisis, less credit protection was needed by the bank. According to 

Mr. Iksil, in January 2010, a decision was made to shrink the SCP’s positions.

301 The head of 

the CIO’s equity and credit trading, Mr. Martin-Artajo stated that, in June 2010, the traders

began to unwind the SCP book.302 As further evidence of the shrinking portfolio, the OCC told 

the Subcommittee that the VaR limit on the SCP was reduced to $50 million in 2010, as the 

portfolio was derisked.303 Notwithstanding that reduction, according to Mr. Iksil, CIO 

management wanted to keep a “tail” hedge, so the SCP was not eliminated entirely.

304 The SCP 

produced 2010 revenues totaling nearly $150 million, which was only about 15% of the revenues 

produced in 2009.305

(2) 2011 SCP Expansion

According to one of the head SCP traders, Mr. Martin-Artajo, by April and May of 2011, 

the VaR limit and average utilization on the Synthetic Credit Portfolio had dropped, reflecting a 

dramatic reduction in its size.

306 In June 2011, however, the CIO determined that the credit 

markets might deteriorate due to uncertainty in Europe,

307

 295 6/21/2012 “CIO Compensation – Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 0002749. 

and the financial markets were 

296 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 297 Id. A class action lawsuit filed by JPMorgan Chase shareholders claims that during this period, the SCP engaged 

in high risk proprietary trades involving mortgage backed securities, collateral debt obligations, Fannie and Freddie 

preferred stock, and foreign currency swaps, among other trades. See In re JPMorgan Chase & Co., Case No. 1:12-

CV-03852-GBD (USDC SDNY), Consolidated Amended Class Action Complaint (11/20/2012), at ¶¶ 67-72. 

298 6/21/2012 “CIO Compensation – Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 0002749. 

299 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 300 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 301 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 302 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

303 Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 304 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 305 6/21/2012 “CIO Compensation – Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 0002749. 306 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012). 307 Subcommittee briefing by JPMorgan Chase (9/4/2012) (Jeanette Boot).
51

bearish.308 According to Mr. Macris, Ms. Drew thought there would be more defaults.

309

The CIO credit traders began to re-evaluate the SCP’s trading strategy. According to Mr. 

Martin-Artajo, the CIO wanted to have a “smart short,”

 

Together, these signs suggested that more rather than less credit protection was needed.

310 meaning one that did not cost much, 

but provided effective protection against corporate defaults. Mr. Martin-Artajo later told the 

JPMorgan Chase Task Force investigation that he proposed doing a combination of long and 

short trades, similar to a strategy he had proposed, and the CIO had used, earlier that year to 

benefit the CIO if there were defaults.

311

More specifically, beginning in mid-2011, the CIO traders began to buy credit protection 

against defaults by purchasing short credit derivatives referencing “high yield” or higher risk 

companies; at the same time, they sold credit protection against defaults by purchasing long

credit derivatives referencing “investment grade” or lower risk companies.

 

312 Greg Baer, a 

deputy general counsel at the bank, explained that the traders were essentially selling insurance 

on the lower risk investment grade indices and using the insurance premiums they received to 

buy insurance on the higher risk, high yield indices.

313 In a later email sent by Ina Drew to 

senior JPMorgan Chase management describing the SCP book’s trading strategy, she wrote that 

selling protection or insurance on investment grade companies generated “carry” or cash income 

from the premiums received from counterparties, which reduced the CIO’s cost of buying high 

yield credit protection.

314 Some current and former JPMorgan Chase personnel referred to that 

strategy as the long positions “financing” the short positions.315

Due to the new trading strategy requiring the purchase of both long and short credit 

instruments, and the addition of some distressed securities, the SCP expanded rapidly in size. At 

the beginning of 2011, the SCP’s notional size was $4 billion; by the end of 2011, it was $51 

billion, a more than tenfold increase.

316

 308 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

 Most of this growth occurred in the first half of 2011. 

309 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012).

310 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

311 Id. Mr. Martin-Artajo proposed doing “forward trades,” a type of trade that includes short and long positions. 

Forward trades are discussed in more detail below.

312 Levin Office briefing by JPMorgan Chase (5/22/2012) (Greg Baer), Levin briefing by JPMorgan Chase 

(6/27/2012) (Greg Baer and Harry Weiss). 313 Levin Office briefing by JPMorgan Chase (5/22/2012) (Greg Baer). See also 2013 JPMorgan Chase Task Force 

Report, at 30. 

314 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “Synthetic Credit 

Materials,” JPM-CIO-PSI 0001101 (“to balance the negative carry cost of the High yield Book overtime [we have] 

been using Investment Grade strategies that gave us some carry or buying optionality ... to offset the directionality of 

the High Yield Book”). 

315 Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9/12/2012) and Irvin Goldman, CIO 

(9/15/2012); JPMorgan Chase Task Force interview of Bruno Iksil, CIO (8/27/2012); JPMorgan Chase Task Force 

interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 9/6/2012). 316 See “Summary of Positions by Type,” prepared by JPMorgan Chase in response to a Subcommittee request, 

JPM-CIO-PSI 0037609. See also 2013 JPMorgan Chase Task Force Report, at 25.
52

Notionals more than tripled in the first quarter, then tripled again in the second quarter to reach 

$42 billion.317

Towards the end of 2011, JPMorgan Chase became concerned about the level of the 

CIO’s Risk Weighted Assets (RWA) and ordered a reduction in its RWA.

318 RWA is a dollar 

measure of a bank’s assets, adjusted according to the assets’ risk.

319 It is used to calculate the 

bank’s minimum capital requirements, with a greater ratio of equity-based capital required for 

banks with higher RWA.320 Mr. Iksil strategized that the SCP could go long on credit risk, use 

the longs to offset the portfolio’s shorts, and thereby reduce the CIO’s overall RWA.

321 He 

wrote: “We can reduce [RWA] by simply selling protection but then the pnl [profit and loss] 

volatility will increase potentially.”322

His supervisor, Mr. Martin-Artajo, responded that the CIO should not go outright long on 

its credit assets because it would breach the CIO’s stress loss limit.

 

323 Instead, Mr. MartinArtajo instructed Mr. Iksil to do “forward trades.”324 The type of forward trade he was 

suggesting occurs when a trader buys a long credit position with a long-term maturity date, and a 

short credit position with a short-term maturity date, in order to be hedged in the shorter term but 

gain exposure to credit risk in the longer term.

325

Whether that trading strategy helped reduce the CIO’s RWA in 2011 is unclear. The 

records that have been produced to the Subcommittee tracing the SCP’s RWA in 2011 and 2012 

are incomplete and contradictory. For example, one January 2012 OCC document reported that 

the SCP’s RWA at the end of 2011 was $70 billion,

 The CIO traders adopted that trading strategy.

326 while other materials reported that, by the 

beginning of 2012, the CIO’s RWA was around $40 billion.327

 317 See “Summary of Positions by Type,” prepared by JPMorgan Chase in response to a Subcommittee request, 

JPM-CIO-PSI 0037609.

 When asked by the 

318 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) (“In 

December 2011, as part of a firm wide effort and in anticipation of new Basel Cap[ital] requirements, we instructed 

CIO to reduce risk weighted assets and associated risk.”); 2013 JPMorgan Chase Task Force Report, at 2.

319 For more information about RWA, see Chapter II. 320 Id. See also 2013 JPMorgan Chase Task Force Report, at 26-27. 321 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012); 

12/22/2011 email from Bruno Iksil to Achilles Macris and Javier Martin-Artajo, CIO, “urgent -----: Rwa,” JPMCIO-PSI 0001227. See also FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 2, 

FDICPROD-0001783 (“The firm believed that due to the historical correlation (beta) of the tranches of the IG-9 

index, they were getting into a neutral position by going long 4-5 times the high yield short positions.”). 322 12/22/2011 email from Bruno Iksil to Achilles Macris and Javier Martin-Artajo, CIO, “urgent -----: Rwa,” JPMCIO-PSI 0001227. The profit and loss volatility would potentially increase, because, as the portfolio grew larger, 

even small changes in the price of individual holdings could translate into large variations in the portfolio’s overall 

value.

323 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 324 Id. 325 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeannette Boot). 326 See 1/31/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, “CIO Quarterly Meeting,” OCC-SPI00004695 (summarizing quarterly meeting with CIO in which CIO Chief Financial Officer John Wilmot indicated 

that, in 2012, the CIO expected to reduce the RWA of its “MTM” book, which included the SCP, from “$70B 

[billion] to $40B”).

327 See 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” 

conveying presentation entitled, “Core Credit Book Highlights,” prepared by Mr. Iksil, at JPM-CIO-PSI 0000100 
53

Subcommittee for more complete RWA records, the bank responded that such records were not 

prepared and were not available, although a former CIO employee who worked on RWA models

recalled that monthly RWA reports for CIO and SCP did exist.

328

In any event, when Mr. Macris was asked about the 2011 effort to reduce the SCP’s 

RWA, he told the JPMorgan Chase Task Force investigation that, as a result of the trading 

strategy to reduce the RWA, by August 30, 2011, the SCP had “a long front leg and a short back 

leg,” adding further complexity to the Synthetic Credit Portfolio.

 

329 Mr. Macris also told the 

investigation that the traders – and he – knew they were using “dangerous” instruments.330

(3) 2011 SCP Profit From Bankruptcies

 

In late 2011, the CIO engaged in a series of short term credit index tranche trades that 

ended up producing a large payoff for the bank. The trading strategy behind this gain was 

intended from its inception to last no more than four months, in sharp contrast to the type of 

long-term, conservative investments often attributed to the CIO. 

According to the OCC and an internal CIO audit report, during the fall of 2011, the CIO

placed a massive bet on a high yield credit index that tracked credit default swaps for 100 higher 

risk companies.

331 Beginning in September 2011, the CIO, through its trader Bruno Iksil, began 

to purchase the short side of several tranches of the index, building a short position that would 

pay off only if at least two companies declared bankruptcy or otherwise defaulted before the 

position expired on December 20, 2011.332

As the short party, the CIO was required to pay premiums to its counterparties, but the 

amounts required were not viewed by the CIO traders as significant since the position was 

expiring in less than four months. In addition, to offset the initial cost of buying the position as 

well as the cost of the ongoing premiums, the CIO purchased the long side of another credit

index, the CDX.NA.IG9 which tracked investment grade companies. By taking the long side on 

that index, the CIO became the recipient of the premiums paid by its short counterparties and 

could use those incoming cash premium payments to offset other SCP costs. 

 

 

(indicating CIO’s RWA was then $40.3 billion); JPMorgan Chase Task Force Report, at 28, footnote 30 (indicating 

CIO RWA at start of 2012 was about $43 billion); 1/19/2012 email from Achilles Macris, CIO, to Ina Drew, CIO, 

and others, “Credit book Decision Table – Scenario clarification,” JPM-CIO-PSI 0000152 (indicating CIO RWA at 

start of 2012 was $43 billion).

328 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). The Subcommittee also located some RWA data in 

the monthly Executive Management Reports prepared by the bank. See, e.g., December 2011 “Chief Investment 

Office – Executive Management Report,” OCC-SPI-00033116, at 8, 10; April 2012 “Chief Investment Office –

Executive Management Report,” OCC-SPI-00033162, at 4.

329 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012). 330 Id. 331 Subcommittee interview of Doug McLaughlin, OCC (8/30/2012); 2011 CA Quarterly Summary: Global Chief 

Investment Office 4th Quarter CA summary,” OCC-SPI-00002483. See also JPMorgan Corporate Sector Executive 

Management Report (Full Year 2011 Actuals), JPM-CIO-PSI 0018046, at 26. 332 For more information on credit index tranches, see Chapter II.
54

Over the next few months, the value of the HY11 changed repeatedly, showing both 

gains and losses. Mr. Iksil continued to build the CIO’s large short position, eventually spending 

as much as $1 billion.

333

The accumulated index position became so large and the counterparty stakes so high,

they caught the attention of the press, which later reported on the standoff and reported that some 

traders had referred to Mr. Iksil as a “caveman, for stubbornly pursuing the trade.”

 

334 With just 

six weeks left before the index expired, one hedge fund investor later said: “It seemed like the 

trade of the century to be long the index,”335 since the expectation was that the CIO’s bet would 

fail and the long side would end up benefiting from both the premiums and final settlement 

payments. But then, on November 29, 2011, American Airlines declared bankruptcy,336

Ina Drew told Jamie Dimon that the gains were about $400 million.

triggering a massive payout to the CIO and others holding the short side of the position.

337 The CIO traders 

later claimed internally that they made $550 million,

338 but did not record the profits all on the 

same day.339 The key CIO trader, Bruno Iksil, later described the gains as “massive,”340 while a 

JPMorgan Chase internal report characterized them as a “windfall.”341 JPMorgan Chase’s

internal auditors also referred to them as “windfall gains.”342

Despite the drama and $400 million gain associated with the 2011 “caveman trade,” the 

CIO’s revenues contributed only about 8% of JPMorgan Chase’s net income for 2011.343 

JPMorgan Chase senior risk managers told the Subcommittee that they had been unaware of the 

2011 trades involving the SCP at the time.

344

 333 See OCC data analysis derived from DTCC data for JPMorgan Chase, described in “JPMC-CIO timeline of 

Significant Events and OCC Discovery,” prepared by the OCC, OCC-SPI-00038895, at 6 [Sealed Exhibit]; 

10/26/2012 OCC Confidential Supervisory Report, Appendix 11 at PSI-OCC-13-0000113 [Sealed Exhibit]; “From 

‘Caveman’ to ‘Whale,’” Wall Street Journal, Gregory Zuckerman (5/17/2012), 

http://online.wsj.com/article/SB10001424052702303879604577408621039204432.html. When asked to confirm 

the $1 billion figure, JPMorgan Chase told the Subcommittee that it was unable to confirm or deny it. 

Subcommittee briefing by JPMorgan Chase (2/4/2013).

334 “From ‘Caveman’ to ‘Whale,’” Wall Street Journal, Gregory Zuckerman (5/17/2012); Subcommittee interview of 

Doug McLaughlin, OCC (8/30/2012).

335 “From ‘Caveman’ to ‘Whale,’” Wall Street Journal, Gregory Zuckerman (5/17/2012). 336 See In re AMR Corporation, Case No. 11-15463 (SHL) (Bankr. SDNY), Voluntary petition for relief under 

Chapter 11 (11/29/2011), 

http://www.amrcaseinfo.com/maincase.php?start_dt=11/29/2011&end_dt=&start_no=&end_no=&desc=&prev_des

c=&sort=F&event_SEARCH=Y&range_start=&range_stop=.

337 See 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI 

0000539 (“The fourth quarter 400 million gain was the result of the unexpected American airlines default.”).

338 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

339 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 340 Id. 341 JPMorgan Corporate Sector Executive Management Report (Full Year 2011 Actuals), JPM-CIO-PSI 0018046 at 

26. 

342 2011 CA Quarterly Summary: Global Chief Investment Office 4th Quarter CA summary,” OCC-SPI-00002483. 343 See FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 11, FDICPROD-0001783. 344 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).
55

The OCC told the Subcommittee that, while its examiners noticed the CIO’s $400 million 

gain at the end of 2011, they did not look into its cause and were unaware of the 2011 SCP trades 

until after the OCC began examining the Synthetic Credit Portfolio in depth several months later 

in 2012.

345 According to the OCC, the SCP’s 2011 gain came from a concentrated position in 

illiquid credit derivatives,

346 that had been “pretty risky” and was completely dependent upon 

timing.347 That is, if American Airlines had defaulted three weeks later, the SCP’s short position 

would have already expired, and the SCP would not have reaped its “massive” profit.348

Within the bank, little or no concern appears to have been expressed about the CIO’s 

having engaged in a risky trading strategy; instead the SCP’s trades and resulting $400 million 

gain appear to have been viewed favorably by CIO management. Ms. Drew told the 

Subcommittee that it was not merely coincidence that the traders profited from the American 

Airlines default, but that they deserved “some credit” for having taken the position.

 The 

OCC explained that the CIO had essentially engaged in a high stakes, high risk wager that ended

up paying off, but could have easily gone the other way. The OCC also told the Subcommittee 

that the SCP’s increased size and risk breached a number of risk limits, which it should have 

noticed at the time but did not, leaving the OCC unaware of the SCP’s high risk trading activity 

in 2011.

349 In fact, 

she told the CIO traders to try to repeat their performance in 2012.350 Mr. Macris told the

JPMorgan Chase Task Force investigation that he viewed the 2011 gain as a great event for the 

CIO.351 Mr. Iksil told that investigation that kind of gain was “unprecedented” within the 

CIO,352 and that he had just “reset” the position the month before because it was “cheap.”353 

According to JPMorgan Chase but for that $400 million gain, the SCP would have lost money in 

2011.

354

The American Airlines gain also appears to have colored how the CIO viewed the SCP 

thereafter, as a portfolio that could produce significant profits from relatively low cost default 

protection. In addition, it produced a favorable view within the CIO of the SCP’s complex 

trading strategy that involved combining investment grade and non-investment grade credit 

index trades, accumulating massive tranche positions, and sustaining a period of losses in 

anticipation of a large payoff. 

It is also notable that JPMorgan Chase has been unable to explain how the 2011 trading 

strategy that produced the $400 million gain functioned as a hedge or credit loss protection for 

the bank. JPMorgan Chase has been unable, for example, to link the 2011 SCP gain from 

 345 Subcommittee interviews of Doug McLaughlin, Michael Sullivan, and Fred Crumlish, OCC (8/30/2012). 346 Subcommittee interview of Doug McLaughlin, OCC (8/30/2012). 347 Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 348 Subcommittee interview of Fred Crumlish, OCC (8/30/2012).

349 Subcommittee interview of Ina Drew, CIO (9/7/2012). 350 Subcommittee interview of Ina Drew, CIO (12/7/2012). 351 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012).

352 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 353 Id. 354 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot); Subcommittee interview of Ina Drew, 

CIO (9/7/2012).
56

American Airlines’ bankruptcy to any loan or credit loss suffered elsewhere in the bank,

355 as 

would be appropriate if the SCP were a hedge. Ina Drew told the Subcommittee that the SCP’s 

credit protection did not serve as an offset for any bank loan losses involving American 

Airlines.

356 The CIO’s Chief Risk Officer, Irvin Goldman, also told the Subcommittee that the 

CIO’s own $350 billion Available-for-Sale portfolio did not have single-name credit exposure,357

In the view of the OCC capital markets examiner responsible for JPMorgan Chase, the

2011 gain was “outsized,” based on an “idiosyncratic trade,” and the CIO “shouldn’t have been 

doing this.”

would not have sustained losses from any individual corporate bankruptcy, and so was not using 

the SCP’s 2011 trading strategy as a hedge. 

358

(4) SCP Size and Revenues

 In light of the disconnect between the credit derivative trading that took place and 

any credit risk or loss to the bank, the 2011 profit-taking appears to have been an example of 

proprietary trading intended to make money for the bank, rather than protect it from loss. 

From its inception in 2006, until 2011, the Synthetic Credit Portfolio generated uneven,

but sometimes substantial revenues for the bank.

359

CIO Synthetic Credit Portfolio Revenues

 The year with the highest revenues was 

2009, when the SCP generated over $1 billion for the bank; the next highest year was 2011 when

the American Airlines bankruptcy resulted in year-end revenues of about $450 million. In 2012, 

the CIO produced an internal chart tracking both SCP revenues and SCP trader compensation,

indicating that the SCP produced the following revenues from 2008 to 2011.

 2008-2011

Year SCP Revenue

2008 $ 170 million

2009 $ 1.05 billion

2010 $ 149 million

2011 $ 453 million

 Total $ 1.772 billion

Source: 6/21/2012 presentation entitled, “CIO Compensation,” chart entitled, 

“Synthetic Credit Book Comparison: Revenue and SCB Trader Incentive 

(2008-2011),” JPM-CIO-PSI-H 0002746-2792, at 749.

When 2007 is added to those years, other internal CIO documents indicate that the total revenues 

produced by the SCP, prior to 2012, was around $2.5 billion.

360

 355 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 356 Subcommittee interview of Ina Drew, CIO (12/11/2012). 357 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 358 Subcommittee interview of Fred Crumlish, OCC (8/28/2012).

359 See “CIO Compensation – Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 0002749. Ms. 

Drew told the Subcommittee that JPMorgan Chase did not establish any specific goals on the amount of return 

expected from the SCP book. Subcommittee interview of Ina Drew, CIO (9/7/2012). 360 See 4/5/2012 email from Ina Drew to Jamie Dimon and other members of the Operating Committee, “CIO,” 

JPM-CIO-PSI 0000539 (The SCP has been “extremely profitable for the company (circa $2.5 billion) over the last 

several years”); “CIO February 2012 Business Review, CIO International Core Credit: Tail Risk Book,” JPM-CIO 
57

(5) SCP Trader Compensation

SCP compensation records from its early years also provide evidence about whether the 

SCP functioned as a hedge or a proprietary trading operation. As the JPMorgan Chase Task 

Force Report noted: “Incentive-based compensation systems are premised on the basic 

assumption that one of the factors that influence individuals’ performance and conduct is 

financial reward.”361 Compensation that rewarded effective risk management would suggest 

that the SCP functioned as a hedge, while compensation that rewarded profitmaking would 

suggest that the SCP functioned more as a proprietary trading operation. The compensation 

history for key employees with responsibility for SCP trading suggests that the bank rewarded 

them for financial gain and risk-taking more than for effective risk management. 

In June 2012, as part of its analysis of the SCP, the bank reviewed the compensation 

awarded, from 2009 to 2011, to three key CIO employees involved with SCP trading, Achilles 

Macris, Javier Martin-Artajo, and Bruno Iksil. The bank prepared a summary chart which is 

reprinted below: 

 

0000225-268, at 247 (“This is a tail risk book that ... from 2007-2011 has generated US$2.4bln total return.”); 

Subcommittee interview of Michael Sullivan, OCC (11/7/2012). But see 2013 JPMorgan Chase Task Force Report, 

at 25 (indicating the SCP “generated roughly $2 billion in gross revenues” from its inception until late 2011).

361 2012 JPMorgan Chase Task Force Report, at 91.
58

Source: 6/21/2012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 754.
59

The compensation data for both Mr. Macris and Mr. Martin-Artajo, which shows them 

receiving incentive pay worth millions of dollars each year, indicates that their compensation

moved in tandem with and reflected SCP profits, which peaked in 2009 with $1 billion in 

revenues, and then diminished in 2010 and 2011.362 Mr. Iksil’s pay did not follow the same 

pattern, however, peaking instead in 2010. All three employees also received positive 

performance reviews in those years.363

The JPMorgan Chase Task Force Report noted that two of the CIO traders “maintained a 

strong focus on daily, monthly, and quarterly profit-and-loss numbers, and were acutely 

concerned about mounting losses in the Synthetic Credit Portfolio.”

 

364 It also stated that “[t]he

Task Force [] found little in the form of direct evidence to reveal what [employees] were 

thinking about their own specific compensation as they made decisions with respect to the 

Synthetic Credit Portfolio,”365 But at least one of the traders contemplated what would occur 

after the SCP suffered large losses. In a March 23, 2012 email, after a day of large losses, Bruno 

Iksil wrote: “I am going to be hauled over the coals. ... [Y]ou don’t lose 500 M[illion] without 

consequences.”366

The JPMorgan Chase Task Force explained in its report that the CIO did not have its own 

incentive compensation system, but participated in a bankwide annual incentive compensation 

plan overseen by the Compensation and Management Development Committee of JPMorgan’s 

Board of Directors.367 It stated: “Awards under the plan are discretionary and non-formulaic, 

and compensation is dependent on multiple factors that can be adjusted and modified depending 

on the particular circumstances.”368

According to internal bank documents, the three SCP employees were among the most 

highly-paid employees in the bank, and their compensation was reviewed by the bank’s 

Operating Committee and approved by CEO Jamie Dimon.369 In developing the total 

compensation amounts to be paid to each employee, the bank established a “reference group” for 

each individual based upon internal and external benchmark positions. The reference group 

used for the SCP employees consisted primarily of Investment Bank employees in positions that 

were profit-oriented, rather than risk management-based. For Mr. Macris, his compensation 

exceeded the salary range for his reference group in both 2010 and 2011 (the only years 

available); Mr. Martin-Artajo’s compensation exceeded his reference group in 2011 and was at 

the top end of the range in 2010; and Mr. Iksil was at the top end of the range for 2011 (the only 

year available).370

 362 See 6/21/2012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 754. See also “CIO Compensation 

– Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 0002749. 

 This data indicates that, not only were the SCP employees compensated like 

Investment Bank employees, but they were compensated at levels that were at the top range of, 

or better than, the best Investment Bank employees. 

363 6/21/2012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 757-760; 766-770; 772-781. 364 2013 JPMorgan Chase Task Force Report, at 92. 365 Id., at 92. 366 3/23/2012 instant messaging session between Bruno Iksil and Julien Grout, CIO, JPM-CIO 0003515-541. 367 2013 JPMorgan Chase Task Force Report, at 92. 368 Id.

369 6/21/2012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 750. 370 Id., at 754.
60

After the SCP whale trades became public, some investors and analysts asked JPMorgan

Chase how the CIO traders were compensated and whether their compensation was linked to 

SCP profits,371 but the bank chose not to disclose publicly their compensation levels. The Task 

Force did report, however, that it recovered “approximately two years’ worth of each 

individual’s total compensation” from Mr. Macris, Mr. Martin-Artajo, and Mr. Iksil, as well as 

from their supervisor, Ina Drew.372

The JPMorgan Chase Task Force also recommended that the bank make it clear to 

employees in the future that losses are sometimes expected and, if the losses are a consequence 

of achieving bank priorities, will not necessarily reduce compensation:

“CIO management, including Ms. Drew, should have emphasized to the employees in 

questions that, consistent with the Firm’s compensation framework, they would be 

properly compensated for achieving the RWA and neutralization priorities – even if, as 

expected, the Firm were to lose money doing so. There is no evidence that such a 

discussion took place. In the future, when the Firm is engaged in an exercise that will 

predictably have a negative impact ... on a front office employee’s or business unit’s 

contribution to the Firm’s profits and losses, the Firm should ensure those personnel are 

reminded that the Firm’s compensation framework recognizes that losses (as well as 

profits) are not necessarily the measure of success.”373

(6) 2012 Opens with Order to Reduce RWA

 

In 2012, the year began with a decision by bank management to reduce the SCP, but

instead, over the next three months, the SCP exploded in size, complexity, and risk.

According to JPMorgan Chase’s Chief Financial Officer Douglas Braunstein, by the end 

of 2011, senior JPMorgan Chase management, including Jamie Dimon, and Ina Drew, had 

determined that the macroeconomic environment was improving374 and credit markets were 

expected to improve as well, with fewer defaults.

375 The SCP traders also expressed the view 

that they were getting “bullish signals” at the end of December, in part because the European 

Union had agreed to provide long-term financing to prop up “bank lending and liquidity” in 

Europe.376

 371 7/13/2012 “JPMorgan Chase’s CEO Discusses Q2 2012 Results – Earnings Call Transcript,” transcribed by 

Seeking Alpha (A question from an unidentified analyst asks “I’m just wondering if in the CIO review there was any

 As Mr. Braunstein explained to the Subcommittee, there was also less of a need for 

conclusions based on – if incentives were aligned with long-term shareholder interest.”) 372 2013 JPMorgan Chase Task Force Report, at 106. See also id., at 109 (reporting that the bank had strengthened 

its ability “to claw back certain equity awards in the event of poor performance by CIO”).

373 Id., at 93. 374 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 375 Id. 376 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012). See also 12/8/2012 European Central Bank Press Release, 

http://www.ecb.int/press/pr/date/2011/html/pr111208_1.en.html.
61

the CIO to protect its $350 billion Available-for-Sale portfolio.377 Together, this analysis 

suggested that the SCP should be reduced in size.378

Another factor in favor of reducing the SCP was its high RWA.

379 Although the CIO 

traders had succeeded in reducing the CIO’s overall RWA in 2011, the CIO’s RWA was still 

many billions of dollars. In December 2011, Mr. Dimon and Mr. Braunstein directed the CIO to 

reduce its RWA even further.

380

Mr. Braunstein told the Subcommittee that, because the CIO had previously asked for an 

increase in its RWA for its $350 billion Available-for-Sale portfolio, CIO management decided 

to use the SCP to achieve its new RWA reduction.

 

381 Mr. Braunstein told the Subcommittee that 

he approved of this approach, since the value of the economic protection the SCP was providing 

at that time to the rest of the bank was less valuable than the capital it required the bank to

provide.

382 Similarly, Mr. Dimon told the Subcommittee that the SCP’s loss protection was 

becoming less relevant, since the bank was bigger and earning more money, and the SCP’s 

synthetic assets would require the use of a lot of capital under the upcoming Basel III 

standards.383

Irvin Goldman, who had become the CIO’s Chief Risk Officer in January, told the 

Subcommittee that he did not recall the order to reduce the RWA being linked to an improving 

macroeconomic environment. He said that Mr. Dimon and Mr. Braunstein had simply ordered 

the CIO to reduce its RWA quickly, and it was easy to look to the SCP to accomplish that

objective, because derivatives were “inefficient from a regulatory capital standpoint.”384 The 

CIO’s CFO at the time, John Wilmot, agreed; he said the SCP – as a derivatives book – drew a 

lot of capital, and running a balanced book was very costly from a capital perspective.385 Mr. 

Goldman also told the Subcommittee that, in December 2011, a decision was made to stop using 

the SCP as a hedge,

386

 377 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).

which made its credit loss protection characteristics irrelevant to the 

decision to reduce its RWA. 

378 CIO management even told regulators, at a January 2012 meeting, that they intended to reduce the size of the 

SCP. See 1/31/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, “CIO Quarterly Meeting,” OCC-SPI00004695 (summarizing quarterly meeting with CIO in which CIO Chief Financial Officer John Wilmot indicated 

that the CIO’s “MTM” book was “decreasing in size in 2012” and it was “expected that RWA will decrease from 

$70B [billion] to $40B”). For more information about this meeting, see Chapter VI.

379 See 2013 JPMorgan Chase Task Force Report, at 2, 26-27. 380 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/19/2012), Ina Drew, CIO (9/7/2012) and Douglas

Braunstein, JPMorgan Chase (9/12/2012). At the time, JPMorgan Chase had recently engaged in stock buybacks 

totaling $9 billion, and had received permission from its regulators to buy back another $15 billion in 2012 and 

2013. See letter from Jamie Dimon to JPMorgan Chase shareholders, 2011 JPMorgan Chase Annual Report, at 3. 

To carry out this buyback program, the bank may have wanted to further reduce the bank’s RWA to minimize its 

mandatory capital requirements.

381 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 382 Id. 383 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). See also 2013 JPMorgan Chase Task 

Force Report, at 26-27. 384 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 385 Subcommittee interview of John Wilmot, CIO (9/11/2012). 386 Subcommittee interview of Irvin Goldman, CIO (9/15/2012).
62

Mr. Iksil later told the JPMorgan Chase Task Force investigation that then-CFO John 

Wilmot told the traders in December 2011, that notwithstanding the $37 billion reduction in 

RWA during the earlier part of 2011, he wanted an additional reduction in RWA of $25 

billion.

387 Mr. Martin-Artajo told the internal investigation that Ms. Drew had told the traders 

that they might need to reduce the SCP even “more” and “faster” to reach the desired RWA 

outcome.388 According to the traders, reducing the portfolio still more, and faster, would be

more expensive389 because of execution costs.390

According to one trader, Bruno Iksil, when his supervisor, Javier Martin-Artajo, asked 

him how much it would cost to reduce the SCP book to achieve the $25 billion RWA reduction, 

Mr. Iksil estimated a cost of $400 million.

 In other words, if they had to sell assets 

quickly, they would have to accept whatever prices were offered and would likely lose money. 

Alternatively, allowing the traders more time to execute asset sales would allow them to trade at 

better prices. 

391 Mr. Martin Artajo later told the JPMorgan Chase 

Task Force investigation that the CIO had not been given any budget to cover that cost to reduce

the SCP.392 When Ms. Drew requested an estimate of the costs to unwind the entire SCP, the 

traders gave her a presentation estimating that the “cost to execute the unwinding” of about 35% 

of the SCP would be $516 million.393 Ms. Drew told the Subcommittee that she then asked the 

traders to see if it was possible to reduce RWA without holding a “fire sale.”394

In response, the traders undertook an analysis of how they could reduce the SCP and the 

CIO’s RWA at a lower cost. When asked whether bank management had provided any 

instruction to the CIO about how to proceed, Mr. Dimon told the Subcommittee that he did not 

provide specific instructions or had a specific expectation as to how the RWA would be reduced 

– that is, by unwinding the book or adopting another course of action – his only expectation had 

been that the reduction be done “wisely.”

 

395 Mr. Braunstein told the Subcommittee that Ms. 

Drew was not told how to achieve the RWA reduction, but also explained it was “fair to say” 

that it was his assumption that unwinding the SCP positions was the most direct way to reduce 

the RWA.396

 387 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 

 Mr. Goldman told the Subcommittee that there was no discussion of reducing 

“notionals,” meaning the size of the SCP, but rather the discussion centered on the expectation 

388 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

389 Id. 

390 Subcommittee interviews of Ina Drew, CIO (9/7/2012) and Michael Cavanagh, JPMorgan Chase (12/12/2012). 

391 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 

392 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

393 12/28/2011 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, “10B RWA Target Reduction.ppt,” JPMCIO-PSI 0000039; JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee 

on 8/27/2012). See also 2013 JPMorgan Chase Task Force Report, at 28 (“a 35% proportional unwind of the [SCP] 

would result in a $10 billion RWA reduction, but could cost slightly more than $500 million”). 

394 Subcommittee interview of Ina Drew, CIO (9/7/2012).

395 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).

396 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).
63

that CIO would exit the synthetic business as a hedging mechanism over the course of the next 

year.397

An additional consideration, however, militated against simply unwinding the SCP book. 

According to Mr. Iksil, Ms. Drew was mindful of the $400 million gain the SCP had achieved by 

having default protection on its books to profit from the American Airlines bankruptcy. Mr. Iksil

told the JPMorgan Chase Task Force investigation that, in early December 2011, Ms. Drew

instructed him to “recreate” the American Airlines situation, because those were the kinds of 

trades they wanted at the CIO: the CIO “likes cheap options.”398 Thus, as he described it, he 

was told to maintain the SCP’s default protection in order to position the CIO to profit from

future American Airlines-type defaults.399 Ms. Drew confirmed to the Subcommittee that she 

gave guidance to the traders to position the book for another gain like in late 2011.400

On January 4, 2012, the CIO traders prepared a presentation for Ms. Drew, John Wilmot, 

and Irvin Goldman that set out the execution costs for unwinding the SCP. The cover email 

stated: “[P]lease find attached a grid for the Core credit Book RWA reduction scenarios .... 

Currently any major reduction will lead to a very high cost through proportional reducing.”

 In short, 

Ms. Drew indicated her preference to avoid reducing the SCP book in a way that would reduce 

its default protection and the opportunity to profit from future corporate defaults. 

401 

That presentation estimated the execution cost for achieving a $10 billion reduction in RWA to 

be $516 million.402 The presentation also identified the possible lost profits from eliminating 

default protection if one or two corporations were to declare bankruptcy.403

On January 10, 2012, Javier Martin-Artajo, head of CIO equity and credit trading, sent an 

email to Ms. Drew informing her that initial efforts to unwind the SCP were proving costly:

 

“Bruno has been unwi[n]ding some of these pos[i]tions opportunistic[al]ly. The 

other side of the P/L [profit and loss] is that it has been somewhat costly to 

unwind too so net net we have actually lost a little bit of money to unwind.” 

Ms. Drew responded: “Let’s review the unwind plan to maximize p l [profit/loss]. We may 

have a tad more room on rwa.” Her comments followed information the day before, that the 

 397 Subcommittee interview of Irvin Goldman, CIO (9/15/2012).

398 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 

399 Id. 400 Subcommittee interview of Ina Drew, CIO (12/11/2012). See also 2013 JPMorgan Chase Task Force Report, at 

3 (indicating CIO traders were “directed to ensure that the Synthetic Credit Portfolio was well-positioned for future 

corporate defaults”); 1/9/2012 email from Ina Drew, CIO, to John Wilmot, CIO, “CRM results for Q4,” JPM-CIOPSI 0000073 (Ms. Drew wrote that she wished to avoid “deleveraging” the SCP book to maintain “option[al]ity”). 

Mr. Wilmot told the Subcommittee that “deleveraging” meant exiting positions. Subcommittee interview of John 

Wilmot, CIO (9/11/2012). JPMorgan Chase counsel explained that “optionality” referred to default protection. Id. 

(Jay Balacek).

401 1/4/2012 email from Julien Grout, CIO, to Ina Drew, John Wilmot, and Javier Martin-Artajo, CIO, “RWA 

reduction for Core Credit- scenario analysis summary,” JPM-CIO-PSI 0001259. 402 Id., at 260. 403 Id.
64

SCP’s RWA total might be better – that is, lower – than anticipated.404

According to the bank, it ultimately decided to require the CIO to meet its original RWA 

reduction target by the end of 2012, and no more.

 Her comments also 

underscored her reluctance to incur the costs associated with unwinding the SCP.

405

(7) Eastman Kodak Default

Another key development early in 2012, was a declaration of bankruptcy by still another

U.S. corporation, Eastman Kodak. This time, however, instead of producing profits, the 

bankruptcy resulted in the SCP’s losing money – an outcome contrary to the SCP’s purported 

function of providing loss protection against precisely that type of default. The loss also ended 

up reinforcing the CIO’s decision to increase rather than decrease the size of the SCP.

The Eastman Kodak loss had its roots in a December 2011 decision to reduce the CIO’s 

net short position. JPMorgan Chase told the Subcommittee that in December 2011,406 some 

short credit protection instruments held in the SCP book expired, which “opened up default 

exposure,” meaning it exposed the SCP to possible losses if certain corporations were to default, 

since the SCP held the long side of several credit index tranches that tracked individual

companies.

407 Notwithstanding the instruction to reduce RWA and to maintain less protection 

due to the improving economic environment, the CIO traders decided to buy short credit 

protection to replace most, but not all, of the instruments expiring in December. As an internal 

JPMorgan Chase presentation later explained in part: “In preparation for large expiry of HY 

[high yield] short risk positions in Dec’11 ... the HY short risk position [was] increased.”408

While the CIO traders acquired the new short credit instruments in December and early 

January,

409

 404 1/10/2012 email from Ina Drew, CIO, to Javier Matin-Artajo, CIO, “International Credit Consolidated P&L 09-

Jan-2012,” JPM-CIO-PSI 0000075. Ms. Drew told the Subcommittee that, in January 2012, Mr. Dimon and Mr. 

Braunstein had not yet decided how much capital reduction would be sought from the CIO. Subcommittee 

interview of Ina Drew, CIO (9/7/2012). 

they did not replace all of the expiring shorts due to the instruction to lower the 

SCP’s RWA and reduce its size due to the improving macroeconomic climate. By January 10, 

405 2013 JPMorgan Chase Task Force Report, at 28. It is unclear, however, what the ultimate RWA target was for 

the CIO in 2012, since different documents specified different targets, varying from $30 billion to $20 billion. See, 

e.g., id. (specifying $30 billion RWA reduction); JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial 

readout to the Subcommittee on 8/27/2012) (specifying $25 billion); 1/19/2012 email from Achilles Macris, CIO, to 

Ina Drew, CIO, and others, “Credit book Decision Table – Scenario clarification,” JPM-CIO-PSI 0000152 

(specifying $20 billion). According to Mr. Martin-Artajo, the purpose of the RWA reduction had been to free up 

capital to enable the firm to buy back its stock from the marketplace. He indicated that the firm ultimately could not 

buy back as much stock as had been anticipated, which created less pressure to lower the CIO’s RWA by unwinding 

the SCP book. See also JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 9/6/2012).

406 Subcommittee briefing by JPMorgan Chase (9/4/2012) (Jeanette Boot). 407 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012). For more information on credit indices, see Chapter II. 408 See 5/2012 “JPM CIO Synthetic Credit Presentation,” at 2, JPM-CIO-PSI-H 0000546.

409 See, e.g., 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Breach of firm var,” 

JPM-CIO-PSI 0000142 (indicating purchases of short risk positions from December 21 through January 19).
65

2012, Mr. Iksil reported internally that the SCP was less “short” than it had been at the end of 

December 2011,

410

On January 19, 2012, Eastman Kodak filed for bankruptcy,

which meant that it was providing less credit protection. 

411 and the SCP book 

“suffered significant losses as a result.”412 Mr. Goldman told the Subcommittee that because the 

SCP held long positions that were exposed to Eastman Kodak, but protection against the 

company’s default had rolled off in December, the SCP was caught having to make a substantial 

payout to its short counterparties when Eastman Kodak filed for bankruptcy.

413 One internal 

CIO document estimated the CIO’s loss at $50 million.414

According to one CIO trader, they were told not to let an Eastman Kodak-type loss

happen again.

 

415 In response, the CIO traders bought additional short credit protection on a 

variety of derivative indices.416

(8) Credit Market Rally Devalues SCP

 

January proved problematic for the traders beyond the $50 million loss related to the 

Eastman Kodak default on January 19. Throughout the month, the CIO purchased greater 

amounts of long credit protection as part of its new trading strategy. It also purchased more short 

credit protection to maintain its “upside on defaults” and prevent another Eastman Kodak-style 

loss. At the same time, as economies strengthened in the United States and elsewhere, 

worldwide credit markets rallied, meaning that the value of long credit positions increased and 

the value of short credit positions fell.417

 410 1/10/2012 email from Bruno Iksil, CIO, to Keith Stephan, CIO, “CRM results for Q4,” JPM-CIO-PSI 0000083.

 Since the value of short credit protection generally 

411 See In re Eastman Kodak Company, Case No. 12-10202 (ALG) (Bankr. SDNY), Voluntary petition for relief 

under Chapter 11 (1/19/2012), http://www.kccllc.net/kodak. See also “Eastman Kodak Files for Bankruptcy,” New 

York Times (1/19/2012), http://dealbook.nytimes.com/2012/01/19/eastman-kodak-files-for-bankruptcy/; 

Subcommittee briefing by JPMorgan Chase (9/4/2012) (Jeanette Boot); Subcommittee interview of Irvin Goldman, 

CIO (9/15/2012). 412 2013 JPMorgan Chase Task Force Report, at 30. 413 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). In connection with the Eastman Kodak loss, Mr. 

Goldman explained that if “a tranche rolls off that protects you, then if somebody defaults you lose money.” Id. For 

more information about credit index tranches, see Chapter II. 414 See 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “First draft of the presentation,” 

conveying “CIO Synthetic Credit Update” (3/2012) at JPM-CIO-PSI 0001247-258, at 258. 415 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012); 

see also 2013 JPMorgan Chase Task Force Report, at 30.

416 2013 JPMorgan Chase Task Force Report, at 30, footnote 33 (“Trading data shows that the traders had been 

adding some high-yield short positions throughout much of January, prior to this instruction. However, the 

additions increased substantially in the period after this instruction.”). See also, e.g., 1/20/2012 email from Keith 

Stephan, CIO, to Irvin Goldman and Peter Weiland, CIO, “Breach of firm var,” JPM-CIO-PSI 0000141-42 

(indicating SCP bought enough protection to trigger a firmwide VaR breach); 1/20/2012 email from MRM 

Reporting, JPMorgan Chase, to Jamie Dimon and others, JPMorgan Chase, “JPMC 95% 10Q VaR – Limit 

Excession Notification (COB 1/19/2012).

417 Subcommittee interview of Peter Weiland, CIO (8/29/2012).
66

declined, the SCP book also lost value.418 As the OCC explained it to the Subcommittee, general 

market movements went against the CIO in January 2012.419

The result was that the SCP experienced nine straight days of losses in the second half of 

January.420 The OCC told the Subcommittee that the ratio of days with losses versus days with 

profits was already “ugly” at that point – long before credit positions added in February and 

March accelerated the SCP losses.

421 Under U.S. generally accepted accounting principles

(GAAP), the value of derivatives, including credit derivatives, has to be recorded at their fair 

market value – “marked to market” – at the close of each business day.422 That meant the 

decreased value of the SCP’s short position had to be recorded on the CIO’s books, even if no 

derivative instruments were actually traded during the day. In a January 26, 2012 email, the 

head trader in charge of the SCP book prepared a report for CIO managers indicating that the 

SCP book has already lost $100 million and predicting further losses of $300 million.423

It was while these losses were piling up that critical decisions were made that ultimately 

resulted in the much more massive SCP losses JPMorgan experienced. According to Javier 

Martin-Artajo, head of the CIO’s equity and credit trading operation, it was then that the head of 

the CIO’s International Office, Achilles Macris, told him that the SCP book was no longer 

needed to hedge tail risk at the bank and should be reshaped, primarily to put a stop to the losses

it was experiencing.

424 Mr. Martin-Artajo later told the JPMorgan Chase Task Force

investigation that, despite Mr. Macris’s comment, he still viewed the SCP book as a hedge.425

The evidence indicates that CIO management gave only cursory attention to the option of

leaving the SCP book as-is, since the book would have continued to lose value during the credit 

market rally, as was the case for hedges and short positions generally.

 In 

any event, the issue in late January was whether to sell off the short positions; take no action 

when positions naturally expired; purchase long positions; or take some other action to reshape 

the SCP. 

426

 418 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot); Subcommittee interview of Michael

Sullivan, OCC (8/30/2012). See also 2013 JPMorgan Chase Task Force Report, at 26 (stating that in the fourth 

quarter of 2011, the SCP held an overall net short position).

According to Mr. 

419 Subcommittee interview of Michael Sullivan, OCC (11/7/2012). 420 See Synthetic Credit Profit and Loss, OCC-SPI-00000298, and chart tracking the SCP’s daily profit and loss 

reports in Chapter IV. 421 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 422 See Section 3.3: Securities and Derivatives of the FDIC Risk Management Manual of Examination Policies, at 6 

and 16. http://www.fdic.gov/regulations/safety/manual/section3-3.pdf. 423 1/26/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “credit book last version,”conveying “Core Credit 

Book Highlights,” JPM-CIO-PSI 0000159-176, at 161. 424 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012). Irvin Goldman, the CIO’s Chief Risk Officer, told the Subcommittee that the decision to stop using the 

SCP as a hedge was actually made in December 2011. Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 

See also JPMorgan Chase Task Force Report, at 29 (indicating CIO trader was told that the“focus in managing the 

[SCP] at that point should be on profits and losses”).

425 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

426 Hedges, like insurance, cost money to keep in place. The CIO traders, however, appeared unwilling to absorb the 

cost of this “insurance,” trying instead to position the SCP book to produce gains rather than reflect the costs of 

maintaining credit loss protection.
67

Martin-Artajo, Mr. Macris did not want to lose money and, in fact, would be “angry” to lose 

money.427 At one point at the end of January, Mr. Iksil sent Mr. Martin-Artajo an email advising

that they should just “take the pain fast” and “let it go.”428 But according to Mr. Iksil, his 

supervisor Mr. Martin-Artajo disagreed and explicitly instructed him to stop losing money.429

The second option, unwinding the book, had already been calculated to cost a minimum 

of $516 million.

 

430 Mr. Martin-Artajo later told the JPMorgan Chase Task Force investigation 

that Mr. Macris did not want to lose money at all, but particularly did not want to lose money 

from unwinding the book.431 In addition, Ms. Drew had already expressed concern about the 

high cost of unwinding the book.

432

(9) Four Options to Reshape the SCP

 

On January 18, 2012, the day before the Kodak default and the start of the nine straight 

days of losses in the SCP, Ms. Drew convened a meeting to discuss the SCP and, in particular,

how to reduce its RWA.

433

In preparation for the meeting, Mr. Iksil provided Ms. Drew a written presentation with 

key information about the SCP.

 

434

 427 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to Subcommittee on 

9/6/2012). (According to Mr. Martin-Artajo, “Achilles told me every day every minute that he would be angry with 

P&L loss.”).

 The first page of the presentation focused on the SCP’s 

RWA. Specifically, it compared the SCP’s RWA results using the bank’s standard RWA model, 

which had been developed by the bank’s Model Risk and Development group (also referred to as 

Quantitative Research or “QR,” a function located within JPMorgan Chase’s bankwide risk 

group), versus the SCP’s RWA results using a model newly developed by the CIO. The 

presentation noted that the CIO’s “Core Credit Book RWA” under the bank’s QR model was 

428 1/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, JPM-CIO-PSI 0001225 (Mr. Iksil also 

warned: “there is more loss coming in core credit book”).

429 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 430 1/4/2012 email from Julien Grout, CIO, to Ina Drew, John Wilmot, and Javier Martin-Artajo, CIO, “RWA 

reduction for Core Credit- scenario analysis summary,” JPM-CIO-PSI 0001259-260, at 260. The $516 million was 

the projected cost for unwinding just 35% of the SCP.

431 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

432 See 1/10/2012 email from Ina Drew, CIO, to Javier Martin-Artajo, CIO, “International Credit Consolidated P&L 

09-Jan-2012,” JPM-CIO-PSI 0000075. 433 See 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” JPMCIO-PSI 0000098-104, conveying presentation entitled, “Core Credit Book Highlights,” (earlier email in chain from 

Andrew Perryman, CIO, to Gina Serpico, who was Ms. Drew’s assistant: “Hi Gina, Please find attached a copy of 

the meeting materials for Ina’s 3 pm meeting with Javier, Achilles and Bruno.”). See also 2013 JPMorgan Chase 

Task Force Report, at 29 (describing January 18 meeting involving Ms. Drew, Mr. Wilmot, Mr. Weiland, and “two 

senior members” of the SCP team to discuss the SCP and RWA reduction).

434 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” JPM-CIOPSI 0000098-104, conveying presentation entitled, “Core Credit Book Highlights,” (see earlier email in chain from 

Andrew Perryman, CIO, to Gina Serpico, who was Ms. Drew’s assistant: “Hi Gina, Please find attached a copy of 

the meeting materials for Ina’s 3 pm meeting with Javier, Achilles and Bruno.”). See also JPMorgan Chase Task 

Force interview of Javier Martin-Artajo, JPMorgan Chase (partial readout to the Subcommittee on 9/6/2012). 
68

$40.3 billion, while under the CIO model it was $20.9 billion.435 The CIO’s Chief Market Risk 

Officer told the Subcommittee that the new CIO model was a “shadow model”436 that had been 

developed by the CIO’s quantitative expert, Patrick Hagan. Mr. Hagan told the Subcommittee 

that he had not developed a fully functioning, alternative RWA model for the CIO at that time, 

but acknowledged that he had worked on the major contributors to the RWA model and had 

provided the $20.9 billion estimate used in the presentation.

437

At the time the presentation was prepared, the Synthetic Credit Portfolio had already 

grown to enormous size. The presentation described just three of its credit derivative holdings as 

follows:

 Mr. Iksil’s presentation indicated

that as of mid-January, implementing the CIO’s shadow RWA model would have had the effect 

of reducing the SCP’s apparent RWA by almost 50%.

Credit Index IG9 – $278 billion in gross notional value;

Credit Index HY10 and 11 – $115 billion in gross notional value; and

Main iTraxx S9 – $90 billion in gross notional value.438

Those credit positions were inherently higher risk, due to their synthetic nature which meant that 

no real economic asset lay behind the positions to stem any losses. The GAAP requirement that 

the positions’ fair value be recorded on the SCP’s books each day also contributed to SCP price 

volatility. In addition, the huge size of the holdings meant that even a small drop in price 

resulted in substantial losses. The complexity of the holdings also meant that they interacted in 

unpredictable ways. The higher risk nature of these positions on top of their huge size all 

boosted the SCP’s RWA. 

The next day, January 19, 2012, to follow up on the prior day’s meeting, Mr. MartinArtajo sent Ms. Drew an email describing four scenarios for reducing the SCP’s RWA that had 

been discussed during the meeting:

“Ina,

[A]s a follow up from yesterday[’]s conversation regarding the tranche book I 

would like to further clarify the different scenarios and assumptions for each of 

them. 

The first scenario is the one discussed when you were in London an[d] is a 

scenario that we reduce our book to the agreed [RWA] target at year end 2012 of 

 435 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” JPM-CIOPSI 0000098-104, conveying presentation entitled, “Core Credit Book Highlights.” 436 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 437 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). For more information about RWA, see Chapter II; 

for more information about the CIO’s efforts to produce an alternative RWA model, see Chapter V. 438 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” conveying 

presentation entitled, “Core Credit Book Highlights” (January 2012), at JPM-CIO-PSI 0000101. The IG9 tracked 

125 investment grade companies in the United States; the HY10 and 11 each tracked 100 companies at higher risk of 

default; the Main ITraxx S9 tracked 125 investment companies in Europe. For more information on credit indices,

see Chapter II.
69

20.5 Bln but the current model used by QR remains. This ... strategy ... would 

have high trading costs and a higher risk profile so that we could also have a large 

drawdown [loss].

The second scenario ... is a scenario that we meet the year end target by 

opportunistically reducing the necessary legs and optimization is used439

The third scenario is possible if we get the new [CIO] model ....

following the current QR model guidelines .... 

The fourth scenario is our Target scenario and the one we are hoping to 

implement ... by midyear.”440

Each of the four scenarios turned on whether the CIO would be required to use the bank’s 

official “QR” model or its own shadow model to calculate RWA; and whether the CIO traders

would be permitted to engage in “opportunistic risk reduction” with respect to the SCP.441 

According to Mr. Martin-Artajo, “opportunistic risk reduction” meant that risk could be reduced 

in a way that minimized execution costs, and that the risk reduction did not have to be completed 

quickly, but could occur over time.442

Mr. Martin-Artajo attached to his email a “Decision Table” describing the four scenarios, 

a copy of which is reprinted below.

 

443

 439 The reference to “legs” is to the SCP’s trading strategy in which it made coordinated acquisitions of credit 

derivatives with both shorter and longer term maturities, and recommended that both sets of derivatives be reduced. 

The reference to “optimization” is to a strategy designed by Mr. Martin-Artajo to offset long and short credit 

instruments to lower their overall risk. Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 

440 1/19/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “Credit book Decision Table –

Scenario Clarification,” at JPM-CIO-PSI 0000105-106. 441 Id., at 106. 442 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

443 1/19/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “Credit book Decision Table –

Scenario Clarification,” at JPM-CIO-PSI 0000106. Mr. Hagan told the Subcommittee that, despite the fact that the 

Decision Table featured his RWA model and contrasted it with the bank’s standard RWA model, he was not 

consulted about it, was unaware of the Decision Table at the time it was created, and had not seen it prior to his 

interview. Subcommittee interview of Patrick Hagan, CIO (2/7/2013).
70

Source: 1/19/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “Credit book Decision 

Table – Scenario Clarification,” at JPM-CIO-PSI 0000106.
71

Of the four scenarios laid out in the Decision Table, the fourth, or “Target Scenario,” had 

the lowest “drawdown” or expected loss.444 Under the first two scenarios, if the QR model 

prevailed, produced a higher RWA, and required the CIO to reduce SCP assets, the Decision 

Table estimated the SCP losses at $200 to $300 million, depending upon whether the traders 

reduced the risk actively – meaning immediately – or opportunistically – meaning over time.

445 

Under the third scenario, if the CIO model prevailed and the traders reduced risk actively, the 

Decision Table estimated losses at $150 million. Under the final scenario, if the CIO model 

prevailed and the traders reduced risk over time, the Decision Table estimated the losses at $100 

million.446

A week after Mr. Martin-Artajo sent Ms. Drew the email describing the four scenarios

and providing the Decision Table, Mr. Iksil included the Decision Table again in a January 26

presentation proposing a trading strategy for the CIO on “the trades that make sense.”

 

447 Mr. 

Iksil later told the JPMorgan Chase Task Force investigation that the last scenario in the table

was the one that the CIO traders began to pursue.448

The Subcommittee asked Ms. Drew about the Decision Table. In her first interview, Ina 

Drew told the Subcommittee that she had never seen it before. In her second interview, the 

Subcommittee staff drew her attention to Mr. Martin-Artajo’s email, which indicated that he had 

discussed the scenarios with her, described them again in his email, and also sent her the table. 

Ms. Drew conceded that she did receive the Decision Table as an attachment to another email 

later on, but said she did not focus on it.

 

449

The analysis undertaken in the January 18 presentation was designed to reduce the SCP’s 

RWA so that the RWA for the CIO as a whole, and in turn, for the bank as a whole, would also 

drop and reduce the bank’s capital requirements. Immediately after the presentation, however, 

the SCP began to experience a series of dramatic losses stemming from the Eastman Kodak 

default on January 19, and the credit market rally that reduced the value of the SCP’s credit 

holdings, leading to SCP losses totaling $100 million by the end of January. JPMorgan Chase 

has acknowledged that the traders’ goals of reducing RWA and avoiding losses were in “constant 

 The Subcommittee has been unable to identify any 

documentation establishing Ms. Drew’s approval of the RWA reduction strategy described in the 

fourth scenario, although it’s difficult to understand why Mr. Martin-Artajo would have 

discussed the options with her, followed up with an email, and had one of his traders include the 

Decision Table in a subsequent presentation, if he had not intended to inform her of the strategy

and obtain her approval before proceeding. 

 444 1/19/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “Credit book Decision Table –

Scenario Clarification,” JPM-CIO-PSI 0000106. The OCC explained to the Subcommittee that a drawdown in this 

context is a loss that is expected to occur. Subcommittee interview of Michael Sullivan, OCC (11/7/2012). 445 1/19/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “Credit book Decision Table –

Scenario Clarification,” JPM-CIO-PSI 0000106. 446 Id. 447 See 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 0000161. 448 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012).

449 Subcommittee interview of Ina Drew, CIO (12/11/2012). The Decision Table she received was attached to the 

Iksil email sent a week later. See 1/26/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, “credit book 

last version,” conveying “Core Credit Book Highlights” prepared by Mr. Iksil, at JPM-CIO-PSI 0000161. 
72

tension.”450

(10) Decision to Go Long

 By the end of January, these problems converged, and the traders came up with a 

solution that they believed would address both problems. 

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 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 

expected to be $590 million.

 The traders had 

also received permission to reduce the SCP’s RWA opportunistically, rather than immediately. 

452

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. 

 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 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 

positions.

455

 450 Levin Office briefing of JPMorgan Chase (6/26/2012) (Harry Weiss).

Still another benefit was that the value of the long credit protection would increase 

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, CIO, 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 
73

during a market rally so, according to CIO’s market risk officer at the time, adding longs would 

help balance the portfolio’s losses if the credit market continued to rally.456 Finally, buying long 

credit products financed the CIO’s purchase of more short positions, enabling the CIO to retain 

its ability to profit from another American Airlines-type default.457

In short, the CIO traders began accumulating long credit derivatives – selling credit 

protection – in a mistaken effort to address all of the CIO’s problems at once: to offset losses by 

producing carry, reduce RWA, add appreciating positions to the portfolio during the market 

rally, and allow the CIO to maintain default protection. 

 

(11) Adoption of 2012 Trading Strategy

Accordingly, on January 26, 2012, Mr. Iksil prepared a presentation for the CIO’s 

International Senior Management Group (ISMG) advocating a new trading strategy in which the 

CIO would buy more long credit derivatives.

458 The ISMG was, as its name indicates, a group of 

senior managers within the CIO’s International Office, including Mr. Macris, Mr. Martin-Artajo, 

and CIO risk personnel, including Keith Stephan.459 The ISMG participants were resident in the 

CIO’s London office, and Ms. Drew attended their meetings when she was in London.460 Ms. 

Drew told the Subcommittee that she considered the ISMG to be the appropriate level for an SCP

strategy review.461

The Iksil presentation began by noting that “the credit book ha[d] a YTD [year-to-date]” 

loss of $100 million and was expected to lose another $300 million.

 

462 The presentation 

identified several sources of the loss, including the “rally in US HY [High Yield credit index] 

and defaults at the same time (as Eastman Kodak this year).”463

 that RWA could “typically” be reduced by offsetting instruments but only with the exact same characteristics, 

including the same “tenor” or maturity date and counterparty. Subcommittee interview of C.S. Venkatakrishnan, 

JPMorgan Chase (10/25/2012). See also 4/9/2012 email from John Wilmot, CIO, to Ina Drew, CIO, and others, 

“Deliverables for meeting tomorrow,” JPM-CIO-PSI 0001645 (referring to conversation with CFO Douglas 

Braunstein, who explained that selling protection might not have been as economic, from an RWA perspective, as 

reducing the existing protection); JPMorgan briefing (7/5/2012) (Greg Baer).

 It also stated that the SCP 

already included some long credit instruments which were providing “offsetting gains to the 

456 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 457 See, e.g., 5/3/2012 email from Irvin Goldman, CIO, to Douglas Braunstein, JPMorgan Chase, and others, “CSW 

10%,” conveying “CIO Synthetic Credit” presentation (5/2012), JPM-CIO-PSI-H 0000549 (presentation indicating 

that the SCP sought to retain the upside on potential defaults and thus sold protection on investment grade indices).

458 1/26/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, “credit book last version,” JPM-CIO-PSI 

0000159-176, conveying “Core Credit Book Highlights,” (1/2012), prepared by Mr. Iksil; Subcommittee interview 

of Peter Weiland, CIO (8/29/2012).

459 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

460 Subcommittee interview of Ina Drew, CIO (9/7/2012). 461 Id. See also JPMorgan Chase Task Force Report, at 32, footnote 39 (stating “there is no evidence that Ms. Drew 

received” the Iksil presentation and that she only “generally” understood “around this time that the traders were 

planning to add long positions,” thereby implying that the ISMG rather than Ms. Drew actually approved the trading 

strategy in January 2012).

462 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, JPM-CIO-PSI 0000161. 463 Id.
74

loss,” both because the long assets had gained value and, due to the premiums being paid by the 

short parties, were producing carry.464

Mr. Iksil’s presentation then proposed executing “the trades that make sense.”

 

465

“The trades that make sense: 

 

Specifically, it proposed:

• sell the forward spread and buy protection on the tightening move

o Use indices and add to existing position

o Go long risk on some belly tranches especially where defaults may 

realize

o Buy protection on HY and Xover in rallies and turn the position 

over to monetize volatility”466

This proposal encompassed multiple, complex credit trading strategies, using jargon that

even the relevant actors and regulators could not understand. Because the traders themselves 

declined the Subcommittee’s request for interviews and were outside of the Subcommittee’s 

subpoena authority, the Subcommittee asked other current and former CIO personnel to explain 

the proposal. Ina Drew, CIO head, told the Subcommittee that the presentation was unclear, and 

she could not explain exactly what it meant.467 Irvin Goldman, then the CIO’s Chief Risk 

Officer, told the Subcommittee that the presentation did not provide enough information to 

clarify its meaning.468 Peter Weiland, the CIO Market Risk Officer, offered the explanation that 

Mr. Iksil was basically describing a strategy of buying low and selling high.

469

The OCC told the Subcommittee that while it agreed the presentation was confusing, 

senior CIO management should have understood exactly what was being proposed before 

allowing billions of dollars in trades, and should have been able to explain the presentation.

No CIO official 

offered a more detailed explanation of the specific trading strategies set forth in the January 

proposal.

470

Selling the forward spread: The presentation proposed buying credit protection in the 

short term and selling credit protection in the long term.

 

The OCC provided the Subcommittee with its understanding of the proposed trading strategies as 

follows.

471

 464 Id. 465 Id. 466 Id. 467 See, e.g., Subcommittee interview of Ina Drew, CIO (9/7/2012). 468 Subcommittee interview of Irvin Goldman, CIO (9/15/2012).

469 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 470 Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 471 Id.
75

Buy protection on the tightening move: The presentation proposed essentially buying 

credit protection when it was less expensive.472

Turn the position over to monetize volatility: The presentation proposed selling SCP 

positions to take advantage of changing prices and locking in any profits.

 As noted above, when credit markets are 

improving, credit insurance becomes less costly. 

473 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 

tranches but more than the super senior tranches.

 

475

Use indices and add to existing position: The presentation noted that the SCP already 

had some long credit index positions on the books,

 The presentation appears to propose 

buying the long side of those credit instruments.

476

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 

million were possible.

and proposed expanding those 

holdings.

477

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 

derivative index on the long side.

 In other words, the proposal warned from the beginning that its trading 

strategies could result in losses totaling $500 million. 

478 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 II. 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).
76

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 

size of the SCP book of assets.

 

482 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 

in losses of another $500 million.

 

485

 480 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

9/6/2012).

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 

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, CIO (9/11/12). 484 JPMorgan Chase Task Force interview of Javier Martin-Artajo, JPMorgan Chase (partial readout to the 

Subcommittee on 9/6/2012). 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).
77

investment-grade long positions gaining less value than expected.486 When the Subcommittee 

asked the OCC about those losses, the OCC explained that the bank had not informed it of either 

the losses or the new trading strategy at the time, but since the CIO was already losing money 

with its trading strategy, the traders should have stopped, rather than expanded its use.

487 The 

OCC further told the Subcommittee that the CIO apparently did not stop, because it did not want 

to take the additional, short-term losses that would have resulted from simply reducing the size 

of the SCP.

488

The losses continued for the rest of January, including after Mr. Iksil began to execute the 

January 26 strategy and increase the size of the SCP book. On January 30, 2012, Mr. Iksil sent 

his supervisor, Mr. Martin-Artajo, an email warning of additional losses and poor liquidity in the 

credit markets, and seeking guidance on what to do. He noted that the trading strategy called for 

purchasing more credit instruments – adding “notionals” – which “increase[d] the issues with the 

risks and the size” of the portfolio.

 

“[W]e have to report a loss in the widening today, much less because the book has 

a long risk bias. Comes month end and we cannot really prevent the forward 

spreads from moving up .... To trade ... is costly and leads to increase in 

notionals. We need to discuss at this stage I guess: All I see is that liquidity is so 

poor that we just add notionals with the stress. So that improves the outright final 

P&L [profit and loss] number but this increases the issues with the risks and the 

size, as well as our sensitivity to price moves and trading costs .... [T]he only one 

I see is to stay as we are and let the book simply die ....”489

In his email, Mr. Iksil singled out the “poor” liquidity then in the market, which meant 

that he had difficulty locating buyers for the SCP’s assets. He also alluded to how purchasing 

long credit instruments meant the book received premium payments from the short parties which 

“improve[d] the outright final P&L number,” but at the same time increased the size of the 

portfolio and its “sensitivity to price moves and trading costs.” In other words, buying new long 

positions brought in more valuable positions as well as cash carry that could be used to offset the 

book’s daily losses, but it also increased the portfolio size which meant that even small price 

drops rolled into large daily losses. After noting the tradeoffs between the portfolio’s increasing 

size and risk of loss, Mr. Iksil wrote that in his view the “only” course of action was “to stay as 

we are and let the book simply die.” In other words, he advocated against buying additional 

credit positions and allowing the existing positions to expire with the attendant losses.

In the same January 30 email, Mr. Iksil expressed concern about the danger of taking on 

ever-increasing positions under the new trading strategy:

“[T]he control of the drawdown [loss] now is generating issues that make the 

book only bigger in notionals .... [T]he notionals become scary and [the] upside 

is limited unless we have really unexpected scenarios. In the meantime, we face 

 486 See 2013 JPMorgan Chase Task Force Report, at 33. 487 Subcommittee interview of Mike Sullivan, OCC (8/30/2012). 488 Subcommittee interview of Doug McLaughlin, OCC (8/30/2012).

489 1/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “update on core credit book,” JPM-CIOPSI 0001223.
78

larger and larger drawdown pressure versus the risk due to notional increase. 

Please let me know the course of action I should take here.”490

The Subcommittee was unable to locate any written record of any guidance provided by 

Mr. Martin-Artajo in response.

That same day, January 30, 2012, Mr. Macris sent an email to Mr. Martin-Artajo also

expressing concern about the ongoing losses:

“We need to discuss the synthetic book. The current strategy doesn’t seem to 

work-out. The intention was to be more bullish, but the book doesn’t behave as 

intended . . . . The financial [p]erformance is worrisome.”491

In hindsight, it appears that the CIO essentially took the trading strategy that had worked 

during the bear market of the second half of 2011, and applied it to the bull market in the early 

part of 2012, with disastrous results.

492 Not only did the SCP’s short positions lose value as the 

economy improved, but the long credit protection the CIO purchased for investment grade 

companies did not increase in value as much as was needed to offset the losses. As Mr. Macris 

put it, the investment grade rally “lagged” the high yield rally.493

Mr. Iksil later told the JPMorgan Chase Task Force investigation that he had not been 

able to sell as much credit protection as he would have liked (which would have generated more 

carry and profits to keep pace with the high yield rally). He said that two risk limits – the “VaR” 

and “CS01” – prevented him from doing so. He later wrote in an email: “[T]he need to reduce 

VAR – RWA and stay within the CS01 limit prevented the book from being long risk 

enough.”

 That meant that the mark-tomarket profits the CIO was able to post on the investment grade credit protection it sold was 

insufficient to offset the mark-to-market losses it had to post on the high yield protection they

purchased. 

494

(2) February 2012

 However, had Mr. Iksil actually acquired even more long positions, it is unclear 

that he would have been able to offset the losses then being reported on the books; it is possible 

he would have dug the SCP hole even deeper.

Despite the concerns expressed by Mr. Iksil and Mr. Macris about the SCP trading 

strategy, the CIO traders continued to pursue it throughout February, acquiring even more credit 

 490 Id. 491 1/31/2012 email from Achilles Macris, CIO, to Javier Martin-Artajo, CIO, “Core book P&L drawdown and main 

exposures,” JPM-CIO-PSI 0000221.

492 See, e.g., 1/31/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Core book p&l drawdown and 

main exposures,” JPM-CIO-PSI 0000222 (forwarded to Achilles Macris and subsequently Ina Drew).

493 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

9/6/2012).

494 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “First draft of the presentation,” conveying

“CIO Synthetic Credit Update” (3/2012) at JPM-CIO-PSI 0001256. As discussed below, Mr. Iksil was not able to 

start selling protection in earnest until a new VaR model entered into force on January 30, retroactive to January 27. 

He similarly was constrained by the CS01 limit which the SCP ultimately breached in February. For more 

information on these limits, see Chapter V.
79

derivatives and incurring even more losses. According to the key trader, Bruno Iksil, at the 

beginning of February, Ms. Drew asked him how much the book would lose if the positions were 

reduced, and he responded “a lot,” because the IG9 long positions were not liquid enough to sell 

easily.495 Apparently neither Ms. Drew nor any other CIO manager told the traders to stop the

book’s acquisitions or reduce any of the growing SCP positions. Instead, over the course of 

February, the CIO traders increased the size of the IG9 forward position from $75 billion at the 

beginning of the month to $94 billion at the beginning of March.496 Those purchases 

dramatically increased the SCP’s long holdings, leading one trader to describe the book as set to 

“trade on the bullish side.”497

At the same time, during the month of February, the credit market continued to rally, and 

the overall value of the SCP book continued to fall.

 

498 Mr. Iksil continued to trade.499 On 

February 9, 2012, the SCP book breached a risk limit called “CS01.”500 The book at that point 

had reported losses exceeding $128 million since the beginning of the year.501

On February 13, 2012, an additional complication arose. According to notations in an 

internal document authored by Mr. Iksil, Ally Financial, Inc., a bank holding company, 

announced that it was preparing a pre-packaged bankruptcy petition for its mortgage subsidiary, 

Residential Capital LLC (ResCap).

 Despite the

breach – and the losses – CIO managers allowed the traders to continue to implement their

trading strategy. 

502 Mr. Iksil explained that this news affected the prices of 

the indices in which the SCP was trading to such an extent that the SCP had to post mark-tomarket losses on both the protection it had bought and the protection it had sold.503

 495 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012).

 The reasons 

for this double loss were unclear, yet the traders continued to acquire still more credit 

derivatives. 

496 See 4/9/2012 email from Achilles Macris, CIO, to Douglas Braunstein, JPMorgan Chase, and Ina Drew, CIO, 

“Synthetic Credit Presentation,” conveying presentation entitled “Core Credit P/L estimates for Q2,” at 22, JPMCIO-PSI-H 0002212; Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot). 

497 2/22/2012 email by Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, and others, “core credit latest version,” 

conveying “Core Credit Book P&L Review,” (2/2012), at JPM-CIO-PSI 0001787.

498 Subcommittee briefing by JPMorgan Chase (10/4/2012) (Olivier Vigneron).

499 See, e.g., 2013 JPMorgan Chase Task Force Report, at 34-37; undated internal document authored by Bruno 

Iksil, CIO, with his personal notes and comments on SCP trading activities from January to March 2012, JPM-CIOPSI 0021890. 500 2/13/2012 email from Syed Hassan, JPMorgan Chase, to Keith Stephan, CIO, Janet Lee, JPMorgan Chase, and 

others, “CIO Global Credit spread BPV limit breach- COB 02/09/2012,” JPM-CIO-PSI 0001825. For more 

information on how the CIO responded to the SCP’s breaching that risk limit, see Chapter V. 501 See chart, prepared by the Subcommittee and printed in Chapter IV, tracking SCP’s daily reported profit and 

losses (P&L) from January to May 15, 2012, derived from an OCC spreadsheet, OCC-SPI-00000298. Numbers do 

not reflect corrected P&L figures after JPMorgan Chase’s restatement in July 2012.

502 Undated internal document authored by Bruno Iksil, CIO, with his personal notes and comments on SCP trading 

activities from January to March 2012, JPM-CIO-PSI 0021890. See also In re Residential Capital, LLC, Case No. 

12-12020 (MG) (Bankr. SDNY), Voluntary petition for relief under Chapter 11 (5/14/2012), 

http://www.kccllc.net/documents/8822900/8822900120514000000000001.pdf.

503 See undated internal document authored by Bruno Iksil, CIO, with his personal notes and comments on SCP 

trading activities from January to March 2012, JPM-CIO-PSI 0021890. 
80

Mr. Iksil later indicated in an internal document that, by mid-February, he had sent Ms. 

Drew his explanation of the ongoing losses, but JPMorgan Chase has been unable to provide a 

copy of that explanation. Mr. Iksil also wrote around the same time that he was trying to reduce 

RWA and VaR “as much as I can in a bleeding book.”504

According to Mr. Iksil, he and Mr. Martin-Artajo discussed the trading strategy in 

February. Mr. Iksil later told the JPMorgan Chase Task Force investigation that he had 

explained to Mr. Martin-Artajo that he did not want to add volume to the book,

 

505 that is, 

increase the overall size of the positions. In Mr. Iksil’s view, the losses would only be multiplied 

by volume.506 He indicated that Mr. Martin-Artajo responded that the book had to be “hedged 

on high yield defaults.”507 In that light, Mr. Iksil contended the only solution was to continue to 

finance the acquisition of high yield default protection through the sale of investment grade 

protection.508

On February 28, Mr. Iksil wrote that there was “more bleeding,” and he had added 

approximately “[$]6-7 bln [billion] ig9 10yr” to the SCP book.

 So he continued to purchase long credit instruments and collect the carry.

509 On February 29, he indicated 

that he had “sold important amounts of protection in ig9 10yr (close to 7bln all day ...),” and was 

concerned it might breach a risk limit.510 Altogether, according to Mr. Macris who oversaw the 

SCP, the CIO traders added some $34 billion in notional value to the SCP book in January and 

February 2012.511

On February 29, 2012, senior CIO managers, including Ms. Drew, Mr. Wilmot, and Mr. 

Goldman, participated in a regularly scheduled “business review” meeting with senior bank 

officials, including Mr. Dimon, Mr. Braunstein, and Mr. Hogan, to review CIO activities.

 

512 

According to the JPMorgan Chase Task Force, CIO management discussed reducing the SCP’s 

RWA, but did not disclose that the CIO was doing so by increasing the size and complexity of 

the portfolio.513

 504 Undated internal document authored by Bruno Iksil, CIO, with his personal notes and comments on SCP trading 

activities from January to March 2012, JPM-CIO-PSI 0021891. 

They also did not disclose that the SCP had incurred two straight months of 

losses.

505 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 506 Id. 507 Id. 508 Id.

509 Undated internal document authored by Bruno Iksil, CIO, with his personal notes and comments on SCP trading 

activities from January to March 2012, JPM-CIO-PSI 0021894. 510 2/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Core credit book update”, JPM-CIO 

0003443. 

511 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012). See also 4/9/2012 email from Achilles Macris, CIO, to Douglas Braunstein, JPMorgan Chase, and Ina 

Drew, CIO, “Synthetic Credit Presentation,” conveying presentation entitled “Core Credit P/L estimates for Q2,” at 

22, JPM-CIO-PSI-H 0002212; 3/7/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to Ina Drew, CIO, and 

others, “CIO CRM Results,” JPM-CIO-PSI 0001815 (stating SCP increased in January and February by $33 

billion); Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot). 512 2/28/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO Business Review 

Materials,” JPM-CIO-PSI 0037408-452, at 410. 513 See 2013 JPMorgan Chase Task Force Report, at 37-38. 
81

As the losses mounted in February, the CIO traders blamed each other and the market for 

the inability of the trading strategy to staunch the losses. According to Mr. Iksil, he had told Ms. 

Drew he wanted to wait until the indices were more liquid to add to the portfolio, but by month 

end he had to “cover the short.”514 Mr. Iksil later explained that, in February, he “added to IG9 

and S9 forwards in order to contain the P&L loss” and to “cover” the high yield short position.515 

Mr. Iksil said that he had not expected to sell as much protection as he did, but that one hedge 

fund was “buying protection outright.”516

When asked about the February trading activity, the OCC told the Subcommittee that the 

CIO traders apparently believed that the prices in the markets were wrong, and that the traders 

had a strategy to defend their positions and keep the prices from falling by taking on more of 

them.

 Mr. Macris later said that all of the trades and losses 

were “well-communicated” to CIO management, meaning that his supervisors were fully 

informed about the status of the SCP book. 

517

(3) March 2012

 

In March, the CIO traders purchased still more long positions, enlarged the SCP further, 

and by the end of the month had moved the SCP firmly into a net long posture. Their actions not 

only increased the portfolio’s risk, breaching multiple risk limits along the way, but also 

escalated the SCP’s losses which, by the end of the month, exceeded half a billion dollars. 

On March 1, Mr. Macris expressed concern about having to reduce the SCP book to 

comply with management’s direction to reduce the portfolio’s RWA, writing:

“I am worried that the $20b RWA committed b[y] year-end, is too aggressive, if 

we need to [a]ctually reduce the book, we will not be able to defend our 

positions.”518

Mr. Macris later told the JPMorgan Chase Task Force investigation that, in the first part of 

March, the credit market was “unusually bullish,” and as it continued to rally, the SCP book 

continued to “underperform.”519

By mid-March, according to Mr. Macris, there were meetings every other day to discuss 

the book.

 In fact, the portfolio was not just underperforming; it was 

losing substantial value. In response, throughout the month, the traders continued to increase the 

size of the long positions in an apparent attempt to staunch the losses.

520

 514 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012).

 According to Mr. Martin-Artajo, the protection the traders bought continued to lose 

515 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, and others, “First draft of the 

presentation,” conveying “CIO Synthetic Credit Update,” (3/2012), JPM-CIO-PSI 0001257. 516 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012) 

(referring to Boaz Weinstein of Saba Capital Management). 517 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). See also 2013 JPMorgan Chase Task Force 

Report, at 39. 518 3/1/2012 email from Achilles Macris, CIO, to Javier Martin-Artajo, CIO, “priorities,” JPM-CIO-PSI 0001219.

519 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012).

520 Id.
82

money relative to the protection the traders sold.521 Mr. Iksil expressed concern about the size of 

the positions and the traders’ limited options: “We look at what we can do ... while not growing 

the positions especially in IG9. The solutions are very limited.”522

“One solution would be to let the book be really long risk, yet this would not be in 

a liquid market and may increase the P&L noise especially in corrections .... The 

solution proposed amounts to be longer risk.”

 Yet, on March 19, 2012, Mr. 

Iksil wrote that perhaps they should increase the book’s long positions even more: 

523

The CIO did just that, executing a series of trades over a couple of weeks in March that 

were so large that the OCC described them internally and to the Subcommittee as “doubling 

down” on the SCP’s already losing trading strategy.524 The first involved the acquisition of an

$8 billion notional long position in the most recent North American Investment Grade index 

series – not the IG9, but the IG17.525 The second involved an even newer IG index series, the 

IG18, which was first issued on March 20, 2012, and in which the CIO acquired a $14 billion 

notional long position.526 On top of that, the CIO acquired a massive $18 billion long position in 

the corresponding iTraxx series of credit indices.527

Mr. Iksil later explained to the JPMorgan Chase Task Force investigation that he had 

switched from the IG9 index to the more recent series to be “less noticeable” to the rest of the 

Altogether, in a few weeks, these trades

increased the notional size of the SCP by $40 billion. 

 521 See undated internal document authored by Bruno Iksil, CIO, with his personal notes and comments on SCP 

trading activities from January to March 2012, JPM-CIO-PSI 0021898. 522 3/15/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Update on Core,” JPM-CIO-PSI 

0000386.

523 3/19/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Core Book analysis and proposed 

strategy,” JPM-CIO-PSI 0001234-235. 524 6/29/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, CIO, and others, “2nd Wilmer Hale Call,” OCCSPI-00071386 (“Macris told Braunstein the majority of the positions were taken in Jan and Feb but we now know 

the doubling down in March.”); Subcommittee interviews of Scott Waterhouse, OCC (9/17/2012), Michael Sullivan 

and Douglas McLaughlin, OCC (8/30/2012); OCC Presentation to the Subcommittee, page entitled, “1Q2012,” 

(noting that “CS01 Exposure nearly doubled . . . between March 14 and March 28”), PSI-OCC-06-000028. See also 

2013 JPMorgan Chase Task Force Report, at 41 (indicating the CIO traders had reasoned they could “put on a large 

position very quickly near the roll date (March 20)” in order to stem the SCP’s losses and reduce the SCP’s VaR and 

RWA totals prior to the bank’s quarter-end public filings). 525 See 2013 JPMorgan Chase Task Force Report, at 42; Subcommittee briefing by JPMorgan Chase (8/15/2012) 

(Jeanette Boot). See also 3/22/2012 email from Peter Weiland, CIO, to Irvin Goldman, CIO, “I would like to 

understand the increase in positions in credit,” JPM-CIO-PSI 0000410-411 (reporting that the SCP’s notional CDX 

IG position – which includes a variety of IG on and off-the-run holdings – had increased from $22.4 billion on 

March 7, 2012, to $52.1 billion on March 21, 2012, a $30 billion increase in two weeks).

526 See 2013 JPMorgan Chase Task Force Report, at 42; Subcommittee briefing by JPMorgan Chase (8/15/2012) 

(Jeanette Boot). See also 3/22/2012 email from Peter Weiland, CIO, to Irvin Goldman, CIO, “I would like to 

understand the increase in positions in credit,” JPM-CIO-PSI 0000410-411. 527 See 2013 JPMorgan Chase Task Force Report, at 42. See also 3/22/2012 email from Peter Weiland, CIO, to Irvin 

Goldman, CIO, “I would like to understand the increase in positions in credit,” JPM-CIO-PSI 0000410-411 

(reporting that the SCP’s notional iTraxx MN position had increased from $38.9 billion on March 7, 2012, to $45.7 

billion on March 21, 2012, a $7 billion increase in two weeks); 3/22/2012 email from Julien Grout, CIO, to the CIO 

Estimated P&L mailing list, “CIO Core Credit P&L Predict [22 Mar]: +$82k (dly) -$276,990k (ytd),” JPM-CIO-E 

00014689-691, at 691(reporting an additional purchase of iTraxx long positions totaling $5.65 billion).
83

market.528 He explained that he had sold so much protection in the IG9 index that he believed 

the other credit traders “knew” his position, and were taking advantage.529 In fact, on March 19, 

2012, Mr. Iksil warned his supervisor that the SCP was a very visible player in a small market: 

“[T]here is a trap that is building: if we limit the Mark-to-Market we risk increasing the notionals 

further and weaken our position versus the rest of the market.”530

“[I]t had to happen. [I]t started back in 2008 you see. [I] survived pretty well 

until [I] was alone to be the target. [Y]es [I] mean the guys know my position 

because [I] am too big for the market. ... [B]ut here is the loss and it becomes 

too large and this is it. [W]e realize that [I] am too visible.”

 Later, Mr. Iksil wrote to a 

colleague: 

531

On March 20, 2012, CIO head Ina Drew and CIO Chief Risk Officer Irvin Goldman 

participated in a meeting with the bankwide Directors Risk Policy Committee regarding the CIO, 

and gave a presentation on the CIO’s investment portfolios and risk profile, but according to the 

bank, did not disclose the SCP’s ongoing losses, risk limit breaches, increased portfolio size, or 

increased RWA.

532 On that same day, two CIO traders, Mr. Iksil and Mr. Grout, circulated the 

daily profit-loss email for the SCP, estimating a daily loss of $40 million which was the largest 

daily loss yet for the SCP, and also describing a $600 million to $800 million “lag” in the SCP 

book.

533 Ms. Drew told the Subcommittee that she never read that email,534

On March 21, Ms. Drew held a lengthy meeting with Mr. Macris and Mr. Martin-Artajo 

on the SCP, in which they discussed the SCP’s “underperformance” and strategies to reduce its 

RWA.

and even though it 

was sent to multiple CIO recipients, no action was taken by any CIO manager to investigate the

enormous “lag” it described. 

535

 528 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012).

According to Ms. Drew, she was not informed at that meeting about the SCP’s recent 

acquisition of additional long positions, the $600 million to $800 million lag described in the 

529 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the Subcommittee on 

8/28/2012).

530 3/19/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo and Julien Grout, CIO, “Core Book analysis and 

proposed strategy,” JPM-CIO 0003476-477, at 477. 531 3/23/2012 instant messaging session between Bruno Iksil and Ade Adetayo, CIO, JPM-CIO-PSI 0001240-246. 532 See 2013 JPMorgan Chase Task Force Report, at 42-43, 88; 3/2012 “Directors Risk Policy Committee – CIO 

2012 Opportunities and Challenges,” prepared by Ina Drew and Irvin Goldman, CIO, JPM-CIO-PSI 0015016. 533 See 3/20/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, “CIO Core Credit P&L 

Predict [20 Mar]: -$39,686k (dly) -$275,424k (ytd),” JPM-CIO-PSI 0016487-489, at 489 (explaining that the IG9 

was “underperform[ing]” by $450 to $500 million; the iTraxx Main credit index was “lagging” by another $60 to 

$80 million; and the High Yield index had a $100 million “loss” plus another “lag” of $100 to $200 million, 

concluding that the total “lag in P&L” was “material” and in the range of $600 to $800 million). For more 

information about this email, see Chapter IV.

534 Subcommittee interview of Ina Drew, CIO (12/11/2012). 535 See 3/22/2012 email from Ina Drew, CIO, to Achilles Macris and Javier Martin-Artajo, CIO, “I was confused by 

the inc[re]ased position noted today after yesterday’s exhaustive meeting,” JPM-CIO 0003492. For more about this 

meeting, see Chapter IV.
84

prior day’s email, or the traders’ use of more favorable derivative prices to minimize reported 

SCP losses.536

The next day, March 22, 2012, the CIO traders acquired still more long positions. As 

recounted in the daily email explaining the SCP’s profit-loss status:

“Again, the book is getting hurt with losses in index forward spreads in S9 and 

IG9, and in tranches (Weaker CDX.HY equity and mezzanine tranches, steeper 

IG9 equity tranches). Today we sold protection in the following index: 

iTraxx.Main (5.65B), iTraxx.Xover (300M), CDX.IT (3.95B) and FINSUB 

(100M). Besides providing carry, these trades should reduce the VaR, but 

increase the IRC. We are pausing in our sale of protection, to see what the overall 

impact on capital numbers is going to be.”537

Ms. Drew, who had met with Mr. Macris and Mr. Martin-Artajo the prior day, expressed 

“confusion” over the SCP’s increased positions.

538 According to both Ms. Drew and the bank, at 

the March 21 meeting, she had been given SCP trading data as of March 7, and was told nothing 

about the intense trading activity which had taken place over the following two weeks and 

further enlarged the SCP book.

539 On March 22, 2012, her reaction to the increased positions 

prompted one CIO risk manager to email another: “Ina is freaking – really! Call me.”540

The CIO’s massive purchases in March magnified the SCP’s risks and later its losses. 

Overall, according to JPMorgan Chase, by the end of March, the Synthetic Credit Portfolio had 

swollen in notional value to $157 billion, three times greater than the $51 billion it held at the 

end of 2011, just three months earlier.

 

541 When asked for more detail, JPMorgan Chase told the 

Subcommittee that, at the end of March, the SCP included $62 billion in IG index holdings, $71 

billion in iTraxx index holdings, $22 billion in High Yield index holdings, and a variety of other 

synthetic credit derivatives.

542 Other contemporaneous internal bank documents provide even 

larger figures. For example, an April 2012 analysis stated that, at the end of March, the SCP 

held an $82 billion long position in the IG9 index alone,

543

 536 Subcommittee interview of Ina Drew, CIO (12/11/2012). For more information on the traders’ pricing practices, 

see Chapter IV.

which comprised over half the market 

537 See 3/22/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, “CIO Core Credit P&L 

Predict [22 Mar]: +$82k (dly) -$276,990k (ytd),” JPM-CIO-E 00014689-691, at 691. 538 See 3/22/2012 email from Ina Drew, CIO, to Achilles Macris and Javier Martin-Artajo, CIO, “I was confused by 

the inc[re]ased position noted today after yesterday’s exhaustive meeting,” JPM-CIO 0003492; see also 

Subcommittee interview of Ina Drew, CIO (12/11/2012).

539 Subcommittee interview of Ina Drew, CIO (12/11/2012); 2013 JPMorgan Chase Task Force Report, at 44. See 

also 6/29/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, OCC, and others, “2nd Wilmer Hale Call,” 

OCC-SPI-00071386. 540 3/22/2012 email from Irvin Goldman, CIO to Peter Weiland, CIO, “I would really like to understand the increase 

in positions in credit,” JPM-CIO-PSI 0000410. 541 “Summary of Positions by Type and Series,” prepared by JPMorgan Chase in response to a Subcommittee 

request, JPM-CIO-PSI 0037609. 542 Id. 543 4/10/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “Net positions vs. 

average trading volumes,” JPM-CIO-PSI 0001026. See also 1/18/2012 email from Bruno Iksil, CIO, to Julien 

Grout, CIO, “Meeting materials for 11am meeting,” conveying presentation entitled, “Core Credit Book 

Highlights,” prepared by Mr. Iksil, at JPM-CIO-PSI 0000101 (reciting even larger SCP positions in January, 
85

in that index.

544 The differing figures over the SCP’s holdings are an indicator of not only how 

poor the SCP recordkeeping was, but also how quickly the portfolio was changing and how 

imprecise existing systems are for valuing derivative positions. Ms. Drew told the 

Subcommittee that she had become increasingly frustrated at the shifting numbers and capital 

calculations of the SCP as the quarter drew to a close, which she felt made her look 

“incompetent” for being unable to calculate the SCP’s RWA.545

The end result was that what had begun as a small, experimental portfolio in 2006, had 

ballooned into a massive, high risk portfolio in 2012. In addition, by the end of March 2012, Mr. 

Iksil had acquired so many long index instruments that the SCP – which had traditionally held a

net short position to provide protection against credit risks for the bank – had flipped and held a

net long position.546

Ms. Drew told the Subcommittee that being long was “not terrible” given that the credit 

market was rallying and short positions had lost so much value, but she conceded that the index 

positions were longer than necessary to “balance the book.”

 In other words, overall, the SCP book held a long credit position at the 

same time as the bank, instead of holding the opposite position as a hedge. 

547 According to the CIO’s longtime

CFO, Joseph Bonocore, the SCP book had always held a net short position when he was there, 

and he observed that a net long position could not serve as an effective hedge.548 Mr. MartinArtajo told the JPMorgan Chase Task Force investigation that, while he believed that the long 

position was necessary to stabilize the book, being long did not serve the mission of the SCP.

549

(4) Phones Down

On March 23, 2012, Ms. Drew ordered the CIO traders to “put phones down” and stop 

trading.550

 

including a $278 billion notional position in the IG9 index, $115 billion notional position in the HY10 and 11 

indices, and $90 billion notional position in the Main ITraxx S9). See also FDIC presentation, “JPMC & 

COMPANY CIO Synthetic Credit Portfolio,” FDICPROD-0001783, at 22 (indicating JPMorgan Chase had 

estimated that its IG9 position was $82 billion notional in March); FDICPROD 0039218-219, at 218 (estimating the 

notional value of the SCP’s long position in the IG9 alone was $75 billion). 

 According to Ms. Drew, she took that action during a video conference meeting with 

CIO personnel in London attended by Mr. Macris, Mr. Martin-Artajo, Mr. Iksil, and other CIO 

544 See DTCC presentation to Subcommittee (9/27/2012), at 2, PSI-DTCC-01-000001 (showing total CDX IG9 

untranched trading to total approximately $150 billion). 545 Subcommittee interview of Ina Drew, CIO (12/11/2012). 546 See 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI 

0000546; 4/16/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, “materials for 

Fed/OCC/FDIC call at noon today,” OCC-SPI-00009712; Subcommittee briefing by JPMorgan Chase (8/15/2012) 

(Jeanette Boot and Harry Weiss); Subcommittee interviews of Ina Drew, CIO (9/7/2012), John Hogan, JPMorgan 

Chase (9/4/2012), and Michael Kirk, OCC (8/22/2012); 2013 JPMorgan Chase Task Force Report, at 43 (quoting an 

unnamed CIO trader, likely Bruno Iksil, saying on March 23: “[I] switched the book to long risk[.] [I] am done.”), 

at 45 (indicating SCP had “assumed an overall net-long credit risk orientation”). 547 Subcommittee interview of Ina Drew, CIO (9/7/2012). 548 Subcommittee interview of Joseph Bonocore, CIO (9/11/2012).

549 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

550 Subcommittee interviews of Ina Drew, CIO (9/7/2012) and Irvin Goldman, CIO (9/15/2012); JPMorgan Chase 

Counsel interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012); 2013 JPMorgan Chase 

Task Force Report, at 45.
86

staff.

551 She explained that Mr. Martin-Artajo had told her that they were trading in the market 

to “defend” their positions.552 Ms. Drew said that he had told her that counterparties were 

increasingly pushing the valuation of the positions, and by “defending,” CIO could push back.553 

Ms. Drew told the Subcommittee that, in her view, “you buy or sell something based on value, 

not to defend your position,”554 an approach that Mr. Iksil confirmed as reflective of her 

philosophy.555 The CIO’s Chief Risk Officer, Irvin Goldman, communicated her order in an 

email to the credit traders, writing: Ms. Drew “does not want any trades executed until we 

discuss it.”556

Another development occurring at the same time also signaled the increasing risk in the 

SCP book.

 

557 On March 22, 2012, the SCP breached a key risk limit known as “CSW10.”558 

Two other risk limits, VaR and CS01, had been breached earlier in the year, but Ms. Drew told 

the Subcommittee that she considered the CSW10 to be the “overriding” limit.559

About a week later, on March 30, 2012, Achilles Macris sent an email to the bank’s Chief 

Risk Officer, John Hogan, stating that he had “lost confidence” in his team and requesting “help

with the synthetic credit book.”

 

560

“Just spoke to Ashley [Bacon] regarding the issue and he has agreed to dedicate 

Olivier to help us with RWA targeting for Q2. ... [T]he objective is to determine 

what is the best course of action to insure that the book is and remains balanced in 

risk and P+L terms. ... [C]learly, we are in crisis mode on this.”

 Mr. Macris reported: 

561

The OCC told the Subcommittee that, after reviewing the SCP’s swollen portfolio and 

trading activities, it was clear that the CIO traders had made trades that violated the CIO’s risk 

limits with “aggressive positions” in a way that was “unsafe and unsound.”562

 551 Subcommittee interviews of Ina Drew, CIO (9/7/2012) and (12/11/2012).

 The OCC also 

552 Id. 553 Subcommittee interview of Ina Drew, CIO (12/11/2012). See also 6/29/2012 email from Elwyn Wong, OCC, to 

Scott Waterhouse, OCC, and others, “2nd Wilmer Hale Call,” OCC-SPI-00071386 (describing the traders’ actions 

in March to acquire still more positions: “Traders were intentionally doing larger notionals to drive the market their 

way. They talked about ‘taking the P/L pain’ versus the risk of building larger positions.”). 554 Subcommittee interview of Ina Drew, CIO (9/7/2012). 555 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 556 3/26/2012 email from Irvin Goldman, CIO, to Achilles Macris, Javier Martin-Artajo, and John Wilmot, CIO, 

“Tranche Plan,” JPM-CIO-PSI 0001267. [Emphasis in original.] 557 5/9/2012 email from Michael Kirk, OCC, to James Hohl, OCC, “Document 1,” OCC-SPI-00021996. 558 Id.

559 Subcommittee interview of Ina Drew, CIO (9/7/2012). For more information on risk limits breached by the SCP, 

see Chapter V.

560 3/30/2012 email from Achilles Macris, CIO, to John Hogan, JPMorgan Chase, “synthetic credit- crisis action 

plan,” JPM-CIO-PSI 0001220. 561 3/30/2012 email from Achilles Macris, CIO, to Irvin Goldman, CIO, copies to Ina Drew, CIO, and others, 

“synthetic credit – crisis action plan,” JPM-CIO-PSI 0001759-760, at 759. See also 2013 JPMorgan Chase Task 

Force Report, at 45-46. 562 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). See also 11/6/2012 OCC Supervisory Letter 

JPM-2012-52, “Chief Investment Office Risk Management Review,” PSI-OCC-17-000015 [Sealed Exhibit] (“Board 

and senior management did not ensure effective oversight of CIO activities. ... Our examinations of Model 

Approvals and Risk Weighted Assets, Audit Coverage, CIO Risk Management, VAR Model Risk Management, and 

CIO Valuation Governance disclosed specific weakness that created an unsafe and unsound environment.”).
87

said that the credit trades taken on were “risk additive” rather than “risk reducing.”563 One OCC 

regulator said that the trades had so many dimensions of risk that “no matter what happened, 

they would lose money.”564

The order to stop trading prevented the CIO traders from expanding the SCP still further, 

but came too late to prevent the losses caused by the positions already acquired. In fact, when 

the CIO traders stopped trading, the losses increased.

 

565 The year-to-date losses reported by the 

CIO climbed from $719 million in March, to $2.1 billion in April, to $4 billion in May, to $4.4

billion in June, and then to $6.2 billion in September.566 Since JPMorgan Chase transferred 

many SCP index positions to its Investment Bank on July 2, 2012, the total amount of losses 

associated with the Synthetic Credit Portfolio will likely never be known.567

One key area of inquiry with respect to the SCP losses has focused on the CIO’s massive 

long position in the IG9 index. To help explain what happened, JPMorgan Chase provided the 

Subcommittee with a chart showing how the credit spreads – the premium amounts charged to 

obtain long IG9 credit protection – generally declined from November 2011 through April 2012. 

In particular, the chart shows a general decline in spreads from January 2012 until March 23, 

2012, the day Ina Drew told the traders to stop trading, after which the prices began to 

rebound.568

 563 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 564 Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 565 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 566 See chart, prepared by the Subcommittee and printed in Chapter IV, tracking SCP’s daily reported profit and 

losses (P&L) from January to May 15, 2012, derived from an OCC spreadsheet, OCC-SPI-00000298. Numbers do 

not reflect restated P&L figures after JPMorgan Chase’s restatement in July 2012. See also JPMorgan Chase & Co. 

Form 10-Q (for period ending 9/30/2012), filed with the SEC (11/08/2012), at 10, 220. 567 Subcommittee interview of Elwyn Wong, OCC (8/20/2012); 2013 JPMorgan Chase Task Force Report, at 110; 

JPMorgan Chase & Co. Form 10-Q (for period ending 9/30/2012), filed with the SEC (11/08/2012), at 8 (“Principal 

transactions in CIO included $449 million of losses on the index credit derivative positions that had been retained by 

it following the transfer of the synthetic credit portfolio to IB on July 2, 2012, reflecting credit spread tightening 

during the quarter.”). 568 Undated chart entitled, “Credit Spreads on IG9 Index,” prepared by JPMorgan Chase, JPM-CIO-PSI-0002062.
88

At first, the general downward trajectory of the IG9 prices over the first quarter of 2012 

allowed the CIO to post mark-to-market gains on its IG9 holdings. The FDIC chart below 

explains how based on a series of theoretical spreads. If the CIO entered into a contract to sell a 

certain amount of IG9 protection at 200 basis points (meaning the counterparty would pay 200 

basis points in periodic premiums to the CIO), and the market price for that protection 

subsequently dropped to 190 basis points, the CIO would receive 200 basis points for protection 

subsequently valued at 190 basis points – a mark-to-market gain of 10 basis points. If the CIO 

then entered into another contract to sell protection at 190 basis points, and the market price

dropped to 180 basis points, the CIO would be able to post mark-to-market gains of 20 basis 

points on the first contract, and 10 basis points on the second contract. In addition, the CIO sold 

such massive amounts of credit protection that, according to some market participants, it drove 

down the overall IG9 market price, which caused the CIO’s earlier acquisitions to continue to 

gain in value and post even more mark-to-market gains.
89

Source: 07/16/2012 FDIC presentation, “What Happened in JP Morgan’s CIO? A Primer,” at 4, 

FDICPROD-0036009.

But posting gains in its IG holdings by driving down the premium prices (credit spreads),

was not enough, because the CIO’s other holdings, such as its short positions in the high yield 

indices, were posting losses even more quickly. In addition, the IG9 gains themselves were 

under pressure. One journalist described the CIO’s IG9 trading strategy as playing a game of 

“chicken” with its counterparties, most of whom were hedge funds. As Mr. Iksil amassed an

increasingly enormous IG9 position:

“Other people in the markets - like hedge funds and other traders - thought Iksil 

was being ridiculously overconfident. Waiting for the giant Iksil’s [bet] to fail, the 

anti-Iksil team took the other side of the bet. The rival traders bought creditdefault swaps on the Index. They also bought protection on the underlying 

corporate bonds to influence the value of those as well. Their hope was that Iksil’s 

bet would go down in value; then he would have to run to them to buy creditdefault swaps to cover his rear and keep his bet even. They outsmarted Iksil. As 
90

he kept digging himself deeper into his position, he got backed into a corner and 

couldn’t cover his losses.”569

When Ms. Drew ordered the trades to stop, the SCP book had to begin absorbing the losses that 

came when the IG9 price began to rise and the CIO traders were no longer taking actions to 

reduce the losses that had to be booked. 

Although Mr. Dimon told the Subcommittee that, in March, the CIO traders were simply 

defending their positions without manipulating any market prices,570 once they stopped selling 

large amounts of IG9 protection, the bank’s own chart shows that the prices – the premiums or 

credit spreads paid for that protection – began to rise.571 JPMorgan Chase acknowledged as 

much, when a representative explained that when the CIO stopped trading, it stopped 

“supporting the price.”572 An OCC examiner also told the Subcommittee that the traders, by 

increasing volume at the end of the month, were artificially driving the prices lower.573

E. Unmasking JPMorgan Chase

Once the 

IG9 premiums began to rise, the value of the CIO’s IG9 holdings fell, adding to the SCP’s

problems. Those problems only worsened when Mr. Iksil’s massive positions were reported in 

the press two weeks later.

By the time Ms. Drew ordered the traders to stop trading, the book was, by the traders’ 

own account, “huge”574 and “more and more monstrous.”575 The JPMorgan Chase official 

charged with conducting the internal investigation of the SCP described the book as having 

grown to a “perilous size.”576

An additional consequence of the size of the positions was that the CIO’s positions 

became visible to the rest of the market. Mr. Iksil had expressed for some time a concern that 

the traders on the opposite side were moving against him.

 As Mr. Iksil had warned in January, the “scary” notionals 

produced price “volatility” which, in turn, produced hundreds of millions of dollars in losses.

577

 569 “JPMorgan’s Loss: The Explainer,” Marketplace, Heidi N. Moore, (5/11/2012), 

http://www.marketplace.org/topics/business/easy-street/jp-morgans-loss-explainer.

 In January, he had predicted a fight 

570 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 571 Undated chart entitled, “Credit Spreads on IG9 Index,” prepared by JPMorgan Chase, JPM-CIO-PSI-0002062. 572 Levin Office briefing by JPMorgan Chase (6/26/2012) (Greg Baer). 573 Subcommittee interview of James Hohl, OCC (9/6/2012). 574 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “First draft of the presentation,” conveying 

“CIO Synthetic Credit Update,” JPM-CIO-PSI 0001249. 575 Recorded telephone conversation between Bruno Iksil, CIO, and Julien Grout, CIO (3/16/2012), JPM-CIO 

0003474.

576 Michael Cavanagh, quoted in “JPMorgan’s ‘Whale’ Loss Swells to $5.8 billion,” Financial Times, Tom 

Braithwaite, (7/13/2012). 

577 See, e.g.,1/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “there is more loss coming in the 

core credit book,” JPM-CIO-PSI 0001225 (“The guys have a huge skew trade on and they will defend it as much as 

we do .... It is pointless to go for a fight.”); 1/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, 

“core credit,” JPM-CIO-PSI 0001226 (“they really push against our positions here everywhere. there is more pain 

to come in HY too.”).
91

in March.578 By mid-March, in an effort to be less visible, Mr. Iksil had begun to purchase long 

positions in newly issued credit indices instead of in the IG9, where the SCP already held 

massive positions.

579

By early April, press speculation about the large trades in the credit markets was 

building. On April 4, 2012, Peter Weiland, the head of market risk for the CIO, received a call 

from a reporter at the Wall Street Journal indicating that the paper was working on a story about

Bruno Iksil and the CIO.

 Yet even there, the SCP’s massive buys attracted market attention.

580 The next day, JPMorgan Chase’s head of Corporate 

Communications, Joe Evangelisti, sent an email to management describing the upcoming article. 

He wrote: “[T]hey are saying that Iksil currently has more than $200 billion in positions in credit 

trading products and has made JPM more than $600 million in profits over the past two 

years.”581

On April 6, 2012, both Bloomberg and the Wall Street Journal ran articles on Mr. Iksil’s 

trading. The Bloomberg story, entitled “JPMorgan Trader’s Positions Said to Distort Credit 

Indexes,” began:

 

“A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial 

health of corporations has amassed positions so large that he’s driving price 

moves in the $10 trillion market, traders outside the firm said.”582

Identifying Mr. Iksil, the article cited investors as complaining that his trades “may be distorting 

prices, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of 

fixed-income holdings.”583 More specifically, according to the article, two hedge-fund traders 

said they had seen “unusually large price swings when they were told by dealers that Mr. Iksil 

was in the market. At least some traders refer to Mr. Iksil as ‘the London Whale.’”584 The 

article also said the size of the position could have been as large as $100 billion.585

The Wall Street Journal article, entitled “London Whale Rattles Debt Market,” told a 

similar tale.586

“[In] recent weeks, hedge funds and other investors have been puzzled by unusual 

movements in some credit markets, and have been buzzing about the identity of a 

 The article stated:

 578 1/31/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “hello, quick update in core credit...,” 

JPM-CIO-PSI 0001229 (“I went to ISMG and advised that we set the book for long risk carry the time for us to see 

whether we really need to fight in mars.”).

579 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot); JPMorgan Chase Task Force interview 

of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 580 4/4/2012 email from Peter Weiland, CIO, to Irvin Goldman, CIO, “Call,” JPM-CIO-PSI-H 0002093. 581 4/5/2012 email from Joseph Evangelisti, JPMorgan Chase, to Ina Drew, CIO, Douglas Braunstein, JPMorgan 

Chase, and others, “WSJ/Bloomberg CIO stories,” JPM-CIO-PSI 0018414. 582 “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg , Stephanie Ruhle, Bradley Keoun, 

and Mary Childs, (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-todistort-credit-indexes.html. 583 Id. 584 Id. 585 Id. 586 “London Whale Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne, (4/6/2012), 

http://online.wsj.com/article/SB10001424052702303299604577326031119412436.html.
92

deep-pocketed trader dubbed ‘the London Whale.’ That trader, according to 

people familiar with the matter, is a low-profile, French-born J.P. Morgan Chase 

& Co. employee named Bruno Michel Iksil. Mr. Iksil has taken large positions 

for the bank in insurance-like products called credit-default swaps. Lately, partly 

in reaction to market movements possibly resulting from Mr. Iksil’s trades, some 

hedge funds and others have made heavy opposing bets, according to people close 

to the matter. Those investors have been buying default protection on a basket of 

companies’ bonds using an index of ... CDS. Mr. Iksil has been selling the 

protection, placing his own bet that the companies won’t default.” 

The article also asserted that the hedge funds were betting against Mr. Iksil, hoping to force him 

to reduce some of his holdings, which would result in gains for them and losses for JPMorgan 

Chase.

587 The article identified the IG9 credit index as the credit instrument whose price some

traders believed may have been “moved” by the size of Mr. Iksil’s trades.588 The article closed 

by noting that the notional volume in IG9 trades had “ballooned to $144.6 billion on March 30 

from $92.6 billion at the start of the year.”589

Because of the Easter holiday in Europe, the first day of trading after the articles 

appeared was April 10, 2012. The CIO reported a $412 million SCP loss that day, more than 

senior management had expected.

590

F. Dismantling the SCP

After the whale trades became public knowledge, JPMorgan Chase ordered a team of 

derivatives experts from the bank’s Investment Bank to analyze the CIO’s Synthetic Credit 

Portfolio.591

“In December 2011, as part of a firm wide effort and in anticipation of new Basel 

Cap[ital] requirements, we instructed CIO to reduce risk weighted assets and 

associated risk. To achieve this in the Synthetic Credit Portfolio, the CIO could 

have simply reduced its existing positions. Instead, starting in mid-January, it 

embarked on a complex strategy that entailed [m]any positions that it did believe 

offset the existing ones. This strategy, however, ended up creating a portfolio that 

was larger and ultimately resulted in even more complex and hard to manage 

 At a later Senate hearing, Mr. Dimon explained what they found as follows: 

 587 Id. 588 Id. 

589 Id. 

590 4/10/2012 email from Douglas Braunstein, JPMorgan Chase, to John Hogan, JPMorgan Chase, “Credit,” JPMCIO-PSI-H 0002276 (upon receiving notice of the $412 million loss, Mr. Braunstein responded: “A bit more than 

we thought,” to which Mr. Hogan replied: “Lovely”).

591 On April 27, 2012, Chief Risk Officer John Hogan sent his Deputy Risk Officer Ashley Bacon to London, along 

with Rob O’Rahilly from the Investment Bank, and Olivier Vigneron, London Head of Model Risk and 

Development, to analyze every position in the SCP. Subcommittee interviews of John Hogan and Ashley Bacon, 

JPMorgan Chase (9/4/2012) and Ashley Bacon, JPMorgan Chase (9/5/2012) (he told the Subcommittee that, 

beginning on April 27, his work on the SCP became “all consuming”); Subcommittee briefing by JPMorgan Chase 

(8/15/2012) (Harry Weiss); 2013 JPMorgan Chase Task Force Report, at 71. 
93

risks. ... CIO’s strategy for reducing the Synthetic Credit Portfolio was poorly 

conceived and vetted.”592

In another context, Mr. Dimon was even more blunt:

 

“We made a terrible, egregious mistake. There is almost no excuse for it. We 

knew we were sloppy. We know we were stupid. We know there was bad 

judgment. In hindsight, we took far too much risk. That strategy we had was 

badly vetted. It was badly monitored. It should never have happened.”593

Mr. Dimon directed his team of derivative experts to dismantle the CIO’s Synthetic 

Credit Portfolio.594 At its height in March 2012, the portfolio included holdings of more than 

100 types of credit derivatives, almost all index or tranche holdings, most of which had lost value 

since their acquisition. The bulk of the SCP credit derivatives were transferred to the Investment 

Bank, which closed out most of the positions; about $12 billion in notional amount was left with 

the CIO which closed out those positions by the end of September.

595 Unwinding those positions

led the CIO to report another $449 million loss.

596

The escalating losses during 2012, which outpaced all predictions, provide concrete proof 

of the high risk nature of the Synthetic Credit Portfolio. In January 2012, the SCP book lost 

$100 million, with the largest daily loss during that month reaching $23 million on January 30. 

In February, the book lost another $69 million, with the largest daily loss of $24 million on 

February 8. In March, the SCP’s reported losses increased nearly eightfold, to $550 million, 

with the month’s largest loss taking place on the last business day, March 30, 2012, of $319 

million. The losses continued for the next six months. At the end of April, the CIO reported 

year-to-date losses totaling $2.1 billion. On May 11, the SCP reported its largest single daily 

loss of $570 million. In July 2012, the bank restated the first quarter’s financial results, 

disclosing additional unreported losses of $660 million, and a year-to-date total of $4.2 billion. 

As of September 2012, the bank reported additional SCP losses of $449 million. By December, 

year-to-date losses from the whale trades exceeded $6.2 billion, or approximately 45% of the 

bank’s pre-tax earnings through September,

 

597 with another $1 billion possible.598 To date, the 

SCP book has lost more than three times the revenues it produced in its first five years combined. 

 592 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).

593 Statement by Jamie Dimon, quoted by Chairman Tim Johnson at “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).

594 See JPMorgan Chase & Co. Form 10-Q (for period ending 9/30/2012), filed with the SEC (11/08/2012), at 10.

595 Id., at 220.

596 Id.

597 See 12/12/2012 OCC Supervisory Letter, JPM-2012-66, PSI-OCC-18-000001 [Sealed Exhibit].

598 See, e.g., “Mortgage Lending Helps JPMorgan Profit Rise 34%,” New York Times (10/12/2012), 

http://dealbook.nytimes.com/2012/10/12/jpmorgan-quarterly-profit-rises-34/?ref=global.
94

 Source: JPMorgan Chase & Co. 2012 SEC filings; OCC spreadsheet, OCC-SPI-00000298.

G. Analysis

JPMorgan Chase is the largest derivatives dealer in the United States, with years of 

experience in trading credit derivatives. At times, bank representatives told the Subcommittee 

that the synthetic credit derivatives traded by the CIO should be viewed as an effective risk 

management tool designed to lower the bank’s overall credit risk. The facts associated with the

whale trades, however, prove otherwise. They show how credit derivatives, when purchased in 

massive quantities, with multiple maturities and reference entities, produce a high risk portfolio 

that even experts can’t manage. Step by step, the bank’s high paid credit derivative experts built 

a derivatives portfolio that encompassed hundreds of billions of dollars in notional holdings and 

generated billions of dollars in losses that no one predicted or could stop. Far from reducing or 

hedging the bank’s risk, the CIO’s Synthetic Credit Portfolio functioned instead as a high risk 

proprietary trading operation that had no place at a federally insured bank. 

The whale trades also demonstrate how risk can be misunderstood, manipulated, and 

mishandled when a bank claims to have been using derivative trades to lower its overall risk, but 

has no contemporaneous records detailing the risk reduction strategy or the assets being hedged, 

no analysis showing how the size and nature of the hedge were determined, and no tests gauging

the hedge’s effectiveness. Hedging claims require those types of contemporaneous records in 

 599 For losses from January through May 15, 2012, see OCC spreadsheet, OCC-SPI-00000298. 600 JPMorgan Chase & Co. Form 10-Q for quarterly period ending 6/30/2012, at 6, 11. 601 JPMorgan Chase & Co. Form 8-K, (7/13/2012), at 2. 602 Testimony of Michael J. Cavanagh, Co-Chief Executive Officer, Corporate and Investment Bank, JPMorgan 

Chase, “JPMorgan Chase Whale Trades: A Case History of Derivatives Risks & Abuses,” before the U.S. Senate 

Permanent Subcommittee on Investigations (March 15, 2013). 

603 JPMorgan Chase & Co. Form 10-Q for quarterly period ending 9/30/2012, at 10, 12. 604 12/12/2012 OCC Supervisory Letter, JPM-2012-66, PSI-OCC-18-000001 [Sealed Exhibit]. The $6.2 billion did 

not change from September, apparently because, by then, the SCP had been largely dismantled and most of its 

positions transferred to the Investment Bank.

CIO Synthetic Credit Portfolio Reported Mark-To-Market Losses 

January - December 2012

Month or Quarter End Monthly or Quarterly Losses Cumulative Losses YTD

January $ 100 million $ 100 million599

February $ 69 million $ 169 million

March $ 550 million $ 719 million

April $ 1.413 billion $ 2.132 billion

As of May 15 $ 1.563 billion $ 3.695 billion

June Not available $ 4.4 billion600

July restatement of first quarter losses $ 660 million601 $ 5.8 billion602

September $ 449 million603 $ 6.2 billion

December Not available $ 6.2 billion604
95

order to be substantiated. In addition, the fact that the OCC was not fully aware of the Synthetic 

Credit Portfolio for years, because its performance data was subsumed within a larger investment 

portfolio, highlights the need for improved derivatives data to ensure the OCC can detect and 

oversee all substantial derivatives portfolios being traded by a bank through a U.S. or foreign 

office. 
96

IV. HIDING LOSSES

In its first four years of operation, the Synthetic Credit Portfolio produced positive 

revenues, but in 2012, it opened the year with sustained losses. In January, February, and March, 

the days reporting losses far exceeded the days reporting profits, and there wasn’t a single day 

when the SCP was in the black. To minimize its reported losses, the CIO began to deviate from 

the valuation practices it had used in the past to price credit derivatives. In early January, the 

CIO had typically established the daily value of a credit derivative by marking it at or near the 

midpoint price in the daily range of prices (bid-ask spread) offered in the marketplace. Using 

midpoint prices had enabled the CIO to comply with the requirement that it value its derivatives

using prices that were the “most representative of fair value.” But later in the first quarter of 

2012, instead of marking near the midpoint, the CIO began to assign more favorable prices 

within the daily price range (bid-ask spread) to its credit derivatives. The more favorable prices 

enabled the CIO to report smaller losses in the daily profit/loss (P&L) reports that the SCP filed 

internally within the bank. 

The data indicates that the CIO began using more favorable valuations in late January and 

accelerated that practice over the next two months. By March 15, 2012, two key participants, 

Julien Grout, a junior trader charged with marking the SCP’s positions on a daily basis, and his 

supervisor, Bruno Iksil, head trader in charge of the SCP book, were explicit about what they 

were doing. As Mr. Grout told Mr. Iksil in an instant message conversation: “[I] am not 

marking at mids as per a previous conversation.”605 The next day, Mr. Iksil expressed to Mr. 

Grout his concerns about the growing discrepancy between the marks they were reporting versus 

those called for by marking at the midpoint prices: “I can’t keep this going .... I think what he’s 

[their supervisor, Javier Martin-Artajo] expecting is a re-marking at the end of the month .... I 

don’t know where he wants to stop, but it’s getting idiotic.”606

For five days, from March 12 to 16, 2012, Mr. Grout prepared a spreadsheet tracking the 

differences between the daily SCP values he was reporting and the values that would have been 

reported using midpoint prices. According to the spreadsheet, by March 16, 2012, the Synthetic 

Credit Portfolio had reported year-to-date losses of $161 million, but if midpoint prices had been 

used, those losses would have swelled by at least another $432 million to a total of $593 million. 

CIO head Ina Drew told the Subcommittee that it was not until July 2012, after she had left the 

bank, that she became aware of this spreadsheet and said she had never before seen that type of 

“shadow P&L document.” 

 

On March 20, 2012, in a lengthy telephone conversation, Mr. Iksil told his supervisor, 

Mr. Martin-Artajo, that in an effort to begin to show the SCP’s losses he had issued a profit/loss 

(P&L) report disclosing not only a $40 million SCP loss for the day, but also projecting a 

“material” P&L “lag” of $600 to $800 million. Mr. Martin-Artajo expressed dismay at 

disclosing large losses prior to a meeting scheduled the next day to discuss the SCP with Ms. 

Drew. Ms. Drew told the Subcommittee that, despite the P&L report, the traders’ growing 

 605 3/15/2012 instant messaging session among Bruno Iksil, CIO, Julien Grout, CIO, and Luis Buraya, CIO, JPMCIO-PSI-H 0003798-819, at 805. 606 3/16/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Julien Grout, CIO, JPMCIO-PSI-H 0003820-822, at 821.
97

agitation over underreporting SCP losses, and an “exhaustive” meeting on the SCP, she did not 

learn at that time that the CIO London team was mismarking the SCP book.

On March 23, Mr. Iksil estimated in an email that the SCP had lost about $600 million 

using midpoint prices and $300 million using the “best” prices, but the SCP reported a daily loss 

of only $12 million. On March 30, the last business day of the quarter, the CIO suddenly 

reported a daily loss of $319 million, a loss six times larger than any prior day. But even with 

that outsized reported loss, a later analysis by the CIO’s Valuation Control Group (VCG) noted

that, by March 31, 2012, the cumulative difference in the SCP’s P&L figures between using 

midpoint prices versus more favorable prices totaled $512 million.

On April 10, 2012, the CIO initially reported an estimated daily loss of $6 million, but 90 

minutes later, after a confrontation between two CIO traders, issued a new P&L report estimating 

a loss of $400 million. That change took place on the first trading day after the whale trades 

gained media attention; one CIO trader later said CIO personnel were “scared” at the time to hide 

such a large loss. As a result, the SCP internally reported year-to-date losses of about $1.2 

billion, crossing the $1 billion mark for the first time. 

One result of the CIO’s using more favorable valuations was that two different business 

lines within JPMorgan Chase, the Chief Investment Office and the Investment Bank, assigned 

different values to identical credit derivative holdings. At one point, the CIO accused the 

Investment Bank, which was a counterparty to some of its trades, of damaging the CIO by using 

different marks and leaking the CIO’s positions to the marketplace, accusations it later dropped. 

Other CIO counterparties also noticed the price differences between the two business lines and

objected to the CIO’s values, resulting in collateral disputes peaking at $690 million. In May, 

the bank’s Deputy Chief Risk Officer, Ashley Bacon, directed the CIO to mark its books in the 

same manner as the Investment Bank, which used an independent pricing service to identify the 

midpoints in the relevant price ranges. That change in valuation methodology resolved the 

collateral disputes in favor of the CIO’s counterparties and, at the same time, put an end to the 

CIO’s mismarking. 

On May 10, 2012, the bank’s Controller issued an internal memorandum summarizing a 

special assessment of the SCP’s valuations from January through April. Although the 

memorandum documented the CIO’s use of more favorable values through the course of the first 

quarter, and a senior bank official even privately confronted a CIO manager about using 

“aggressive” prices in March, the memorandum generally upheld the CIO valuations because, on 

their face, the prices generally fell within the daily price range (bid-ask spread) for the relevant 

derivatives. The bank memorandum observed that the CIO had reported about $500 million less 

in losses than if it had used midpoint prices for its credit derivatives, and even disallowed and 

modified a few prices that had fallen outside of the permissible price range (bid-ask spread), yet

found the CIO had acted “consistent with industry practices.”

The sole purpose of the Controller’s special assessment was to ensure that the CIO had 

accurately reported the value of its derivative holdings, since those holdings helped determine 

the bank’s overall financial results. The Controller determined that the CIO could properly 

report a total of $719 million in losses, instead of the $1.2 billion that would have been reported 

if midpoint prices had been used. That the Controller essentially concluded the SCP’s losses 
98

could legitimately fall anywhere between $719 million and $1.2 billion exposes the subjective,

imprecise, and malleable nature of the derivative valuation process. 

The bank told the Subcommittee that, despite the overly favorable pricing practices noted 

in the May memorandum and the collateral disputes resolved in favor of the CIO’s 

counterparties, it did not view the CIO as having engaged in any mismarking until June 2012, 

when its internal investigation began reviewing CIO recorded telephone calls and heard CIO 

personnel disparaging the very marks they were reporting. On July 13, 2012, the bank restated 

its first quarter earnings, reporting additional SCP losses of $660 million. JPMorgan Chase told 

the Subcommittee that the decision to restate its financial results was a difficult one, because 

$660 million was not clearly a “material” amount for the bank, and the valuations used by the 

CIO did not clearly violate bank policy or generally accepted accounting principles since they 

used prices that were generally within the daily price range (bid-ask spread) for the relevant 

credit derivatives. The bank told the Subcommittee that the key consideration leading to the 

restatement of the bank’s losses was its determination that the London CIO personnel had not 

acted in “good faith” when marking the SCP book, which meant the SCP valuations had to be 

revised. Essentially, the CIO traders had failed to use the price “that is most representative of 

fair value in the circumstances” as required by bank policy and generally accepted accounting 

principles.

The ability of CIO personnel to hide hundreds of millions of dollars of additional losses 

over the span of three months, and yet survive valuation reviews by both internal and external 

accounting experts, shows how imprecise, undisciplined, and open to manipulation the current 

process is for valuing derivatives. This weak valuation process is all the more troubling given 

the high risk nature of synthetic credit derivatives, the lack of any underlying tangible assets to 

stem losses, and the speed with which substantial losses can accumulate and threaten a bank’s 

profitability. The whale trades’ bad faith valuations exposed not only misconduct by the CIO

and the bank’s violation of the derivative valuation process mandated in generally accepted 

accounting principles, but also a systemic weakness in the valuation process itself for 

derivatives.

In compiling the information for this section of the Report, as explained earlier, the 

Subcommittee was unable to interview the key CIO personnel involved in marking the SCP book

and preparing the CIO’s daily P&L statements, Achilles Macris, Javier Martin-Artajo, Bruno 

Iksil, and Julien Grout, each of whom declined to speak with the Subcommittee and remained

outside the reach of the Subcommittee’s subpoena authority. Mr. Macris was the head of the 

CIO’s International Office. Mr. Martin-Artajo was the head of the CIO’s equity and credit 

trading operation. Mr. Iksil was a senior CIO trader who oversaw the Synthetic Credit Portfolio. 

Mr. Grout was a more junior CIO trader specializing in credit derivatives and charged with 

preparing the SCP’s daily marks. 
99

A. Background

(1) Valuing Derivatives In General

Under U.S. Generally Accepted Accounting Principles (GAAP), at the close of every 

business day, companies that own derivatives, including credit derivatives, must establish their

“fair value.”607 Under GAAP, fair value is defined as “the price that would be received to sell an 

asset or paid to transfer a liability in an orderly transaction between market participants at the 

measurement date.”608 GAAP explains that deriving fair value “assumes a hypothetical 

transaction but is nonetheless a market-driven exercise using the best available information at 

hand.” 

GAAP specifies a hierarchy of three categories of information that should be used when

calculating the fair value of a derivative, placing a priority on observed market prices.

609 Level 1

consists of “quoted prices in active markets for identical assets or liabilities.”610 Level 2 consists 

of “inputs other than quoted prices included within Level 1 that are observable for the asset or 

liability, either directly or indirectly.”611 They include, for example, quoted prices for similar 

assets in either active or inactive markets. Level 3 consists of “unobservable inputs,” such as 

pricing models used when no actual market prices are available.612 

To establish the fair value of a derivative that is traded in a dealer’s market, such as credit 

derivatives, GAAP focuses on the prices actually used by the dealers. Since those prices 

fluctuate over the course of the day, a key issue is what price to use within the daily range of 

prices being offered in the marketplace. The daily price range is often referred to as the “bid-ask 

spread,” meaning the prices that dealers offer to buy or sell a derivative during the course of a 

trading day. GAAP states: “[T]he price within the bid-ask spread that is most representative of 

fair value in the circumstances shall be used to measure fair value.”613 

Determining what price within a given price range is “most representative of fair value in 

the circumstances” permits market participants to exercise a degree of subjective judgment. 

GAAP also supports using “mid-market pricing ... as a practical expedient for fair value 

measurements within a bid-ask spread.”614

 607 Accounting Standards Codification Topic 820-10-30, Fair Value Measurements and Disclosures (ASC 820).

By “mid-market pricing,” it means the price in the 

middle of the day’s price range. For that reason, many market participants routinely use the 

midpoint price of a derivative’s bid-ask spread in their daily financial reporting. To supply that 

information, some firms that administer credit indices publish or provide clients with the daily 

608 Id.

609 Accounting Standards Codification Topic 820-10-35-37, Fair Value Measurements and Disclosures (ASC 820). 610 Accounting Standards Codification Topic 820-10-35-40, Fair Value Measurements and Disclosures (ASC 820). 611 Accounting Standards Codification Topic 820-10-35-47, Fair Value Measurements and Disclosures (ASC 820). 612 Accounting Standards Codification Topic 820-10-35-52, Fair Value Measurements and Disclosures (ASC 820). 613 Accounting Standards Codification Topic 820-10-35-36C, Fair Value Measurements and Disclosures (ASC 

820).

614 Accounting Standards Codification Topic 820-10-35-36D, Fair Value Measurements and Disclosures (ASC 

820). 
100

bid-ask spread and midpoint price for derivatives of interest.

615 Some financial firms employ 

independent price reporting services to identify, for a fee, the bid-ask spread and midpoint prices 

of specified derivatives for use in their financial reporting.616 Still other firms use their own 

personnel to identify the daily bid-ask spread and midpoint prices for their derivatives. 

Although GAAP essentially provides a safe harbor for midpoint prices, it does not 

compel firms to use them. For example, if a trade were to occur late in the day at a price near the 

extreme end of the daily price range (bid-ask spread), GAAP would allow a market participant to 

use that price (versus the mid-price) if it were to determine that the end-of-day price was “most 

representative of fair value in the circumstances.”617 

Because GAAP requires derivative values to be recorded each business day in accordance 

with market values, derivatives are often characterized as “mark-to-market.” The values or 

prices assigned to the derivatives each day are often referred to as the daily “marks.” Under 

GAAP, the value of every derivative must be recorded or marked-to-market each day in a 

company’s books, even if the derivative was not actually purchased, sold, or otherwise actively

traded. The daily gain or loss is typically reported internally by each business line within a firm

and rolled up into a firmwide daily profit and loss statement. 

Because derivative values often fluctuate, parties to a derivative agreement often agree to 

post cash collateral on an ongoing basis to cover the cost of settling the derivatives contract. The 

amount of cash collateral that has to be posted typically changes periodically to reflect the fair 

value of the derivative. If a dispute arises over the value of the derivative and the amount of 

collateral to be posted, the parties typically negotiate a resolution of the “collateral dispute.” 

As part of establishing the fair value of derivatives, pricing adjustments are also 

sometimes made when the derivatives are, for example, traded in less liquid markets,

618 or are 

part of a large holding whose size might affect the price.

619

 615 See, e.g., Markit Group, Ltd., a global financial information services company that administers multiple credit 

index products, and publishes the daily bid-ask spread and midpoint price for them on its website at 

 Parties with derivative portfolios 

may also establish a reserve, known as a fair value adjustment, based on such considerations as

the illiquidity of the market, the creditworthiness of its derivative counterparties, the extent to 

www.markit.com. Markit Credit Indices: A Primer (October 2012), at 7, 12; see also 

http://www.markit.com/en/products/data/indices/credit-and-loan-indices/cdx/cdx-prices-iframe.page. 616 JPMorgan Chase’s Investment Bank, for example, took this approach. 617 Accounting Standards Codification Topic 820-10-35-24B, Fair Value Measurements and Disclosures (ASC 

820).

618 See Accounting Standards Codification Topic 820-10-35-54D, Fair Value Measurements and Disclosures (ASC 

820) (“If a reporting entity concludes that there has been a significant decrease in the volume or level of activity for 

the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), 

further analysis of the transactions or quoted prices is needed.”). 

619 See, e.g., 2013 JPMorgan Chase Task Force Report, at 49, footnote 60 (“By convention, the exit price is 

estimated for normal trading size, and CIO was not required to estimate the prices it would have received if it 

attempted to sell its entire (large) position at once.”). See also 5/10/2012 JPMorgan Chase Controllers special 

assessment of CIO’s marks, January to April 2012, at 5, JPM-CIO 0003637-654, at 641 (“GAAP continues to permit 

size-based adjustments for derivatives portfolios if an election is made to do so.”). 
101

which it holds a concentrated block of assets, and the uncertainties associated with its pricing 

methodology.

620 

(2) Valuing Derivatives at JPMorgan Chase 

Because JPMorgan Chase is one of the largest derivative dealers and traders in the world

and the value of its derivatives holdings affect its financial results, it has longstanding policies 

and procedures on how to price its derivative holdings and report their fair value on the 

company’s books. Its policies and procedures generally adhere closely to GAAP principles. 

To determine fair value, for example, as summarized in a 2012 internal report examining 

SCP pricing, JPMorgan Chase policies reflect GAAP’s accounting principles: 

“General

Fair value is the price to sell an asset or transfer a liability in the principal (or 

most advantageous) market for the asset or liability (an exit price). The sale or 

transfer assumes an orderly transaction between market participants. 

Data Sources and Adjustments

Valuation techniques used to measure the fair value of an asset or liability 

maximize the use of observable inputs, that is, inputs that reflect the assumptions 

market participants would use in pricing the asset or liability developed based on 

market data obtained from independent sources. Valuations consider current 

market conditions and available market information and will, therefore, represent 

a market-based, not firm-specific, measurement. 

Where available, quoted market prices are the principal reference point for 

establishing fair value. Market quotation may come from a variety of sources, but 

emphasis is given to executable quotes and actual market transactions (over 

indicative or similar non-binding price quotes). In certain circumstances 

valuation adjustments (such as liquidity adjustments) may be necessary to ensure 

that financial instruments are recorded at fair value.

Bid-offer spread and position size

As further described in US GAAP Accounting Standards Codification Topic 820 

Fair Value Measurement (‘ASC 820’), the objective of a fair value measurement 

is to arrive at an appropriate exit price within the bid-offer spread, and ASC 820 

notes that mid-market pricing may (but is not required to) be used a practical 

expedient.”621

 620 Subcommittee briefing by Public Company Accounting Oversight Board (9/14/2012). 621 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January through April 2012, at 4, 

JPM-CIO 0003637-654, at 640. See also 11/8/2007 Controllers Corporate Accounting Policies, “Fair Value 

Measurements,” prepared by JPMorgan Chase, OCC-SPI-00056794, at 4 (“The transaction to sell the asset or 

transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a 

market participant that holds the asset or owes the liability. Therefore, the objective of a fair value measurement is 

to determine the price that would be received to sell the asset or paid to transfer the liability at the measurement date 

(an exit price).”).
102

In its January 2013 report on the CIO whale trades, the JPMorgan Chase Task Force summarized 

the bank’s derivatives valuation approach as follows: “[B]oth U.S. GAAP and Firm policy 

required that CIO make a good-faith estimate of the exit price for a reasonably sized lot of each 

position, and assign values reflecting those estimates.”622

Since at least 2007, JPMorgan Chase policy has been to use midpoint prices as the 

“starting point” for valuing its derivatives:

“The Firm makes markets in derivative contracts, transacting with retail and 

institutional clients as well as other dealers. ... In general, the dealer market is 

the Firm’s principal market for derivative transactions as the greatest volume of 

the Firm’s derivatives activities occur in the dealer market. In addition the dealer 

market is the most advantageous exit market for the Firm. ... The starting point 

for the valuation of a derivatives portfolio is mid market. As a dealer, the Firm 

can execute at or close to mid market thereby profiting from the difference 

between the retail and dealer markets. If the Firm cannot exit a position at mid 

market certain adjustments are taken to arrive at exit price.”623

Investment Bank. Within JPMorgan Chase, the Investment Bank is one of the largest 

holders of derivatives. JPMorgan Chase told the Subcommittee that the Investment Bank’s

standard practice was to value its derivatives using the midpoint price in the relevant price 

range.

624 To identify the mid-price, the Investment Bank employed an independent pricing

valuation service which provided pricing information on a number of derivatives for trading 

book valuations.625 This service typically provided the bank with the midpoints of the bid-ask 

spreads for specified derivatives.

Chief Investment Office. The CIO began actively investing in credit derivatives and 

assembling a Synthetic Credit Portfolio beginning in 2006. The internal document authorizing

the CIO to conduct credit derivatives trading contained this paragraph on valuing credit 

derivatives:

“Valuation Control

CIO is not a market maker and uses the Investment Bank’s risk and valuation 

systems to transact its products. As such CIO is a price taker using prices and 

valuation inputs controlled and determined by the market making businesses of 

the bank. CIO’s Valuation Control Group coordinator will ensure that where 

pricing adjustments are identified from the month end price test process for 

 622 2013 JPMorgan Chase Task Force Report, at 48-49. 623 11/8/2007 Controllers Corporate Accounting Policies, “Fair Value Measurements,” prepared by JPMorgan 

Chase, OCC-SPI-00056794, at 11. See also 5/10/2012 Controllers Corporate Accounting Policies, “Fair Value 

Measurements,” prepared by JPMorgan Chase, JPM-CIO 0003424-442. 624 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Olivier Vigneron). 625 Subcommittee briefing by JPMorgan Chase legal counsel (2/4/2013). For example, Markit provides price data 

for credit derivative indices, while Totem, a related company, provides price data for credit index tranches. See 

5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January through April 2012, at 6, JPMCIO 0003637-654, at 642.
103

market making groups in the Investment Bank, that where CIO hold the same 

positions the adjustments are also discussed with/applied to CIO.”626

In 2010, a CIO internal procedure for testing the accuracy of CIO asset valuations stated

that “[i]ndependent and reliable direct price feeds are the preferred method for assessing 

valuation. In general, third party prices/broker quotes are considered the next best pricing 

source.”627 It also indicated that the CIO’s price testing group obtained independent and reliable 

direct price feeds from the “Finance Valuation & Policy Group (‘FVP’) within the Investment 

Bank” for “select CIO products,” and that in other cases, the “IB FVP team conducts price 

testing of select positions” for the CIO. It also noted that “[i]ndependent prices are obtained 

from various external sources (Markit, Totem, etc.) and applied to CIO positions for price testing 

purposes.”628

These documents indicate that, to value its credit derivatives, the CIO was to use the 

same “prices and valuation inputs” as the Investment Bank and to work closely with the 

Investment Bank’s valuation team, drawing in part on independent pricing information from 

valuation services like Markit and Totem. The evidence indicates, however, that was not how 

the CIO actually operated in the case of the Synthetic Credit Portfolio in 2012.

In 2012, there was little or no evidence that CIO personnel valuing SCP credit derivatives

coordinated their review with the Investment Bank, used Investment Bank prices, or relied on 

daily prices supplied by independent pricing valuation services. Instead, CIO personnel 

unilaterally reviewed the market data each business day for each of its credit derivatives,

estimated their fair value, and then, on a daily basis, entered the fair value of each derivative

position in the CIO’s Synthetic Credit Portfolio trading book.

629 As explained in a later bank 

report on the CIO’s derivatives pricing practices:

“CIO’s valuation process reflects how and to whom CIO would exit positions by 

typically seeking price quotes from the dealers with whom CIO would most 

frequently transact and with whom CIO would seek to exit positions, rather than 

looking for more broad based consensus pricing from a wide variety of dealers 

not active in these credit markets. ... CIO necessarily uses judgment to identify 

the point within the bid-offer spread that best represents the level at which CIO 

reasonably believes it could exit its positions, considering available broker quotes, 

market liquidity, recent price volatility and other factors.”630

 626 CIO Executive Summary, “Chief Investment Office New Business Initiative Approval” on “Credit and Equity 

Capability,” (undated, but in 2006), at 11, OCC-SPI-00081631. 627 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 1. 628 Id., at 3.

629 See 2013 JPMorgan Chase Task Force Report, at 46. 630 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 5, JPMCIO 0003637-654, at 641. See also 2013 JPMorgan Chase Task Force Report, at 46-47. 
104

By March 2012, when the SCP routinely encompassed over 100 different types of credit 

derivatives, this daily pricing effort required sustained effort.631 The resulting CIO prices often

differed from those of the Investment Bank, as explained below.

During the period examined by the Subcommittee, the daily task of marking the SCP 

book with the fair value of its credit derivatives fell to a junior CIO trader, Julien Grout, who 

performed the task with assistance from the head Synthetic Credit Portfolio manager Bruno 

Iksil.632 Late in the afternoon each business day, Mr. Grout determined the daily marks for each 

of the SCP’s holdings and then used a series of computer programs to generate an estimate of the 

SCP’s overall daily profit or loss, known as the “P&L Predict.”633 He also often drafted a short 

explanation for the day’s gains or losses and included that explanation in the P&L Predict as 

well.

634 At the end of the business day in London, Mr. Grout sent an email with the P&L Predict

to a designated list of CIO personnel in both London and New York.635 

In New York, a CIO colleague, Isi Oaikhiena, consolidated a variety of daily CIO P&L 

reports, including the SCP P&L Predict from London, into a single document each day known as

the CIO “EOD” (End of Day) P&L report, and emailed it to the “EOD Credit Estimate” group.636 

That group consisted of about 20 CIO employees, including CIO head Ina Drew, Chief Financial 

Officer John Wilmot, the key CIO traders, and various CIO risk managers and VCG analysts.

637

The EOD Credit Estimate Group reviewed and produced a final CIO EOD P&L report for the 

day, using a computer database to generate a composite, cumulative daily P&L figure for the 

CIO.

638 The final EOD P&L report included an SCP P&L figure that often differed from the 

original estimate and sometimes, but not always, included the explanation provided by Mr. 

Grout. The final CIO P&L results were also rolled it up into a bankwide, internal, cumulative,

daily P&L statement.

639

Although it seems that the CIO’s practice prior to 2012 had been to value the SCP credit 

derivatives at or near the midpoint price in the relevant daily price range, at some point in early 

2012, that practice changed. According to notes of an interview of Bruno Iksil by the JPMorgan 

Chase Task Force review, Mr. Martin-Artajo told Mr. Iksil that he was not there to provide 

“mids.” Mr. Martin-Artajo thought that the market was irrational, and Mr. Iksil should provide 

 631 See, e.g., 4/10/2012 email from Julien Grout, CIO, to “CIO Credit Positions” email group, “CIO CORE Credit 

Positions: 10-Apr12,” JPM-CIO-PSI 0023061 (listing numerous credit derivative positions and their fair values). 632 See 2013 JPMorgan Chase Task Force Report, at 46. According to the JPMorgan Chase Task Force, to 

determine the fair value of particular derivatives, the trader considered “recently executed trades,” “price quotes 

received from dealers and counterparties,” and his “observations of and judgment regarding market conditions, 

including the relationships between and among different instruments.” Id.

633 2013 JPMorgan Chase Task Force Report, at 47. 634 Id. 635 See, e.g., 3/20/2012 email from Julien Grout, CIO, to “CIO ESTIMATED P&L” mail list, “CIO Core Credit 

P&L Predict [20 Mar]: -$39,686k (dly) -$275,424k (ytd),” JPM-CIO-PSI 0016487-89. 636 See, e.g., 3/20/2012 email from Isi Oaikhiena, CIO, to “EOD Credit estimate” mail list, copy to “CIO P&L 

Team” mail list, “International Credit Consolidated P&L 20-Mar-2012,” JPM-CIO-PSI 0019484. 637 12/12/2012 distribution list document, “Distribution List Membership Around March 2012,” provided to 

Subcommittee by JPMorgan Chase legal counsel, JPM-CIO-PSI-H 0002815. 638 Subcommittee briefing by JPMorgan Chase legal counsel (2/4/2013).

639 Id. (explaining that the bank’s internal database, “Monster Truck,” generated P&L data for both the CIO and 

firmwide P&L reports).
105

his judgment and estimate the value of the positions, not rely on the exit price. Mr. Iksil told the 

Task Force that there was a difference between what Mr. Martin-Artajo and the bank expected 

him to do.

640 

Valuation Control Group. Due to the importance of derivative valuations, which can 

encompass a large set of assets that affect bankwide profit and loss calculations on a daily basis, 

all banks are required to set up an internal process to crosscheck the accuracy of the values 

reported internally.641 At JPMorgan Chase, this process was administered by the Valuation 

Control Group (VCG). VCGs at the level of the bank’s lines of business reported to the Chief 

Financial Officer at the line of business, who in turn reported to the bank’s Chief Financial 

Officer, Douglas Braunstein.

642 At the end of each month, each VCG was required to validate

the asset valuations in the relevant books, including the CIO’s VCG which reviewed the credit 

derivative marks in the SCP book.643 

According to the bank, the CIO VCG “independently price test[ed] the front office marks 

at each month end and determine[d] necessary adjustments to arrive at fair value for the purposes 

of US GAAP books and records.”644 The bank has also explained that, to test the accuracy of the 

booked values, the VCG examined, for each position, transaction data, dealer quotes, and 

independent pricing service data on the last day of the month, and then selected a value that fell

within that day’s price range (bid-ask spread).645 That value was called the “VCG mid price.” 

The VCG then compared the booked price on the last day of the month to the VCG mid price. 

Because both GAAP and bank policy permitted lines of business to exercise subjective 

judgments when calculating the fair value of their derivatives, the CIO VCG explicitly allowed

the CIO to deviate from the VCG mid prices.

646 The extent of the permitted deviation varied 

depending upon the type of credit index or tranche position at issue.

647 Some of the permitted 

deviations were so extensive that they allowed the CIO to select from a wide range of prices

which, when applied to the SCP’s large positions, then translated into valuations which, 

collectively, could vary by tens or even hundreds of millions of dollars from the VCG mid 

prices. In addition to reviewing the SCP book, the VCG was responsible for calculating and 

monitoring the amount and categorization of any liquidity and concentration reserves established 

for the SCP derivatives.648

 640 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 641 See 1/29/2013 email from OCC legal counsel to the Subcommittee, PSI-OCC-23-000001. 642 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). See also 2013 JPMorgan Chase 

Task Force Report, at 53.

643 See 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685. 644 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 5, 

JPM-CIO 0003637-654, at 642. 645 See 2013 JPMorgan Chase Task Force Report, at 53. 646 See, e.g., 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 6. 647 See, e.g., 4/20/2012 email from Jason Hughes, CIO, to Edward Kastl, JPMorgan Chase, “Credit Index and 

Tranche Book,” JPM-CIO-PSI-H 0006636-639, at 636 (listing price deviations allowed from VCG mid prices for 18 

credit derivative positions). See also 2013 JPMorgan Chase Task Force Report, at 54.

648 See 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 6 (“In assessing the 

reasonableness of fair value measurements that are subject to testing, VCG will consider whether such 

measurements appropriately reflect liquidity risk, particularly in the case of instruments for which CIO maintains 

either a significant/concentrated position and/or if the market for given instrument can be observed to be less liquid. 
106

B. Mismarking the CIO Credit Derivatives

The mismarking of the SCP credit derivatives appears to have begun in late January, 

accelerated in February, and peaked in March 2012. Recorded telephone conversations, instant 

messaging exchanges, and a five-day spreadsheet indicate that key CIO London traders involved 

with the marking process were fully aware and often upset or agitated that they were using 

inaccurate marks to hide the portfolio’s growing losses. 

(1) Mismarking Begins

On January 31, 2012, CIO trader Bruno Iksil, manager of the Synthetic Credit Portfolio,

made a remark in an email to his supervisor, Javier Martin-Artajo, which constitutes the earliest 

evidence uncovered by the Subcommittee that the CIO was no longer consistently using the 

midpoint of the bid-ask spread to value its credit derivatives. Mr. Iksil wrote that, with respect to 

the IG9 credit index derivatives: “we can show that we are not at mids but on realistic level.”649 

A later data analysis conducted by the bank’s Controller reviewing a sample of SCP valuations

suggests that, by the end of January, the CIO had stopped valuing two sets of credit index 

instruments on the SCP’s books, the CDX IG9 7-year and the CDX IG9 10-year, near the 

midpoint price and had substituted instead noticeably more favorable prices.

650

This change in the CIO’s pricing practice coincided with a change in the SCP’s profitloss pattern in which the Synthetic Credit Portfolio began experiencing a sustained series of daily 

losses. The SCP book lost money on 17 of 21 business days in January, reporting just four 

profitable days.651 By month-end, not only had the book reported losses totaling $100 million, 

but there was not a single day in January when the book was cumulatively in the black.652 In 

addition, the book lost money on nine business days in a row at the end of January, producing 

collective losses of $81 million.653 February was equally bleak, losing money on 15 of 21 

business days, including on seven consecutive business days at the end of the month.

654

 

In this regard, VCG is responsible for calculating / monitoring these reserves and consulting with the business on 

such estimates ....”); Subcommittee interview of Elwyn Wong, OCC (8/20/2012).

 March 

continued the pattern, losing money on 16 of 22 business days, including a string of losses – 15 

649 1/31/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “hello, quick update in core credit...,” 

JPM-CIO-PSI 0001229 (Mr. Iksil: “as to IG9, things look much better. Not that we are immune but we can show 

that we are not at mids but on realistic level.”). 

650 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 17, 

JPM-CIO-0003637-654, at 653, excerpted in charts below. The report showed that the two prices used by the CIO 

deviated from the midpoint prices by more than one basis point and produced prices more favorable to the CIO. The 

IG9 7-year credit index was priced at 102.000, when the midpoint price was 103.500; the IG9 10-year index was 

priced at 119.500 when the midpoint price was 120.750. Id., at 653. For more information about credit indices, see 

Chapter II.

651 See OCC spreadsheet, OCC-SPI-00000298, reprinted below. Numbers do not reflect restated P&L figures. 652 Id. 653 Id. 654 Id.
107

of the last 16 business days – at the end of the month.

655 April and May were more of the 

same.656 

The following chart, which was prepared by the Subcommittee using daily SCP P&L data 

supplied by the OCC, sets out the daily profit-loss figures reported internally by the CIO to bank 

management from January through mid-May 2012.657

 655 Id. 656 Id. 657 Id. While most P&L numbers in January likely used midpoint prices to calculate the value of the book’s 

derivatives, the remaining P&L figures likely incorporated the more favorable prices used by the CIO from late 

January to mid-May 2012. 
108

Source: OCC spreadsheet, OCC-SPI-00000298. Losses are indicated by figures in parentheses. Numbers do not 

reflect restated P&L figures. Prepared by U.S. Senate Permanent Subcommittee on Investigations, March 2013.
109

The SCP had never before experienced those types of sustained losses. According to 

CIO personnel, at the beginning of 2012, $5 million was considered a sufficiently large loss that 

the head of CIO, Ina Drew, would ask about it.658 On February 29, 2012, the SCP book reported 

internally a daily loss of $15 million. CIO trader Bruno Iksil informed his supervisor, Javier 

Martin-Artajo, on that date that he had made some large trades, all of which experienced 

“adverse” price changes, and seemed to obliquely reference manipulating the marks as a method 

to limit the amount of losses reported, when he wrote that the trades had experienced “month end 

price moves that were all adverse although we could limit the damage.”659 He also advocated

analyzing “the lags we have in the core book.”660 The “core book” was a reference to the SCP, 

which the traders often described as the “Core Credit Book.” According to the bank, the term

“lag” referred to “the aggregate differential between the prices being assigned and the unadjusted 

mid-market price.”661

On March 9, 2012, in a recorded telephone conversation with Mr. Iksil, Mr. Grout 

expressed concern about how “we’re lagging,” predicting that the final outcome of the SCP

trading strategy would be “a big fiasco” and “big drama when, in fact, everybody should have ... 

seen it coming a long time ago.”662 His use of the term “lagging” in the telephone conversation 

appears to have been a reference to the SCP’s ongoing, unreported losses. He cautioned: “We 

have until December to cover this thing. ... [W]e must be careful.”663 His supervisor, Mr. 

Martin-Artajo, later told the JPMorgan Chase Task Force investigation that their strategy was as 

follows: “We can lose money on a daily basis, but correct with carry of the book.664

 658 Javier Martin-Artajo, head of CIO equity and credit trading, reported: “If we ever had a loss over $5 million, Ina 

calls me at night.” JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 9/6/2012). See also 2013 JPMorgan Chase Task Force Report, at 50, footnote 64. 

 Month-end 

659 2/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Core credit book update”, JPM-CIO 

0003443. A later analysis by JPMorgan Chase’s Controller showed that, of 18 positions on February 29 examined 

to verify their values, five or nearly one third had used more favorable prices than the midpoint prices. See chart on 

February valuations, 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April

2012, JPM-CIO 0003637-654, at 653. 660 2/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Core credit book update”, JPM-CIO 

0003443. 

661 2013 JPMorgan Chase Task Force Report, at 47. The JPMorgan Chase Task Force defined the “unadjusted midmarket price” as “the mathematical mid-point between the best bid and best offer in the market.” Id. It also noted 

that “at times” some traders used the term “lag” to refer to “the amount by which the Synthetic Credit Portfolio was 

underperforming a theoretical or fundamental valuation of the positions – i.e., how far behind their expectations it 

was.” Id., at 48, footnote 57. For a longer discussion of the meaning of the term “lag,” see below. 662 See 3/9/2012 transcript of a recorded telephone conversation between Julien Grout, CIO, and Bruno Iksil, CIO, 

JPM-CIO 0003445-356, at 449. (“Mr. Grout: Here we’re lagging – we’re lagging. Well, you’ll tell me this on 

Monday and, and anyway, I see the impact very well. I have a vague idea you know how this is going to end up. 

You know that [indecipherable] Trevor is going to try to get some capital, Ina will say no, so it will be a big fiasco 

and it will be a [b]ig drama when, in fact, everybody should have, should have seen it coming a long time ago. ... 

Anyway, you see, we cannot win here. ... I believe that it is better to say that it’s dead, that we are going to crash. 

The firm will service the debt. ... It’s going to be very uncomfortable but we must not screw up. ... It’s going to 

be very political in the end. ... We have until December to cover this thing. ... we must be careful.”).

663 Id. 664 “Carry” refers to the cash premiums that short counterparties were paying to the CIO as the long party on certain 

credit derivatives. Mr. Martin-Artajo seemed to be saying that the daily losses in the SCP book could be 

“correct[ed]” or lessened through the receipt of the cash premiums or “carry” from the short counterparties. 
110

is not as important as quarter-end.”665 Mr. Martin-Artajo likely viewed the quarter-end as more 

important because, as part of their mandatory SEC filings, corporations registered with the SEC 

have to file a financial statement that is made public and whose accuracy must be attested to by 

the Chief Executive Officer and Chief Financial Officer. In addition, at quarter-end, federally 

insured banks have to file with the FDIC call reports with financial information whose accuracy 

also has to be attested to by bank management.

(2) Mismarking Peaks

The end of the first quarter was March 31, 2012. The last business day was Friday, 

March 30. As the quarter-end approached, the SCP losses deepened rather than abated. CIO

personnel responded by booking even more favorable prices more often than before to minimize 

the reported losses. 

Data later compiled by the JPMorgan Controller’s office as part of a special assessment 

of the SCP marks during the first four months of the year indicates that the mismarking likely 

peaked in March. The data showed that, for 18 selected SCP marks as of March 31, 2012, with 

respect to 16 of those marks, the CIO had booked a value equal to the price at the extreme 

boundary of the bid-ask spread, had booked one mark almost at the extreme, and had even 

booked one mark outside of the bid-ask spread. All of this led to more favorable values for the

SCP book than would have been provided by marking at the midpoint, which helped minimize 

the SCP losses.

666 While similar analyses by the Controller’s office of selected CIO marks at the 

end of January and February also showed marks using more favorable prices than those at the 

midpoint, none of those marks had gone so far as to use a price at the extreme edge of the bidask spread.667 

The OCC noticed the same trend when it examined the March marks. As one OCC 

examiner put it: “New marks increase loss [$]472m[illion] for March. ... Instead of marking to 

mid, in most cases longs were marked at offer and shorts a[t] bid.”668 In its January 2013 

management report, JPMorgan Chase also acknowledged the mismarking:

“[F]rom at least mid-March through early April, the Synthetic Credit Portfolio’s

losses appear to have been understated. ... [O]n a number of days beginning in at 

least mid-March, at the direction of his manager, [a CIO trader] assigned values to 

certain of the positions in the Synthetic Credit Portfolio that were more beneficial 

to CIO than the values being indicated by the market. The result was that CIO 

underreported the losses, both on a daily basis and on a year-to-date basis.”669

 665 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

 

666 See chart examining 18 SCP marks as of March 31, 2012, 5/10/2012 JPMorgan Chase Controllers special 

assessment of CIO’s marks, January to April 2012, at 17, JPM-CIO 0003637-654, at 653, reprinted in part below. 667 Id., the charts examining 18 SCP marks as of January 31 and as of February 29, 2012, reprinted in part below. 668 7/10/2012 email from Fred Crumlish, OCC, to Mike Brosnan and Scott Waterhouse, OCC, “Company lost 

confidence in March marks,” OCC-SPI-00055687. 669 2013 JPMorgan Chase Task Force Report, at 46. See also id., at 53 (“Unlike the January and February monthend prices, the marks for March 30 were not generally at or near the mid.”) and 89 (“From at least mid-March 
111

Evidence indicates that the CIO personnel in London responsible for reporting the SCP 

marks were fully aware that they were misusing the valuation process to understate the SCP 

losses. As the discrepancy in the marks grew, the two key CIO traders recording the marks 

became increasingly agitated. 

In mid-March, the junior CIO trader charged with reporting the daily value of the SCP 

book, Julien Grout, began keeping a spreadsheet tracking the difference between what he was 

reporting to the bank using the more favorable values versus what he would have reported using 

the midpoint prices.670 For five days, he tracked the divergence for three of the largest credit 

derivative holdings in the SCP book, the “CDX.IG” credit index referencing credit default swaps 

for U.S. investment grade companies, the “iTraxx Main” index which is the European equivalent 

of the IG index, and the “CDX.HY,” or High Yield credit index, which referenced credit default 

swaps for below investment grade companies. 

On the spreadsheet, the first column, entitled “Distance,” showed the total difference 

between the midpoint prices and the CIO’s booked values for all three indices on each of the five 

days. The next six columns broke out the difference for each of the three credit indices, using

both dollars and basis points.671 

Grout Spreadsheet

 U.S. Dollars Basis Points

Source: Spreadsheet prepared by Julien Grout, CIO, JPM-CIO-PSI-H 0002812. Losses are indicated by figures in 

parentheses.

On March 15, 2012, in a recorded session of instant messaging, Mr. Grout discussed the 

spreadsheet results up to that date with Mr. Iksil who asked him to send a copy of the 

spreadsheet to their supervisor, Javier Martin-Artajo. 

Mr. Iksil: “Can [yo]u drop me here the breakdown of the lag672 please? ... And send it 

to javier email ... Put me in copy ... I refer to the spreadsheet”673

 

through at least March 30, the traders did not provide good-faith estimates of the exit prices for all the positions in 

the Synthetic Credit Portfolio.”).

 

670 See spreadsheet maintained by Julien Grout, CIO, depicting the divergence from the midpoint of the bid-ask 

spread for various credit derivative indexes in dollars and basis points, JPM-CIO-PSI-H 0002812. 671 A basis point is a unit of measure describing a change in value. One basis point is equivalent to one hundredth of 

a percent (0.01%).

672 In this context, “lag” refers to the difference between what the CIO was reporting as losses and what those losses 

would have been had the CIO used midpoint prices.

673 As requested, Mr. Grout, CIO, sent an email and the spreadsheet to Mr. Martin-Artajo, CIO. See 3/15/2012 

email and spreadsheet from Julien Grout, CIO, to Javier Martin-Artajo, CIO, with copy to Mr. Iksil, CIO, JPM-CIO 
112

Mr. Grout: “itraxx 83 (4bp) ig180 (4bp) hy 37) 0.12”674 

Mr. Iksil: “... So julien, basically [yo]u say the worsening is 1bp in ig9 ...”675

Mr. Grout: “correct bruno”

[Later that same day]

Mr. Iksil: “We have 6 bps in ig9 after all676 ... I question here how we position 

ourselves Aren’t we making ig9 10 responsible for all here?”

Mr. Grout: “ah yes it’s definitely pb [problem] number one677 also: main s9 10y”

Mr. Iksil: “I am confused. I mean, [I’]m trying to keep a relatively realistic picture here 

- ig9 10y put aside Because 7 bps in ig9 10yr makes up for 7x50 gives 350 ...”678 

Mr. Grout: “that’s what [I] am saying. [I] am not marking at mids as per a previous 

conversation ...”

Mr. Iksil: “... Send to me and javier the spread[s]heet where [yo]u store the breakdown 

of the difference between our estimate and crude mids I will comment to javier”679 

The Grout spreadsheet and the March 15 instant messaging exchange show that the CIO 

traders knew that the changes they had made in how the credit index derivatives were valued had 

produced enormous reductions in the amount of losses reported internally, compared to the 

losses that would have been reported using midpoint prices. By March 16, 2012, the spreadsheet 

 

0003457-459. That version of the spreadsheet contained data for only four days, March 12 through March 15. A 

later version of the spreadsheet added data for March 16, which is the version reprinted above.

674 Mr. Grout was directing Mr. Iksil’s attention to the divergent figures he had calculated for that day for the three 

individual credit indices. See spreadsheet showing the iTraxx “distance” (unreported losses) totaled $83 million, 

which was 4 basis points away from the total that would have been reported using the midpoint price in the 

marketplace; the CDX.IG’s unreported losses totaled $180 million, which created a 4 basis point difference; and the 

CDX HY’s unreported losses totaled $37 million, which created a 0.12 basis point difference. 675 See spreadsheet showing that the “difference” for the CDX.IG had dropped 1 basis point from the prior day, from 

3.0 on March 14 to 4.0 on March 15. The figures show that a one basis point change in this index was equivalent to 

nearly $50 million.

676 The reference to “6 bps” is to a policy of the CIO’s Valuation Control Group which allowed the CIO to report 

derivative values for the IG credit index that could vary from the midpoint market prices by up to 6 basis points. 

See 4/20/2012 email from Jason Hughes, CIO, to Edward Kastl, JPMorgan Chase, “Credit Index and Tranche 

Book,” JPM-CIO-PSI-H 0006636-639, at 636 (listing tolerance levels for 18 credit derivative positions). 677 This reference is to the spreadsheet entries showing that the amount of divergence from midpoint prices was the 

largest for the CDX.IG of the three indices; it exceeded $136 million on March 14 and $181 million on March 15, 

the day of the conversation.

678 Mr. Iksil is essentially asking whether the figures show that a 7 basis point divergence in the values assigned to 

the IG9 10-year credit index would, given the large notional size of the SCP book’s holdings, translate into $350 

million in additional, unreported losses.

679 See 3/15/2012 instant messaging session between Bruno Iksil, CIO, Julien Grout, CIO, and Luis Buraya, 

JPMorgan Chase, JPM-CIO-PSI-H 0003798-819, at 801-806. 
113

showed that the unreported losses – the “Difference” – had reached at least $432 million. If that 

amount had been added to the amount of cumulative losses actually reported to the bank on that 

same day by the CIO, $161 million, the loss total would have nearly tripled to $593 million.

680 

Later on March 15, 2012, Mr. Iksil sent an email to his supervisor, Mr. Martin-Artajo,

about the Grout spreadsheet: 

“The divergence increases between crude mid prices and our estimate. Julien 

[Grout] will send a small sprea[d]sheet recording the brea[k]down of the 

divergence per blocks. The ig9 10yrs lags another bp [basis point] today.”681 

Mr. Iksil’s observation, that the IG9 10 year credit index “lag[ged]” by another basis point

“today” was reflected in the spreadsheet column showing that, between March 14 and March 15, 

the “distance” between the midpoint price and the CIO’s booked price for the “CDX.IG9 10y” 

had increased from “3.0” basis points to “4.0” basis points. In his email, Mr. Iksil used the word 

“lag” to refer to the unreported losses in the SCP book.

The next day, March 16, 2012, Mr. Iksil informed Mr. Martin-Artajo that the problem

was growing and already, in less than a day, involved $300 million in hidden losses: “[T]he 

divergence has increased to 300 now.”682 Mr. Iksil warned that the book would continue to lose 

money: “[I]t has been like this since the start of the year and the drift keeps going. I reckon we 

get to 400 difference very soon.”683 He speculated later in the day that, by the end of March, the 

total divergence might reach $1 billion.

684 

In another email on March 16, 2012, Mr. Iksil told Mr. Martin-Artajo, Mr. Grout, and 

Patrick Hagan, a CIO quantitative analyst, that additional trades in the IG9 10 year and iTraxx 

Main S9 10 year indices might enable the CIO to “lock a PNL [profit and loss] in form of carry 

forward that offsets the current unrealized loss.”685 He was suggesting that taking additional 

long positions in those credit indices might be used to offset “the current unrealized loss.” 

The sudden jump on March 16, between the losses being reported by the CIO and the 

losses that would have been reported by using midpoint prices, led to several agitated exchanges 

between the CIO traders later that day. For example, Mr. Iksil and Mr. Grout had the following 

telephone conversation over an apparent instruction from Mr. Martin-Artajo to wait until the end 

 680 See 3/15/2012 email and spreadsheet from Julien Grout, CIO, to Javier Martin-Artajo, CIO, with copy to Mr. 

Iksil, CIO, JPM-CIO 0003457-459, at 458; see also spreadsheet maintained by Julien Grout, CIO, depicting the 

divergence from the midpoint of the bid-ask spread for various credit derivative indexes in dollars and basis points,

JPM-CIO-PSI-H 0002812. 681 3/15/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “Update on core,” JPM-CIO-PSI 0000386. 682 3/16/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “update on Core PNL,” JPM-CIO 

0003475.

683 Id. 684 3/16/2012 transcript of an instant messaging session between Bruno Iksil, CIO, Julien Grout, CIO, and Eric de 

Sangues, JPMorgan Chase, JPM-CIO-PSI 0001231-233, at 232 (Mr. Iksil: “sent an Email to Javier an[n]ouncing 

this is more 300 now. that was 100 Monday. it is 300 now. 1000 for month end? Mr. de Sangues: “Ouch.” Mr. 

Iksil: “well that is the pace.”). 685 See 3/16/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, Julien Grout, CIO, and Patrick Hagan, 

JPMorgan Chase, “trade ideas on core,” JPM-CIO-PSI 0000387. 
114

of the month before making a large “one-off” or one-time adjustment to reduce the divergence

between the marks that had been booked and the marks that would have been booked using

midpoint market prices. Mr. Iksil expressed dismay with the marks and described the SCP book 

as growing “more and more monstrous”: 686

Mr. Grout: “Did you speak to [...]” 

Mr. Iksil: “Yes, yes. He says nothing I find that ridiculous. I’ll send you the thing that I 

sent.” 

Mr. Grout: “You sent something to propose doing that?” 

Mr. Iksil: “Yes, that’s what I sent when you said it was at 300. I can’t keep this going,

we do a one-off at the end of the month to remain calm. I think what he’s [Mr. MartinArtajo’s] expecting is a remarking at the end of the month, you can’t do it unless it’s 

month[-]end. ... I don’t know where he wants to stop, but it’s getting idiotic. ... [N]ow 

it’s worse than before ... there’s nothing that can be done, absolutely nothing that can be 

done, there’s no hope. ... [T]he book continues to grow, more and more monstrous.”687

Mr. Iksil’s comments indicate that the CIO traders themselves were uncomfortable with the SCP 

marks they were booking.

The Grout spreadsheet contained two entries for March 16, the first showing that the 

unreported losses had grown to $498 million and the second showing a smaller amount of $432 

million. Both exceeded the prior day’s losses by about $200 million. JPMorgan Chase told the 

Subcommittee that it could not explain why there were two entries for March 16, or which 

correctly depicted the difference between the losses that the CIO traders reported internally and 

the additional losses they would have reported had they been using midpoint prices. According 

to the bank’s counsel, Mr. Grout’s five day spreadsheet is the only written document of its kind 

that the bank’s internal investigation uncovered.

688 And despite the spreadsheet’s indicating a 

$200 million increase in losses for the day using midpoint prices, the CIO reported internally on 

March 16, that the SCP incurred a daily loss of just $3.9 million.689

When asked about the Grout spreadsheet, CIO head Ina Drew told the Subcommittee that 

she first became aware of the spreadsheet in late April or early May when Douglas Braunstein 

and John Hogan were reviewing the marks with the CIO team over one of the weekends.690

 686 3/16/2012 transcript of a recorded telephone conversation between Julien Grout, CIO, and Bruno Iksil, CIO, 

JPM-CIO-PSI-H 003820-822. 

 

When asked about the spreadsheet again in a later interview, Ms. Drew retracted her earlier 

statement and told the Subcommittee that she did not remember when she learned of the 

spreadsheet; she may have learned about it in July when the firm publicly announced the 

687 Id. 688 JPMorgan Chase’s legal counsel to the Subcommittee (11/16/2012) (Reginald Brown).

689 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures. The Subcommittee is unaware of any analysis of the derivative marks underlying 

the $3.9 million loss to determine the extent to which those marks reflected prices within the daily bid-ask spread.

690 Subcommittee interview of Ina Drew, CIO (12/11/2012).
115

problems with the CIO’s marks.691 This spreadsheet, however, was not disclosed to the public in 

July and, by then, Ms. Drew had already left the bank. 

Ms. Drew also told the Subcommittee that she had never before seen that type of

“shadow P&L document.”692

Three days after the spreadsheet was apparently discontinued, on March 19, 2012, the 

CIO traders appear to have calculated that, by mid-day, the cumulative unreported losses were in 

the range of $500 million. Mr. Iksil provided Mr. Martin-Artajo with the following analysis of 

the market: 

“When markets are caught in a squeeze like this one, the P&L [profit and loss] 

volatility can become very large : this is what is happening since the beginning of 

this year in CDX IG9 and Main ITRAXX S9 series. The hit amounts to 5-10 Bps

[basis point] lag in those forwards .... [T]he loss is likely to range between 

[$]100m[illion] to [$]300m[illion] – main reason is the CDX IG9 lag (2-3 bps or 

100-150m) – second next is CDX HY : the hit is another 100m spread within the 

tranche and index bid-ask. Typical here, you cannot really trade but the mid does 

not change. – third is Main itraxx : the curve in S9 steepened by 5bps pushing the 

forward back up while the other curves steepened 1 bp in the rally. The hit here is 

80-100m. – the estimated bid-ask on the book grossly amounts to 500m all-in

(200m for IG, 100m for Itraxx main, 200m for CDX HY).693

In calculating the $500 million “all-in” figure, Mr. Iksil repeatedly used the words “hit,” 

“lag,” and “loss” in connection with the three credit indices he was analyzing. Despite 

his analysis discussing hundreds of millions of dollars in cumulative losses, at the end of 

the day on March 19, the CIO reported internally an SCP daily loss of only $3 million.694

(3) Increasing the Reported Losses

His telephone calls, instant messages, and emails show that Mr. Iksil, who was charged 

with managing the SCP book, was becoming increasingly concerned about the growing 

difference between the SCP losses that the CIO was reporting to the bank versus the losses that 

would have been reported by marking at the midpoint. When on March 19, 2012, the unreported 

losses reached half a billion dollars, Mr. Iksil decided not to wait until the end of the month, as 

his supervisor had requested, but to begin reporting larger losses immediately to better reflect the 

 691 Subcommittee interview of Ina Drew, CIO (12/21/2012).

692 Id.

693 3/19/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, with copy to Julien Grout, CIO, “Core 

Book analysis and proposed strategy,” JPM-CIO 0003476-477. [Emphasis added.] 

694 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures. The Subcommittee is unaware of any analysis of the derivative marks underlying 

the $3 million loss to determine the extent to which those marks reflected prices within the daily bid-ask spread. In 

its 2013 report, the JPMorgan Chase Task Force stated that, by March 19, the CIO had reported only a small SCP 

daily loss for each of the prior seven consecutive days. 2013 JPMorgan Chase Task Force Report, at 50. It also 

wrote that the CIO trader recording the SCP marks “told another trader that a more senior trader had pressured him 

throughout this period not to show large losses in the Synthetic Credit Portfolio.” Id. 
116

actual market prices. On March 20, 2012, Mr. Iksil directed Mr. Grout to report a much larger

SCP loss than had been reported previously during the year.

695 

While Mr. Grout was preparing the SCP P&L Predict email that would report the larger 

daily loss, Mr. Martin-Artajo met briefly with Ms. Drew about the SCP. In a March 20, 2012

email sent by Ms. Drew to Mr. Martin-Artajo’s supervisor, Achilles Macris, Ms. Drew wrote:

“Javier briefed me this morning on the credit book. He sounded quite nervous. 

Let’s discuss on our weekly call. The full briefing is later in the morning but I 

want to understand the course of action from you.”696

Mr. Macris, Ms. Drew, Mr. Martin-Artajo, and Chief Risk Officer Irvin Goldman arranged a 

meeting for the next day, Wednesday, March 21, to discuss the SCP.

In the meantime, Mr. Grout worked with Mr. Iksil to complete the daily SCP P&L 

Predict email to report a sizeable SCP loss, together with a brief explanation. Prior to it being 

sent, Mr. Iksil left a telephone message and an electronic message with Mr. Martin-Artajo to 

obtain his approval, but received no response. In his telephone message, Mr. Iksil said that the

CIO needed to start showing losses: “[W]e would show a loss of 40 million core and 3 million 

in, in tactical .... I think we should, we should start, start showing it.”697 

The largest daily loss reported for the SCP book, up to that point in 2012, was a $24 

million loss on February 8. On March 20, Mr. Iksil instructed Mr. Grout to report an estimated

daily loss of $43 million and a year-to-date cumulative loss of $207 million, which he believed

would get the immediate attention of CIO management, including Ina Drew.

698 

In addition, in the P&L email’s commentary explaining the CIO’s loss, Mr. Iksil699

 695 See 3/20/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, “CIO Core Credit P&L 

Predict [20 Mar]: -$39,686k (dly) -$275,424k (ytd),” JPM-CIO-PSI 0016487-489.

told

senior CIO management that the IG9 was “underperform[ing]” by $450 to $500 million; the 

iTraxx Main credit index was “lagging” by another $60 to $80 million; and the High Yield index 

696 3/20/2012 email from Ina Drew, CIO, to Achilles Macris, CIO, “Wed call,” JPM-CIO-PSI 0001236. 697 3/20/2012 audio file of recorded telephone message left by Bruno Iksil, CIO, for Javier Martin-Artajo, CIO, 

JPM-CIO-PSI-A 0000054 (“Hello Javier, it’s Bruno. Again, you know, we can’t try to be close to the market prices 

and we, we would show a loss of 40 million core and 3 million in, in tactical and I wanted to know if that was okay 

with you. I’m going to send you an SMS, to get your, your approval. We’re still in the range but it’s a 3 

everywhere so, as I try to get closer to, to the target and I don’t want to make it last, you know? I think we should, 

we should start, start showing it. Please call me back if you can or just reply to my SMS please.”); see also written 

transcript of the recorded telephone message, at JPM-CIO 0003481. The reference to “SMS” is to an instant 

messaging service.

698 See JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012) (“A $5 million loss? Ok. But this $43 million would cause issues with Ina.”).

699 See 3/20/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Javier Martin-Artajo, 

CIO, JPM-CIO-PSI-A 0000055, JPM-CIO-PSI-H 0006392, at 394 (Mr. Iksil: “[B]ut that’s why I tried sending this 

P&L, I sent also the comments it came from Julien but I wrote it, where I said okay you know we take this loss, we 

are maintaining long risk where we have to be, the rally is on IG but guess what you know it's lagging so much that 

actually we have to show loss.”).
117

had a $100 million “loss” plus another “lag” of $100 to $200 million, concluding that the total 

“lag in P&L” is “material” and in the range of $600 to $800 million:

“As of today, reconstructing the CDX.IG9 10yr performance from the on the run 

indices and the 4 widest names in CDX.IG9 (Radian, MBIA, Istar, Sprint), the 

underperformance of the CDX.IG9 curves is between 6bps [basis points] to 

13bps, which amount approximately to $450-500M[illion] for the sole CDX.IG9 

series. iTraxx.Main S9 is also lagging by 3-4 bps or another $60-80M. Added to 

this the CDX.HY loss of $100M for Kodak and Rescap, plus the lag of 

CDX.HY10-CDX.HY11 series versus on-the-runs that is also $100-200M, the lag 

in P&L is material ($600-800M).”700

By way of context, a loss of $600 million, on top of the marked loss of $208 million,701 would 

more than extinguish all of the revenues produced by the Synthetic Credit Book in 2010 and 

2011, combined.702

Mr. Grout emailed the SCP P&L Predict, projecting a $40 million loss and the 

commentary discussing a “material” P&L “lag” of $600 to $800 million, to the designated list of

CIO personnel who routinely received the SCP P&L Predict. The same information was also 

included in the CIO’s End of Day (EOD) P&L report, which was sent at the close of the business

day in New York to about 20 designated CIO personnel, including Ina Drew, John Wilmot, 

Achilles Macris, Javier Martin-Artajo, Irvin Goldman, Peter Weiland, Keith Stephan, Patrick

Hagan, and Jason Hughes.

703 

Soon after the SCP P&L Predict email went out at the end of the business day in London, 

Mr. Martin-Artajo telephoned Mr. Iksil.

704 In a lengthy conversation, Mr. Martin-Artajo

repeatedly expressed dismay at the action taken by Mr. Iksil and indicated that neither he nor his 

supervisor, Achilles Macris, had wanted to report increased SCP losses until they received

guidance from Ina Drew at the meeting that was scheduled for the next day.705 Mr. MartinArtajo also acknowledged that Mr. Iksil had been placed in a difficult position.

Mr. Iksil: “Yea[h] so, yea[h] we sent an estimate down [$]40 million today. ...” 

 700 3/20/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, “CIO Core Credit P&L Predict 

[20 Mar]: -$39,686k (dly) -$275,424k (ytd),” JPM-CIO-PSI 0016487-489, at 489. [Emphasis added.] For more 

information about the referenced credit indices and such terms as “on the run” and “basis points,” see Chapter II.

701 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above (showing a 

cumulative loss of $207,991,125 as of March 20, 2012). Numbers do not reflect restated P&L figures. 

702 See 5/3/2012 email from Irvin Goldman, CIO, to Douglas Braunstein, John Hogan, and Ashley Bacon, JPMorgan 

Chase, “CSW 10%,” JPM-CIO-PSI-H 0000546-556, at 552. 703 See 3/20/2012 email from Isi Oaikhiena, JPMorgan Chase, to “EOD Credit estimate” mail list, copy to “CIO 

P&L Team” mail list, “International Credit Consolidated P&L 20-Mar-2012,” JPM-CIO-PSI 0019484-487, at 486; 

12/12/2012 distribution list document, “Distribution List Membership Around March 2012,” provided to 

Subcommittee by JPMorgan Chase legal counsel, JPM-CIO-PSI-H 0002815. 704 See 3/20/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Javier Martin-Artajo, 

CIO, JPM-CIO-PSI-H 0006392-400. 705 Id., at 398 (Mr. Martin-Artajo: “I wish I could discuss it with you, because, um, I didn’t, I didn’t want to show 

the P&L and Achilles told me yesterday not to do it.”).
118

Mr. Martin-Artajo: “Okay, okay. I just don’t want you to do this. I don’t know why 

you’ve done it anyway you’ve done it ... [Y]ou should have told me this because it 

doesn’t help us for the conversation for tomorrow.” 

Mr. Iksil: “... [Y]ou know, I thought we should actually you know, not do like minus, 

minus 5 every day but say okay boom you know there is, there is something 

happening...”

Mr. Martin-Artajo: “... You think that this is right. This is not what I would have done 

but you’ve done it so I’m okay with this. I’ve already said what the problem is, so okay

they know they’re not going to be surprised we have a meeting tomorrow...” 

Mr. Iksil: “I know it’s embarrassing but --” 

Mr. Martin-Artajo: “Yea[h] I don’t understand your logic mate, I just don’t 

understand. I’ve told Achilles, he told me that he didn’t want to show the loss until we 

know what we’re going to do tomorrow. But it doesn’t matter I know that you have a 

problem you want to be at peace with yourself, okay, it[’]s okay Bruno. I’ve, it’s alright I 

know that you’re in a hard position here...”

Mr. Iksil: “[W]hat we’ve tried to do is to say okay you know for month’s end, we want 

to fight ... [R]eally, really, if we want to just be realistic as to what we can expect to do, 

I wanted to show like upfront, precisely before we discuss, you know, what it’s going to 

look like[.] [T]hat you know if we expect potentially to lose [$]100, 200 million it’s 

because from where we are today, right, we will fail to bring back one basis point here, a 

crossover point in high yield there. ...” 

Mr. Martin-Artajo: “No, no, no, it’s okay, it’s everywhere. I know.”

On the same call, Mr. Martin-Artajo expressed displeasure at Mr. Iksil’s disclosing in the

daily SCP P&L Predict that the “lag” in the SCP book could approach $800 million (“800 

bucks”). In addition, Mr. Martin-Artajo expressed concern over what would happen if Ms. Drew 

were to instruct them to stop “going long,” which would likely intensify the book’s losses. 

Mr. Iksil: “[W]e take this loss, we are maintaining long risk where we have to be, the 

rally is on IG but guess what you know it’s lagging so much that actually we have to 

show loss, and I explained that this is a lag that keeps going, that amounts to a potential 

of 800 bucks, right ...” 

Mr. Martin-Artajo: “What are you saying, Bruno? What are you talking about? What 

is, you’re losing your mind here, man, why did, you’re sending an email that you would 

get, what is the 800 bucks?”

Mr. Iksil: “It’s just the lag that we have in IG, in high yield, in main, that is all over the 

book that makes that this book is just bleeding the money but it’s just the lag, that’s just 

the lag.” 
119

Mr. Martin-Artajo: “Okay but this is what we need to explain tomorrow you don’t 

need to explain in the email man.” 

Mr. Iksil: “Yea[h] but I had to put the comment on this big move, I thought, I thought 

that was, that was a way to, to, to show what’s happening on a day like --” 

Mr. Martin-Artajo: “Yea[h] but why do you do it today when we are going to explain 

it tomorrow ...” 

Mr. Iksil: “Because, because, because that’s, that’s what we saw today, you know 

we’ve tried everything ...” 

Mr. Martin-Artajo: “Why don’t you explain it tomorrow when Ina is there and we 

have, because this only, this only creates, it just creates more tension, you understand? ... 

What happens if she tells me that we cannot keep going long?”706

Continuing the conversation, Mr. Iksil indicated that the divergence between the reported 

and unreported losses, which then approached four basis points, or as much as $200 million, in 

two credit indices, were too large for him to ignore. He expressed the hope that Ms. Drew would 

read the SCP P&L commentary which would give her additional time before the meeting the 

next day to think about what the CIO should do, especially as the quarter-end approached. Mr. 

Iksil also commented that he had been forced to choose between “one bad thing and one thing 

that I think was worse” – perhaps referring to admitting increased SCP losses versus hiding 

losses that were rapidly escalating.

Mr. Iksil: “[I]t’s like there were 4 basis points missing on IG9 or 4 basis points missing 

on S9 ...” 

Mr. Martin-Artajo: [interrupting] “Okay, okay, okay ....” 

Mr. Iksil: “... [Y]ou know it’s just that, I have to, I don’t know I thought, I thought that 

was, that was not realistic know what we were doing, and ... I said probably I was wrong 

you know, I thought that it was this estimate before tomorrow, you know, was the way to,

because I know Ina is going to read the comments, so maybe it will leave some time, and 

she will have different questions, or I don’t know. ... [I]t’s one mistake for another here, 

because if I don’t --” 

Mr. Martin-Artajo: “No, no, no, man, no man.” 

Mr. Iksil: “I think I do a worst one, you know so. It’s sort of my logic is strange but in 

fact I have to choose between one bad thing and one thing that I think was worse.”707

 706 Id., at 394-395. 707 Id., at 396-397.
120

Mr. Martin-Artajo responded that he had already informed Ms. Drew that the SCP was 

experiencing problems, which was why he and Mr. Macris had a meeting scheduled to seek her

guidance on how to proceed. 

Mr. Martin-Artajo: “I’m trying to get all the facts in front of Achilles and Ina, the fact 

that we show a loss here it’s okay it’s not, it is a problem, you know. I’ve already told 

her that there’s a problem, so, you know, I’ve already told her, so, you know we’re going 

to sit down tomorrow and talk about the CRM708 and we’re going to talk about the 

problems. You know I’ve sent you an email on what she wants to discuss tomorrow she 

wants to see the changes in the book okay so you need to make sure that Julien does 

that.” 

Mr. Iksil: “It, I was working on it.”709 

Finally, Mr. Iksil apologized to Mr. Martin-Artajo for creating more work for him with 

Ms. Drew, but also reaffirmed his belief that the CIO needed to get its marks closer to market

value, stating: “we had to get closer to where the market is even if the market is wrong.”

Mr. Martin-Artajo: “I didn’t want to show the P&L and Achilles told me yesterday not 

to do it. So, okay, so we’re just going to have to explain that this is getting worse, that’s 

it. ...”

Mr. Iksil: “... Sorry for that .... in any case, I feel bad. If I do that I know I’m not 

making your life easier, and if --” 

Mr. Martin-Artajo: “No, no, no, you know I think that you’re an honest guy. ... I did 

not want you to do this way, but you know you feel that the bid offer spreads are giving 

you a headache, and you want to release it this way, which is your own way of doing it.

... ” 

Mr. Iksil: “The thing is you know today, I said I told Julien you know okay let’s try to 

frame this you know, this P&L estimate whatever it’s going to be, right, so that with 

tomorrow, whatever the decision made, right, whether we settle or we decide to fight, you 

know like we go long and then we are going to defend the position on IG, on 9, on high 

yield you know, try to do the minimum size everywhere you know so that the book grows 

a little bit but not too much, so that we are, you know, we maintain knowledge the level 

where we are, and [inaudible] we aren’t too far off. I thought that tomorrow, at one 

stage, after, before at one stage later, I would show you, you know what the plan can be, 

where, how many basis points here and there we are chasing and what size we can expect 

to do, right? And I realized we were, we were, we had to get closer to where the market 

is even if the market is wrong, you see? ...” 

 708 “CRM” refers to “Comprehensive Risk Measure,” which measures portfolio risk in the context of calculating a 

bank’s capital requirements; generally, Federal regulators require banks to acquire more capital when engaging in 

higher risk activities. For more information on CRM, see Chapter V.

709 3/20/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Javier Martin-Artajo, 

CIO , JPM-CIO-PSI-H 006392, at 397.
121

Mr. Martin-Artajo: “Ok, Bruno, no, no, no, it’s fine, okay, I see what you’re going 

through. ... [W]e’ll sit down tomorrow and we’ll look at the spreadsheet. I’m sure 

you’ve done some numbers that make sense and you think this is part of something you 

can’t recover therefore you’ve released, and you know, I know what you’re doing and 

you’re signaling here that there is a problem. I’ve already said it, Achilles knows it, and 

Ina knows it, and you’re saying it now so, okay. I truly don’t have a lot to say now 

because we have so much to speak tomorrow, I mean, we have a long day tomorrow.”710

The next day, on March 21, 2012, Mr. Martin-Artajo sent an email to Ms. Drew, Mr.

Macris, and Irvin Goldman, then the CIO’s Chief Risk Officer, confirming that the purpose of 

the meeting to take place later that day was to discuss issues related to the Synthetic Credit 

Portfolio’s “underperformance” and Risk Weighted Assets (RWA).

711 The meeting on March 21 

took place, as confirmed in an email the next day from Ms. Drew to Mr. Martin-Artajo and Mr. 

Macris in which she described the meeting as “exhaustive.”712 

When asked about the March 20 SCP P&L report, Ms. Drew told the Subcommittee that, 

while she routinely received the CIO’s daily EOD P&L emails and was meeting the next day to 

discuss the SCP, she did not open or read that particular email. When shown the text, Ms. Drew 

told the Subcommittee that she interpreted it as disclosing potential SCP losses and said, had she 

seen the $800 million figure at the time, it would have been a “game changer” in how she viewed 

the SCP book.713 A week after her interview, Ms. Drew’s legal counsel contacted the 

Subcommittee to indicate that Ms. Drew had changed her interpretation of the email.714 He told 

the Subcommittee that Ms. Drew had become “emotional” when listening to the recording of the 

conversation between Mr. Iksil and Mr. Martin-Artajo in preparation for her second 

Subcommittee interview and had become “emotional” again when seeing the transcript of the 

call during the interview. The legal counsel said that, upon reflection, Ms. Drew decided she had 

been too quick to interpret the $600 to $800 million figure in the email as referring to unreported 

losses, and that upon reading the email again, it appeared the traders were trying to reassure her 

by writing about a lag in market performance and predicting the SCP would regain $600 to $800 

million in value. This telephone call took place after the Subcommittee’s interview of Michael 

Cavanagh, head of the bank’s internal investigation of the SCP losses, in which he and the 

bank’s general counsel, Stephen Cutler, told the Subcommittee that they viewed the March 20 

email, not as disclosing unreported losses, but as predicting that the market would rebound and 

add $600 to $800 million to the value of the SCP holdings.715

 710 Id., at 398-399. 711 See 3/21/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, with copies to Achilles Macris, CIO, and 

Irvin Goldman, CIO, “Synthetic Book,” JPM-CIO 0003489-490 (“The fact that the increase that we have seen in the 

book has not materialized in our performance has raised the following issues: 1. Our current underperformance in 

the Synthetic Book is large compared to our estimates given the changes in the profile of the book.”).

712 See 3/22/2012 email from Ina Drew, CIO, to Achilles Macris and Javier Martin-Artajo, CIO, “I was confused by 

the inc[re]ased position noted today after yesterday’s exhaustive meeting,” JPM-CIO 0003492. 713 Subcommittee interview of Ina Drew, CIO (12/11/2012). See also March 2012 presentation, CIO Synthetic 

Credit Update, JPM-CIO-PSI 0021953-974, at 970 (“the realistic P&L miss is rather 800M USD”). 714 Ina Drew’s legal counsel to the Subcommittee (12/18/2012) (Lee Richards). 715 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). Counsel for Ms. Drew told the 

Subcommittee that she was not aware of the explanation of Mr. Cutler and Mr. Cavanagh.
122

This interpretation of the March 20 email as conveying a positive message about future

market performance is difficult to reconcile with the email’s generally negative tone regarding 

the SCP. The purpose of the email’s commentary was to explain a $40 million loss, which was 

the largest of the year and followed two straight months of losses. The email described problems 

with three key credit index positions held by the SCP;716 used the words “underperformance,” 

“lagging” and “loss” to describe those problems; attached a monetary figure to each described 

problem; then added up the figures and concluded that the “lag in P&L” was “material” and in 

the range of $600 to $800 million. The email also referred to the Eastman Kodak and Rescap 

bankruptcies, which cannot be interpreted as any type of prediction of better market 

performance. In addition, predictions about future market performance are rarely described as 

“material,” and the email contains no positive descriptors of the $600 to $800 million figure.717 

Moreover, those figures did, in fact, reflect the ballpark amount of unreported losses then at 

stake, given the CIO’s valuation practices; the bank’s subsequent restatement put the first 

quarter’s unreported losses at $660 million.

718

In any event, whether or not the March 20 email was intended to or did disclose the 

extent of the unreported CIO losses to CIO management, Ms. Drew told the Subcommittee that 

she did not see the email at the time it was sent to her. In addition, despite her “exhaustive” 

meeting on March 21 regarding the SCP and evidence that Mr. Iksil and Mr. Grout viewed the 

mismarking as having reached “idiotic” and “monstrous” proportions and wanted to start 

showing the losses, Ms. Drew told the Subcommittee that no one informed her at the time about 

the mismarking.

 

719 

On the same day, March 21, 2012, that Mr. Martin-Artajo and Mr. Macris met with Ms. 

Drew to discuss the synthetic credit book, the CIO reported its only profitable day during the 

second half of March. Its internal daily P&L statement reported a gain of over $700,000.

720 The 

next day, March 22, 2012, the CIO reported a daily loss of $1.8 million.721 

 716 The same three credit index positions were the subject of the Grout spreadsheet from the prior week. See 

undated spreadsheet referencing 3/16/2012, JPM-CIO-PSI-H 0002812. 717 The email also described $100 million in losses caused by Eastman Kodak and Rescap bankruptcies that had 

already taken place.

718 See also prior communications involving Mr. Grout, CIO, or Mr. Iksil, CIO, cited earlier in this section, using the 

word “lag” to refer to unreported losses. See also March 29, 2012 email from Bruno Iksil, CIO, to Javier MartinArtajo, CIO, “first draft of the presentation,” JPM-CIO 0003543-554, at 545 (“the book is huge: 96Bln IG9 and 

38Bln S9 fwds. ... Series 9 lag is overwhelming: total loss YTD is 1.5bln.”). See also 2013 JPMorgan Chase Task 

Force Report, at 47.

719 Subcommittee interview of Ina Drew, CIO (9/7/2012). 720 See OCC spreadsheet, OCC-SPI-00000298. Numbers do not reflect restated P&L figures. The Subcommittee is 

unaware of any analysis of the derivative marks underlying the $700,000 to determine the extent to which those 

marks reflected prices within the daily bid-ask spread. 721 Id. The Subcommittee is unaware of any analysis of the derivative marks underlying the $1.8 million loss to 

determine the extent to which those marks reflected prices within the daily bid-ask spread. 
123

(4) Trading Stopped

On Friday, March 23, 2012, Ina Drew ordered Mr. Martin and Mr. Iksil to “put phones 

down” and stop trading credit derivatives related to the SCP book.722 The halt in trading did not, 

however, produce a halt in the mismarking.

The SCP book, which was essentially frozen in place on March 23, continued to incur 

losses throughout the trading day. Mr. Iksil informed Mr. Martin-Artajo that the SCP losses that 

day were huge, between $300 and $600 million, depending upon whether the CIO used the 

midpoint or “best” prices available in the daily price range (bid-ask spread): “I reckon we have 

today a loss of 300M USING THE BEST BID ASKS and approximately 600m from the 

mids.”723 

Using instant messaging, Mr. Iksil asked Mr. Grout to find out from Mr. Martin-Artajo

what level of losses to report for the day. Mr. Iksil characterized the huge losses as “hopeless,” 

predicted “they are going to trash/destroy us,” and “you don’t lose 500 M[illion] without 

consequences,” concluding that he no longer knew what marks to use: 

Mr. Iksil: “[I]t is over/it is hopeless now ... I tell you they are going to trash/destroy us 

... [T]onight you’ll have at least [$]600m[illion], BID ASK MID BID ASK YOU 

HAVE [$]300M[illion] AT LEAST... [I]t is everywhere/all over the place we are dead I

tell you --” 

[Later that day]

Mr. Grout: “[W]ill you give me the color please? [I]f there is some.” 

Mr. Iksil: “[N]othing for now ... [I]t will be negotiated with the IB [Investment Bank]

at the top and I am going to be hauled over the coals ... [Y]ou don’t lose 

[$]500M[illion] without consequences --”

[Later that day]

Mr. Iksil: “[A]sk javier what pnl [profit and loss] we print today. ... please, go see 

javier. I don’t know which pnl I should send ...” 

Mr. Grout: “Did you talk to Javier?” 

[5 minutes later] 

 722 Subcommittee interview of Ina Drew, CIO (9/7/2012). See also 5/5/2012 email from Achilles Macris, CIO, to 

Ina Drew, CIO, “per the last call, here are the facts,” JPM-CIO-E 00013052 (“Jamie asked if the position was 

increased after you ordered to stop trading. I think that your instruction came on March 23 following the SAA 

meeting in the previous day in which Bruno presented the book.”). 

723 See 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Javier Martin-Artajo, CIO, JPM-CIO 

0003507-508, at 508. See also 2013 JPMorgan Chase Task Force Report, at 51.
124

Mr. Iksil: “yes. we show -3 [basis points] until month end on this one ... [A]ll that I 

am asking you is to tell Javier what you see. [T]hat’s it and he decides what we show 

because me, I don’t know anymore.”724

Less than an hour later, Mr. Iksil repeated many of the same complaints to a CIO 

colleague, stating that the crux of the problem was that the CIO had become “too big for the 

market.”

Mr. Iksil: “[I]t had to happe[n] [I]t started back in 2008 you see [I] survived pretty 

well until [I] was alone to be the target ... [Y]es [I] mean the guys know my position 

because [I] am too big for the market. ... [B]ut here is the loss and it becomes too large 

and this is it ... [W]e realize that [I] am too visible”725

Despite the emails predicting losses of between $300 million and $600 million, at the end of the 

day on March 23, 2012, the CIO reported internally a daily loss of only $12.5 million.726 

(5) Accusing the Investment Bank

In the second half of March as the SCP losses continued to pile up, CIO management

began to suspect and then blame the JPMorgan Chase Investment Bank for some of its trading 

problems. The Investment Bank, like the CIO, managed a large portfolio of derivatives and was 

active in the credit derivative markets. In fact, the original authorization for the CIO to trade in 

credit derivatives indicated that the CIO should use the Investment Bank’s marks, because the 

Investment Banker was a market maker in the product.727 However, by 2012, the CIO was not 

using the Investment Bank’s marks (if it ever did), leading to a growing valuation discrepancy 

between the two entities within JPMorgan Chase. This discrepancy not only drew the SCP

valuations into question overall, they also caused problems because the CIO and Investment 

Bank were sometimes on opposite sides of the same credit derivative trade, and settling those 

trades using the Investment Bank marks would result in much larger losses for the SCP than it 

would otherwise record using its own, more favorable marks.

728 

Mr. Macris and Mr. Martin-Artajo communicated a variety of concerns in emails and 

telephone conversations, including that the Investment Bank was competing with the CIO,

assigning unfavorable marks to positions where the SCP held the opposite side of the trade, and 

 724 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Julien Grout, CIO, JPM-CIO 0003515-541, 

at 528-541. 725 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Ade Adetayo, CIO, JPM-CIO 0001240-246, 

at 244-245. 726 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures. The Subcommittee is unaware of any analysis of the derivative marks underlying 

the $12.5 million loss to determine the extent to which those marks reflected prices within the daily bid-ask spread. 727 See “Chief Investment Office New Business Initiative Approval,” prepared by CIO, on “Credit and Equity 

Capability” (undated, but in 2006), at 11, OCC-SPI-00081631. 728 See, e.g., 3/23/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, copy to Achilles Macris, CIO, 

“Synthetic Book – URGENT,” JPM-CIO-PSI 0000416 (discussing whether to “settle” SCP trades with the 

Investment Bank and noting that settling them could lead to a “permanent loss” for the SCP book as large as $350 

million).
125

disclosing information about the CIO’s positions to the marketplace at large.

729 In response, a

senior Investment Bank executive, Daniel Pinto,

730 investigated the allegations and determined 

they were untrue.

On March 23, 2012, the same day that Ms. Drew ordered a halt in the SCP derivatives 

trading, the allegations were discussed in a telephone conversation between Mr. Martin-Artajo

and Keith Stephan, the market risk officer in the CIO’s London office.

731

Mr. Martin-Artajo: “Hey Keith, man. Having a lot of headaches here.” 

Mr. Stephan: “... I mean, I’ve been through the book before with Pete [Weiland] as 

you’re aware. I talk to him every day about it. So I have some patience to take Irv 

through it. But then it seems like there is a breakdown in the link of communication here 

because I was under the impression that everybody was very clear that ... what we were 

doing was adding sort of another 20 to 25 [b]illion dollars of risk in one sense, right, you 

know, on the run? And now it seems like everybody says no we don’t, we didn’t know 

what we were doing ....” 

Mr. Martin-Artajo: “No, no, no. I spoke with Ina. The reason I told her, the reason 

I’m doing that is to defend the position, okay? We can reduce that [RWA]. I just didn’t 

want the investment bank to roll over us, okay? This732

 729 See, e.g., 3/23/2012 email from Achilles Macris, CIO, to Ina Drew, CIO, “This is not ‘normal’....,” JPM-CIOPSI 0000415 (Mr. Macris: “Javier and team here feel ‘surrounded’ and blindsided in terms of methodology etc. I 

think that we will need to intervene and somehow mediate this issue with the IB and insure the unbiased role of 

Ashley and Risk management. Let’s please decide and coordinate on our exact course of action, as this issue is 

really taking a worrisome direction that could be embarrassing to the firm. Clearly, the IB knows our positions as 

well as the ‘checkmate’ in terms of Capital treatment. They will certainly like to settle with CIO and close their 

short position in IG. ... The problem with ‘settling’ with the IB and help closing their shorts, is that CIO will be 

substantially short the market, post settlement. This is not where we [sic] I would like us to be in the middle of this 

strong market.”); 3/23/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, copy to Achilles Macris, CIO, 

“Synthetic Book – URGENT,” JPM-CIO-PSI 0000416 (Mr. Martin-Artajo: “[D]uring the last week we have been 

trying to work on our best path for the Synthetic Book trying to both to reduce our overall RWAs and get the book 

in a balanced way. The problem with this has been that we have engaged in a dialogue with Risk Management 

(Ashley Bacon), QR (Venkat) and the IB (Guy America and Daniel Pinto) and this has resulted in a heightened alert 

about our positions in the IB and is really hurting us in various ways. ... and also we have worse marks against our 

current book. ... In any case it is very important that we need to let the IB know that we need to talk to them to stop 

this negative [s]piral that we are seeing in the market because we have disclosed too much information to them and 

we are sever[e]y affected by this. Specifically on the long IG9 position that is getting the attention of the market.” 

Ms. Drew: “You guys need to get irv [Goldman] and call [CRO John] hogan and explain. I can give him a heads 

up.”). 

has increased the book by 25 or 

26 billion of RWA which is freaking them out. ... So this is going all the way up, man, 

just, just for you to know. Achilles and I, we’ve raised this issue to Ashley Bacon and 

he’s going to talk to [Chief Risk Officer John] Hogan and he’s going to talk to Daniel 

730 At the time, Mr. Pinto was co-head of fixed income and CEO of the bank’s Europe, Middle East and Africa 

(EMEA) region. Mr. Pinto is now the co-head of Corporate and Investment Banking, a position shared with 

Michael Cavanagh, JPMorgan Chase.

731 3/23/2012 recorded telephone conversation between Keith Stephan, CIO, and Javier Martin-Artajo, CIO, JPMCIO-PSI-A 0000060. See also, partial transcript of this conversation at JPM-CIO 0003493. 732 Mr. Martin-Artajo was referring to several recent large trades by the CIO, including a $9 billion purchase of one 

credit index and a $14 billion purchase of another, for a total of $23 billion. 
126

Pinto and he’s going to talk to Guy America, okay? So we’re escalating the problem 

here, all the way up, okay?” 

Mr. Stephan: “Okay.” 

Mr. Martin-Artajo: “The issue here is that the investment bank is manipulating the 

prices. They want us out of – you know how valuable the IG9 position is, right?” 

Mr. Stephan: “I know.” 

Mr. Martin-Artajo: “And we have a lot of it, okay? So it’s almost they are trying to 

squeeze us out. ... We have a good position, it’s not performing and we are getting 

paranoid here, okay? ... But this is out of my control or Achilles’ control now. This is 

Ina. Ina has to decide this with, with, with whoever it is.” 

Mr. Stephan: “Jes Staley.” 

Mr. Martin-Artajo: “With Jes, basically. ... They [the Investment Bank] are not 

trading volume. They are just avoiding us, okay? They are just giving us bad marks. So 

they are manipulating the market and we have to stop it because now it’s coming to me 

from the market. The market is asking us what ... are we doing? Okay? They think that 

we have a large position. Okay? And, you know, that’s the last thing you want.”

That same day, March 23, Mr. Pinto spoke with Achilles Macris about the accusations 

against the Investment Bank.

733 During the conversation, Mr. Macris began to retreat. 

Mr. Macris: “So we are acting after Ina’s instruction, you know, who, you know, wants 

to talk to [John] Hogan about it ....” 

Mr. Pinto: “Ok, well then, I need to talk to Hogan too. ... [W]e don’t have any 

collateral, significant collateral disputes with anyone. I will, I’m trying to ... really check 

on all of the valuations of the positions. ...” 

Mr. Macris: “... Javier has, like, you know, sort of, you know, some, you know, 

feedback, and you know, issues, you know, with the dealers. ...” 

Mr. Pinto: “I should say that it’s a situation where I need to do a formal investigation. 

And, really, if Javier is fantasizing about this, he’s going to really, he will, he will have a 

ba-, a hard time here. I mean, if he’s right, I need to fire a lot of people. ...”

Mr. Macris: “Yeah, exactly, you know, I mean, I’m not on that page so much. Like, I 

don’t disagree with you. You know, this elevation is not my style, right?”

 733 3/23/2012 Subcommittee transcription of recorded telephone conversation among Achilles Macris, CIO, and 

Javier Martin-Artajo, CIO, and Daniel Pinto, Investment Bank, JPM-CIO-PSI-A 0000140. 
127

Mr. Pinto: “From what I understand, how we got here, honestly, I don’t care. What I 

see, is that it is an accusation that the investment bank, with someone leaking the position 

of CIO, is acting against CIO on mismarking the books to damage CIO. ....”

Mr. Macris: “No, it’s not, that is not to my understanding. My understanding is, listen, 

I, yeah, I don’t know. These are very aggressive comments. ... I don’t know how ... this 

has become ... an issue of disciplinary action ....”

Mr. Pinto: “Yeah, that’s fine. But that, at the moment what it is, is a real accusation. 

It’s not that a concern that you may have for the future. And the way that the people 

think, over this side, is someone in my group, did something wrong. Either mismarked 

the books or used information that they should have not used to trade against your 

position and acted against the benefit of the, to harm the bank. So that is what is floating 

around.”734

Mr. Pinto then questioned Mr. Martin-Artajo about the accusations against the Investment Bank. 

Mr. Pinto: “So my question is, there is something that DID happen, that in any shape or 

form, you think that our investment bank is trading against your position, because the 

position was leaked in some weird form to them?” 

Mr. Martin-Artajo: “Ok, I don’t think that there is anything here that has happened that 

is of, of a serious nature. What I think is happening here, that is of a serious nature, is 

that what can happen with the marks that we get from the investment bank. Ok?” 

Mr. Pinto: (laughs) “... So now we go to the marks. Have you got any, we don’t have 

any collateral disputes, so, or very little ones. Have you, have you, can you see, any of 

the marks, that they are deliberately un-, mismarked to hurt your position? ...” 

Mr. Martin-Artajo: “Ok, what happens is that, every time we put a trade on, I get, you 

know, I get, sort of like an immediate ask from, from the dealer into the position that we 

just traded, right? So, I get evidence that they have access either to ICE or to some other 

way to look at what we do and you know, I am concerned about that ...?” 

Mr. Pinto: “Honestly, I don’t, I, I don’t know. Is that the case? That someone is 

accessing your, your position? Because Olivier gave it to them or someone? So I need to 

fire that person.” 

Mr. Martin-Artajo: “Ok.” 

Mr. Pinto: “So we need to be extremely careful.”735

Ultimately, Mr. Pinto pointed out that the market had likely become aware of the CIO’s 

positions, because the CIO’s positions at the time were enormous and the market had a limited 

 734 Id. 735 Id.
128

number of participants. He also promised to examine the issue of how the positions were being 

marked, since the CIO and Investment Bank had different values on their books for the same 

credit derivatives. 

Mr. Martin-Artajo: “[R]isk management knows that we have large, large, 

concentrations, ok? Now, I, I, I am hearing in the market that, you know, some of the 

guys in the company are talking to them and wondering what we are going to do with the 

positions. Now, I, I just want to stop that ...yeah?” 

Mr. Pinto: “But Javier, Javier, Javier, Javier, my friend. You know that over these days, 

because of the difference in performance, everyone is stating that. So that it’s very likely

--.” 

Mr. Martin-Artajo: “But I want it to be inside the company. I don’t want it to be, 

known out there. ...” 

Mr. Pinto: “But ... obviously, you bought those positions in the market so it is very 

likely that some of the market people can put two and two together. ... That someone is 

trading against you, knowing your position, is something that I will be extremely 

surprised that is going on but we’ll take a look and see if that is coming up and that’s it.” 

Mr. Martin-Artajo: “Ok, thank you. Thank you for that Daniel. Thank you for that.” 

Mr. Pinto: “And if you could, so how much do you think is [the] damage?” 

Mr. Martin-Artajo: “It’s a few basis points but it’s in a large position so that’s the 

issue.” 

Mr. Pinto: “So it’s not many millions of dollars?” 

Mr. Martin-Artajo: “I don’t know like, maybe 250?” 

Mr. Pinto: “Two hundred and fifty million dollars?” 

Mr. Martin-Artajo: “Yeah.” 

Mr. Pinto: “Ok. And you think that the fact that we marked the book that way, so we 

are benefitting with that amount and you are having a loss of that amount?” 

Mr. Martin-Artajo: “Well, I, I just, I’m just concerned that the bid/offer spread is wide,

and I don’t know where the, the, the prices are when we trade. That’s basically what it is, 

really.”

Mr. Pinto: “Ok, so then, then, I think that we need to get Jean Francois736

 736 Jean Francois Bessin was the director and global head of valuation for the Investment Bank.

to take a look 

of the marks and see if there is anything that is being done inappropriate. What I was 
129

telling Achilles is that we haven’t ... had recently, any substantial ... discrepancies in the 

valuations with clients, or any market disputes.” 

Mr. Martin-Artajo: “Ok.” 

Mr. Pinto: “So, if we would have something of that nature, we would have substantial 

market disputes. But in any case, so I’ll take a look and then we’ll take it from there. ...”

Mr. Pinto: “But, but, yeah but to think, to think, that someone from us ... went and 

openly in the market, talked about your positions? Really? I would be extremely 

surprised.” 

Mr. Macris: “Ok.” 

Mr. Pinto: “That the market knows that, what your positions are? That may be, because 

you bought tons of it.” 

Mr. Macris: “Yeah.”737

According to JPMorgan Chase, the Investment Bank reviewed its books, determined it 

had not traded in size against the CIO, had correctly marked its positions, and had no material 

collateral disputes indicating a problem with its marks.

738 Mr. Pinto’s logic in identifying 

collateral disputes as a red flag of mismarking shows that the bank itself should have focused on

the CIO’s growing collateral disputes in March and April as evidence of a mismarking problem. 

JPMorgan Chase also told the Subcommittee “there was no evidence that the Investment Bank

was leaking” information about the CIO’s positions to the market at large.

739 Instead, as Mr. 

Pinto pointed out and as Mr. Macris admitted, the market’s awareness of the CIO’s positions was 

attributable to the CIO’s voluminous trading.

(6) Mismarking Continued

When Ina Drew halted trading in the SCP book on March 23, 2012, the CIO personnel in 

London continued to use more favorable prices than those at the midpoint to value the SCP’s 

credit derivatives, although they also began reporting substantially more losses than previously. 

On Monday, March 26, the CIO reported a daily loss for the SCP of $32 million and year-to-date 

losses of $254 million. The next day, March 27, the CIO reported a $45 million loss, its highest 

daily loss during the year to date. On March 28, the CIO reported a $51 million loss, and on the 

day after that, a $50 million loss. Altogether, the SCP book lost $179 million in the first four

days of the week, and the year-to-date loss by then totaled $399 million.740

 737 3/23/2012 Subcommittee transcription of recorded telephone conversation between Achilles Macris, CIO, Javier 

Martin-Artajo, CIO, and Daniel Pinto, Investment Bank, JPM-CIO-PSI-A 0000140.

 JPMorgan Chase 

738 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

739 Id. (noting that the bank’s compliance group had come to that conclusion, which Mr. Martin-Artajo accepted). 740 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures.
130

told the Subcommittee that the CIO traders were apparently attempting to get the reported losses 

closer to the actual losses in light of the upcoming end to the quarter.741

The last day of the week was March 30, 2012, which was also the last business day of the 

first quarter of the year. The marks at quarter-end are more important than on other days or 

month-ends, because quarter-end information is included in various publicly filed financial 

reports, and publicly traded corporations are required to attest to their accuracy. Within 

JPMorgan Chase, month-end and quarter-end marks were also validated within each line of 

business by an independent internal review team, the Valuation Control Group (VCG).742 

Ina Drew expressed concern about how the SCP would perform on the last day of the 

month and how the day’s losses would affect the quarter as a whole.743 Earlier in the month, 

before she halted SCP trading, the CIO traders had engaged in a series of enormous trades,

involving $40 billion in credit derivatives, which dramatically increased the size of the portfolio 

and which the OCC later characterized as “doubling down” on the book’s trading strategy. Due 

to the portfolio’s enormous size by the end of March,744 even small price variances in the 

positions could produce large losses.

745 

On March 30, 2012, the CIO ended up reporting losses totaling $319 million, more than

six times larger than any other daily loss up to that point in the year.746 When added to the 

previous day’s cumulative year-to-date loss of $399 million, the losses on the last day of March 

produced a grand total for the quarter of almost $719 million. 

 741 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). 742 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, JPM-CIO 

0003637-654, at 642. 743 See 3/30/2012 email exchange between Irvin Goldman, CIO, and Javier Martin-Artajo, CIO, “Any better 

numbers so far?,” JPM-CIO 0003564-565 (“No further progress on estimate yet. Will update you again in one 

hour.” “As I mentioned to Keith, Ina wants a summary of breakdown when u have it bid offer attribution etc.”). 

See also transcript of recorded telephone conversation between Irvin Goldman, CIO, and Javier Martin-Artajo, CIO, 

JPM-CIO 0003555 and JPM-CIO-PSI-A 0000069 (“Mr. Goldman: “Ina just called me...she was curious if you 

had any range of estimate about what the day is going to look like.” Mr. Martin-Artajo: “I don’t have that yet, 

unfortunately. I don’t have it Irv. I don’t have it. It is not looking good.” Mr. Goldman: “You still don’t know if 

it’s minus 50 or minus 150?” Mr. Martin-Artajo: “I don’t know man. I have a bad feeling about bid-offer spread 

here.” Mr. Goldman: “If we get what you are nervous about, where do you think it could be?” Mr. MartinArtajo: “It could be we have a very bad number, could have 150.”). See also 3/30/2012 email from Achilles 

Macris, CIO, to Irvin Goldman, CIO, copies to Ina Drew, CIO, and others, “synthetic credit – crisis action plan,” 

JPM-CIO-PSI 0001759-760, at 759 (Mr. Macris: “Just spoke to Ashley [Bacon] regarding the issue and he has 

agreed to dedicate Olivier to help us with RWA targeting for Q2. ...the objective is to determine what is the best 

course of action to insure that the book is and remains balanced in risk and P+L terms. ...clearly, we are in crisis 

mode on this.” [Emphasis added.] ). See also 2013 JPMorgan Chase Task Force Report, at 51-53. 744 See 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “first draft of the presentation,” JPMCIO 0003543-554, at 545 (“the book is hug : 96Bln IG9 and 38Bln S9 fwds. ... Series 9 lag is overwhelming: total 

loss YTD is 1.5bln.”). 

745 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 2, 

JPM-CIO 0003637-654, at 638. See also 2013 JPMorgan Chase Task Force Report, at 52. 746 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures. See also 6/29/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, CIO, and 

others, “2nd Wilmer Hale Call,” OCC-SPI-00071386 (“Real market marks were trued by end of Mar and the large 

loss on 3/31/2012 was due to that one reason.”).
131

Even that large number, however, hid the true extent of the losses in the SCP book at 

quarter end. A recorded telephone conversation on March 30, 2012, between Mr. Grout and Mr. 

Martin-Artajo, indicates that they were continuing to use overly favorable prices.

Mr. Grout: “Go ahead and tell me where I should put...” 

Mr. Iksil: Yes.” 

Mr. Grout: “Tell me where I should take a reserve?” 

Mr. Iksil: “If you can avoid doing that screwed-up thing you can really stay within bidask. It’s better you see since you don’t have a reserve, you see?” 

Mr. Grout: “For the United States, we’re back to the bid-ask on the on-the-run ... and 

for Europe, if you want, I can scratch out two bps [basis points] on the crossover.” 

Mr. Iksil: “But you see what I mean? This is a little bit at the limit. We should 

probably do something cleaner with a, you see, a lesser result. You see what I mean?” 

Mr. Grout: “Okay. But if I take off ... I can take off four bps on the crossover.” 

Mr. Iksil: “...okay, then do that. Do that and we’ll see. Okay? ... I’m sorry to ask you 

to do this. But I prefer to do it this way. It’s cleaner, you see.” 

Mr. Grout: “I must look into this because ...” 

Mr. Iksil: “You see, now it’s okay. I have the connection. I will validate it for you right 

away, okay?” 

Mr. Grout: “Okay, that’s good.”747 

At the end of the business day in London, the CIO traders sent an SCP P&L Predict

estimating that the daily losses on March 30, 2012, would total $138 million.

748 The final P&L 

for the day reported considerably larger losses of $319 million, a revised total apparently due to 

changes made by CIO personnel in New York.

Despite that massive daily loss, which followed three straight months of losses that 

seemed to be escalating rather than easing, JPMorgan Chase did not alert the OCC, its primary 

Federal regulator, to the problems being experienced by the CIO’s Synthetic Credit Portfolio. In 

fact, bank management did not even begin a dialogue with the OCC about the SCP until April 9, 

2012, after media reports unmasked the bank’s role behind the whale trades roiling credit 

 747 3/30/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Julien Grout, CIO, JPMCIO 0003562-563. 748 See 3/30/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, “CIO Core Credit P&L 

Predict [30 Mar]: -$138,135k (dly) -$583,296k (ytd),” JPM-CIO 003567-569, at 569. 
132

markets, and even then downplayed the SCP’s losses and the risks to the bank. The OCC told 

the Subcommittee that the bank should have reported the SCP losses much earlier.749

The evidence indicates that the mismarking continued into April, although the CIO 

continued to report much higher losses than in the beginning of the year.750 On Friday, April 6, 

2012, Bloomberg and the Wall Street Journal published the articles that first directed public 

attention to the SCP book.751 On that same day, Jamie Dimon and Douglas Braunstein asked Ina 

Drew for a “full diagnostic” of the SCP by Monday.

752 Ms. Drew then asked Achilles Macris for

more detailed information on the P&L status of the SCP book. 

Mr. Macris responded that he was unsure how big the losses or “drawdown” in the SCP 

book would be at the end of the second quarter, since it would be “highly depend[e]nt on the 

marks.”753 Later that day, Mr. Martin-Artajo sent an email to Ms. Drew estimating that the 

second quarter losses would not exceed $200 million, provided they “exclude[d] very adverse 

marks” from the SCP books: 

“In terms of the worse case scenario for us for Q2 [second quarter] I am redoing 

the work once again to make sure that if we exclude very adverse marks to our 

book the potential loss due to market moves or any economic scenario including 

defaults would not exceed a number higher than -200 MM USD [$200 million] at

the end of Q2 with the current book as it is.”754

The email did not explain to Ms. Drew how the CIO could “exclude very adverse marks” from 

the SCP book, and in that email exchange, she did not ask.

The first trading day after the whale trade media reports was April 10, 2012.

755

 749 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). For more information on the poor quality of 

bank disclosures to the OCC about the SCP, see Chapter VI.

At the 

close of business in London, the CIO traders sent out an SCP P&L Predict projecting a daily loss 

750 See 2013 JPMorgan Chase Task Force Report, at 46 (“[F]rom at least mid-March through early April, the 

Synthetic Credit Portfolio’s losses appear to have been understated.”). 751 “London Whale Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne (4/6/2012); 

“JPMorgan Trader Iksil’s Heft Is Said to Distort Credit Market,” Bloomberg News, Stephanie Ruhle, Bradley 

Keoun and Mary Childs (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-issaid-to-distort-credit-indexes.html. 752 See 4/6/2012 email from Ina Drew, CIO, to Achilles Macris, CIO, “Credit,” JPM-CIO-PSI 0000571, at 573 (Ms. 

Drew: “Jamie and Doug want a full diagnostic monday. I will need it sunday night.”). 753 See 4/6/2012 email from Ina Drew, CIO, to Achilles Macris, CIO, “Credit,” JPM-CIO-PSI 0000571 at 572; 

4/6/2012 email from Achilles Macris, CIO, to Ina Drew, CIO, and Javier Martin-Artajo, CIO, JPM-CIO-PSI 

0001582-583, at 583 (Mr. Macris: “Any further draw-down, will be the result of further distortions and marks 

between the series where we are holding large exposures. ... I am however unsure on the potential magnitude of an 

‘one touch’ draw-down for Q2 which is highly depend[e]nt on marks.”). See also 4/9/2012 email from Douglas 

Braunstein, JPMorgan Chase to Jamie Dimon, JPMorgan Chase, “Follow up”, JPM-CIO-PSI 0000944 (“Have asked 

Ina and Wilmot for clear analysis of the positions – maturities, balances, spreads (current) and normalized.”). 754 4/6/2012 email exchange among Javier Martin-Artajo, CIO, Ina Drew, CIO, and Achilles Macris, CIO, “Update,” 

JPM-CIO-PSI 0001429. 755 The markets were closed on Monday, April 9, due to Easter. See 2013 JPMorgan Chase Task Force Report, at 

64, footnote 78.
133

of only about $6 million,

756 which suggests that a decision had been made to continue the 

mismarking. Less than ninety minutes later, however, a second P&L Predict email was sent

showing an estimated loss of $395 million.757 That loss was 60 times greater than the loss 

reported in the first SCP P&L Predict. 

The difference between the two estimates was $389 million. Of that difference, a 

comparison of the two estimates shows that $142 million or nearly half of the difference was 

directly attributable to the CIO’s changing the marks on two of its largest positions, the 

“CDX.IG S09 10Y” and the “iTraxx.Main S09 10Y.” The mark for the SCP’s IG9 10 year credit 

index position was changed from 123.75 to 126,

758 a significant change on a position with a 

notional value of $79 billion; it increased the daily loss on this position from $330 million to 

$418 million, a $88 million increase. Almost as dramatic, the mark for the iTraxx Main S9 10 

year position was changed from 164 to 167.25,

759 which, for a position with the notional value of

$23 billion, increased its daily loss from $227 million to $282 million, a $55 million increase. 

These increased losses were combined with over 100 other gains and losses in the SCP book. 

When asked about the huge increase in the reported daily loss after the 90-minute 

interval, Bruno Iksil later told the JPMorgan Chase Task Force investigation that the first number 

was simply an “accident.”760 When the two emails are compared, however, they contain 

multiple differences at various points, including the new marks just described; there is no single 

typographical or arithmetic mistake. In its 2013 report, the JPMorgan Chase Task Force wrote 

that the CIO trader responsible for the SCP daily marks – who was Mr. Grout – had been 

directed by an unnamed trader to use the lower number in the first P&L Predict.

761 According to 

the JPMorgan Chase Task Force report, after the first P&L Predict was emailed, there was a 

“confrontation between the other two traders” – again unnamed – and a decision was made to 

send out the second P&L Predict. Mr. Venkatakrishnan told the JPMorgan Chase Task Force 

that, on April 10, 2012, after Mr. Martin-Artajo indicated that the CIO planned to value the SCP 

positions at what they were really worth rather than what the market showed, Mr. 

Venkatakrishnan told him instead to “let the losses flow,” after which Mr. Martin-Artajo walked 

away without saying anything.762 Trader interviews with the JPMorgan Chase Task Force 

suggest that Mr. Martin-Artajo then directed the second SCP P&L Predict to be emailed.763 

 756 See 4/10/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, dated April 10, time 

19:02:01 GMT, subject “CIO Core Credit P&L Predict [10 Apr]: -$5,711k (dly) -$626,834k (ytd). See JPM-CIO 

0003570-572. 757 See 4/10/2012 email from Julien Grout, CIO, to the CIO Estimated P&L mailing list, time “10 Apr 2010 

20:30:42 GMT,” “CIO Core Credit P&L Predict [10 Apr]: -$394,735k (dly) -$1,015,858k (ytd),” JPM-CIO 

0003573.

758 Compare email from Julien Grout, CIO, to the CIO Credit Positions mailing list, dated April 10, time 19:02:23 

GMT, JPM-CIO-PSI 0032406, with email from Julien Grout, CIO, to the CIO Credit Positions mailing list, dated 

April 10, time 20:31:08 GMT, JPM-CIO-PSI 0023061.

759 Id. 760 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012) (Harry Weiss). 761 See 2013 JPMorgan Chase Task Force Report, at 64-65. 762 JPMorgan Chase Task Force interview of C.S. Venkatakrishnan, JPMorgan Chase (partial readout to the 

Subcommittee on 1/18/2013).

763 JPMorgan Chase Task Force interviews of Julien Grout, CIO, and Bruno Iksil, CIO (partial readout to the 

Subcommittee on 1/18/2013).
134

With respect to the second P&L report, Mr. Grout told the Task Force investigation: 

“Bruno was scared about a big number. Bruno thought it was real. Bruno spoke with Javier and 

Achilles. They decided to show the losses.”764 His statement suggests Mr. Iksil and his 

colleagues may have been “scared” about hiding a $400 million loss on that day, given the media

spotlight on the whale trades.

In an April 10, 2012 email sent by Ina Drew at the end of the day to Jamie Dimon, 

Douglas Braunstein, John Wilmot, and others, she attributed the $400 million loss to the market 

moving against the CIO’s positions in anticipation of its liquidating the SCP book:

“[T]he mtm [marked-to-market] loss is [$]412 mil today, an 8 standard deviation 

event mostly from the steep[en]ing of the [IG]9 curve. SPECIFIC to our position. 

No other high grade or high yield index moved much clearly anticipating our 

liquidation.”765

Her email notified the most senior officials in the bank about an “8 standard deviation event,” 

meaning a wholly unexpected and unpredictable loss; however, bank officials told the 

Subcommittee that, at the time, they were expecting large losses as a result of the media 

attention.

766 

The final daily loss recorded internally for the SCP by the bank on April 10, 2012, was

$415 million.767 That $415 million loss was the single largest daily loss for the book up to that 

point in the year. The cumulative year-to-date losses then jumped to $1.2 billion, the first time 

the cumulative SCP losses had crossed the $1 billion threshold.768

Three days later, on April 13, 2012, JPMorgan Chase held an earnings call and discussed 

the whale trades for the first time. Mr. Dimon dismissed concerns about the trades as a 

“complete tempest in a teapot.”

Around the same time, in a recorded telephone conversation, Ms. Drew told Mr. MartinArtajo: “[S]tart getting a little bit of that mark back ... so, you know, an extra basis point you 

 764 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 765 4/10/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “Credit,” JPM-CIO-PSI-H 

0002276.

766 Subcommittee interview of Ina Drew, CIO (12/7/2012) (noting that the news article itself was “a cause of a large 

piece of the loss,” and that Messrs. Iksil, Martin-Artajo, and Macris believed it was the “provocateur” for losing 

money); see also JPMorgan Chase Task Force interview of Julien Grout, CIO (partial readout to the Subcommittee 

on 1/18/2013) (stating he expected a “bloodbath” of losses based on public disclosure of market positions in the 

media reports).

767 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures.

768 Due to the media attention and escalating losses in the synthetic credit book, Ina Drew, CIO, set up daily 

conference calls for the next two days (leading up to the quarterly earnings call) with Jamie Dimon, Douglas 

Braunstein, Barry Zubrow, John Hogan, Jes Staley, and Achilles Macris. See 4/10/2012 email from Ina Drew, CIO, 

to Jamie Dimon, JPMorgan Chase, and others, “8:30am Calls Set up for Wednesday and Thursday,” JPM-CIO-PSI 

0001719. 
135

can tweak at whatever it is I’m trying to show.”769 When asked about this telephone 

conversation, Ms. Drew told the Subcommittee that the traders had told her they were being

“conservative in the bid offer,” and she wanted them to be more aggressive. “If the position is 

starting to mean revert,” Ms. Drew said, she wanted them to “show it.”770 Her recommendation 

that the CIO traders “tweak” the marks, as well as her explanation that she wanted them to be 

less conservative in their analysis, provide additional evidence of the imprecise and subjective 

nature of the marks assigned by the bank to its credit derivative holdings. On April 17, 2012, the 

SCP showed a gain of $10 million, after eight consecutive days of losses.771 

On April 19, 2012, in a recorded telephone conversation, Mr. Iksil, Mr. Grout, and 

another CIO colleague, Luis Buraya, discussed an ongoing collateral valuation dispute caused by 

a disagreement over the accuracy of the CIO marks. Mr. Iksil commented: 

“[W]e have to be careful, not to be too stretched. ... The point is we need to 

have a strong position. ... I think our method is good. But we need to be careful 

that we don’t look like we are too stretched, you know, on the one we use. ... 

[W]e are less stretched on the, on the mark we use and that’s it, you know, from 

the bid-ask.”772 

Mr. Iksil’s comment may have meant that he did not want to use a mark that was too far from the 

midpoint of the bid-ask spread, since another party would be contesting the validity of the mark. 

Mr. Buraya commented in part: “I can imagine the next headline ‘JP Morgan is hoarding 

cash. They are not marking the stuff in the right place.’ I can see it happening.” Mr. Iksil 

 769 Subcommittee transcription of undated (likely mid to late April 2012) recorded telephone conversation between 

Ina Drew, CIO, and Javier Martin-Artajo, CIO, JPM-CIO-PSI-A 0000076. 770 Subcommittee interview of Ina Drew, CIO (9/7/2012). 771 See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared by the Subcommittee above. Numbers do 

not reflect restated P&L figures. The Subcommittee is unaware of any analysis of the derivative marks underlying 

the $10 million to determine the extent to which they reflected appropriate prices within the daily bid-ask spread. 772 4/19/2012 Subcommittee transcription of recorded telephone conversation among Bruno Iksil, Julien Grout, and 

Luis Buraya, CIO, JPM-CIO-A 00000018 (Mr. Iksil: “...we have to be careful not to be too stretched. ...” Mr. 

Buraya: “I can imagine the next headline ‘JP Morgan is hoarding cash. They are not marking the stuff in the right 

place.’ I can see it happening. ...” Mr. Iksil: “...The point is we need to have a strong position. So, we need to 

work. We need to be less stretched. ...” Mr. Grout: “...now, I think Javier should be aware of this. Because as 

you suggest, that could be another article in the press. ...” Mr. Iksil: “...all we have to do is stick to our method. I 

agree, not change anything. I think our method is good. But we need to be careful that we don’t look like we are 

too stretched, you know, on the one we use. So on the one hand, we acknowledge these quotes. On the other hand, 

from the prices we use, you know, we need to be less stretched. ... So just with that, you know, I think, we keep 

talking to Jason [Hughes]. We keep adjusting from what show us, and we are less stretched on the, on the mark we 

use and that’s it, you know, from the bid/ask.” Mr. Buraya: “...we do the exercise on Monday [April 23], or we 

are marking where we see it. We give it to Jason. So we prove that 10 days before month end, we were where we 

were saying we were. Yeah? ... It would be nice ... otherwise I can tell you, they might actually, without us 

saying anything, they might actually come and ask on Monday ‘ok, we want to see where the market is and what 

you guys have.’” Mr. Iksil: “Yeah, that’s why, that’s why we need to be not too stretched on the marks, you know, 

so that whatever adjustments there are, we can do it, you see? But they have to provide, you know, marks with a 

proper data, you see?” Mr. Buraya: “No I mean, exactly. I totally agree. That’s, that’s why it is important to 

agree with Jason. ... Better to be prepared and not diplomatically correct.” Mr. Iksil: “...and if they want us to 

line 500 [million] lower, so be it. So be it. Right? There’s nothing wrong with it. But we have to address the 

problem, right?”). See also “JPMorgan restates first-quarter results, citing trader marks,” Reuters (7/13/2012) 

http://www.reuters.com/article/2012/07/13/us-jpmorgan-loss-restatement-idUSBRE86C0FR20120713.
136

replied in part: “... and if they want us to line 500 [million] lower, so be it. So be it. Right? 

There’s nothing wrong with it.”773 Mr. Iksil’s response demonstrates, again, the malleable 

nature of the bank’s credit derivative valuation process in which he viewed a half a billion dollar 

downward adjustment of the SCP book’s value as a possible outcome if management wanted it. 

C. Ending the Mismarking

The CIO’s mismarking of the SCP appears to have finally ended in May 2012, as part of 

a concerted effort by JPMorgan Chase to resolve a series of collateral disputes with CIO 

counterparties that began in March and intensified throughout April.

774 The disputes apparently 

arose, in part, as the CIO’s counterparties became aware that the CIO was marking the value of 

its derivative holdings using much more favorable numbers than JPMorgan Chase’s Investment 

Bank did for the same derivatives. In May, JPMorgan Chase ordered the CIO to begin using the 

same valuation methodology as the Investment Bank for its credit derivatives. That change in 

valuation methodology erased the difference between the CIO and Investment Bank marks, 

validated the complaints of the counterparties, and led to the CIO’s resolving the collateral 

disputes with dollar adjustments in the favor of those counterparties. 

Collateral disputes arise when there is disagreement between parties over the value of a 

derivative position, especially when the parties have agreed to post cash collateral based upon 

the fluctuating value of a position in which each holds the opposite side. Ina Drew told the 

Subcommittee that the CIO did not typically have collateral disputes, and that “large disputes 

over $200 million had not happened before” 2012.775 At their peak in mid-April 2012, the CIO 

collateral disputes involved $690 million.776 

The collateral disputes were escalated to the attention of Ms. Drew.777 By April 20, 

2012, the CIO had collateral disputes with 10 different counterparties, involving primarily 

differences over the prices assigned to credit tranche positions.778

 773 Id.

 On April 20, 2012, Daniel 

774 See 4/20/2012 email from Mark Demo, JPMorgan Chase, “Largest OTC Collateral Call Dispute Report plus 

Update on Collateral Disputes Reported to Supervisors,” JPM-CIO 0003590-596, at 592. See also 4/20/2012 email 

from Mark Demo, JPMorgan Chase, to John Wilmot, CIO, and others, “Largest OTC Collateral Call Dispute Report 

plus Update on Collateral Disputes Reported to Supervisors,” JPM-CIO-PSI-H 0000141-151, at 142 (“This is a 

weekly report that we in IB Collateral produce that reflects the 10 largest collateral disputes for the week. You 

should know that in our top 10 this week, we have quite a few disputes that are largely driven by mtm [mark to 

market] differences on CIO London trades. If I look at the total mtm differences across the CIO book facing the G15 – the mtm difference totals over $500MM. ... The collateral team also provided a time series which shows the 

overall difference growing through March to approx[imately] $500mm at March month end. March month end was 

tested as satisfactory by VCG.”). This email was forwarded to Ina Drew, CIO, and Irvin Goldman, CIO, on 

4/23/2012. See also 4/23/2012 email from Ina Drew, CIO, to Irvin Goldman, CIO, “Largest OTC Collateral Call 

Dispute Report plus Update on Collateral Disputes Reported to Supervisors,” JPM-CIO-PSI-H 0000141-151, at 141. 775 Subcommittee interview of Ina Drew, CIO (12/11/2012). 776 5/14/2012 email from James Hohl, OCC, to Fred Crumlish, OCC, and others, “May 14 minutes,” OCC-SPI00025835 (“At one time widest collateral disputes were $690MM. Morgan Stanley difference was once in excess of 

$120MM. The largest difference was around mid April.”). 777 Subcommittee interview of Ina Drew, CIO (12/11/2012). 778 See 4/20/2012 email from Mark Demo, JPMorgan Chase, to John Wilmot, CIO, and others, “Largest OTC 

Collateral Call Dispute Report plus Update on Collateral Disputes Reported to Supervisors,” JPM-CIO-PSI-H 

0000141-151, at 142. 
137

Vaz sent an email to the CIO with a subject line “URGENT ::: Huge Difference for iTraxx & 

CDX trades,” asking the CIO to check its marks.779 The CIO collateral disputes were so large 

that even JPMorgan Chase senior personnel took note. On April 20, 2012, Chief Risk Officer 

John Hogan sent an email to Chief Financial Officer Douglas Braunstein stating: “This isn’t a 

good sign on our valuation process on the Tranche book in CIO. I’m going to dig further.”780

The largest single dispute involved Morgan Stanley which contested credit derivative 

valuations that it contended were overstated by more than $90 million.781 Morgan Stanley told 

the Subcommittee that the marks it had assigned to the derivative positions in question were in 

line with JPMorgan’s Investment Bank, but diverged significantly from the marks used by the 

CIO.

782 It explained the problem in an email sent to JPMorgan Chase as follows:

“We completed our initial analysis and it shows two different prices used 

depending if the tranche is done through the CIO desk vs the JPM dealer desk. 

We [Morgan Stanley] have significant MTM [mark to market] breaks on positions 

facing the CIO trades whereas trades facing you[r] dealer desk are very much inline.”783

According to Ina Drew, the large collateral disputes generated a series of questions 

internally about the CIO’s valuation process. She told the Subcommittee that Jamie Dimon “felt 

that one way to find out [about the validity of the disputes] was to ask Mr. Macris, Mr. Martin, 

and Mr. Iksil to narrow the bid-offer spreads. Over a period of a few days, you should see a 

narrowing of the disputes. Then we would find out if the disputes were real or not.”784

 779 See 4/20/2012 email from Daniel Vaz, JPMorgan Chase, “URGENT ::: Huge Difference for iTraxx and CDX 

trades,” JPM-CIO 0003586-587.

 As the 

disputes narrowed, it meant that the bank’s marks were getting closer to their counterparties’ 

marks (and closer to the midpoints of the bid-offer spreads where the values had historically 

been marked). As shown in the chart below, the collateral disputes did narrow in early May, 

apparently due to a re-emphasis on the CIO marks at the request of the bank’s CEO.

780 4/20/2012 email from John Hogan, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, “Collateral 

Disputes,” JPM-CIO-PSI-H 0000108. 781 See 5/14/2012 email from James Hohl, OCC, to Fred Crumlish, OCC, and others, “May 14 minutes,” OCC-SPI00025835; Morgan Stanley response to Subcommittee questions (representing that the largest collateral dispute with 

the CIO was in mid-April at approximately $90 million); Subcommittee interview of Morgan Stanley (9/25/2012). 782 Subcommittee interview of Morgan Stanley (9/25/2012). 783 4/20/2012 email from Morgan Stanley to JPMorgan Chase, JPM-CIO 0003603-605. 784 Subcommittee interview of Ina Drew, CIO (12/10/2012).
138

Chief Investment Office Collateral Disputes - April 20-May 23, 2012

Date Total of CIO Collateral Disputes Largest Counterparty Difference Counterparty of Largest Dispute

4/20/2012785 $ 520 million $ 115 million Morgan Stanley

05/02/2012786 $ 182 million $ 55 million Morgan Stanley

05/03/2012787 $ 194 million $ 57 million Morgan Stanley

05/04/2012788 $ 203 million $ 61 million Morgan Stanley

05/07/2012789 $ 212 million $ 61 million Morgan Stanley

05/08/2012790 $ 144 million $ 54 million Morgan Stanley

05/09/2012791 $ 120 million $ 58 million Morgan Stanley

05/10/2012792 $ 66 million $ 46 million Morgan Stanley

05/11/2012793 $ 69 million $ 27 million Morgan Stanley

05/14/2012794 $ 156 million $ 46 million Morgan Stanley

05/15/2012795 $ 152 million $ 110 million DBKAG

05/17/2012796 $ 42 million $ 27 million Morgan Stanley

05/21/2012797 $ 25 million $ 32 million Morgan Stanley

05/23/2012798 ($ 29) million $ 17 million Morgan Stanley

05/24/2012799 ($ 29) million $ 17 million Morgan Stanley

05/25/2012800 $ 25 million $ 39 million Morgan Stanley

 Source: JPMorgan Chase and OCC documents cited in the above footnotes.

 785 See 4/20/2012 email from John Hogan to Douglas Braunstein, JPMorgan Chase, “Collateral Disputes,” JPM-CIO 

0003597, at 598. The largest disputed position was the iTraxx Main S09 10 year 22-100 tranche. 786 See 5/6/2012 email from Paul Bates, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, 

JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Thursday 3rd,” JPMCIO-PSI 0014195. 787 Id. 788 See 5/7/2012 email from Paul Bates, JPMorgan Chase, to Phil Lewis, CIO, and others, “CIO Credit Collateral 

differences as of COB Friday 4th,” JPM-CIO-PSI 0008878.

789 See 5/8/2012 email from Paul Bates, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, 

JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Monday 7th,” JPM-CIOPSI 0014779.

790 See 5/9/2012 email from Hema Coombes, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, 

JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB [Tues]day 8th including 

2 day differences against Morgan Stanley,” JPM-CIO-PSI-H 0002712-717.

791 See 5/10/2012 email from Hema Coombes, JPMorgan Chase, to Jamie Dimon, Douglas Braunstein, John Hogan, 

JPMorgan Chase, Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Wednesday 9th May,” 

JPM-CIO-PSI 0014797.

792 See 5/11/2012 email from Phil Lewis, CIO, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, 

Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Thursday 10th May,” JPM-CIO-PSI 

0017989.

793 See 5/14/2012 email from Phil Lewis, CIO, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, 

Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Friday 11th May,” JPM-CIO-PSI 0032235.

794 See 5/15/2012 email from Phil Lewis, CIO, to Jamie Dimon, Douglas Braunstein, John Hogan, JPMorgan Chase, 

Ina Drew, CIO, and others, “CIO Credit Collateral differences as of COB Monday 14th May,” JPM-CIO-PSI 

0018281.

795 See 5/16/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00114068, at 11. 796 See 5/22/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089239, at 15. 797 See 5/23/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089295, at 18.

798 See 5/24/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00088644, at 18. Negative number implies that 

JPM marks are too low. Positive number implies that the marks are too high.

799 See 5/25/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089351, at 18. Negative number implies that 

JPM marks are too low. Positive number implies that the marks are too high.

800 See 5/29/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00089407, at 18.
139

Despite the extent and number of these collateral disputes generating questions about the 

CIO’s valuation process in March and April 2012, Ms. Drew and other JPMorgan personnel told 

the Subcommittee that the bank remained unaware at that time of the deliberate mismarking of 

the CIO’s books.

On April 27, 2012, JPMorgan Chase sent its Deputy Chief Risk Officer Ashley Bacon to 

the London CIO office to examine the marks in the SCP book. Mr. Bacon told the 

Subcommittee that, sometime in May, he required the CIO to mark its positions at the midpoint 

and to use the same independent service used by the Investment Bank to value its derivative 

positions.

801 This change in valuation methodology erased the differences between the CIO and 

Investment Bank valuations and ultimately resolved the collateral disputes with Morgan Stanley

and other counterparties by the end of May.802 

D. Reviewing the SCP Valuations

The Valuation Control Group (VCG) of the Chief Investment Office was charged with 

reviewing the accuracy of the CIO’s marks at both month-end and quarter-end. In April 2012, 

the CIO VCG conducted its regular review of the SCP book as of the last day in March.

803 That 

same month, the bank conducted a special, four-month assessment of the CIO’s P&L figures, 

from January to April 2012, essentially reviewing the VCG’s work. According to the bank, this 

special assessment was performed by “a combination of individuals from CIO Finance, the 

Firm’s internal accounting department, valuation experts from the Investment Bank, and 

others.”804 The effort was headed by the bank’s Controller, Shannon Warren.805 The assessment 

uncovered evidence that the CIO, rather than marking at the midpoint, had used more

“advantageous” prices, had exceeded some variance limits, and used increasingly “aggressive” 

marks over the course of the quarter. It also reported that, by the end of the quarter, the CIO had 

reported $512 million less in losses than it would have reported using midpoint prices. At the 

same time, because the CIO had generally used prices that fell within the relevant bid-ask spread 

for the derivatives being valued, the Controller validated the CIO’s quarter-end credit derivative 

marks as “consistent with industry practices” and acceptable under bank policy, and offered no 

criticism of its valuation practices.

VCG Deficiencies. At the time that the VCG conducted its regular review of the SCP 

prices and the Controller’s office conducted its special assessment, the CIO VCG itself was

under criticism. On March 30, 2012, JPMorgan Chase’s internal audit group released a report

criticizing the VCG, noting among other problems that it was using unreviewed risk models,

unsupported and undocumented pricing thresholds, inadequate procedures for evaluating pricing 

 801 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 802 Id. See also Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012) (Mr. Braunstein: 

“Ashley Bacon abandoned the traders’ marks in early May because we directed them to mark at the mid. The 

collateral disputes were noise in the markets that could be problematic.”). 

803 See 2013 JPMorgan Chase Task Force Report, at 54. 804 Id., at 73. 805 Ms. Warren issued the memorandum summarizing the assessment. See 5/10/2012 JPMorgan Chase Controllers 

special assessment of CIO’s marks, January to April 2012, JPM-CIO 0003637-654. 
140

sources, and inadequate procedures for requiring reserves.806 For example, the internal audit 

report rated the following as “Needs Improvement”807:

“CIO VCG practices where a number of risk & valuation models have not been 

reviewed by Model Review Group and included the absence of a formally applied 

price sourcing hierarchy, insufficient consideration of potentially applicable fair 

value adjustments (e.g. concentration reserves for significant credit indices 

positions) and the lack of formally documented/consistently applied price testing 

thresholds.”808 

With respect to price testing “thresholds,” which determined how much a booked value could 

deviate from a specified midprice, the internal audit report concluded that the CIO VCG 

thresholds had been applied “without sufficient transparency or evidence.” It also found that the 

“root cause” of the problems with the CIO VCG’s price testing practices was an “insufficient 

assessment/formalization of certain price testing methodologies and poorly documented CIO 

VCG practices.”809 

The audit report should have encouraged the VCG to conduct a more careful review of

the CIO valuations at quarter’s end. In addition, the CIO itself was experiencing an unusual

series of escalating losses and an unprecedented amount of collateral disputes, both of which also 

should have raised red flags about the CIO’s valuations and led to a more careful review. 

Adding still more sensitivity was that both the VCG quarter-end review and the Controller’s

special assessment were undertaken in April 2012, just after the whale trades attracted media 

attention and raised multiple concerns within the bank.

Controller’s Assessment. The Controller’s office began its work reviewing the CIO’s 

marks in early April 2012. In a late April email responding to a bank colleague’s inquiry into the 

CIO’s valuation practices, an analyst described how the CIO had valued the SCP positions in 

March: 

“There were differences between the [CIO] desk and the independent marks at 

month end. The desk marked the book at the boundary of the bid/offer spread 

depending on whether the position was long or short. We then applied a tolerance 

to make sure the prices were within tolerance and the majority of positions were. 

 806 See March 2012 Continuous Audit Quarterly Summary of Global Chief Investment Office, OCC-SPI-00033688, 

at 692. 

807 JPMorgan’s internal audit group used three ratings in its reports: Satisfactory, Needs Improvement, and 

Inadequate. “The latter two are considered ‘adverse’ ratings.” 2013 JPMorgan Chase Task Force Report, at 55, 

footnote 69.

808 March 2012 Continuous Audit Quarterly Summary of Global Chief Investment Office, OCC-SPI-00033688, at 

692. The internal audit report also noted that the CIO’s London office was “using unapproved models in the 

calculation of risk including VaR,” and that “associated risk measurement methodologies ha[d] not been 

appropriately documented and or catalogued.” Id. 

809 Id. See also 2013 JPMorgan Chase Task Force Report, at 55-56.
141

We had a small number of positions where they fell outside these tolerances and 

hence the adjustment that was passed.”810 

In another email, the same analyst wrote: “At March month end the CIO FO [front office] 

marked their book at the most advantageous levels based on the positions they held in specific 

indices and tranches.”811 These emails show that, by late April, the Controller’s office was fully 

aware that, in March 2012, the CIO had used the “most advantageous” prices “at the boundary” 

of the relevant bid-ask spread to value its derivative positions, and that the CIO prices differed 

from the values being assigned to the same positions by “independent” pricing services.

As part of its review, the Controller’s office analyzed key credit derivative positions in 

the SCP book during the covered time period. Specifically, of the more than 100 credit 

derivative positions that appeared in the SCP book, the Controller’s office selected 18 that were 

present in the portfolio throughout the covered period. For each of those 18 positions, together 

with other information, the Controller’s office compiled data on the value or “mark” that 

appeared in the SCP book on the last day of each of the relevant months, the corresponding 

midpoint price and price range (bid-ask spread) for that same day, and whether the CIO mark –

compared to the midpoint price – provided more or less of a financial benefit to the SCP book. 

The memorandum summarizing the special review presented the data in four charts, each 

of which presented data on the selected CIO marks on the last days in January, February, March, 

and April.

812 Excerpts from three of those charts are presented below, covering the months of 

January, February, and March 2012. In each chart, the first column identifies the relevant credit 

derivative, and the second column presents the relevant CIO daily mark. The next three columns 

contain the extreme low end of the daily price range (bid-ask spread), the midpoint price, and the 

extreme high end of the daily price range (bid-ask spread). The sixth column, which the 

Controller’s office entitled, “Benefit,” indicates what type of price (compared to the midpoint)

would have produced a more favorable financial result for the SCP. 

CIO Marks of 18 Positions as of January 31, 2012 

Credit Default Swap Indices 

and Tranches

CIO 

Mark

Broker 

Bid

Broker 

Mid Price

Broker 

Offer

Benefit

CDX.NA.HY 10-15% S08 05Y 70.000 69.625 70.313 71.000 lower price

CDX.NA.HY 10-15% S10 07Y 20.750 19.700 20.538 21.375 higher price

CDX.NA.HY 15-25% S10 05Y 93.375 92.875 93.313 93.750 higher price

CDX.NA.HY 15-25% S11 05Y 86.250 85.438 86.063 86.688 higher price

CDX.NA.HY 35-100% S10 05Y 106.313 106.170 106.315 106.460 higher price

CDX.NA.HY IDX S11 07Y 101.000 100.688 101.000 101.313 higher price

CDX.NA.HY IDX S14 05Y 100.625 100.375 100.625 100.875 lower price

CDX.NA.HY IDX S15 05Y 100.125 99.938 100.125 100.313 lower price

CDX.NA.IG 0-3% S09 05Y 26.813 26.460 26.680 26.900 lower price

CDX.NA.IG 0-3% S09 10Y 60.750 60.563 60.813 61.063 higher price

 810 4/20/2012 email from Jason Hughes, CIO, to Rory O’Neill, JPMorgan Chase, and others, “URGENT ::: Huge 

Difference for iTraxx & CDX trades,” JPM-CIO 0003582-587, at 586. 811 See 4/20/2012 email from Jason Hughes, CIO, to Edward Kastl, JPMorgan Chase, “Credit Index and Tranche 

Book,” JPM-CIO-PSI-H 0006636-639, at 637. 812 See 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, at 17, 

JPM-CIO 0003637-654, at 653. These marks do not encompass all of the credit derivative positions in the synthetic 

credit book. 
142

CDX.NA.IG IDX S09 07Y 102.000 101.500 103.500 105.500 lower spread

CDX.NA.IG IDX S09 10Y 119.500 119.000 120.750 122.500 lower spread

iTraxx.Main 0-3% S09 10Y 66.563 66.290 66.620 66.950 higher price

iTraxx.Main 22-100% S09 07Y 19.750 18.160 19.495 20.830 lower spread

iTraxx.Main 22-100% S09 10Y 40.000 39.400 40.600 41.800 lower spread

iTraxx.Main IDX S09 07Y 148.500 146.750 148.750 150.750 lower spread

iTraxx.Main IDX S09 10Y 158.000 156.500 158.500 160.500 lower spread

iTraxx.Main IDX S16 05Y 143.000 142.500 143.000 143.500 lower spread

Source: 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 

2012, JPM-CIO 0003637-654, at 653.

CIO Marks of 18 Positions as of February 29, 2012 

Credit Default Swap Indices 

and Tranches

CIO 

Mark

Broker 

Bid

Broker 

Mid Price

Broker 

Offer Benefit

CDX.NA.HY 10-15% S08 05Y 89.750 89.500 90.000 90.500 lower price

CDX.NA.HY 10-15% S10 07Y 17.000 15.160 16.245 17.330 higher price

CDX.NA.HY 15-25% S10 05Y 95.375 94.660 95.120 95.580 higher price

CDX.NA.HY 15-25% S11 05Y 86.250 85.660 86.330 87.000 higher price

CDX.NA.HY 35-100% S10 05Y 106.188 106.000 106.145 106.290 higher price

CDX.NA.HY IDX S11 07Y 102.000 101.063 101.563 102.063 higher price

CDX.NA.HY IDX S14 05Y 101.375 101.250 101.500 101.750 lower price

CDX.NA.HY IDX S15 05Y 100.563 100.313 100.500 100.688 lower price

CDX.NA.IG 0-3% S09 05Y 24.188 23.830 24.060 24.290 higher price

CDX.NA.IG 0-3% S09 10Y 59.875 59.625 59.853 60.080 lower price

CDX.NA.IG IDX S09 07Y 92.000 89.613 91.813 93.813 lower spread

CDX.NA.IG IDX S09 10Y 112.500 111.063 113.313 115.563 lower spread

iTraxx.Main 0-3% S09 10Y 66.125 65.875 66.138 66.400 lower price

iTraxx.Main 22-100% S09 07Y 15.500 15.250 16.125 17.000 lower spread

iTraxx.Main 22-100% S09 10Y 34.500 34.400 35.115 35.830 lower spread

iTraxx.Main IDX S09 07Y 131.750 130.750 132.750 134.750 lower spread

iTraxx.Main IDX S09 10Y 146.750 144.250 146.250 148.250 lower spread

iTraxx.Main IDX S16 05Y 128.250 126.000 128.250 128.500 lower spread

Source: 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 

2012, JPM-CIO 0003637-654, at 653. 

CIO Marks of 18 positions as of March 31, 2012

Credit Default Swap Indices 

and Tranches CIO 

Mark

Broker 

Bid

Broker 

Mid Price

Broker 

Offer Benefit

Month-End CIO 

Trade (date and

price)813

CDX.NA.HY 10-15% S08 05Y 91.500 91.500 92.000 92.500 lower price Info not available.

CDX.NA.HY 10-15% S10 07Y 13.125 10.625 11.875 13.125 higher price Info not available.

CDX.NA.HY 15-25% S10 05Y 93.375 92.875 93.125 93.375 higher price Info not available.

CDX.NA.HY 15-25% S11 05Y 83.750 82.875 83.313 83.750 higher price Info not available.

CDX.NA.HY 35-100% S10 05Y 106.000 105.625 105.813 106.000 higher price Info not available.

CDX.NA.HY IDX S11 07Y 102.000 101.250 101.625 102.000 higher price Info not available.

CDX.NA.HY IDX S14 05Y 101.438 101.438 101.688 101.813 lower price Info not available.

CDX.NA.HY IDX S15 05Y 100.500 100.500 100.688 100.875 lower price Info not available.

CDX.NA.IG 0-3% S09 05Y 18.375 17.750 18.063 18.375 higher price Info not available.

CDX.NA.IG 0-3% S09 10Y 62.750 62.750 63.125 63.500 lower price 3/30 @ 63.250

CDX.NA.IG IDX S09 07Y 88.000 88.000 89.500 91.000 lower spread 3/30 @ 90.000

CDX.NA.IG IDX S09 10Y 110.750 110.750 112.250 113.750 lower spread 3/30 @ 113.000

iTraxx.Main 0-3% S09 10Y 65.875 65.750 66.250 66.625 lower price 3/30 @ 66.375

 813 Trades executed by CIO at or near month-end (Friday, March 30, 2012). See JPM-CIO-PSI 0037501.
143

iTraxx.Main 22-100% S09 07Y 12.000 12.000 13.300 14.500 lower spread 3/30 @ 12.750

iTraxx.Main 22-100% S09 10Y 33.000 33.000 34.700 36.750 lower spread 3/30 @ 33.625

iTraxx.Main IDX S09 07Y 119.750 123.250 127.250 131.250 lower spread 3/30 @ 129.000

iTraxx.Main IDX S09 10Y 144.250 144.250 147.750 151.250 lower spread 3/30 @ 149.000

iTraxx.Main IDX S16 05Y 121.750 121.250 121.750 122.250 lower spread Info not available.

Source: 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, JPMCIO 0003637-654, at 653. 

The data in the Controller office’s charts showed that, over the course of the first three 

months of 2012, the CIO changed how it marked the value of the 18 positions, moving its marks 

away from the midpoint and closer to the extreme boundaries of the relevant price range. The 

data in the January chart showed, for example, that the CIO marks were generally close to the 

midpoint values. In two cases, however, the CIO marks were more than one basis point away 

from the midpoint price. In contrast, the February chart showed that five of the 18 marks, or 

nearly one-third, deviated noticeably from the midpoint prices. In March, the chart showed that 

all 18 CIO marks had moved to the extreme boundaries of the bid-ask spread. Sixteen of those 

marks reflected the most extreme price within the bid-ask spread; one mark was almost at the 

extreme; and one mark even fell outside the bid-ask spread. In addition, every one of the CIO 

marks that deviated noticeably from the midpoint price did so in a way that benefited the SCP 

book financially.

To further test the accuracy of the CIO marks, for the month of March, the Subcommittee 

examined whether the CIO had engaged in any actual trades involving the 18 listed positions, 

and added a seventh column to the chart with the results. The Subcommittee analysis found 8 

instances in which the CIO executed trades involving the positions examined by the VCG. In 

every case, the CIO executed those trades at prices that were noticeably closer to the midpoint 

prices than to its reported marks, even though the stated objective of the CIO’s valuation process 

was to reflect the CIO’s exit prices. The fact that the CIO used marks that produced more 

favorable financial results than if it had used its actual exit prices is additional proof that the 

CIO’s marks did not accurately reflect the credit derivatives’ fair value.

The Controller’s assessment also made it clear that the CIO was aware of the financial 

consequences of its using more favorable prices than those at the midpoint. The assessment

observed that the CIO had calculated that, by using the marks it did, it was able to report half a 

billion dollars in fewer losses at the end of the first quarter:

“CIO estimated that as of March 31, 2012, the sum total of the differences 

between the front office marks and the CIO VCG mid market estimates was $512 

million before adjustment to the boundary of the VCG valuation range ... and 

$495 million after adjustment.”814

In other words, after finding a $512 million difference between what the CIO reported and what 

would have been reported if the CIO had used the midpoint prices, the Controller then shaved off 

 814 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 9, JPMCIO 0003637-654, at 645. See also Subcommittee briefing by JPMorgan Chase (8/15/2012) (JPMorgan Chase also 

informed the Subcommittee the CIO marks had varied from VCG allowable prices by $30 million in December 

2011.).
144

$17 million from that difference by disallowing certain reported marks that were so extreme they 

fell outside the VCG’s range of permitted deviations from the midpoint prices.

815 After 

changing those marks to reflect the extreme edge of the VCG’s allowed valuation range,

816 the 

Controller’s office determined that the CIO’s reported losses were still $495 million less than 

what would have been reported if the book had been marked at the midpoint.

817

Internally, two days before it issued the memorandum summarizing its assessment, a 

senior official in the Controller’s office confronted the head of the CIO’s equity and credit 

trading office in London about the data showing the CIO had changed the way in which it valued 

the SCP book, providing more favorable marks in March than in January.

818 In a telephone 

conversation, Alistair Webster, head of Corporate Accounting Policies for Europe, the Middle 

East, Africa and Asia, had the following exchange with Javier Martin-Artajo:

Mr. Webster: “So if I look at those back in January, the front office marks were all 

either mid or somewhere, you know, close to mid.”

Mr. Martin-Artajo: “Right.”

Mr. Webster: “That ...”

Mr. Martin-Artajo: “In terms of conservative and aggressive. ...[T]hat’s what you’re 

asking?”

Mr. Webster: “Well, it’s subtly different, subtly different.” 

Mr. Martin-Artajo: “Okay.”

Mr. Webster: “But they were, none of them were actually at the boundaries of the bid 

or offer.”

Mr. Martin-Artajo: “Right.” 

 815 For a number of credit derivatives, the VCG had established an explicit “threshold” which allowed the CIO mark 

to deviate from the midpoint price by no more than a specified number of basis points. See, e.g., 4/20/2012 email 

from Edward Kastl, JPMorgan Chase, to Jason Hughes, CIO, “Credit Index and Tranche Book,” JPM-CIO-PSI-H 

0006636-639, at 636 (noting that the accepted deviation for the iTraxx Main Series 9 7-year index was a six-basispoint deviation from the midpoint of the relevant bid-ask spread). 816 See 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, at 8, 

JPM-CIO 0003637-654, at 644 (“If the front office mark is outside the VCG valuation range, the position mark is 

adjusted to the outer boundary of the range.”).

817 The bank also determined that the VCG used formulas in its spreadsheets that had not been properly vetted, 

“introduced two calculation errors,” and resulted in the VCG’s understating the difference between the VCG midprices and the SCP marks. See 2013 JPMorgan Chase Task Force Report, at 56. The Controller later increased the 

amount of unreported losses to $677 million in July, then reduced that total due to certain price adjustments and the 

application of a liquidity reserve. See 2013 JPMorgan Chase Task Force Report, at 55, footnote 68.

818 See 5/8/2012 recorded telephone conversation between Alistair Webster, JPMorgan Chase, and Javier MartinArtajo, CIO, JPM-CIO-PSI-A 0000164; 5/8/2012 transcript of the same recorded telephone conversation, JPM-CIO 

0003631-636, at 631-634.
145

Mr. Webster: “So then when, if we roll forward to March, if the front office marks had 

migrated, not all of them, to the aggressive side, most of them, but not all of them to the 

aggressive side, but they’ve also migrated from either mid or somewhere close to being at 

the, you know, the bounds of the bid or offer.”

Mr. Martin-Artajo: “Yeah, but I think that’s because we were trading there. I think 

that’s because we were trading them, quite heavily.” 

Mr. Webster: “In March?” 

Mr. Martin-Artajo: “Yeah, in March.”819 

This conversation indicates that, in early May 2012, senior JPMorgan Chase personnel viewed 

the CIO as having changed its valuation practices over the course of the first quarter and, in 

March 2012, used “aggressive” prices to minimize its losses. 

Despite this internal exchange and the April 20 emails observing that the CIO had 

marked its book “at the most advantageous levels,” the Controller’s assessment contained no 

mention of a shift in valuation methodology or the use of more aggressive marks towards the end 

of the quarter. To the contrary, the assessment concluded that “the CIO valuation process is 

documented and consistently followed period to period” and “market-based information and 

actual traded prices serve as the basis for the determination of fair value.”820 The assessment

also stated: 

“The Firm believes that its valuation practices in CIO are consistent with industry 

practices for other no-dealer investors/managers. CIO, like other non-dealer 

investor/managers, relies more heavily on transaction-level data available through 

its own market activity, and its valuation process reflects its exit market and the 

participants in that market.”821

The last page of the memorandum stated that the bank had shared its memorandum with 

JPMorgan Chase’s outside auditor, PricewaterhouseCoopers, which had “concur[red] with the 

conclusions.”822

 819 5/8/2012 transcript of recorded telephone conversation between Alistair Webster, JPMorgan Chase, and Javier 

Martin-Artajo, CIO, JPM-CIO 0003631-636 (Mr. Martin-Artajo: “I mean are you saying, are you saying that we 

had a trend at the end of the month to mark a little bit towards more, more one side of the bid offer as opposed to the 

trend that we had at the beginning of the year? That’s what you’re saying, right?” Mr. Webster: “Yeah ...” Mr. 

Martin-Artajo: “Okay, two things. One is that at the end of March we really traded a lot and second, that, I don’t 

think the traders have that bias to be honest with you. I don’t think so.”). See also 2013 JPMorgan Chase Task 

Force Report, at 74 (“And, when questioned about the March 30 marks, the traders all confirmed that the marks at 

March 30 reflected their good-faith estimation of the positions’ value, and one of them explicitly denied any bias.”). 820 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, at 11, JPMCIO 0003637-654, at 647. 821 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, at 10, JPMCIO 0003637-654, at 646. 822 Id., at 647. See also 2013 JPMorgan Chase Task Force Report, at 6, 74.
146

On May 9, 2012, the day before the Controller’s memorandum summarizing its 

assessment was released and the bank certified its first quarter results and conducted a business 

update call, the bank met with OCC examiners to discuss the SCP.

823 Representing the bank 

were Chief Financial Officer Douglas Braunstein, General Counsel Stephen Cutler, Chief 

Investment Officer Ina Drew, Chief Risk Officer John Hogan, and the head of Corporate & 

Regulatory Affairs Barry Zubrow. At that meeting, among other matters, the bank informed the

OCC of the CIO’s ongoing collateral disputes relating to SCP valuations. When the OCC asked 

about whether the CIO had mismarked the SCP book, Mr. Hogan flatly denied it.

824 His deputy, 

Ashley Bacon, told the Subcommittee that the collateral disputes led him to investigate the 

marks, and after the bank took away the CIO’s discretion in marking its positions so that, 

instead, its marks aligned with Markit valuation data, the disputes were resolved.825 

When later asked about the bank’s special assessment of the SCP marks, a senior OCC

examiner told the Subcommittee that “it was garbage.”826 The OCC said that the VCG itself

“should have picked up the marking issue” during its review of the February valuations, and 

taken action then to stop the aggressive marking practices.

827 The OCC told the Subcommittee 

that it was clear the CIO traders were “gaming the system.”828 The OCC indicated that, by the 

end of March, the CIO traders were marking virtually all of the SCP positions at the very edge of 

“what they could get away with” and were booking “fictitious profits.”829 Yet neither the VCG 

nor the special assessment raised any objection to the SCP marks. The OCC disagreed that the 

SCP marks accurately reflected the fair market value of the SCP’s credit derivatives.

The sole purpose of the Controller’s special assessment was to ensure that the CIO was 

accurately reporting the value of its derivative holdings, since those holdings helped determine

the bank’s overall financial results. As part of its assessment, the Controller approved of the 

CIO’s failing to include $512 million in losses, which would have led to a 70% increase in the 

 823 See 5/10/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “Braunstein / Cutler call on CIO,” 

OCC-SPI-00000018-020, at 020. 824 Subcommittee interview of Michael Kirk, OCC (8/22/2012); Subcommittee interview of Scott Waterhouse, OCC 

(9/17/2012) (when discussing the CIO’s collateral dispute with Morgan Stanley, “Hogan told us that there were no 

problems with the CIO’s marks”). See also 6/29/2012 email from Michael Kirk, OCC, to Elwyn Wong, Scott 

Waterhouse, Fred Crumlish, OCC, and others, “2nd Wilmer Hale Call,” OCC-SPI-00071386-388, at 386 (“Section 1 

on Traders is damaging to Hogan’s reputation in respect to his interaction with regulators, in my opinion. On the 

very first daily call, Hogan discussed that earlier there had been a large collateral dispute with their counterparties. I 

questioned him on how it was resolved and he said JPM eventually agreed to the counterparties marks. ... I then 

followed with a question relating to what I described as mismarked books to which Hogan forcefully stated JPM 

books were not mismarked; leaving both Elwyn and me ... puzzled over how a collateral dispute could be resolved 

by agreeing to the counterparties marks, without admitting your own marks were incorrect.”). See also Hogan email 

from two weeks earlier expressing concern about the CIO collateral disputes and CIO valuation process, 4/20/2012 

email from John Hogan, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, “Collateral Disputes,” JPMCIO 0003597-598, at 597 (“This isn’t a good sign on our valuation process on the Tranche book in CIO. I’m going 

to dig further.”).

825 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) (Ashley Bacon). 826 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 827 Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 828 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 

829 Id. 
147

$719 million in SCP losses that the CIO did report.830 That the Controller concluded that the 

SCP’s losses could legitimately be reported at anywhere between $719 million and $1.2 billion 

at the end of March exposes the imprecise, malleable, and potentially biased nature of the credit 

derivative valuation process.

The same prices upheld by the Controller had been privately disparaged by the CIO 

trader who played a key role in the marking process. In March 2012, Bruno Iksil called the SCP 

marks “idiotic.”831 At another point, he said that his supervisor would have to “decide[ ] what 

we show. [B]ecause me, I don’t know anymore.”832 That type of undisciplined pricing process

should not have received the bank’s seal of approval.

The bank’s Controller could have but did not criticize the CIO’s valuation process or 

modify the reported derivative values,

833 based upon the change in pricing practices over the 

quarter, the “aggressive” nature of the prices, their failure to reflect the prices used in executed 

trades, or their role in minimizing the SCP losses. Instead, the bank’s Controller found that the 

CIO’s actions were “consistent with industry practices” and acceptable under bank policy.834 

The Controller’s conclusion is all the more perplexing in light of the fact that the original 

authorization for the CIO to trade in derivatives indicated that the CIO would follow the 

Investment Bank’s lead on prices, since it was often a market-maker. If the CIO had done so, it 

would have effectively used the midpoint prices, and the price deviation between the CIO and 

Investment Bank would have been effectively eliminated. The Controller also failed to note that 

the CIO was not using the Investment Bank’s marks, contrary to the authorizing document, and 

that the two lines of business had very different valuations for the same credit derivatives. 

That the bank’s Controller found the SCP valuations permissible under bank policy, 

industry practice, and generally accepted accounting principles demonstrates how imprecise and 

open to manipulation the current process is for valuing credit derivatives. The Controller’s 

support for the CIO’s pricing practices, which was further backed by the JPMorgan Chase Task 

Force Report, indicates that all of JPMorgan Chase’s lines of business are free to use those same

derivatives pricing practices, without censure.835

 830 JPMorgan Chase later restated its financial results to attribute $660 million in additional losses to the SCP by the 

end of March. See 7/13/2012 “Form 8-K,” JPMorgan Chase & Co., at 2, 

http://files.shareholder.com/downloads/ONE/2261741819x0xS1193125-12-301391/19617/filing.pdf. 831 3/16/2012 transcript of a recorded telephone conversation between Julien Grout, CIO, and Bruno Iksil, CIO, 

JPM-CIO-PSI-A 0000162. 832 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Julien Grout, CIO, JPM-CIO 0003515-541, 

at 541.

833 See 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at 8, 

JPM-CIO 0003637-654, at 644 (“any difference between front office mark and the mid-market price may be 

adjusted, at CIO VCG’s discretion”).

834 5/10/2012 JPMorgan Chase Controllers special assessment of CIO’s marks, January to April 2012, at JPM-CIO0003646. See also 2013 JPMorgan Chase Task Force Report, at 55, 74. 

835 In its 2013 report, the JPMorgan Chase Task Force did not criticize either the CIO VCG or the Controller’s 

special assessment for upholding the original SCP marks, explaining: “Individuals working on the review 

understood that, although the March 30 trader marks for the Synthetic Credit Portfolio were aggressive, they were 

predominantly within the VCG thresholds.” 2013 JPMorgan Chase Task Force Report, at 74. See also id., at 55. In 

other words, presuming that the CIO personnel making the marks acted in good faith, the bank viewed the SCP 

marks as acceptable, even though they deviated from the midpoint prices by hundreds of millions of dollars and 

were used to minimize the CIO’s losses. The Task Force found no fault with the change in pricing practices over 
148

On May 11, 2012, the day after the Controller’s assessment was issued and JPMorgan 

Chase disclosed that the SCP’s losses had climbed to $2 billion, the SCP reported internally a 

daily loss of another $570 million.836 That $570 million was the largest single daily loss

reported by the SCP up to that point in 2012. While it may have reflected negative market 

developments following the bank’s public filing, it is also possible the CIO used an inflated mark 

to take into account the $512 million in unreported losses that had been identified in the 

Controller’s assessment. During the May 10 call in which Mr. Dimon disclosed the $2 billion 

loss, he stated that he was “not going to make calls every time the number moves around, by 

$0.5 billion,”837 and, in fact, he did not disclose publicly the next day’s loss, even though it 

increased the SCP’s reported losses after a single day by another 25%. In July 2012, JPMorgan 

Chase restated the SCP’s first quarter losses, pushing the $660 million in losses that would have 

been reported in the second quarter back to the first quarter instead.

Liquidity and Concentration Reserves. Even before completing its special assessment

of the SCP marks, in April 2012, the bank’s Chief Financial Officer increased the CIO’s liquidity 

reserve fivefold from $33 million to $186 million.

838 The bank told the Subcommittee that it 

expanded the reserve, because the SCP had increased holdings of illiquid credit derivatives, 

primarily credit tranches in “off-the run” – or older – credit indices. As the CIO CFO John 

Wilmot explained to Mr. Dimon and Mr. Braunstein:

“Credit Tranche markets have always been considered less liquid (compared to 

Index markets) and Liquidity reserves are therefore computed and taken. 

However, in the past, the Liquidity Reserve associated with these 6 Series-9 

Tranche positions was not taken because their markets were deemed sufficiently 

liquid. The additional +$155 Million Liquidity Reserve was taken due to the 

inclusion of these 6 Series-9 tranche positions; this reflects the market’s reduced 

liquidity.”839

 

the quarter, the size of the pricing deviation, the use of prices at the extreme edge of the bid-ask spread, or the 

consistent bias in favor of the bank. The Task Force did criticize the bank for failing “to ensure that the CIO VCG 

price-testing procedures – a important financial control – were operating effectively,” noting such “operational 

deficiencies” as the VCG’s failure to document its price-testing thresholds and its use of time-consuming manual 

input procedures. Id., at 96-97. See also id., at 55-56. The Task Force report also announced formation of a new 

“CIO Valuation Governance Forum” responsible for “understanding and managing the risks arising from valuation 

activities within the CIO and for escalating key issues to a Firm-wide VCF,” established in 2012 to strengthen the 

bank’s valuation activities. Id., at 108. But the report contains no acknowledgement of any of the problems inherent 

in the derivatives valuation process itself which, in the case of the whale trades, was easily manipulated to hide 

substantial losses. 836 See OCC spreadsheet, OCC-SPI-00000298, printed as a Subcommittee chart earlier in this chapter. Numbers do 

not reflect restated P&L figures. 

837 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 8, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf. 838 See 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, JPMCIO 0003637-654, at 645-646; 4/13/2012 CIO Valuation Summary Memo, March 2012 Month-End Results, OCCSPI-00021381-388, at 386 (“For March month end the level of the Liquidity Reserve, which represents the 

illiquidity of off-the run positions, was $(186.4)mm.”). 

839 4/9/2012 email from John Wilmot, CIO, to Jamie Dimon and Douglas Braunstein, JPMorgan Chase, “Series 9 

forward tranche liquidity reserves,” JPM-CIO-PSI 0000960.
149

When asked about the reserve, CIO head Ina Drew professed not to know its purpose. 

She told the Subcommittee that in December 2011, a “$30 million reserve was taken by finance 

at year-end against the position. I don’t know what kind of reserve it was, exactly. There hadn’t 

been reserves previously. This was probably a liquidity reserve.”840 

The CIO’s Valuation Control Group (VCG) had the initial responsibility for calculating 

the CIO’s liquidity and concentration reserves and monitoring them to ensure their adequacy, 

taking into account such factors as whether the CIO maintained “significant” or “concentrated” 

positions and did so in markets that were “less liquid.”841 Mr. Braunstein, by virtue of his 

position as Chief Financial Officer, had the responsibility for approving the establishment and 

size of the reserves.

842

Liquidity and concentration reserves have a direct impact on financial results, since they 

subtract, dollar for dollar, from reported revenues. The size of the SCP reserve would, thus, 

presumably be of interest to CIO and bank management, since it would reduce the CIO and 

bank’s reported revenues. The fivefold increase in the SCP’s liquidity reserve in April 2012, for 

example, would have increased the CIO’s losses by more than $150 million.

When the OCC was asked about the SCP liquidity reserve, one OCC examiner told the 

Subcommittee that even the increased amount in April 2012 was “wholly inadequate,” noting 

that the reserve had risen to “over $700 million” by August 2012.843 Another OCC examiner 

noted that the bank had not set up any “concentration reserve” for the SCP, even though the SCP 

held highly concentrated positions, including over $80 billion in one credit index.844

E. Admitting the Mismarking

Sometime in May 2012, after the memorandum summarizing the Controller’s special 

assessment was issued, JPMorgan Chase’s Chief Market Risk Officer Ashley Bacon ordered the 

CIO to begin using the Markit independent pricing service to value its credit derivatives.845 That 

change meant that CIO derivative positions would generally be valued at or near the midpoint in 

the relevant bid-ask spread. It also meant that the CIO could no longer manipulate its marks to 

minimize its losses. 

The bank told the Subcommittee that, due in part to the Controller’s special assessment in 

May, it had viewed the SCP marks as acceptable, even though they deviated by half a billion 

 840 Subcommittee interview of Ina Drew, CIO (9/7/2012). OCC examiner Elwyn Wong told the Subcommittee that 

the $33 million reserve had been a “severe underestimate.” Subcommittee interview of Elwyn Wong, OCC 

(8/20/2012).

841 5/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at 6. 842 See 4/6/2012 email from Douglas Braunstein, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, “Follow up,” 

JPM-CIO 0000547 (proposing $155 million increase in SCP liquidity reserve due to less liquid market for IG9 credit 

tranches). See also 4/6/2012 email from John Wilmot, CIO, to Jamie Dimon and Douglas Braunstein, JPMorgan 

Chase, copy to Ina Drew, CIO, “synthetic credit tranche reserve,” JPM-CIO 0000576; 4/9/2012 email from John 

Wilmot, CIO, to Douglas Braunstein and Jamie Dimon, JPMorgan Chase, “Series 9 tranche liquidity reserves,” 

JPM-CIO 0000987; Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 843 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 844 Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 845 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) (Ashley Bacon). 
150

dollars from the relevant midpoint prices. The bank told the Subcommittee that its view of the 

marks did not change until early June, when the internal investigation being conducted by the 

JPMorgan Chase Task Force began reviewing CIO recorded telephone calls and listened to the 

traders criticizing the very marks they were reporting.846 Michael Cavanagh, the Task Force 

head, told the Subcommittee that he was convinced the traders thought they had a winning 

trading strategy, viewed the market as “wrong” in how it was valuing the SCP credit derivative 

positions, and believed the SCP positions would recover their value. He also indicated that he 

was convinced that the London CIO personnel, with varying degrees of culpability, had 

deliberately mismarked the value of the SCP positions.847 In its 2013 report, the JPMorgan

Chase Task Force wrote: “From at least mid-March through at least March 30, the traders did 

not provide good-faith estimates of the exit prices for all the positions in the Synthetic Credit 

Portfolio.”848 

On July 13, 2012, JPMorgan Chase & Co., the holding company for JPMorgan Chase 

Bank, reported that it was restating its first quarter 2012 financial results and reduced the bank’s 

previously-reported total net revenue by $660 million,

849 an amount which it said fell to $459 

million after taxes. The bank blamed the reduced earnings on inappropriate SCP valuations by 

the CIO:

“JPMorgan Chase & Co. ... restated its previously-filed interim financial 

statements for the quarterly period ended March 31, 2012. The restatement 

related to valuations of certain positions in the synthetic credit portfolio held by 

the Firm’s Chief Investment Office (‘CIO’) and reduced the Firm’s reported net 

income by $459 million for the three months ended March 31, 2012.”850

JPMorgan Chase told the Subcommittee that the decision to restate its financial results 

was a difficult one, since neither $660 million nor $459 million was clearly a “material” amount 

for the bank.851 In addition, the bank told the Subcommittee that the valuations used by the CIO 

did not, on their face, violate bank policy or GAAP, because the CIO had generally used prices 

that fell within the bid-ask spread to value its credit derivative positions.852 The bank told the 

Subcommittee that it finally decided, however, that the telephone calls, instant messages, and 

emails indicated that the London CIO personnel had not acted in “good faith” when selecting 

prices for the SCP positions, and so the SCP valuations had to be revised.853

 846 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). See also 2013 JPMorgan Chase 

Task Force Report, at 75, 89. 

847 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). 848 2013 JPMorgan Chase Task Force Report, at 89.

849 7/13/2012 “Form 8-K,” JPMorgan Chase & Co., at 2, 

http://files.shareholder.com/downloads/ONE/2261741819x0xS1193125-12-301391/19617/filing.pdf. 850 JPMorgan Chase & Co. 10-Q filing with the SEC for the second quarter of 2012, at 4, 

http://www.sec.gov/Archives/edgar/data/19617/000001961712000264/jpm-2012063010q.htm. 851 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). 852 Id. See also 5/10/2012 JPMorgan Chase Controller’s special assessment of CIO’s marks, January to April 2012, 

at 10, JPM-CIO 0003637-654, at 646 (“CIO book marks on individual positions were generally within the bid offer 

spread.”); 2013 JPMorgan Chase Task Force Report, at 6, 55, 74. 853 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). See also 2013 JPMorgan Chase 

Task Force Report, at 7-8, 89.
151

Ina Drew resigned on May 13, 2012. On July 12, 2012, the day before the restatement 

was announced, the bank sent termination letters to Achilles Macris, Javier Martin-Artajo, and 

Bruno Iksil. Mr. Martin-Artajo’s letter included the following explanation for his termination: 

“During March and April 2012, when the Book began to show significant losses, 

you directed Bruno Iksil and/or Julien Grout to show modest daily losses in the 

marking of the Book rather than marking the Book in a manner consistent with 

the standard policies and procedures of JP Morgan Chase & Co ... and/or to 

provide daily profit and loss reports that would show a long-term trend in the 

value of the Book’s positions that did not necessarily reflect the exit price for 

those positions under the Firm’s standard policies and procedures.”854 

Bruno Iksil’s termination letter included a similar explanation: 

“During March and April 2012, when the Book began to show significant losses, 

you received or were aware of instructions from Javier Martin-Artajo (i) to show 

modest daily losses in the marking of the Book rather than marking the Book in a 

manner consistent with the standard policies and procedures of JP Morgan Chase 

& Co ... and/or (ii) to provide daily profit and loss reports that would show a 

long-term trend in the value of the Book’s positions that did not necessarily 

reflect the exit price for those positions under the Firm’s standard policies and 

procedures. You complied with, or permitted the compliance by Julien Grout 

with, such instructions in whole or in part with the result that there was a 

significant divergence between values under the Firm’s standard policies and 

procedures in the Book’s stated value.”855

The bank told the Subcommittee that it did not terminate Julien Grout at the time, because it 

wanted to consider whether, as a junior trader, he had been coerced into marking the SCP book 

improperly.856 Mr. Grout later resigned from the bank in December 2012. 

F. Analysis

While JPMorgan Chase has essentially conceded that the CIO mismarked the SCP book

to hide losses, it has chosen to rest its analysis on the subjective intent of the traders involved 

with the mismarking, rather than on the objective evidence. That evidence shows that the CIO 

had changed its valuation practices over time, began using more favorable marks than the 

midpoint prices in ways that consistently benefited the bank, and used those more favorable

prices to avoid reporting hundreds of millions of dollars in losses over a three-month period. 

The CIO’s mismarking was also evident from the hundreds of millions of dollars in collateral 

disputes it had with its counterparties, including JPMorgan Chase Investment Bank.

 854 7/12/2012 letter from JPMorgan Chase to Javier Martin-Artajo, CIO, JPM-CIO-PSI-H 0002744-745, at 744. 855 7/12/2012 letter from JPMorgan Chase to Bruno Iksil, CIO, JPM-CIO-PSI-H 0002740-741, at 740. See also 

7/12/2012 letter from JPMorgan Chase to Achilles Macris, CIO, JPM-CIO-PSI-H 0002742-743, at 742. 856 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012) (Harry Weiss).
152

Detecting the mismarking of derivatives does not require analysis of a person’s subjective

opinions; it requires analysis of the marks themselves to determine the extent to which they 

deviate from the midpoint prices and the extent to which that deviation benefits the financial 

institution marking the values. Calculating those two objective factors is not only possible, but 

provides a cost-effective option for bank managers and regulators to exercise better oversight of 

the derivative valuation process. 

While JPMorgan Chase has admitted the misconduct of the CIO personnel engaged in the 

mismarking, it has yet to acknowledge the deficiencies in the SCP pricing reviews conducted by 

the VCG and Controller’s offices. These reviews failed to use the objective information at hand

to expose the SCP’s mismarking, to condemn the CIO’s use of overly favorable derivative prices

to minimize losses, and to prohibit other bank business lines from engaging in similar derivative 

valuation practices. Instead, the bank expressed support for the two internal reviews that upheld 

the CIO’s pricing practices. By failing to provide any criticism of those reviews, the bank has 

essentially signaled that its businesses can continue to game derivative prices, as long as they 

select prices from the daily bid-ask spread and disguise their motives. That troubling message 

should be counteracted with a clear policy statement prohibiting the gaming of derivative values

to benefit the bank.

Given the ongoing importance of derivative holdings in large, federally insured financial 

institutions, strengthening the derivative valuation process is essential, including through 

improved oversight measures to detect and stop mismarking and stronger policies that prohibit

the gaming of derivative valuations.
153

V. DISREGARDING RISK

In contrast to JPMorgan Chase’s reputation for best-in-class risk management, the whale 

trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk 

metrics were frequently criticized or downplayed, and risk evaluation models were targeted by 

bank personnel seeking to produce artificially lower capital requirements. 

The CIO used five key metrics and limits to gauge and control the risks associated with 

its trading activities, including a Value-at-Risk (VaR) limit, Credit Spread Widening 01 (CS01)

limit, Credit Spread Widening 10% (CSW10%) limit, stress loss limits, and stop loss advisories. 

During the first three months of 2012, as the CIO traders added billions of dollars in complex 

credit derivatives to the Synthetic Credit Portfolio, the SCP trades breached the limits on all five 

of the risk metrics. In fact, from January 1 through April 30, 2012, CIO risk limits and 

advisories were breached more than 330 times.

In January 2012, the SCP breached the VaR limit for both the CIO and the bank as a 

whole. That four-day breach was reported to the bank’s most senior management, including 

CEO Jamie Dimon. In the same month, the SCP repeatedly breached the Credit Spread 01 

(CS01) risk limit, exceeding the limit by 100% in January, by 270% in early February, and by 

more than 1,000% in mid-April. In February 2012, a key risk metric known as the 

Comprehensive Risk Measure (CRM) warned that the SCP risked incurring a yearly loss of $6.3 

billion, but that projection was dismissed at the time by CIO personnel as “garbage.” In March 

2012, the SCP repeatedly breached the Credit Spread Widening 10% (CSW10%) risk limit, as 

well as certain stress loss limits signaling possible losses in adverse market conditions, followed 

by stop loss advisories that were supposed to set a ceiling on how much money a portfolio was 

allowed to lose over a specified period of time. Concentration limits that could have prevented 

the SCP from acquiring outsized positions were absent at the CIO despite being commonplace 

for the same instruments at JPMorgan Chase’s Investment Bank.

The SCP’s many breaches were routinely reported to JPMorgan Chase and CIO 

management, risk personnel, and traders. The breaches did not, however, spark an in-depth 

review of the SCP or require immediate remedial actions to lower risk. Instead, the breaches 

were largely ignored or ended by raising the relevant risk limit. 

In addition, CIO traders, risk personnel, and quantitative analysts frequently attacked the 

accuracy of the risk metrics, downplaying the riskiness of credit derivatives and proposing risk 

measurement and model changes to lower risk results for the Synthetic Credit Portfolio. In the 

case of the VaR, after analysts concluded the existing model was too conservative and overstated 

risk, an alternative CIO model was hurriedly adopted in late January 2012, while the CIO was in 

breach of its own and the bankwide VaR limit. The CIO’s new model immediately lowered the 

SCP’s VaR by 50%, enabling the CIO not only to end its breach, but to engage in substantially 

more risky derivatives trading. Months later, the bank determined that the model was improperly 

implemented, requiring error-prone manual data entry and incorporating formula and calculation 

errors. On May 10, the bank backtracked, revoked the new VaR model due to its inaccuracy in 

portraying risk, and reinstated the prior model.
154

In the case of the bank’s CRM risk metric and model, CIO quantitative analysts, traders, 

and risk managers attacked it for overstating risk compared to their own far more optimistic 

analyses. The CIO’s lead quantitative analyst also pressed the bank’s quantitative analysts to 

help the CIO set up a system to categorize the SCP’s trades for risk measurement purposes in a 

way designed to produce the “optimal” – meaning lowest – Risk Weighted Asset total. The CIO 

analyst who pressed for that system was cautioned against writing about it in emails, but received 

sustained analytical support in his attempt to construct the system and artificially lower the 

SCP’s risk profile. 

The head of the CIO’s London office, Achilles Macris, once compared managing the 

Synthetic Credit Portfolio, with its massive, complex, moving parts, to flying an airplane. The 

OCC Examiner-in-Charge at JPMorgan Chase told the Subcommittee that if the Synthetic Credit 

Portfolio were an airplane, then the risk metrics were the flight instruments. In the first quarter 

of 2012, those flight instruments began flashing red and sounding alarms, but rather than change 

course, JPMorgan Chase personnel disregarded, discounted, or questioned the accuracy of the 

instruments instead. The bank’s actions not only exposed the many risk management 

deficiencies at JPMorgan Chase, but also raise systemic concerns about how many other 

financial institutions may be disregarding risk indicators and manipulating models to artificially 

lower risk measurements and capital requirements.

A. Background

Until news of the synthetic credit derivative trading losses broke in April 2012, JPMorgan 

Chase was widely regarded as having among the best risk management practices in the financial 

industry. The bank had consistently outperformed its peers during periods of economic turmoil. 

As CEO, Jamie Dimon developed a reputation as a “risk-averse manager who demands regular 

and exhaustive reviews of every corner of the bank.”857 During the financial crisis, government 

officials, investors, and depositors alike viewed JPMorgan Chase as a safe harbor in the storm. 

In 2008, bank regulators brokered JPMorgan Chase acquisitions of Washington Mutual and Bear 

Stearns as those institutions failed.858 While JPMorgan Chase accepted $25 billion in bailout 

funds during the crisis, it was among the first of the banks to fully repay the loans.859 In 2009, 

during the worst recession in generations, JPMorgan Chase’s performance was buoyed by more 

than $1 billion in profits from the Synthetic Credit Portfolio.860

When word broke of hundreds of millions of dollars in CIO losses due to high risk 

synthetic credit derivatives trading, questions immediately focused on JPMorgan Chase’s risk 

management practices. At a hearing before the Senate Banking, Housing, and Urban Affairs 

Committee in June 2012, Mr. Dimon admitted to risk management failures:

 857 “House of Dimon Marred by CEO Complacency Over Unit's Risk,” Bloomberg, Erik Schatzker et al. 

(6/12/2012), http://www.bloomberg.com/news/2012-06-12/house-of-dimon-marred-by-ceo-complacency-over-units-risk.html. 858 See, e.g., “JPMorgan Chase & Company,” New York Times, (Updated 11/16/2012), 

http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html. 859 Id.; “JPMorgan and 9 Other Banks Repay TARP Money,” New York Times, Dealbook (6/17/2009), 

http://dealbook.nytimes.com/2009/06/17/jpmorgan-repays-treasury-as-tarp-exits-continue/. 860 See 6/21/2012 “CIO Compensation – Revenue to Compensation Historical Lookback,” JPM-CIO-PSI-H 

0002746, at 749. 
155

“CIO’s strategy for reducing the synthetic credit portfolio was poorly conceived 

and vetted. In hindsight, the CIO traders did not have the requisite understanding 

of the new risk they took. The risk limits for the synthetic credit portfolio should 

have been specific to that portfolio and much more granular, i.e. only allowing 

lower limits of risk on each specific risk being taken. CIO particularly, the 

synthetic credit portfolio should have gotten more scrutiny from both senior 

management, and I include myself in that, and the firm wide risk control 

function.”861

Later in the same hearing, in response to a question by Committee Chairman Tim Johnson about 

specific risk limits, Mr. Dimon stated:

“CIO had its own limits around credit risk and exposure. At one point, in March, 

some of those limits were triggered. The CIO at that point did ask the traders to 

reduce taking risk and [Ms. Drew] started to look very heavily into the area which 

would be the proper thing to do, sometimes triggers on limits do get hit. And 

what should happen afterwards is people focus on it, think about it, and decide 

what to do about it.”862

While it may be true that additional risk limits and greater scrutiny from senior 

management would have helped, Mr. Dimon’s testimony belies the fact that the Synthetic Credit 

Portfolio did, in fact, cause multiple breaches of both CIO and bankwide risk limits during the 

first three months of 2012. Senior management, at times including Mr. Dimon, were notified of 

those breaches but did not initiate an effective investigation into the nature of the risk facing the 

bank. Despite JPMorgan Chase’s reputation for careful risk management, in the case of the CIO 

losses, the warning signs were clear, but they were disregarded or rationalized. Even Mr. Dimon

acknowledges that it was not until March that the CIO instructed the traders to stop taking on 

additional positions.

The Chief Investment Office, which managed a $350 billion investment portfolio 

consisting, in part, of federally insured deposits, had an inadequate risk management function. 

The CIO did not have a Chief Risk Officer until far too late, and even before then the seniormost risk officer viewed it as his responsibility merely to observe and report risk, not to lower it. 

The person most responsible for managing the CIO’s risk profile, Chief Investment Officer Ina 

Drew, was afforded great deference by Mr. Dimon and the bank’s operating committee.863 Inside 

her office, the traders were much more influential than the risk managers. At the same time, 

policing risk conflicted with her interest in generating gains.

 861 Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “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), http://www.cq.com/doc/congressionaltranscripts-4105471. 862 Id. 863 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/19/2012) and Michael Cavanagh, JPMorgan 

Chase (12/12/2012). See also 2013 JPMorgan Chase Task Force Report, at 22.
156

The bank’s reliance on Ms. Drew to police risk within the CIO was so excessive that 

some senior risk personnel first became aware of the CIO’s outsized synthetic credit positions 

from the media. John Hogan, the bank’s Chief Risk Officer, for example, told the Subcommittee 

that the articles about the “London Whale,” which first appeared on April 6, 2012, surprised 

him.864 Mr. Hogan said that the Synthetic Credit Portfolio was not on his radar in an “alarming 

way” prior to that date.865 It speaks volumes that the financial press became aware of the CIO’s 

risk problems before JPMorgan Chase’s Chief Risk Officer. 

While the bank’s Chief Risk Officer was apparently left in the dark, by April 2012, senior 

CIO management was well aware that the Synthetic Credit Portfolio had lost money on most 

days during the first quarter of the year, had cumulative losses of at least $719 million, and had 

massively increased the portfolio size with tens of billions of dollars of new synthetic credit 

positions threatening additional losses. Ms. Drew was so concerned that on March 23, she had

ordered the traders to stop trading. Yet in the week following publication of the “London 

Whale” articles, Mr. Dimon, Mr. Hogan, Chief Financial Officer Douglas Braunstein, and others, 

gave the impression that the press reports were overblown. On the bank’s April 13 quarterly 

earnings call, Mr. Dimon referred to the press accounts as a “complete tempest in a teapot,”866

and Mr. Braunstein stated that the bank was “very comfortable with our positions.”867 Those 

statements did not reflect the magnitude of the problems in the Synthetic Credit Portfolio. Mr. 

Dimon publicly withdrew his comment a month later.868

Prudent regulation of the U.S. financial system depends in part on understanding how a 

small group of traders in the London office of a global bank renowned for stringent risk 

management were able to purchase such a large volume of synthetic credit derivatives that they 

eventually led to losses of more than $6 billion. This case study elucidates the tension between 

traders and risk managers. Traders are incentivized to be aggressive and take on significant risk. 

Risk managers are supposed to be a voice of caution, limiting and reigning in that risk. Just 

because trading strategies sometimes succeed does not mean they are prudent. Bad bets 

sometimes pay off, and it is easy to confound profits with successful trading strategies. At the 

CIO, initial success in high risk credit derivative trading contributed to complacent risk 

management, followed by massive losses.

CIO synthetic credit traders were able to take on positions of enormous risk because, 

despite its reputation, JPMorgan Chase’s Chief Investment Office lacked adequate risk 

management. The risk metrics that were in place at the CIO were sufficient to limit, if not 

prevent entirely, the losses to the bank caused by the Synthetic Credit Portfolio, had they been 

heeded. Understanding the risk management failures at JPMorgan Chase’s CIO requires an 

 864 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 865 Id. 866 See 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 10, JPM-CIOPSI 0001151.

867 Id., at 7. 868 See 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf (Mr. Dimon: “But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly 

executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective [an] 

economic hedge than we thought.”).
157

analysis of its risk management structure, risk personnel, and why specific risk metrics in place 

at the time of the trades were disregarded.

B. Risk Management Structure at CIO

JPMorgan Chase provides a broad overview of its risk management practices in its 

Annual Report. The 2011 Annual Report describes risk management at the firm in the following 

way:

“Risk Management operates independently of the lines of businesses to provide 

oversight of firmwide risk management and controls, and is viewed as a partner in 

achieving appropriate business objectives. Risk Management coordinates and 

communicates with each line of business through the line of business risk 

committees and chief risk officers to manage risk. The Risk Management 

function is headed by the Firm’s Chief Risk Officer, who is a member of the 

Firm’s Operating Committee and who reports to the Chief Executive Officer and 

is accountable to the Board of Directors, primarily through the Board’s Risk 

Policy Committee. The Chief Risk Officer is also a member of the line of 

business risk committees. Within the Firm’s Risk Management function are units 

responsible for credit risk, market risk, country risk, private equity risk and 

operational risk, as well as risk reporting, risk policy and risk technology and 

operations. Risk technology and operations is responsible for building the 

information technology infrastructure used to monitor and manage risk.”869

JPMorgan Chase maintained a number of bankwide risk limits as well as risk limits for 

each major business unit. Bankwide risk limits were set by the bank’s CEO and CRO,

870 and 

were regularly discussed with the Risk Policy Committee of the Board of Directors.

871 The 

business unit risk limits were developed by each unit’s head and risk management personnel,872

in consultation with the bank’s Chief Risk Officer.873 The CIO’s limits depended on overall firm 

risk appetite as well as its own mandate, which required a dialogue between the CIO and firm 

managers.

874 Risk limits were a topic of discussion at the CIO’s annual “Business Review,” a 

formal meeting attended by top executives of the bank and CIO.875 The CIO’s 2012 Business 

Review was held in February and attended by Mr. Dimon, Mr. Braunstein, Mr. Zubrow, and Mr. 

Hogan, as well as Ms. Drew, Mr. Goldman, Mr. Macris, and Mr. Wilmot.876

 869 See 3/30/2012, “2011 Annual Report,” JPMorgan Chase publication, at 125, 

http://files.shareholder.com/downloads/ONE/1839748086x0x556139/75b4bd59-02e7-4495-a84c06e0b19d6990/JPMC_2011_annual_report_complete.pdf. 870 3/2012 presentation prepared by JPMorgan Chase entitled “Market Risk Limits,” at 12, OCC-SPI-00117682. 871 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). See also 3/20/2012 

Directors Risk Policy Committee meeting minutes for JPMorgan Chase, JPM-CIO-PSI-0013563. 872 3/2012 presentation prepared by JPMorgan Chase entitled “Market Risk Limits,” at 12, OCC-SPI-00117682. 873 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 874 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). 875 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 876 2/2012 presentation prepared by JPMorgan Chase entitled “CIO February 2012 Business review,” at 1, JPM-CIOPSI 0000224-267.
158

For both the bank and its business units, risk limits were categorized as either Level 1 or 

Level 2 limits. Breaches of Level 1 limits were viewed as more serious. According to a March 

2012 JPMorgan Chase presentation on market risk limits, the “[CIO] Risk Committee reviews 

Level 1 and Level 2 limits for each business on a monthly basis.”877 When Level 1 firm limits 

were breached, the firm Operating Committee was notified by email. Changes in or waivers of 

bankwide Level 1 limits required the approval of the CEO and CRO. Changes in or waivers of a 

business unit’s Level 1 limits also required the approval of the unit head and its CRO.878 For 

example, the bankwide 10Q VaR limit was a Level 1 limit; its waiver or adjustment required Mr. 

Dimon’s approval.879 The CIO 10Q VaR limit was a Level 1 limit inside the CIO; its waiver or 

adjustment required the approval of Ina Drew.880

Documents obtained by the Subcommittee indicate that, in theory, breaches of Level 1 

and Level 2 risk limits – “excessions” in the bank’s parlance – required immediate remedial 

action. A March 2012 JPMorgan Chase presentation provided to the OCC, for example, outlines 

the actions that were supposedly mandatory when those risk limits were breached. It states that, 

for breaches of Level 1 and Level 2 limits: “Business unit must take immediate steps toward 

reducing the exposure to be within the limit, unless a One-off Approval is granted by all Grantors 

and Grantees of limits.”881 JPMorgan Chase’s 2011 Annual Report states: “Limit breaches are 

reported in a timely manner to senior management and the affected line-of-business is required 

to reduce trading positions or consult with senior management on the appropriate action.”882

In practice, the bank told the Subcommittee that its risk metrics were intended to act, not 

as ironclad limits, but as guidelines and red flags. Mr. Dimon told the Subcommittee that a 

breach in a risk “limit” was intended to lead to a conversation about the situation, not to an 

 877 3/2012 presentation prepared by JPMorgan Chase entitled, “Market Risk Limits,” at 1, OCC-SPI-00117682. 878 Id., at 13.

879 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 880 See also 2013 JPMorgan Chase Task Force Report, at 75-76 (describing the CIO’s risk limit policy: “The three 

categories of risk metrics applicable to CIO were VaR, stress, and non-statistical credit-spread widening metrics 

(Credit Spread Basis Point Value (‘CSBPV’) and CSW 10%). Pursuant to Firm policy, each of these metrics was

subject to certain limits. Limits are classified by type, as Level 1, Level 2, or ‘threshold.’ A limit’s type determines 

who is responsible for approving the limit, who receives notice of any excessions, and who within the Firm is 

responsible for approving any increases. The CIO Global 10-Q VaR and CIO stress limits were Level 1 limits, while 

the CIO CSBPV and CSW 10% limits were Level 2 limits. Any excessions of Level 1 or Level 2 limits had to be 

reported to the signitories to the limit, the risk Committee for the line of business, and the Market Risk Committee 

or Business Control Committee for the line of business. Under Firm policy, all excession notifications should 

include (1) a description of the limit excess, (2) the amount of the limit, (3) the exposure value (i.e. the amount by 

which the limit has been exceeded) and the percentage by which the limit has been exceeded, and (4) the number of 

consecutive days the limit has been exceeded.”).

881 See, e.g., 3/2012 presentation prepared by JPMorgan Chase entitled, “Market Risk Limits,” at 13, OCC-SPI00117682.

882 3/30/2012, “2011 Annual Report,” JPMorgan Chase publication, at 162, 

http://files.shareholder.com/downloads/ONE/1839748086x0x556139/75b4bd59-02e7-4495-a84c06e0b19d6990/JPMC_2011_annual_report_complete.pdf. See also 2013 JPMorgan Chase Task Force Report, at 76 

(describing how the CIO was supposed to respond to risk limit breaches: “Excessions are addressed differently 

depending on type, but in the event of ‘active limit excess,’ which occurs when a business unit exceeds its own limit, 

the business unit ‘must take immediate steps to reduce its exposure so as to be within the limit,’ unless a ‘one-off 

approval’ is granted. A ‘one-off approval’ refers to a temporary increase for a limited period of time; it must be 

provided by the persons who were responsible for setting the original limit.”).
159

automatic freeze or unwinding of positions.883 The CIO used the same approach. If a risk limit 

were breached, CIO traders were expected to express a view about the risk in the portfolio and 

what should be done, but not to immediately reduce the portfolio’s holdings to end the breach.884

Over the course of 2011 and 2012, the SCP breached every risk limit that the 

Subcommittee examined, but none of those breaches led to an analysis of whether the portfolio 

was engaged in overly risky trading activities. Instead, CIO personnel, including Javier MartinArtajo, head of the CIO’s equity and credit trading operation and the first line manager of the 

SCP, repeatedly challenged and downplayed the significance, validity, and relevance of the 

various metrics used to quantify the risk in the SCP.885 Ms. Drew and Mr. Macris held Mr. 

Martin-Artajo in high regard, and put a great deal of confidence in his analysis.886 The CIO’s 

risk personnel did not express a countervailing view.887 

With hindsight, the JPMorgan Chase Task Force provided this negative assessment of the 

CIO’s risk management structure:

“For a significant period of time prior to the first quarter of 2012, CIO was 

subjected to less rigorous scrutiny than client-facing lines of business. The lower 

level of oversight engendered weak risk management and infrastructure within 

CIO, which performed ineffectively at a time when robust, effective controls were 

most needed. Granular limits were lacking, and risk managers did not feel 

adequately empowered.”888 

C. CIO Risk Management Personnel

Although the CIO was not a client-facing business, it managed as much as $350 billion in 

assets and oversaw a trading book that was among the largest in the industry.889 Yet the CIO did 

not have a Chief Risk Officer until 2012. The position of CIO Chief Risk Officer was vacant 

through 2011.

890 During the key months of January through March 2012, Irvin Goldman was 

new to the position, still learning the ropes, and did not respond in a vigorous way to CIO 

breaches of various risk metrics. Peter Weiland, the CIO’s senior market risk officer, told the 

Subcommittee that it was not his job to enforce the risk limits.891

 883 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 

 When he was informed of limit 

884 Subcommittee interview of Ina Drew, CIO (12/11/2012). 885 See, e.g., 3/8/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “CIO CRM Results,” 

JPM-CIO-PSI 0008773-775, and discussion below. 886 Subcommittee interview of Ina Drew, CIO (9/7/2012); JPMorgan Chase Task Force interview of Achilles Macris, 

CIO (partial readout to the Subcommittee on 8/28/2012). 887 See 2013 JPMorgan Chase Task Force Report, at 100, and discussion below. 888 2013 JPMorgan Chase Task Force Report, at 94.

889 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). See also testimony of Jamie 

Dimon, Chairman & CEO, JPMorgan Chase & Co., “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), http://www.cq.com/doc/congressionaltranscripts-4105471 (“Here -- here are the facts. We have 

$350 billion of assets in CIO.”).

890 Subcommittee interview of Irvin Goldman, CIO (9/15/2012).

891 Subcommittee interview of Peter Weiland, CIO (8/29/2012).
160

breaches, bank documents indicate that his reaction was to challenge the metrics, not the CIO

traders.892 The same was true of the CIO’s top risk quantitative analyst, Patrick Hagan.893

Peter Weiland served as the senior-most risk officer at CIO from 2008 until January 2012. 

Mr. Weiland had been hired by Ms. Drew, in 2008, to serve as the CIO’s Chief Market Risk 

Officer.894 Mr. Weiland initially reported directly to Ms. Drew. The top traders at CIO also 

reported directly to Ms. Drew, creating a situation where the final authority on risk management 

at the CIO was in the hands of the person who was also in charge of the top trading strategist,

resulting in a lack of independence in the risk management function. 

That lack of independence raised concerns with regulators. In 2009, JPMorgan Chase 

changed the CIO’s reporting lines, and Mr. Weiland ostensibly began reporting directly to Barry 

Zubrow, the bankwide Chief Risk Officer, while maintaining a “dotted-line,” or indirect, 

reporting relationship with Ms. Drew. Mr. Weiland told the Subcommittee that the changes were 

made in response to regulatory pressure. When asked if the reorganization made a difference 

functionally, Mr. Weiland answered, “Not really.”895

As a result, CIO risk managers were, in practice, more beholden to CIO management than 

the Firm’s risk organization. According to the 2013 JPMorgan Chase Task Force Report:

“The CIO Risk function had been understaffed for some time, and CIO 

management, rather than the Risk function, had been the driving force behind the 

hiring of at least some of the risk personnel. Although the CIO had long-tenured 

Risk personnel in less senior positions ... they appear not to have been expected, 

encouraged or supported sufficiently by CIO management or by the Firm-wide 

Risk organization to stand up forcefully to the CIO front office and to vigorously 

question and challenge investment strategies within the CIO. Rather, at least with 

respect to some Risk managers, such as Messrs. Goldman and Weiland, there was 

a sense that they were accountable first and foremost to CIO managers rather than 

to the Firm’s global Risk organization. They generally did not feel empowered to 

take the kinds of actions that risk managers elsewhere within the Firm believed 

they could and should take. Responsibility for this failure lies not only with CIO 

Risk managers, but with Ms. Drew as well.”896

As the Chief Investment Officer, Ina Drew was ultimately responsible for the risks taken 

by the CIO traders. Ms. Drew was an experienced risk manager herself, and had been widely 

credited for devising the macro hedge that saved Chemical Bank during the recession of 1987.897

 892 See Chapter V, Section D, “Disregarding CIO Risk Metrics,” below.

 

Many senior bank managers were not even aware that the position of CIO Chief Risk Officer 

was vacant. One telling indication of the lack of a robust risk management culture at JPMorgan 

893 Id. 894 Subcommittee interview of Peter Weiland, CIO (8/29/2012). Mr. Weiland resigned from JPMorgan Chase in 

October 2012. 2013 JPMorgan Chase Task Force Report, at 20.

895 Subcommittee interview of Peter Weiland, CIO (8/29/2012).

896 2013 JPMorgan Chase Task Force Report, at 99-100.

897 Subcommittee interview of Ina Drew, CIO (9/7/2012).
161

Chase’s CIO is that to the Subcommittee’s question, “Who was the Chief Risk Officer at CIO in 

2011?” Different bank managers, current and former, gave different answers.

While Mr. Weiland was the head of Market Risk at CIO,898 many in the CIO were under 

the impression that Mr. Weiland was, in fact, the CIO’s Chief Risk Officer prior to the hiring of 

Irvin Goldman in January 2012. Joseph Bonocore served as the Chief Financial Officer (CFO)

of CIO during Mr. Weiland’s tenure before Mr. Wilmot took over and Mr. Bonocore became 

JPMorgan Chase’s Corporate Treasurer.899 Mr. Bonocore was unambiguous that Mr. Weiland 

served as the Chief Risk Officer for CIO, telling the Subcommittee, “I knew Pete as the CRO 

during my time there.”900 David Olson was the head of credit trading for the CIO’s Available for 

Sale portfolio from 2006 until 2011 (which did not include synthetic credit derivatives). Mr. 

Olson and Mr. Weiland had desks near each other on the CIO trading floor in New York, and 

they spoke regularly.901 Mr. Olson also told the Subcommittee that Mr. Weiland was the CIO’s

Chief Risk Officer.902 Likewise, CIO’s head of Quantitative Analytics, Patrick Hagan, said that 

he thought Mr. Weiland was the CIO’s Chief Risk Officer.903 Even Mr. Weiland’s 2010 

performance review, conducted by Ms. Drew, referred to him as the CIO’s CRO, though Ms.

Drew told the Subcommittee that this characterization was imprecise.904 In other words, in late 

2011, when CIO International began putting on the synthetic credit positions that would lead to 

the $6 billion loss, the CIO Chief Risk Officer position was vacant; and the person that some at 

CIO thought to be the Chief Risk Officer, was not, in fact, serving in that capacity.

In January 2012, the bank made several changes to its risk personnel. Mr. Zubrow 

became the head of Corporate and Regulatory Affairs and John Hogan, who had previously 

served as the Chief Risk Officer in the Investment Bank, took his place as the bankwide Chief 

Risk Officer.905 Mr. Hogan told the Subcommittee that, while he was appointed to the new 

position in January 2012, he continued to serve as the Chief Risk Officer of the Investment Bank 

through February.906 Also in February, Ashley Bacon was appointed the bankwide Chief Market 

Risk Officer reporting to Mr. Hogan.907

With regard to the CIO, the risk management apparatus that Mr. Hogan inherited from 

Mr. Zubrow was dysfunctional. The 2013 JPMorgan Chase Task Force Report found:

 898 See, e.g., Subcommittee interview of Peter Weiland, CIO (8/29/2012); 2013 JPMorgan Chase Task Force Report, 

at 20; undated (“Effective Pre-June 2011”) chart produced by JPMorgan Chase in response to a Subcommittee 

request, “CIO Risk Management Team,” JPM-CIO-PSI-H 0002813; 1/30/2012 email from Irvin Goldman, CIO, to 

Ashley Bacon, JPMorgan Chase, “CIO VaR heads up and update,” JPM-CIO-PSI 0020168 (“Pete as head of market 

risk ....”).

899 Subcommittee interview of Joseph Bonocore, JPMorgan Chase (9/11/2012). Mr. Bonocore served as CFO for 

CIO from September 2000 to November 2010, after which time he served as firmwide Corporate Treasurer until his 

departure from JPMorgan Chase in October 2011 for personal reasons. Id. 

900 Subcommittee interview of Joseph Bonocore, JPMorgan Chase (9/11/2012).

901 Subcommittee interview of David Olson, CIO (9/14/2012).

902 Id.

903 Subcommittee interview of Patrick Hagan, CIO (2/7/2013).

904 1/10/2011 email from Ina Drew, CIO, to Peter Weiland, CIO, “Confidential – 2010 Performance Evaluation” 

JPM-CIO-PSI-H 0002801.

905 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).

906 Id.

907 Id.
162

“[Mr. Zubrow] bears significant responsibility for failures of the CIO Risk 

organization, including its infrastructure and personnel shortcomings, and 

inadequacies of its limits and controls on the Synthetic Credit portfolio. The CIO 

Risk organization was not equipped to properly risk-manage the portfolio during 

the first quarter of 2012, and it performed ineffectively as the portfolio grew in 

size, complexity and riskiness during that period.”908

In January, Mr. Hogan appointed Irvin Goldman as the CIO’s first official Chief Risk 

Officer. Mr. Goldman reported to both Ms. Drew and Mr. Hogan. Mr. Hogan told the 

Subcommittee that he selected Mr. Goldman, who already worked for Ms. Drew in another 

capacity, on the advice of Ms. Drew and Mr. Zubrow, who is a brother-in-law to Mr. Goldman.909 

Mr. Goldman had not served in a risk management capacity at JPMorgan Chase prior to his 

promotion. Ms. Drew had hired him as a portfolio manager in 2008, and hired him again in 

2010 to be a senior advisor.910 Mr. Weiland, who remained the CIO’s Chief Market Risk Officer,

began reporting to Mr. Goldman.911 The end result was that, just as the CIO’s SCP began rapidly 

increasing its risk and incurring significant losses, the top risk positions were shuffled and the 

new risk management leadership team was just settling into place.912

By March 20, 2012, as a result of the trading strategy, the SCP had nearly tripled in size, 

incurred hundreds of millions of losses, and triggered bankwide VaR and CIO CS01 risk limit 

breaches. Yet when Ms. Drew, Mr. Goldman, Mr. Hogan, and Mr. Bacon all attended a March 

20 meeting of the Risk Policy Committee of JPMorgan Chase’s Board of Directors, chaired by 

James Crown, the SCP trading strategy, its mounting losses, and the risk limit breaches were not 

disclosed.

913

 

The CIO’s own Risk Committee, typically chaired by the head risk officer at CIO and 

attended by the CIO’s top managers and risk officers, should also have provided a venue to 

address the burgeoning risks of the Synthetic Credit Portfolio.914 But the CIO Risk Committee 

met only three times in 2011, and held its first 2012 meeting on March 28, 2012, by which time 

the ill-fated trades had already been made.915

 908 2013 JPMorgan Chase Task Force Report, at 8.

 In addition, unlike other JPMorgan Chase lines of 

909 Id., at 98, footnote 109. (“In late 2010/early 2011, Ms. Drew and Mr. Zubrow, whose wife’s sister is married to 

Mr. Goldman, began a search to fill the newly created position of Chief Risk Officer of CIO.”). 

910 Subcommittee interview of Irvin Goldman, CIO (9/15/2012).

911 See 4/26/2012 email from Gina Serpico, CIO, to Manish Jain, JPMorgan Chase, “Org Chart,” conveying 

presentation entitled “CHIEF INVESTMENT OFFICE – ORGANIZATION,” JPM-CIO-PSI 0001885. 

912 See also 2013 JPMorgan Chase Task Force Report, at 12 (“With respect to personnel, a new CIO Chief Risk 

Officer was appointed in early 2012, and he was learning the role at the precise time the traders were building the 

ultimately problematic positions.”) 

913 3/20/2012 presentation for JPMorgan Chase Directors Risk Policy Committee (DRPC) meeting, JPM-CIO-PSI 

0013890; 3/20/2012 Risk Policy Committee meeting minutes for JPMorgan Chase, JPM-CIO-PSI-0013563. See 

also 2013 JPMorgan Chase Task Force Report, at 42-43 (finding that, at the March 20th meeting of the DPRC, “CIO 

management did not disclose the increasing mark-to-market losses, the recent breaches in certain of CIO’s risk 

limits, the substantial increase in RWA, the significant growth in the Synthetic Credit Portfolio’s notionals, or the 

breaches in the VaR limit earlier in the year.”). See also id., at 43, footnote 53.

914 2013 JPMorgan Chase Task Force Report, at 100.

915 See 2013 JPMorgan Chase Task Force Report at 100; 3/28/2012 Outlook Calendar Appointment, “CIO RISK 
163

business, the CIO’s Risk Committee typically did not invite outside personnel to its meetings to 

review its trading strategies and risk profile. According to the 2013 JPMorgan Chase Task Force 

Report: “There was no official membership or charter for the CIO Risk Committee and 

attendees typically included only personnel from CIO .... Had there been senior traders or risk 

managers from outside CIO or had the CIO Risk Committee met more often, the process might 

have been used to more pointedly vet the traders’ strategies in the first quarter of 2012.”916

Even if the role of CIO Chief Risk Officer had been filled earlier, the reporting lines had 

been clear, and the CIO Risk Committee had met more often, there is little evidence that these 

changes would have prevented Mr. Iksil from pursuing the trading strategy that he and Mr. 

Martin-Artajo had devised. Mr. Macris had approved the strategy, which was within the 

authority that Ms. Drew had delegated to him.917 At the CIO, in 2011 and early 2012, risk 

managers played no role in evaluating and approving trading strategies.918 Mr. Weiland 

explained to the Subcommittee that his role as a risk manager was descriptive, rather than 

prescriptive.919 He said that he acted as a “middleman” who “coordinated” between the risk 

modelers and the traders and managers to ensure that the risk metrics were properly calculated 

and disseminated to decision makers. Mr. Weiland told the Subcommittee that he described the 

risks that existed in the portfolio, but did not challenge trading decisions. According to Mr. 

Weiland, the CIO’s risk appetite was set by members of the bank’s Operating Committee, and it 

was up to Ms. Drew rather than to the risk personnel to enforce the risk limits.920

Mr. Weiland’s passive role as a risk manager meant that when the SCP began causing the 

CIO to breach its risk limits in January 2012, he did not enforce those limits, or direct the traders 

to exit any positions. In fact, beginning with the VaR breaches in January, he repeatedly worked 

with CIO traders and quantitative analysts to challenge or modify the risk metrics, or approve 

limit increases or exemptions.921

Given Mr. Weiland’s perception of his role and Mr. Goldman’s inexperience as a risk 

manager, neither attempted to constrain the CIO trading strategies. In addition, by his own 

admission, Mr. Hogan told the Subcommittee that he was not focused on the Synthetic Credit 

Portfolio until after the media broke the news of the whale trades in April.922

 

COMMITTEE (Attachment Below),” JPM-CIO-PSI-H 0006401-437.

 Mr. Hogan stated 

that until the stories broke, his first priority had been to understand the bank’s consumer 

916 2013 JPMorgan Chase Task Force Report, at 100.

917 Subcommittee interview of Ina Drew, CIO (9/7/2012).

918 Subcommittee interview of Peter Weiland, CIO (8/29/2012); 2013 JPMorgan Chase Task Force Report, at 100 

(“Although the CIO had long tenured risk personnel in less senior positions ... they appear not to have been 

expected, encouraged or supported sufficiently by CIO management or by the Firm-wide Risk organization to stand 

up forcefully to the CIO front office and to vigorously question and challenge investment strategies within the 

CIO.”). In addition, although risk managers were asked to provide input for the CIO traders’ 2011 annual 

performance review, their input did not raise any risk management concerns. 2013 JPMorgan Chase Task Force 

Report, at 92.

919 Subcommittee interview of Peter Weiland, CIO (8/29/2012).

920 Id.

921 See Section D “Disregarding CIO Risk Metrics,” below.

922 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).
164

business.923 As a result, bank management had placed itself in an inadequate position to assess 

the CIO trading problems.

In its review of the CIO, the JPMorgan Chase Task Force summarized the many 

shortcomings in the CIO’s risk management efforts as follows:

“CIO Risk Management lacked the personnel and structure necessary to manage

the risks of the Synthetic Credit Portfolio. ... More broadly, the CIO Risk 

function had been historically understaffed, and some of the CIO risk personnel 

lacked the requisite skills. With respect to structural issues, the CIO Risk 

Committee met only infrequently, and its regular attendees did not include 

personnel from outside CIO. As a result, the CIO Risk Committee did not 

effectively perform its intended role as a forum for constructive challenge of 

practices, strategies and controls. Furthermore, at least some CIO risk managers 

did not consider themselves sufficiently independent from CIO’s business 

operations and did not feel empowered to ask hard questions, criticize trading 

strategies or escalate their concerns in an effective manner to Firm-wide Risk 

Management. And finally, the Task Force has concluded that CIO management, 

along with Firm-wide Risk Management, did not fulfill their responsibilities to 

ensure that CIO control functions were effective or that the environment in CIO 

was conducive to their effectiveness.”924

The fact that these systemic risk management failures at the CIO, which controlled a 

$350 billion portfolio, the second largest at JPMorgan Chase, became known to bank 

management, regulators, policymakers, and investors more or less by chance – when the SCP’s 

enormous whale trades attracted media attention – exposes not only the fact that good banks can 

have poor quality risk controls, but also that lax risk management practices are too often neither 

detected nor prevented by bank regulators.

D. Disregarding CIO Risk Metrics

JPMorgan Chase, like all major financial institutions today, uses various risk metrics and 

mathematical models to measure, track, and evaluate the risks presented by its trading activities. 

Those activities typically involve numerous, complex financial instruments around the globe, 

with different time horizons, risk characteristics, and potential interactions. They also often 

feature daily trading and quick asset turnovers. The models needed to track and analyze the risks 

posed by those trading activities and the resulting financial instruments are usually designed by 

quantitative analysts with doctorates in mathematics, finance, or even physics. For example, 

Patrick Hagan, head of quantitative analytics at the CIO, received a B.S. and Ph.D. in Applied 

Mathematics from the California Institute of Technology. Before entering finance, Mr. Hagan 

helped design chemical reactors for Exxon, was a scientist for Los Alamos’s Theory and 

Computer Research & Applications groups, and was the Deputy Director for the Los Alamos 

 923 Id.

924 2013 JPMorgan Chase Task Force Report, at 12-13.
165

Center for Nonlinear Science.925 He then worked for several financial research firms and 

financial institutions.926

Increasingly, for regulators to evaluate the risks and quality of risk management at a 

financial institution, they have to understand the institution’s risk metrics and models. 

Regulators also rely on mathematical models to help determine, among other matters, how much 

capital a financial institution must hold to mitigate its risks. Regulators’ duties today include

determining whether proposed models meet detailed regulatory requirements, overseeing model 

changes and variations, examining model implementation which can raise complex operational 

issues, and overseeing back-testing of the models to evaluate their accuracy.

927 These complex 

tasks are made more difficult if banks’ quantitative experts are developing new or revised models 

to artificially lower the bank’s risk ratings and capital requirements.

JPMorgan Chase uses a variety of models to track and measure risk for specific lines of 

business and business units as well as for the bank as a whole. At the CIO, during the first 

quarter of 2012, the CIO’s risk limits were repeatedly breached by the Synthetic Credit Portfolio, 

even triggering a breach of a bank-wide limit. But instead of investigating and reducing the high 

risk trading activities that triggered the breaches, the CIO’s traders, risk management personnel, 

and senior managers criticized the risk metrics as inaccurate and pushed for model changes that 

would portray credit derivative trading activities as less risky. 

(1) Disregarding the VaR Limit

One of the early red flags about the risk being taken on by the Synthetic Credit Portfolio 

was the CIO’s breach of the Value-at-Risk (VaR) limit. In January 2012, the CIO’s SCP 

breached not only the CIO’s individual VaR limit, but also the VaR limit for the bank as a whole. 

The breach continued for four days, and ended only after the bank temporarily increased the 

limit. The CIO’s traders and quantitative analysts then rushed approval of a new CIO VaR model 

which, when it took effect, portrayed the Synthetic Credit Portfolio as 50% less risky than the 

prior VaR model. The new VaR model not only ended the SCP’s breach, but also freed the CIO 

traders to add tens of billions of dollars in new credit derivatives to the SCP which, despite the

supposedly lowered risk, led to additional massive losses. Those losses helped expose both 

substantive and serious operational flaws in the new VaR model. As a result, in May 2012, the 

bank backtracked, revoked the CIO’s new VaR model, and restored the old one.

(a) Background

VaR models use historical profit and loss data to calculate a dollar figure that is supposed 

to represent the most money that a portfolio of assets could be expected to lose over a fixed 

 925 See 12/5/2012 biographical information on Patrick Hagan, course tutor for Incisive Training, “Patrick Hagan on 

Fixed Income,” http://ev888.eventive.incisivecms.co.uk. 926 Subcommittee interview of Patrick Hagan, CIO (2/7/2013).

927 See, e.g., 12 C.F.R. Part 3, Appendix B. The OCC, Federal Reserve, and FDIC have also proposed new 

regulations to comply with new capital, risk, and liquidity standards issued by the Basel Committee on Banking 

Supervision. See 8/30/2012, Joint Final Rule, “Risk-Based Capital Guidelines: Market Risk,” Federal Register, 

http://www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-16759.pdf. 
166

period of time to a certain degree of confidence.928 The OCC provides detailed guidance on how 

regulatory VaR models should function, but allows individual banks to design their own 

models.

929 The OCC also requires all of the banks it oversees to obtain its approval of VaR 

models used to calculate regulatory capital.930 Banks also use VaR models for internal risk 

management. While the OCC has broad authority to oversee the risk management and model 

development process, banks are not required to submit internal risk management VaR models for 

OCC approval.931

JPMorgan Chase defines VaR as a “measure of the dollar amount of potential loss from 

adverse market moves in an ordinary market environment.”932 JPMorgan Chase’s 2011 Annual 

Report explained the bank’s use of VaR as a risk metric as follows:

“JPMorgan Chase utilizes VaR, a statistical risk measure, to estimate the potential 

loss from adverse market moves. Each business day, as part of its risk 

management activities, the Firm undertakes a comprehensive VaR calculation that 

includes the majority of its material market risks. VaR provides a consistent 

cross-business measure of risk profiles and levels of diversification and is used for 

comparing risks across businesses and monitoring limits. These VaR results are 

reported to senior management and regulators, and they are utilized in regulatory 

capital calculations.”933 

According to public filings, JPMorgan Chase “has one overarching VaR model 

framework used for risk management purposes across the Firm,”934 but Mr. Dimon told the 

Subcommittee that the bank has hundreds of individual VaR models used by various lines of 

business and business segments.935 For the purposes of this chapter, the relevant VaR is known 

as the “95%” or “10Q” VaR. The “95%” refers to the confidence level in the computation, and 

the “10Q” indicates it is the VaR that JPMorgan Chase reports in its 10-Q quarterly filings with 

the SEC. According to JPMorgan Chase’s 2011 Annual Report:

 928 See OCC definition of VaR, 12 C.F.R. Part 3, Appendix B, Section 2 (“Value-at-Risk (VaR) means the estimate of 

the maximum amount that the value of one or more positions could decline due to market price or rate movements 

during a fixed holding period within a stated confidence interval.”).

929 See 12 C.F.R. Part 3, Appendix B, Sections 4 and 5; Subcommittee briefing by OCC (3/4/2012). 930 12 C.F.R. Part 3, Appendix B, Section 3(c)(1) (“(c) Requirements for internal models. (1) A bank must obtain the 

prior written approval of the OCC before using any internal model to calculate its risk-based capital requirement 

under this appendix.”). 931 See 12 C.F.R. Part 3, Appendix B, Section 3(d) (“(2) The bank must validate its internal models initially and on 

an ongoing basis. The bank’s validation process must be independent of the internal models’ development, 

implementation, and operation, or the validation process must be subjected to an independent review of its adequacy 

and effectiveness.”).

932 3/30/2012, “2011 Annual Report,” JPMorgan Chase publication, at 311, 

http://files.shareholder.com/downloads/ONE/1839748086x0x556139/75b4bd59-02e7-4495-a84c06e0b19d6990/JPMC_2011_annual_report_complete.pdf. 933 Id., at 158.

934 JPMorgan Chase & Co. Form 10-Q (for period ending 9/30/2012), filed with the SEC (11/08/2012), at 96, 

http://files.shareholder.com/downloads/ONE/2252595197x0xS19617-12-308/19617/filing.pdf. 935 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).
167

“The Firm calculates VaR to estimate possible economic outcomes for its current 

positions using historical simulation, which measures risk across instruments and 

portfolios in a consistent, comparable way. The simulation is based on data for 

the previous 12 months. This approach assumes that historical changes in market 

values are representative of the distribution of potential outcomes in the 

immediate future. VaR is calculated using a one day time horizon and an 

expected tail-loss methodology, and approximates a 95% confidence level. This 

means that, assuming current changes in the market are consistent with the 

historical changes used in the simulation, the Firm would expect to incur losses 

greater than that predicted by VaR estimates five times in every 100 trading days, 

or about 12 to 13 times a year. However, differences between current and 

historical market price volatility may result in fewer or greater VaR exceptions 

than the number indicated by the historical simulation. The firm’s VaR 

calculation is highly granular and incorporates numerous risk factors, which are 

selected based on the risk profile of each portfolio.”936

According to the OCC’s Examiner-in-Charge at JPMorgan Chase, the bank’s 10-Q VaR 

estimated the potential loss to the bank’s portfolio over the course of a day by looking at the 

previous 264 trading days and taking the average loss of the worst 33 days.937

At JPMorgan Chase, risk models, including VaR models, were normally developed or 

overseen by the Model Risk and Development (MRAD) group, also referred to as the 

Quantitative Research (QR) team within the bank’s risk management division.938 Some models 

required review and testing by MRAD before they were put into effect; tier two models were 

scheduled for periodic review and could be implemented by business units prior to approval by 

MRAD.

939 In addition, the Subcommittee was told that, normally, a new model is analyzed

concurrently with an existing model for several months to evaluate how the new model performs 

and examine any diverging results between the two.940

(b) Developing a New VaR Model

JPMorgan Chase told the Subcommittee that the new VaR model adopted by the CIO in 

January 2012, was not produced at short notice, but was the product of more than a year of

planning and development. 

The bank told the Subcommittee that the CIO had embarked upon the project to 

reformulate the methodology for calculating its VaR results in 2011.

941

 936 3/30/2012, “2011 Annual Report,” JPMorgan Chase publication, at 158, 

 The CIO 10-Q VaR 

model then in effect had been designed by Keith Stephan, a member of the CIO’s risk 

http://files.shareholder.com/ 

downloads/ONE/1839748086x0x556139/75b4bd59-02e7-4495-a84c-06e0b19d6990/ 

JPMC_2011_annual_report_complete.pdf. 937 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012); see also Subcommittee briefing by JPMorgan 

Chase (8/15/2012). 

938 Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012).

939 Id. 

940 Id.

941 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer).
168

management team in London.942 Although Mr. Stephan remained employed by the CIO in a risk 

management capacity, he was not the primary developer of the new VaR model; instead, that 

task was assigned to Patrick Hagan, the CIO’s senior quantitative analyst who worked with the 

CIO traders.943 Mr. Hagan had never previously designed a VaR model.944 According to 

JPMorgan Chase, having an employee from a business unit design the unit’s risk model was 

somewhat unusual,945 but it did not violate bank policy.946 The new VaR model, when finalized, 

indicated that it had been created by both Mr. Hagan and Mr. Stephan.947

Mr. Hagan told the Subcommittee that he initially began work on two other VaR models, 

a “stress VaR” model and then a “historical” VaR model with a 99% confidence level, both of 

which were intended to be used in a model designed to calculate Risk Weighted Assets (RWA) 

for the CIO.948 Mr. Hagan told the Subcommittee that he was told the objective of his research 

was to design VaR models that, when fed into the RWA model, would produce lower RWA 

results for the CIO, since both he and the CIO traders viewed the bank’s standard RWA model as 

overstating CIO risk.949 Mr. Hagan said that he began work on the stress VaR and VaR-99 

models in the early summer of 2011, wrote algorithms for them, and worked to refine the models 

over the next few months.

Mr. Hagan told the Subcommittee that his supervisor, Javier Martin-Artajo, then asked 

him to design a new 10-Q 95% VaR model for the CIO. Mr. Hagan explained that he was able 

to develop that model quickly, because he derived the VaR-95 model from the VaR-99 model he 

had already been working on. He explained that the VaR-99 and VaR-95 models were nearly 

identical, since they drew from the same historical data sets and used very similar mathematical 

functions. He said that he worked on the VaR-95 model for a two-month period, from October 

to November 2011, designing both the model and a computer program to run it during that time 

period.950 Mr. Hagan said that he felt “rushed” and “under a lot of pressure” from Mr. MartinArtajo to get the new VaR-95 model completed and implemented quickly.951

According to JPMorgan Chase, the impetus for the new VaR models was to render the 

CIO’s VaR models compliant with Basel III requirements.952

 942 Subcommittee interviews of Elwyn Wong, OCC (8/20/2012); Michael Kirk, OCC (8/22/2012); and C.S. 

Venkatakrishnan, JPMorgan Chase (10/25/2012).

 Basel III refers to a set of 

943 Subcommittee interview of Patrick Hagan, CIO (2/7/2013); Levin Office briefing by JPMorgan Chase 

(7/5/2012).

944 Subcommittee interview of Patrick Hagan, CIO (2/7/2013); 2013 JPMorgan Chase Task Force Report, at 104.

945 Levin Office briefing by JPMorgan Chase (7/5/2012); Subcommittee briefing by JPMorgan Chase (8/15/2012).

946 Levin Office briefing by JPMorgan Chase (7/5/2012). 

947 See 10/10/2011 memorandum by Patrick Hagan and Keith Stephan, CIO, “VAR METHODOLOGY,” JPM-CIOPSI 0000041-47.

948 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). A “stress VaR” is a VaR designed to reflect market 

conditions similar to the 2007-2008 financial crisis. The “historical VaR” for calculating RWA is based on a ten day 

time horizon and 99% confidence level.

949 Id. Mr. Hagan explained that the bank’s VaR-95 model was designed so that traders were expected to exceed the 

VaR total produced by the model on at least 5 days out of 100, but, in fact, the bank had not exceeded the total on a 

single day during the prior year, proving that the VaR-95 model “overstated the risk.” Id.

950 Id. See also 2013 JPMorgan Chase Task Force Report, at 122-123 (stating the CIO worked on the new VaR 

model from August to November 2011).

951 Subcommittee interview of Patrick Hagan, CIO (2/7/2013).

952 Levin Office briefing by JPMorgan Chase (7/5/2012). For more information on Basel III, see Chapter II.
169

international banking standards issued by the Basel Committee on Banking Supervision 

addressing capital, risk, and liquidity issues; the new Basel III standards were intended to be 

phased in globally beginning in 2013, but according to the bank, the CIO wanted to “pre-adopt” 

them.

953 

In addition to citing compliance with Basel III as a motivation for changing the VaR 

models, JPMorgan Chase also told the Subcommittee that the CIO’s old VaR-95 model was “too 

conservative.”954 That is, the old VaR model overstated risk.955 As the 2013 JPMorgan Chase 

Task Force put it: “The trader who had instructed the modeler to develop the new VaR model, 

CIO Market Risk, and the modeler himself also believed that the [old] model was too 

conservative – that is, that it was producing a higher VaR than was appropriate.”956 Both 

JPMorgan Chase and Mr. Hagan informed the Subcommittee that the new model was designed 

to consider and reflect additional types of risks compared to the prior model, and would produce 

more accurate results.

957 

In a document authored by Mr. Hagan explaining his new VaR-99 model, which also 

formed the basis for the new VaR-95 model, he wrote that the new model was a “conservative” 

one that was expected to produce “higher” VaR results.958 When asked about that description, 

Mr. Hagan told the Subcommittee that he had thought that might be the result, although in 

practice, the new VaR model typically produced lower results – generally 20% lower – than the 

prior model. He said that he never fully understood the prior VaR model and so did not know 

exactly why his model produced lower results.959

Bank documents, emails, and recorded telephone conversations are clear that a key

motivation for developing the new VaR model was to produce lower VaR and Risk Weighted 

Assets (RWA) results for the CIO. Earlier in 2011, JPMorgan Chase had directed the CIO to 

reduce its RWA in order to lessen the bank’s capital requirements under the upcoming Basel III 

rules.

960

 953 Levin Office briefing by JPMorgan Chase (5/25/2012). See also 2013 JPMorgan Chase Task Force Report, at 

121-122 (explaining that the new VaR model was developed to bring the CIO in compliance with Basel 2.5). 

Recently, the Basel Committee announced plans to delay implementation of the Basel III rules to January 1, 2019. 

See “Banks Win an Easing of Rules on Assets,” New York Times, Jack Ewing (1/6/2013), 

 Under those rules, a higher RWA required greater capital to protect against the higher 

http://www.nytimes.com/2013/01/07/business/global/07iht-banks07.html?src=twrhp. For more information about 

the Basel Accords generally, see Chapter II.

954 Subcommittee briefing by JPMorgan Chase (8/15/2012). See also 2013 JPMorgan Chase Task Force Report, at 

79, footnote 98 (“The previous model was viewed as too conservative and the VaR that it was producing thus was 

considered to be too high. The new model was thought to be a substantial improvement that would more accurately 

capture the risks in the portfolio.”).

955 Subcommittee interview of Ina Drew, CIO (9/7/2012).

956 2013 JPMorgan Chase Task Force Report, at 122.

957 Subcommittee interviews of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) and Patrick Hagan, CIO 

(2/7/2013).

958 See “VaR Methodology,” prepared by Patrick Hagan and Keith Stephan, JPM-CIO-PSI 0000041, at 045 (“All the 

above problems with our methodology generally lead to higher VAR, which is unsurprising since VAR can be 

considered as a measure of noise. Accordingly, we believe that our VAR-99 calculation is decidedly conservative.”). 

Mr. Hagan told the Subcommittee that it was his standard practice to prepare a written explanation of his models to 

communicate his reasoning. Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 959 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 

960 RWA is a dollar measure of a bank’s assets, adjusted according to the assets’ risk. For more information, see 
170

risk; the bank wanted to minimize its mandatory capital requirements and so ordered the CIO to 

bring down its RWA. Normally, the most direct way to reduce a portfolio’s RWA is to reduce 

the size and riskiness of its holdings, but key CIO personnel proposed another approach as well, 

modifying its VaR model and certain other risk related models used to calculate its RWA in 

order to produce lower RWA results. This objective was not necessarily in conflict with the 

bank’s stated goal of producing more accurate risk analysis, since the CIO personnel advocating 

the model changes viewed credit derivatives trading as less risky than portrayed by the existing 

models. 

A key document providing insight into the thinking of the CIO traders and analysts is an 

internal presentation prepared for CIO head Ina Drew in late 2011. On December 22, 2011, 

Javier Martin-Artajo, head of the CIO’s equity and credit trading operation and charged with 

overseeing SCP trading, sent an email to Ms. Drew laying out a plan for reducing the CIO’s

RWA by $13 billion by the end of the first quarter of 2012. The email recommended achieving 

that reduction in large part by modifying the VaR and other models and procedures used to 

calculate the CIO’s RWA. Mr. Martin-Artajo wrote: 

“The estimates of reductions will be:

Model reduction QR CRM (ackno[w]ledged already) 5 (Pat [Hagan] estimate)

Model reduction QR VaR 0.5 (Pat estimate)

Model Reduction QR Stress 1.5 (Pat estimate)

Reduction for duration shortening 1 Actual

Book optimization 3 Estimate

Book reduction 2 Trading reduction

TOTAL 13 Billion RWA end Q1 2012”961

The email indicates that Mr. Martin-Artajo estimated that $7 billion, or more than 50% of 

the total $13 billion RWA reduction, could be achieved by modifying risk related models.

962

 

Chapters II and III.

 

961 12/22/2011 email from Javier Martin-Artajo, CIO, to Ina Drew and John Wilmot, CIO, “RWA – Tranche Book,” 

JPM-CIO-PSI 0000032-034, at 033. See also 12/22/2012 email from Javier Martin-Artajo, CIO, to Bruno Iksil, 

Patrick Hagan, Julien Grout and Samir Ratel, CIO, “urgent ----- : Rwa,” JPM-CIO-PSI 0001227 (requesting specific 

estimates for the amount of RWA reduction that could be achieved by each of the listed “model reduction[s]” by the 

end of the first quarter of 2012).

962 The email estimated that a $5 billion reduction in the SCP’s composite RWA could be achieved by modifying the 

QR model used to calculate the CIO’s Comprehensive Risk Measurement (CRM), and another $500 million 

reduction could be achieved by modifying the QR model used to calculate its VaR. CRM and VaR are both key 

contributors to RWA calculations. The email also estimated that a $1.5 billion reduction in the SCP’s composite 

RWA could be achieved by modifying the QR model used to calculate its “Stress” VaR, another key contributor to 

the RWA model. Mr. Hagan confirmed to the Subcommittee that he had provided all three of these estimates. 

Subcommittee interview of Patrick Hagan, CIO (2/7/2013). The recommended model changes, projected to reduce 

the CIO’s RWA by $5 billion, $500 million, and $1.5 billion, added up to an RWA reduction of $7 billion. See also 

5/3/2012 email from Irvin Goldman, CIO, to Douglas Braunstein, JPMorgan Chase, and others, “CSW 10%,” with 

attached JPMorgan Chase presentation entitled “CIO Synthetic Credit: Risk background information for upcoming 

meetings,” slide entitled “Capital Metrics History, chart entitled “Synthetic Credit RWA,” at 8, JPM-CIO-PSI-H 

000546-556, at 555 (identifying the key components in calculating the SCP’s RWA as VaR, Stress Var, CRM, and 

IRC). 
171

While changing the VaR model was only one of the proposed changes and was estimated to have 

the smallest effect, it was nevertheless characterized as capable of producing half of a billion 

dollars in RWA reduction. That the Martin-Artajo email included specific estimates for RWA 

reductions from Mr. Hagan in connection with changing, not only the VaR model, but also other 

QR models that fed into the RWA calculation, shows that the CIO viewed Mr. Hagan’s work, at 

least in part, as a way of producing lower – as opposed to simply more accurate – SCP risk 

results.

963

Several weeks later, on January 18, 2012, Mr. Iksil provided Ms. Drew a written 

presentation that included a comparison of the CIO’s RWA results using the bank’s standard 

“QR” model versus results from using the CIO’s own, newly developed model.964 Mr. Hagan 

told the Subcommittee that he was not shown this document at the time, but observed that it used 

figures that had been developed by his staff.965 Mr. Hagan told the Subcommittee that he had 

not developed a fully working RWA model for the CIO when the estimates were provided, but

acknowledged that, while at the CIO, he worked on each of the key contributors to a RWA 

model.966 The Iksil presentation stated that the CIO’s “Core Credit Book RWA” under the 

bank’s standard QR model was $40.3 billion, while under the CIO’s model it would be about 

half that amount, at $20.9 billion.967 The next day, January 19, Mr. Martin-Artajo sent Ms. Drew 

an email describing four scenarios for reducing the SCP’s RWA.

968 The four options revolved in 

large part around whether the CIO could convince bank management to allow it to use its own 

“shadow” RWA model.

969 Changing the CIO’s VaR model was one element in that larger plan.

(c) Breaching the VaR Limit

As explained earlier, during the first three weeks of January 2012, the CIO traders 

purchased a variety of short credit instruments in order to ensure that the Synthetic Credit 

Portfolio “maintained its upside on defaults.”970 Those purchases pushed up the SCP’s VaR total

and eventually resulted in the four-day breach of not only the CIO’s VaR limit, but also the VaR 

limit for the entire bank. 

 963 See, e.g., 3/8/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “CIO CRM Results,” 

JPM-CIO-PSI 0000373 (indicating that the CIO traders had deliberately worked to change the VaR model: “We are 

not going to do with ... RWA yet what we have done with the VaR that is to challenge the current methodology and 

have the model changed.”).

964 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” JPM-CIOPSI 0000098-104, conveying presentation entitled, “Core Credit Book Highlights.”

965 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 966 Id. Mr. Hagan told the Subcommittee that, while at the CIO, he worked on models to produce Comprehensive 

Risk Measurement (CRM), stress VaR, VaR-99, and Incremental Risk Charge (IRC) results. Id. 967 1/18/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “Meeting materials for 11am meeting,” JPM-CIOPSI 0000098-104, conveying presentation entitled, “Core Credit Book Highlights.” Mr. Hagan told the 

Subcommittee that the $20.9 billion figure was “not realistic,” because it was far from clear that the bank’s QR 

group would adopt the model changes he was advocating. Subcommittee interview of Patrick Hagan, CIO 

(2/7/2013).

968 1/19/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “Credit book Decision Table –

Scenario Clarification,” at JPM-CIO-PSI 0000106. 969 The term “shadow model” was used by the CIO’s senior market risk officer when describing the CIO model to 

the Subcommittee. Subcommittee interview of Peter Weiland, CIO (8/29/2012).

970 For more information, see Chapter III.
172

On January 10, 2012, the firmwide VaR daily update stated: “The Firm’s 95% 10Q VaR 

as of cob [close of business] 01/09/2012 is $123mm [million] or 98% of the $125mm limit, an 

increase of $5mm from the prior day’s revised VaR.”971 The daily update also reported that the 

CIO had utilized $88 million of its $95 million limit.972 Later that day, apparently concerned 

with the CIO’s approaching its 10Q VaR limit, Ms. Drew emailed Mr. Weiland the notification 

and asked: “This says cio var still 88? Can u give me breakdown tomorrow.” Mr. Weiland 

responded:

“Yes, I have details and can give you tomorrow. Short story is that the increase in 

VaR corresponds to increased credit protection on HY [High Yield credit index], 

in particular trades executed between Dec. 19 and January 6. ... This has

obviously been a significant increase and I sent Javier an email today to highlight 

the RWA implications.”973

His email indicates that, while the CIO bought a variety of long and short positions in January, it 

was the short positions – the “increased credit protection” – that drove up the VaR. 

The following day, January 11, 2012, Mr. Weiland forwarded the email exchange to Keith 

Stephan, the Chief Market Risk Officer for CIO International. Mr. Stephan responded by 

forwarding the explanation he had provided on January 10th to Messrs. Martin, Iksil, Grout, and 

others:

“[S]ince 21 December, the [Core Credit] book var has moved from $76mm 

[million] to $93mm, nearly +25% increase driven by position changes and 

through the inclusion of m[ar]k[e]t data in the last week of 20[1]1 with rally in 

OTR [on-the-run] HY [High Yield] indicies. ... The big drivers, are increases in 

notional of HY OTR short risk in indicies +2.6bio not’l [notional], +14MM 

VAR.”974

In other words, Mr. Stephan explained that the increased credit derivative positions – specifically, 

the short positions – acquired by the SCP in December and January had caused the increase in 

VaR, which was quickly approaching its limit. 

On January 12, 2012, Mr. Weiland emailed Mr. Martin-Artajo, head of the CIO’s equities 

and credit trading operation, asking about Mr. Stephan’s explanation: “Is this not correct?”975

 971 1/10/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, 

and others, “JPMC Firmwide VaR – Daily Updated – COB 1/09/2012,” JPM-CIO-PSI 0000095.

 

Mr. Martin-Artajo replied: “No, in terms of VAR.” Mr. Martin-Artajo continued:

972 Id.

973 1/10/2012 email from Peter Weiland, CIO, to Ina Drew, CIO, and others, “JPMC Firmwide VaR – Daily Updated 

– COB 1/09/2012,” JPM-CIO-PSI 0000094. The email mentions RWA, because a version of the VaR is used, in 

part, to calculate RWA scores. Therefore, risks that increase the VaR also increase the RWA, and could potentially 

trigger increased capital reserve requirements.

974 1/10/2012 email from Keith Stephan, CIO, to Bruno Iksil, CIO, and others, “Core Credit Var Summary 06 

January,” JPM-CIO-PSI 0000093, [emphasis in original]. 975 1/12/2012 email from Peter Weiland, CIO, to Javier Martin-Artajo, CIO, “JPMC Firmwide VaR – Daily Updated 

– COB 1/09/2012,” JPM-CIO-PSI 0000093.
173

“Will come back to you with a better explanation. From our point of view we did 

not have any P/L [profit/loss] vol[ume] to increase the overall VAR so much. Pat 

[Hagan]’s model is in line with the 70 VAR and has a much better explanation for 

these changes. Hopefully we get this [model] approved as we speak.”976

Mr. Martin-Artajo essentially contended that the purchases made by the CIO traders had 

not been so voluminous that they would have increased the “overall VaR so much.”977 He 

also noted that the new VaR model being developed by Mr. Hagan would produce a lower 

VaR – which he predicted would be in the range of $70 million – and the CIO was 

attempting to finalize its approval “as we speak.”978 

Despite inquiring into the CIO’s increasing VaR and noting that the CIO was approaching 

its limit, neither Ms. Drew nor Mr. Weiland instructed the CIO traders to stop trading or reduce 

the SCP holdings. Their inaction is especially puzzling since Mr. Dimon, Mr. Braunstein, and 

Ms. Drew all told the Subcommittee that, in December 2011, bank management had instructed 

the CIO to reduce its RWA, and had taken the view that, in an improving macroeconomic 

environment, less credit protection was necessary.

979 The CIO and bank’s senior management 

nevertheless stood by and allowed the CIO traders to purchase additional short credit protection 

in such quantities that it would cause a VaR breach. 

On January 16, 2012, CIO exceeded its VaR limit.980 While several JPMorgan Chase 

officials minimized the relevance of VaR breaches in interviews with the Subcommittee, VaR 

measurements are considered significant enough within the bank that the bank’s Operating 

Committee received daily VaR updates from the firm’s Market Risk Management (MRM) 

Reporting group detailing the VaR levels for various business lines and business segments and 

explaining the basis for any significant changes. In addition, a breach of the firmwide VaR was 

treated within the bank as a “Level 1” notification, and was reported to the highest levels of bank 

management, including to CEO Jamie Dimon and the rest of the Operating Committee.981

On January 16, 2012, the CIO’s purchases of additional short positions triggered not only 

a breach of the CIO VaR limit,982 but also a breach of the bankwide VaR limit, a breach that 

continued for the next three days.

983

 976 1/12/2012 email from Javier Martin-Artajo, CIO, to Peter Weiland, CIO, and others, “JPMC Firmwide VaR –

Daily Updated – COB 1/09/2012,” JPM-CIO-PSI 0000093.

 These VaR breaches caused real concern within the CIO. 

977 Id. 

978 Id. 979 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/19/2012), Douglas Braunstein, JPMorgan Chase 

(9/12/2012), and Ina Drew, CIO (9/7/2012). For more information, see Chapter III.

980 1/20/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, 

and others, “JPMC 95% 10Q – VaR – Limit Excession Notification (COB 1/19/12),” JPM-CIO-PSI 0000150; 

1/16/2012, JPMorgan Chase spreadsheet “Position Limit and Loss Advisory Summary Report,” JPM-CIO-PSI 

0037534 (showing excession of the $95 million MTM 10Q VaR limit for close of business January 16, 2012). 

980 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 

981 Id. 

982 1/16/2012, JPMorgan Chase spreadsheet “Position Limit and Loss Advisory Summary Report,” JPM-CIO-PSI 

0037534 (showing excession of the $95 million MTM 10Q VaR limit for close of business January 16, 2012). 

983 See 1/19/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan 
174

On January 20, 2012, the CIO Chief Risk Officer, Irvin Goldman, emailed two of his 

subordinates with this instruction:

“This is the third consecutive breach notice ... that has gone to Jamie [Dimon] and 

[Operating Committee] members. We need to get Ina [Drew] specific answers to 

the cause of the breach, how it will be resolved, and by when.”984

One of Mr. Goldman’s subordinates, Mr. Stephan – the chief market risk officer in 

London and designer of the VaR model then in use – responded:

“The VaR increase is driven by Core Credit (tranche) .... We are in late stages of 

model approval ... which will have the effect [of] reducing the standalone VaR for 

Core Credit from circa $96MM [million] to approx[imately] $70MM .... My 

recommendation therefore is that we continue to manage to the current ... limit ... 

and that we discuss further with the model review group (MRG) today the 

schedule for completion of approval of the new model with a view toward 

implementation next week if possible.”985

Once again, changing the model – not modifying the risky positions – was presented as the 

solution to the VaR breach.

Mr. Goldman conveyed the same argument to his boss, Chief Risk Officer John Hogan:

“Two important remedies are being take[n] to reduce VaR .... 1. Position offsets 

to reduce VaR are happening daily. 2. Most importantly, a new improved VaR 

model that CIO has been developing is in the near term process of getting 

approved by MRG and is expected to be implemented by the end of January. The 

estimated impact of the new VaR model based on Jan 18 data will be a CIO VaR 

reduction in the tranche book by 44% to [$]57mm [million], with CIO being well 

under its overall limits.”986

This email repeats Mr. Martin’s previously-stated hierarchy for addressing risk reduction in the 

Synthetic Credit Portfolio: changing the model was “most” important, while position “offsets” 

were secondary. Moreover, it was not clear what Mr. Goldman meant by position offsets. Mr. 

 

Chase, and others, “JPMC 95% VaR – Limit Excession Notification (COBs 1/16/12 and 1/17/12),” JPM-CIO-PSI 

0005264; 1/23/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, “APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval,” JPM-CIO-PSI 

0001337; 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Breach of firm var,” JPMCIO-PSI 0000141.

984 1/20/2012 email from Irvin Goldman, CIO, to Keith Stephan, CIO, and others, “Breach of firm var,” JPM-CIOPSI 0000149.

985 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, “Breach of firm var,” JPM-CIO-PSI 0000147.

986 1/20/2012 email from Irvin Goldman, CIO, to John Hogan, JPMorgan Chase, “CIO VaR,” JPM-CIO-PSI 

0000151. [Emphasis in original.] Mr. Goldman’s prediction of a $57 million VaR for the SCP was even lower than 

the $70 million VaR that had been predicted by Mr. Martin-Artajo and Mr. Stephan. See 1/12/2012 email from Peter 

Weiland, CIO, to Javier Martin-Artajo, CIO, “JPMC Firmwide VaR – Daily Updated – COB 1/09/2012,” JPM-CIOPSI-000093; 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, “Breach of firm var,” JPM-CIO-PSI 

0000147.
175

Hogan told the Subcommittee that position “offsets” could involve either disposing of positions 

or adding new positions designed to offset the risk of other positions.987 In either case, it was 

clear that having a new model that produced a lower VaR value was viewed as key. 

After receiving Mr. Goldman’s email, Mr. Martin-Artajo forwarded it to Patrick Hagan, 

the CIO VaR model developer, and said: “Dual plan ... as discussed keep the pressure on our 

friends in Model Validation and QR [Quantitative Research].”988 JPMorgan Chase has since 

indicated: “There is some evidence that the Model Review Group accelerated its review as a 

result of this pressure, and in so doing it may have been more willing to overlook the operational 

flaws apparent during the approval process.”989

On January 20, 2012, the Market Risk Management Reporting group notified the 

Operating Committee of the CIO’s ongoing breach of the firmwide 10Q VaR limit. The 

notification stated:

“The Firm’s 95% 10Q VaR breached its $125mm [million] limit for the fourth 

consecutive day on January 19th, 2012, primarily driven by CIO.

CIO 95% VaR has become elevated as CIO balances credit protection and 

management of its Basel III RWA. In so doing, CIO has increased its overall 

credit spread protection (the action taken thus far has further contributed to the 

positive stress benefit in the Credit Crisis (Large Flattening Sell-Off) for this 

portfolio which has increased from +$1.4bn to +$1.6bn) while increasing VaR 

during the breach period.

Action has been taken to reduce the VaR and will continue. In addition, CIO has 

developed an improved VaR model for synthetic credit and has been working with 

MRG [Model Review Group] to gain approval, which is expected to be 

implemented by the end of January.

The impact of the new VaR model based on Jan. 18 data will be a reduction of 

CIO VaR by 44% to $57mm.”990

A four-day breach of the firm’s 10Q VaR – the VaR that JPMorgan Chase reported

in its SEC filings – driven by trades in the CIO’s Synthetic Credit Portfolio ought to have 

been enough to trigger an intensive internal review of the SCP trading strategy, but it did

not. The Subcommittee could identify no significant action taken by the bank to reduce 

the VaR other than by changing the model. 

 987 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).

988 1/23/2012 email from Javier Martin-Artajo, CIO, to Patrick Hagan, “CIO VaR,” JPM-CIO-PSI 0000151. “QR” 

refers to Quantitative Research, a part of the bank’s risk division that worked on model development. Subcommittee 

interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012). 

989 2013 JPMorgan Chase Task Force Report, at 125.

990 1/20/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, 

and others, “JPMC 95% 10Q – VaR – Limit Excession Notification (COB 1/19/12),” JPM-CIO-PSI 0000150. 
176

(d) Raising the VaR Limit Temporarily

Ashley Bacon, John Hogan’s deputy in risk management, told the Subcommittee that, on 

some occasions when a firmwide limit is breached, “people were told to get back under their 

limit.”991 The CIO’s breach of the firmwide VaR limit in January 2012, however, was not such 

an occasion. If JPMorgan Chase had ordered the CIO to reduce the Synthetic Credit Portfolio to 

get back under its VaR limit, the bank would have limited – and perhaps prevented – the whale 

trade losses. Instead, the bank elected to raise the bankwide VaR limit on a temporary basis to 

buy the CIO enough time to get a new VaR model in place to produce a more favorable risk 

analysis. 

On January 23, 2012, the Market Risk Management Reporting group sent an email to Mr. 

Dimon and Mr. Hogan asking them to approve a temporary increase in the firmwide VaR limit

from $125 million to $140 million, an increase of more than 10%. The group proposed 

increasing the firmwide limit for a little over a week, until the end of the month, predicting that, 

by then, the CIO’s new VaR model would be approved, would dramatically reduce the CIO’s 

VaR, and would end the breach. 

“This email is to request your approval to implement the temporary increase of 

the Firm’s 95% 10Q VaR limit from $125mm [million] to $140mm, expiring on 

January 31st, 2012. There is a pending approval for a new model for the CIO Intl 

Credit Tranche book. If the new model is approved and implemented prior to 

January 31st, the Firm’s 95% 10Q VaR limit will revert back to the original 

$125mm level .... CIO has increased its overall credit spread protection .... 

Action has been taken to reduce the VaR and will continue. In addition, CIO has 

developed an improved VaR model .... The impact of the new VaR model based 

on Jan. 18 data will be a reduction of CIO VaR by 44% to $57mm.”992

This email shows that Mr. Dimon was informed about the new VaR model and the expectation 

that it would have the effect of lowering the apparent risk of the CIO’s portfolio by a dramatic 

amount.

When asked about this email, Mr. Dimon told the Subcommittee that he did not recall 

whether he was required to approve a temporary increase in the bankwide VaR limit or approve a 

request by a business segment to exceed an existing bankwide VaR limit.993 He indicated that he 

did not view raising the bankwide VaR limit as a decision that required his personal attention and 

analysis, but as one which he could normally make in a matter of “seconds” relying on the 

recommendation of his risk management team. He also told the Subcommittee that he could not 

recall any details in connection with approving the VaR limit increase in January 2012.

However, an email dated January 23, 2012, shows that both he and Mr. Hogan replied to the 

email requesting the limit increase by writing simply: “I approve.”994

 991 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).

 

992 1/23/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, 

and others, “APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval,” JPM-CIO-PSI 0001337-338.

993 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).

994 1/23/2012 email from Jamie Dimon, JPMorgan Chase, to John Hogan, JPMorgan Chase, and others, 
177

The temporary limit increase in the bankwide VaR limit provided immediate relief to the 

CIO by enabling its traders to take on more risk in their gamble to overcome an unprecedented 

cascade of losses in the SCP which had begun earlier in January.

995 On January 23, 2012, the 

same day the VaR limit was raised, the SCP recorded a loss of $15 million.996 The next day, the 

CIO trader charged with managing the Synthetic Credit Portfolio, Bruno Iksil, wrote in an 

internal document that by January 24th the book had begun to “lose money in an uncontrollable 

way.”997 Altogether, during the last nine days in January, the SCP incurred losses every day, 

totaling in excess of $75 million.

998

Mr. Weiland, the CIO Chief Market Risk Officer, told the Subcommittee that the CIO 

traders responded to the SCP losses by making a decision to purchase the long side of a variety 

of credit derivatives, collecting the equivalent of insurance premiums from their short 

counterparties, and using those incoming cash premiums – which they called “carry” – to offset 

some of the losses.999 In addition, just as short positions decline in value during a market rally, 

long positions increase in value during a market rally. Thus, there was a dual benefit to going 

long: generating carry, but also allowing the CIO to post mark-to-market profits on the long 

positions, both of which the CIO could use to offset the mark-to-market losses on the SCP’s 

short positions. The CIO traders were able to carry out that trading strategy – go long – because 

Mr. Dimon and Mr. Hogan had temporarily increased the VaR limit and allowed the additional 

credit derivative purchases. 

By January 27, 2012, the SCP’s rapid purchase of long positions1000 were threatening yet 

another breach of the bankwide VaR limit, despite the temporarily higher limit. Mr. Stephan, 

chief market risk officer in London, informed the CIO’s Chief Risk Officer, Irvin Goldman,

about what was happening:

 

“APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval,” JPM-CIO-PSI 0001337. See also 

1/25/2012 email from Ina Drew, CIO, to MRM Reporting and others, “ACTION NEEDED: CIO International-Oneoff Limits Approval, JPM-CIO-PSI 0000157-158 (containing Ms. Drew’s approval of the temporary increase in the 

CIO’s VaR limit); 2013 JPMorgan Chase Task Force Report, at 79 (“Messrs. Dimon and Hogan approved the 

temporary increase in the Firm-wide VaR limit, and Ms. Drew approved a temporary increase in CIO’s 10-Q VaR 

limit.”).

995 For more information about these losses, see Chapter IV. 996 See chart, prepared by the Subcommittee and printed in Chapter IV, tracking SCP’s daily reported profit and loss 

(P&L) from January to May 15, 2012, derived from an OCC spreadsheet, OCC-SPI 00000299. Numbers do not 

reflect restated P&L figures after JPMorgan Chase’s restatement in July 2012. See also JPMorgan Chase & Co. 

Form 10-Q (for period ending 9/30/2012), filed with the SEC (11/08/2012), at 10, 220, 

http://files.shareholder.com/downloads/ONE/2252595197x0xS19617-12-308/19617/filing.pdf. 997 Undated internal document authored by Bruno Iksil with his personal notes and comments on SCP trading 

activities from January to March 2012, JPM-CIO-PSI 0021879-917, at 882.

998 See chart, prepared by the Subcommittee and printed in Chapter IV, tracking SCP’s daily reported profit and loss 

(P&L) from January to May 15, 2012, derived from an OCC spreadsheet, OCC-SPI-00000298-299. Numbers do 

not reflect restated P&L figures. 

999 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 1000 See undated spreadsheet of trades produced by JPMorgan Chase in response to a Subcommittee request, JPMCIO-PSI 0037501. See also 1/27/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Update 

on *old/current methodology VaR* increase for COB 27 Jan,” JPM-CIO-PSI 0000177.
178

“CIO is over its temporary limit, and could cause the Firm to do the same. ... VaR 

has increased by +3mm [million], to $107.6mm driven by increase in CDX IG S9 

10Y index long risk1001 .... This is consistent w/ the VaR increases of the last 

several days ... wherein the VaR increases approx 1mm per billion of notional in 

IG9 10y. ... We anticipate approval on Monday [January 30], and that the *new 

methodology should become the official firm submission from Monday, for 

27 Jan COB [close of business].* Limit issues should therefore cease beginning 

from Monday.”1002 

In his email, Mr. Stephan explained that for every billion-dollar increase in the size of the SCP’s 

notional holdings of the IG9 long positions, its VaR score was increasing by $1 million. He also 

disclosed that the SCP’s long purchases had already caused a breach of the CIO’s temporarily 

increased VaR limit and was threatening to breach the new bankwide VaR limit as well. In 

addition, Mr. Stephan explained that the anticipated approval of the CIO’s new VaR model on 

Monday, January 30, which was intended to apply to the most recent trading day, January 27, 

should put an end to the VaR “limit issues.”1003 

By the end of the day on January 27, the SCP’s VaR totaled $125.7 million,

1004 breaching

the CIO’s temporary VaR limit of $105 million1005 but not yet the bankwide limit of $140 

million. The CIO traders continued their buying spree, expanding the size of the SCP and the 

CIO’s VaR. As the CIO’s VaR continued to climb, the documentation produced to the 

Subcommittee contains few emails, messages, or telephone calls asking whether the CIO’s 

trading strategy made sense. On January 28, 2012, Barry Zubrow, former Chief Risk Officer for 

JPMorgan Chase, did send an email to the CIO Chief Risk Officer Irvin Goldman and the bank 

Chief Risk Officer John Hogan asking: “Why is the CIO VAR so elevated?” but took no further 

action to evaluate the CIO trading strategy causing the VaR increase.

1006 Even if the existing 

VaR model was viewed as overstating the risk, at a minimum the precipitous upward trend in the 

CIO’s VaR should have given bank management pause.1007 Ms. Drew conceded as much to the 

Subcommittee.

1008 

 1001 “CDX IG S9 10Y” and “IG9 10y” refer to credit derivative indices acquired by the SCP. For more information 

about these indices, see Chapter II.

1002 1/27/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Update on *old/current 

methodology VaR* increase for COB 27 Jan,” JPM-CIO-PSI 0000177, at 178 [emphasis in the original]. 1003 JPMorgan Chase has explained that the purpose of the long positions was to offset the shorts and thereby reduce 

risk, in lieu of unwinding the short positions. However, according to JPMorgan Chase’s own internal documents, 

the purchases of the long positions at the end of January themselves raised the VaR instead of lowering it. 

Therefore, it is difficult to see how JPMorgan Chase could have believed the long positions were, in fact, reducing 

the risk associated with the short positions. 1004 See 5/2012 JPMorgan Chase spreadsheet of VaR levels in the Synthetic Credit Portfolio, FDICPROD-0024286. 1005 1/23/2012 email from Ina Drew, CIO, to MRM Reporting, and others, “ACTION NEEDED: CIO Global 10Q 

VaR Limit One-off Limit Approval,” JPM-CIO-PSI-H 0002880. 1006 1/28/2012 email from Barry Zubrow, JPMorgan Chase, to John Hogan, JPMorgan Chase and Irvin Goldman, 

CIO, “JPMC Firmwide VaR – Daily Update – COB 01/26/2012,” JPM-CIO-PSI-H 0002897. 1007 This trend was not visible to investors, because the change in the VaR model was not disclosed in JPMorgan 

Chase’s April 8-k filing. For more information, see Chapter VII. 1008 Subcommittee interview of Ina Drew, CIO (9/7/2012).
179

(e) Winning Approval of the New VaR Model

On January 30, 2012, the CIO won bank approval of its new VaR model.1009 The impact 

of the new model was even greater than the 44% described in the emails to firm management: it

immediately reduced the CIO’s VaR by 50%, from $132 million to $66 million.

1010 

JPMorgan Chase told the Subcommittee that the change in the CIO VaR model was not 

motivated by a desire to give the CIO traders more room to take risk.1011 However, the evidence 

is clear that the January 2012 pressure to expedite approval of the model change was motivated 

by the CIO traders’ desire to end the CIO’s VaR breach and produce a much lower VaR, which 

then enabled them to take on more risk. An OCC model expert told the Subcommittee that it 

was “no coincidence” that the CIO’s new VaR model was implemented at the same time the CIO 

traders were increasing their acquisitions; rather, instituting the new VaR model was part of the 

trading strategy.1012 Mr. Dimon acknowledged as much during his testimony before Congress 

when, in discussing the SCP losses, he stated: “In January, the new model was put in place that 

allowed them to take more risk and it contributed to what happened.”1013 

JPMorgan Chase has acknowledged to the Subcommittee that the internal approval 

process for the new CIO VaR model was “hurried.”1014 All of the bank’s VaR models were 

supposed to be reviewed and approved by its internal Model Review Group, which was part of 

its risk division.1015 When the bank’s Model Review Group undertook its evaluation of the 

CIO’s new VaR model, it found a number of operational and mathematical problems and asked 

the developers to provide action plans to address the problems as well as provide dates for when 

the action plans would be completed.1016 No dates were set for completing the action plans, 

however,1017 and the action plans were, in fact, never completed.1018 A later OCC internal 

review described the action plans as identifying essential requirements that should have been 

completed before the model was placed into use.1019

In addition, the Subcommittee was told that, normally, a new model is run concurrently 

with an existing model for several months to evaluate how the new model performs and examine 

 1009 See 1/30/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, “draft of the MRG review of 

the HVAR methodology for the CIO core credit books,” JPM-CIO-PSI 0000187. 1010 See undated spreadsheet of CIO 10Q VaR from 12/1/2011 to 5/10/2012, JPMC-Senate/Levin 000155. 1011 Levin Office briefing by JPMorgan Chase (6/26/2012). 1012 Subcommittee interview of Michael Sullivan, OCC (11/7/2012). 1013 Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “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), http://www.cq.com/doc/congressionaltranscripts-4105471. 1014 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer). 1015 Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012). 1016 See, e.g., 1/25/2012 email from Dan Pirjol, JPMorgan Chase, to Patrick Hagan, CIO, and others, “draft of the 

MRG review of the HVAR methodology for the CIO core credit books,” JPM CIO-PSI 0000190-191. 1017 See 1/27/2012 email from Keith Stephan, CIO, to Dan Pirjol, JPMorgan Chase, and others, “draft of the MRG 

review of the HVAR methodology for the CIO core credit books,” JPM CIO-PSI 0000189. 1018 Subcommittee briefing by JPMorgan Chase (8/15/2012); 2013 JPMorgan Chase Task Force Report, at 127.

1019 Subcommittee interview of Michael Sullivan, OCC (8/20/2012); 12/12/2012 OCC Supervisory Letter to 

JPMorgan Chase, “CIO Oversight and Governance Examination,” PSI-OCC-18-000001 [Sealed Exhibit]. 
180

any diverging results between the two.1020 When asked about testing, JPMorgan Chase 

responded that the question “touched a nerve,” and the bank was “not proud” of the inadequate 

backtesting performed in this situation.1021 The Subcommittee found no evidence that the Model 

Review Group expressed any concerns at the time about how and why the new model produced 

such dramatically lower VaR results for the SCP’s trading activity compared to the prior model. 

Mr. Hagan told the Subcommittee that the 50% drop in the CIO’s VaR results was surprising and 

“very significant,” yet at the time the new VaR totals went unchallenged.1022 

Despite the operational problems identified by the Model Review Group and the obvious 

questions raised by the new VaR model results, a lax approval process at the bank allowed the 

model to be put into effect immediately, prior to the specified corrective actions being 

completed. Bank and CIO personnel agreed in an email that “if [the] January tests look all right, 

we should go ahead and implement the new model even before the MRG [Model Review Group] 

review is completed.”1023 On January 30, 2012, Ashish Dev, a member of the Model Risk and 

Development Group reporting to Mr. Venkatakrishnan informed CIO Chief Market Risk Officer 

Peter Weiland that the new VaR model was approved.

1024 

Documents obtained by the Subcommittee show that the bank did send contemporaneous 

copies of its internal emails to the OCC about the proposed VaR model change. Despite those 

emails, the OCC asked no questions and took no steps to investigate the new model at the time it 

was approved by the bank for use by the CIO. A review conducted by the OCC subsequent to 

the SCP trading losses identified failures in the model review process. A November 6, 2012 

OCC Supervisory Letter stated that one “Matter Requiring Attention” was that “[t]he bank was 

using several VAR models that were not properly reviewed internally and others did not receive 

required regulatory approval.”1025 The OCC concluded that JPMorgan Chase’s “VaR Model risk 

management is weak and constitutes an unsafe and unsound banking practice.”1026

(f) Using the New VaR Model to Increase Risk

As soon as it was approved internally, the new model produced a dramatically lower VaR 

for the CIO. On January 27, 2012, for example, the same day the new VaR model took effect, 

the CIO’s VaR was $66 million, whereas under the prior model, its VaR was $132 million.1027

 1020 Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012).

 

1021 Levin Office briefing by JPMorgan Chase (6/26/2012) (Greg Baer). See also 2013 JPMorgan Chase Task Force 

Report, at 104 (stating that the MRG did not compare the two model results at all) and 123 (stating the Model 

Review Group “performed only limited back-testing of the model,” because the CIO “lacked the data necessary for 

more extensive back-testing”). 1022 Subcommittee interview of Patrick Hagan. CIO (2/7/2013). 1023 1/27/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, and others, “draft of the MRG 

review of the HVAR methodology for the CIO core credit books,” JPM-CIO-PSI 0000187. 1024 1/30/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, “draft of the MRG review of the 

HVAR methodology for the CIO core credit books,” JPM-CIO-PSI 0000187. See also 2013 JPMorgan Chase Task 

Force Report, at 126 (stating new VaR model was authorized by the MRG on January 30, and received “[f]ormal 

approval” on February 1, 2012). 

1025 11/6/2012 OCC Supervisory Letter to JPMorgan Chase, “Examination of VaR Model Risk Management,” at 2, 

PSI-OCC-17-000019 [Sealed Exhibit]. 1026 Id. 1027 See undated spreadsheet of CIO 10Q VaR from 12/1/2011 to 5/10/2012, JPMC-Senate/Levin 000155. This 
181

Mr. Hagan told the Subcommittee, when shown emails predicting that his new VaR 

model would lower the CIO’s VaR results by 44%, that the CIO traders were “dreaming.”1028 

When informed that on the first day the model was implemented, it actually reduced the CIO’s 

VaR results by 50%, he mouthed the word “wow,” said he was “very surprised,” and 

characterized it as a “very significant” reduction that he didn’t know about at the time.1029 

The sizeable difference between the two figures – the VaR remained between 30 and 

50% lower than it would have been under the prior model1030 – continued until the new VaR 

model was abandoned in May 2012.1031 The following chart shows the calculations produced by 

the new VaR model compared to the previous model and the CIO VaR limit.1032

Source: Subcommittee chart created from data provided by JPMorgan Chase, JPMC-Senate/Levin 000155-6.

 spreedsheet also indicated that, on April 6, 2012, the new VaR was $68 million and the prior VaR was $192 million. 

Id. 

1028 Subcommittee interview of Patrick Hagan, CIO (2/7/2013).

1029 Id. 1030 Subcommittee chart created from data provided by JPMorgan Chase, JPMC-Senate/Levin 000155-6; Levin 

Office briefing by JPMorgan Chase (7/5/2012) (Greg Baer).

1031 See 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2, 

http://i.mktw.net/_newsimages/pdf/jpm-conference-call.pdf (Mr. Dimon: “In the first quarter, we implemented a new 

VAR model, which we now deemed inadequate. And we went back to the old one, which had been used for the prior 

several years, which we deemed to be more adequate.”); 5/12/2012 email from Peter Weiland, CIO, to John Hogan, 

CIO, and others, “NON IB VaR Bandbreak Summary Report – CIB 4/30/2012,” JPM-CIO-PSI 0007884. 1032 This chart was prepared by the Subcommittee using data provided by JPMorgan Chase, JPMC-Senate/Levin 

000155-6.

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

Dec-1

Dec-15Dec-29

Jan-12Jan-26

Feb-9

Feb-23

Mar-8

Mar-22

Apr-5

Apr-19

May-3

Value-at-Risk

Date

Value-at-Risk for the Chief Investment Office (CIO 

Global 10Q VaR)

Reported VaR Model

Old VaR Model

VaR Limit
182

The chart shows, not only the wide discrepancy between the two VaR models, but also 

that the old model produced much higher VaR numbers for the CIO than the new model. The 

chart also shows that, beginning in mid-January, the old VaR model would have shown the CIO 

as consistently and continuously in breach of its VaR limit, while the new model showed no 

breach at all through May 2012. In addition, the old VaR model would have shown the CIO in 

breach of the bankwide VaR limit in February, March, April, and May.

(g) Failing to Lower the VaR Limit

When JPMorgan Chase approved the CIO’s new VaR model on January 30, 2012, it 

should have acted at the same time, but did not, to lower the CIO’s VaR limit. As a consequence, 

the new model enabled the CIO to engage in substantial additional risky trading without 

violating its own or the bankwide VaR limit. The end result was that, when the CIO triggered the 

VaR limit breaches in January, rather than remove the offending credit derivative positions to 

reduce the amount of risk in the SCP, JPMorgan Chase removed the brakes instead. 

JPMorgan Chase told the Subcommittee that a “recommendation” had been made to 

lower the CIO’s VaR limit from $95 million to $70 million at the time the new model was 

approved, but that limit change was not made.1033 When asked why not, Ms. Drew explained 

that “everything can’t happen at once,” and “models get changed all the time.”1034

As Mr. Dimon acknowledged during his Congressional testimony, the change in the VaR 

model allowed the CIO traders to take on more risk. However, the model change is not alone 

responsible for the SCP’s growing risk: the bank’s failure to adopt a limit appropriate to the 

model change represents an additional failure in its risk management.

JPMorgan Chase told the Subcommittee that the failure to impose a new VaR limit in 

January was a consequence of the fact that the CIO was then in the process of reconsidering all 

of its limits across its entire complement of risk metrics, and that its VaR limit was already due 

to be considered in March.1035 In addition, Mr. Goldman told the Subcommittee that when he 

assumed the role of Chief Risk Officer of the CIO in January, he initiated a review of all of the 

CIO’s risk metrics at that time, but did not implement new risk limits due to the ongoing process 

to review them.1036 At the end of March, the CIO’s Risk Operating Committee received a 

presentation regarding a new “proposed limits framework,” but planned additional weeks of 

review, leaving both the new VaR model and the old VaR limit in place.

1037

 1033 Subcommittee briefing by JPMorgan Chase (8/15/2012); 3/8/2012 email from Ashley Bacon, JPMorgan Chase, 

to John Hogan, JPMorgan Chase, Peter Weiland, CIO, and others, “Firmwide VaR overlimit,” JPM-CIO-PSI 

0000379 (“Also CIO is contemplating a possible reduction in VaR limit to $70 mil (factored in here but not yet 

agreed.)”).

 Mr. Dimon told the 

Subcommittee that a discussion as to whether the VaR limit should have been lowered at the 

1034 Subcommittee interview of Ina Drew, CIO (9/7/2012). 1035 Subcommittee briefing by JPMorgan Chase (8/15/2012). 1036 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 1037 The CIO Risk Operating Committee Minutes noted that the “proposed limits framework was presented to the 

committee noting that a full overhaul of all limits is underway. Over the next few weeks the limits will be discussed 

with the individual regions and presented back to the group for approval.” See 3/28/2012, “CIO Risk Operating 

Committee Minutes – March 28th, 2012,” JPMorgan Chase document produced to the OCC, OCC-SPI-00004734.
183

same time as the VaR model change should have taken place.1038 The OCC Examiner-in-Charge

at JPMorgan Chase told the Subcommittee that he would have expected the firm to “recalibrate” 

the VaR limit given the major decline in the VaR resulting from the model change.1039 But the 

limit was not lowered.

After the new VaR model was put in place, the CIO traders increased the size of the SCP. 

Mr. Iksil, who headed the SCP trading strategy, later looked back on the SCP debacle and 

explained that he had wanted to take the SCP book even “longer” in January, but could not due 

in part to the VaR limit: “the need to reduce VaR – RWA ... prevented the book from being long 

risk enough.”1040 Once the VaR was removed as an obstacle, Mr. Iksil, in fact, purchased 

substantially more long credit derivatives and caused the SCP book to change from a net short to

a net long position. On January 31, 2012, the day after the new VaR model was approved, he 

told his supervisor, Mr. Martin-Artajo: “[W]e set the book for long risk carry. ... I hope I did 

right. Let me know your thoughts.”1041

At the end of 2011, the SCP contained synthetic credit derivatives whose net notional 

value totaled over $51 billion. By the end of March 2012, that total was over $157 billion. That 

tripling of the size of the SCP would not have been possible without the new VaR model which 

allowed the CIO to increase its trades and risk without breaching its VaR limit. Notwithstanding

accumulations in positions that the traders themselves considered “huge,”1042 the CIO never 

breached its VaR limit after the model change. In April 2012, Mr. Stephan discovered that the 

CIO was then on the verge of pushing the entire bank to the brink of another VaR breach, even 

though the CIO itself remained within its own limit because of the model change. In an April 18, 

2012, email to Mr. Macris, Mr. Stephan wrote:

“FYI – we discovered an issue related to the VAR market data used in the 

calculation .... This means our reported standalone var for the five business days 

in the period 10-16th April was understated by appr[o]x[imately] $10m[illion] .... 

The unfortunate part is the firm is running close to its limit (CIO is within it[s] 

limit as it stands).”1043 

The OCC told the Subcommittee that if the new VaR model approval had not been 

hurried in January, the CIO traders would have been forced to “derisk” rather than load up with 

new risk.1044

 1038 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).

The OCC said that when the pressure mounted in late January to address the SCP 

losses, that was precisely when the model reviewers should have held firm instead of activating a 

1039 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1040 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “First draft of the presentation,” with 

attachment entitled “CIO Synthetic Credit Update,” at slide entitled “Core Credit Book: Summary,” at 6, JPM-CIOPSI 0001247.

1041 1/31/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “hello, quick update in core credit,” JPMCIO-PSI 0001229. 1042 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “First draft of the presentation,” with 

attachment entitled “CIO Synthetic Credit Update,” at slide entitled “Core Credit Book: summary,” at 1, JPM-CIOPSI 00001247 (“the book is huge”). 1043 4/18/2012 email from Keith Stephan, CIO, to Achilles Macris, CIO, and others, “CIO VaR,” JPM-CIO-PSI 

0001205.

1044 Subcommittee interview of Michael Sullivan, OCC (8/30/2012).
184

flawed model intended primarily to artificially lower the CIO’s risk profile and give its traders 

more room to purchase even higher risk instruments. 

(h) Operating and Implementation Failures

The bank made the new CIO VaR model effective as of January 27, 2012. Once it was in 

place, however, serious operational and implementation problems gave rise to understated VaR 

results, which continued undetected for months. 

Mr. Hagan told the Subcommittee that he was personally charged with implementing and 

running the VaR model for the CIO.1045 He said that one of the key problems was that he was 

never given sufficient funds to construct a database to feed trading data into the CIO’s VaR 

model on an automated basis. Instead, he said that he had to manually enter data into multiple 

spreadsheets each trading day, which often took hours. He said that the amount of data entry and 

problems with how the spreadsheets integrated that data produced faulty VaR results which he 

did not detect until April or May 2012.1046 

The 2013 JPMorgan Chase Task Force Report summarized the operational and 

implementation problems with the new CIO VaR model as follows:

“[T]he model was approved despite operational problems. The Model Review 

Group noted that the VaR computation was being done on spreadsheets using a 

manual process and it was therefore ‘error prone’ and ‘not easily scalable.’ 

Although the Model Review Group included an action plan requiring CIO to 

upgrade its infrastructure to enable the VaR calculation to be automated 

contemporaneously with the model’s approval, the Model Review Group had no 

basis for concluding that the contemplated automation would be possible on such 

a timetable. Moreover, neither the Model Review Group nor CIO Risk followed 

up to determine whether the automation had in fact taken place. ...

CIO’s implementation of the model was flawed. CIO relied on the model creator 

[Patrick Hagan], who reported to the front office, to operate the model. Data were 

uploaded manually without sufficient quality control. Spreadsheet-based 

calculations were conducted with insufficient controls and frequent formula and 

code changes were made. Inadequate information technology resources were 

devoted to the process. Contrary to the action plan contained in the model 

approval, the process was never automated.”1047

Still another problem was that the new VaR model included an unapproved model 

component designed by Mr. Hagan, but never tested or approved by the Model Risk 

 1045 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 1046 Id. 1047 2013 JPMorgan Chase Task Force Report, at 105.
185

Group,1048 as well as calculation errors involving hazard rates and correlation estimates 

that improperly lowered the VaR results.

1049

In other words, a critical risk model for a portfolio containing hundreds of billions 

of dollars of financial instruments, operated by the man who developed the model at the 

behest of the portfolio manager, included flawed and untested components, and depended 

upon manual uploads of key trading data daily for its calculations. This untested, 

unautomated, error-prone VaR model was nevertheless put into place at a bank renowned 

for its risk management. 

At the time it was implemented, the new VaR model produced no objections from 

the bank’s regulators. Later, however, after the agency conducted an intensive review of 

the VaR model and learned of the operational problems, the OCC head capital markets 

examiner told the Subcommittee that the bank’s poor implementation efforts were 

“shocking” and “absolutely unacceptable.”1050

In May 2012, four months after activating it, JPMorgan Chase revoked the CIO’s 

new VaR model and replaced it with the prior model. Four months after that, JPMorgan 

Chase revised the VaR model used for the CIO for a third time.

1051 The newest VaR

model “resulted in a reduction to average fixed income VaR of $26 million, average Total 

IB [Investment Bank] VaR of $26 million, average CIO VaR of $17 million, and average 

Total VaR of $36 million” for the third quarter of 2012.1052 Bank officials told the 

Subcommittee that the new VaR model had the effect of reducing the bank’s overall VaR 

by 20%.1053 This action by the bank indicates that lowering VaR results by changing the 

VaR model is part of an ongoing pattern at JPMorgan Chase.

(2) Ignoring Comprehensive Risk Measure

The VaR was not the only risk metric that flagged the increasing risk in the Synthetic 

Credit Portfolio; nor was it the only risk metric that was disregarded. Another example of a risk 

metric that was triggered but disregarded by CIO traders, risk personnel, and management alike 

is the Comprehensive Risk Measure, or CRM. After the SCP exploded in size at the beginning 

of 2012, the portfolio’s CRM projected, at the end of February 2012, that the SCP risked annual 

losses totaling $6.3 billion. A key CIO risk manager immediately dismissed the CRM figure as 

“difficult for us to imagine” and “garbage.” The CIO’s senior risk analyst also attacked the 

CRM model as inaccurate and sought to game the method used to determine which SCP assets 

would be subjected to that model in order to produce the “optimal” – meaning lowest possible –

CRM and RWA totals for the SCP. 

 1048 Id., at 125, 128. 

1049 Id., at 128 (explaining that this error “likely had the effect of muting volatility by a factor of two and of lowering 

the VaR”).

1050 Subcommittee briefing by OCC (3/4/2013) (Fred Crumlish). 1051 See JPMorgan Chase & Co. Form 10-Q for period ending 9/30/2012, filed with the SEC (11/08/2012), at 22, 

http://files.shareholder.com/downloads/ONE/2252595197x0xS19617-12-308/19617/filing.pdf. 1052 Id., at 98. 1053 Subcommittee briefing by JPMorgan Chase (1/28/13) (Neila Radin). 
186

(a) Background

CRM, like VaR, produces a dollar figure representing potential losses. While VaR 

quantifies possible losses over the course of day in the context of ordinary markets, CRM 

quantifies possible losses over the course of a year in markets undergoing a high level of stress. 

As the bank’s top quantitative analyst told the Subcommittee, CRM represents how much money 

a portfolio can lose in a worst case scenario over the course of a year, with a 99% level of 

confidence.

1054 

Along with VaR and several other risk metrics, CRM is a key component used to 

calculate a bank’s overall Risk Weighted Assets (RWA) which, in turn, is used to determine how 

much capital the bank is required to have on its books to absorb any losses generated by those 

assets.

1055 The CRM metric was created by Basel 2.5, “a complex package of international rules 

that imposes higher capital charges on banks for the market risks they run in their trading books, 

particularly credit-related products.”1056 Basel 2.5 established four new risk measures to help 

calculate RWA: 

• “A stressed value-at-risk (SVaR) model, which adds to the VaR-based capital 

requirements in Basel II. SVaR is intended to capture more adequately the 

potential consequences of more volatile market conditions than those encountered 

in the historical prices on which their VaR models are based.

• The incremental risk charge (IRC), which aims to capture default and credit 

migration risk.

• New standardized charges for securitization and resecuritization positions.

• The comprehensive risk measure (CRM) for correlation trading positions, which 

assesses default and migration risk of the underlying exposures.”1057

Because these measures were relatively new,

1058 JPMorgan Chase’s revised RWA model, 

together with its component CRM model, were put into effect for the first time in 2011, and were 

still being evaluated and fine-tuned in 2012.

1059 In addition, some business segments, like the 

CIO, were attempting either to modify the bankwide models or win approval to use their own 

variations.1060

 1054 Subcommittee interview of C. S. Venkatakrishnan, JPMorgan Chase (10/25/2012). A new Federal regulation, 

that took effect on January 1, 2013, defines CRM as a measure of risk “over a one-year time horizon at a one-tail, 

99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of 

constant positions.” See 8/30/2012, Joint Final Rule, “Risk-Based Capital Guidelines: Market Risk,” Federal 

Register, at 53106, 

 

http://www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-16759.pdf. 1055 Subcommittee briefing by JPMorgan Chase (8/15/2012). 1056 5/14/2012 “Basel 2.5 Increases The Squeeze On Investment Banking Returns,” Standard & Poors publication, 

https://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245334380388. 1057 Id. 1058 See 2/2011 “Revisions to the Basel II Market Risk Framework,” Basel Committee on Banking Supervision, 

http://www.bis.org/publ/bcbs193.pdf. 1059 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 1060 See, e.g., 12/22/2011 email from Javier Martin Artajo, CIO, to Ina Drew, CIO, and others, “RWA –

Tranche Book,” JPM-CIO-PSI 0000032 (advocating a change in the QR CRM model to produce an 

estimated $5 billion reduction in the SCP’s RWA total); Subcommittee interview of Patrick Hagan, CIO 

(2/7/2013).
187

At the CIO, CRM was used to measure risk and capital requirements related to credit 

tranche positions and their associated hedges.1061 While CRM is a component of RWA and thus 

used to determine capital requirements, Mr. Venkatakrishnan told the Subcommittee that it can 

also be used to gauge the risk of a portfolio.1062 

(b) Challenging the CRM Results

JPMorgan Chase applied the CRM risk metric to the Synthetic Credit Portfolio beginning 

in 2011.1063 In December 2011, the bank decided to combine the CIO’s CRM results with those 

of the Investment Bank, which “produced a diversification benefit” and lowered the CRM totals 

for both.1064 In January 2012, however, the CIO’s CRM totals suddenly began to skyrocket. On 

January 4, CRM was calculated at $1.966 billion.1065 On January 11, it was $2.344 billion.1066 

On January 18, it reached $3.154 billion.1067

As discussed earlier and as outlined in more detail in Chapter III, on December 22, 2011, 

Javier Martin-Artajo sent an email to Ina Drew recommending that the SCP’s RWA be reduced 

primarily by modifying the models used to calculate the CIO’s RWA.

1068 The largest single 

reduction he advocated was a change in the model for calculating CRM, which is a key 

component of RWA. His email stated that changing the CRM model could reduce the CIO’s 

overall RWA by as much as $5 billion.1069

Patrick Hagan, the CIO’s lead quantitative expert, told the Subcommittee that, at the 

direction of Mr. Martin-Artajo, his supervisor, he had begun work on developing a new CRM 

model for the CIO during the summer of 2011.

1070 He confirmed to the Subcommittee that he 

provided the estimate that the new CRM model he was developing could lower the CIO’s RWA 

by $5 billion.1071

 1061 Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012).

 

1062 Id. 1063 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 1064 See 1/9/2012 email from Keith Enfield, CIO, to Achilles Macris, CIO, and others, “CRM Results for Q4,” JPMCIO-PSI 0000085. See also 1/9-10/2012 email exchanges among CIO personnel, “CRM results for Q4,” JPM-CIOPSI 0000083-84. 1065 3/2/2012 email from Kevin Krug, JPMorgan Chase, to Peter Weiland, CIO, and others, “CIO CRM Results,” 

JPM-CIO-PSI 0000338-339, at 339. 1066 Id. 1067 Id. See also 3/8/2012, email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “CIO CRM 

Results,” JPM-CIO-PSI 0008773-775, at 775; 3/22/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to 

Bruce Broder, JPMorgan Chase, “Privileged and Confidential,” JPM-CIO-PSI 0036179-181, at 180-181. 1068 See 12/22/2011 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and John Wilmot, CIO, “RWA –

Tranche Book,” JPM-CIO-PSI 0000032-034, at 033. See also 12/22/2012 email from Javier Martin-Artajo, CIO, to 

Bruno Iksil, Patrick Hagan, Julien Grout and Samir Ratel, CIO, “urgent ----- : Rwa,” JPM-CIO-PSI 0001227 (listing 

similar “model reduction[s]”).

1069 See 12/22/2011 email from Javier Martin-Artajo, CIO, to Ina Drew and John Wilmot, CIO, “RWA – Tranche 

Book,” JPM-CIO-PSI 0000032-034, at 033 (“Model reduction QR CRM (ackno[w]ledged already) 5 (Pat [Hagan] 

estimate).”). 1070 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 1071 Id.
188

As explained above, a few weeks later, on January 18, 2012, Mr. Iksil provided a written 

presentation to Ms. Drew and others related to reducing the SCP’s RWA. The presentation 

showed that, while the bank’s standard “QR” model produced a CIO RWA of $40.3 billion, an 

RWA model – a “shadow model” in Mr. Weiland’s words1072 – developed by the CIO would 

produce an RWA of just $20.9 billion, a reduction of nearly 50%.

1073 In addition, Mr. Iksil’s 

presentation projected that if the QR model prevailed, and the SCP had to be actively reduced in 

size, it would cost $590 million; whereas, if the CIO model prevailed, reduction of the portfolio 

could cost as little as $100 million.1074

Soon after the January 18 presentation, however, the bank’s QR team experienced 

technical difficulties and did not provide new CRM results for the CIO for five weeks.

 These projections show that the CIO had a strong 

incentive to see its shadow RWA model approved, including its revised method for calculating

CRM.

1075 CRM

results for the CIO were not calculated again until the beginning of March.1076 At that time, the 

QR team calculated the CRM for CIO positions as of February 22, 2012. The result was the $6.3 

billion total, representing an increase of more than 300% in less than seven weeks.1077

On March 1, 2012, Mr. Macris emailed Mr. Martin-Artajo to discuss the SCP’s dilemma

when confronting an increased CRM: “If we need to [a]ctually reduce the book, we will not be 

able to defend our positions.”1078 His statement expressed the concern, examined in Chapter III, 

that credit derivative prices were not following historical norms; that the CIO had to continue 

trading in volume to prop up the value of its credit positions; and that reducing the SCP’s 

positions in order to reduce its RWA would cause the values to plummet. In the email, Mr. 

Macris offered a potential solution: “We need to win on the methodology ....”1079 The 2013 

JPMorgan Chase Task Force Report explains: “This phrase refers to the traders’ goal ... to 

convince the Firm that it should change the methodology of the model used to calculate RWA for 

the Synthetic Credit Portfolio.”1080 Given the key role of CRM in calculating RWA, having to 

accept what the CIO traders saw as an inflated CRM would have been a major setback.

On March 2, 2012, a QR quantitative expert, Kevin Krug, who was responsible for 

running the CRM calculations, emailed Pete Weiland, the CIO’s Chief Market Risk Officer, with 

 1072 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 1073 See 1/18/2012 email from Bruno Iksil to Julien Grout, CIO, “Meeting materials for 11am meeting,” conveying a 

presentation entitled, “Core Credit Book Highlights,” prepared by Mr. Iksil, JPM-CIO-PSI 0000098-104. 1074 Id. 1075 See 5/3/2012 email from Irvin Goldman, CIO, to Douglas Braunstein, JPMorgan Chase, and others, “CSW 

10%,” with attached JPMorgan Chase presentation entitled “CIO Synthetic Credit: Risk background information for 

upcoming meetings,” slide entitled “Capital Metrics History,” at 8, JPM-CIO-PSI-H 0000546-556, at 555 (“From 

late January through February model output was halted due to technology issues. ... QR could not provide 

information for 5 weeks.”).

1076 See 3/2/2012 email exchanges among Peter Weiland, CIO, and Javier Martin-Artajo, CIO, and others, “CIO 

CRM Results,” JPM-CIO-PSI 0000338-339. See also 3/8/2012 email exchanges among Ina Drew, CIO, and Javier 

Martin-Artajo, CIO, and others, “CIO CRM Results,” JPM-CIO-PSI 0000373-375. 1077 See, e.g., 3/8/2012 email from Ina Drew, CIO, to Javier Martin-Artajo, CIO, and others, “CIO CRM Results,” 

JPM-CIO-PSI 0000373-375, at 374. See also 3/22/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to 

Bruce Broder, JPMorgan Chase, “Privileged and Confidential,” JPM-CIO-PSI 0036179-181, at 180-181. 1078 3/1/2012 email from Achilles Macris, CIO, to Javier Martin-Artajo, CIO, “priorities,” JPM-CIO-PSI 0001219.

1079 Id. 1080 2013 JPMorgan Chase Task Force Report, at 39.
189

the CRM results for January and February.1081 Mr. Weiland expressed surprise at the huge CRM 

figure and questioned the results: 

“These results, if I understand them, suggest that there are scenarios where the 

CIO tranche book could lose $6 billion in one year. That would be very difficult 

for us to imagine given our own analysis of the portfolio.”1082 

Mr. Weiland forwarded the results to Mr. Martin-Artajo, head of the CIO’s equity and credit 

trading, stating: “We got some CRM numbers and they look like garbage as far as I can tell, 2-

3x what we saw before.”1083 Mr. Weiland told the Subcommittee that by “garbage” he meant, 

not that the results were negative, but rather that they were unreliable.1084 Faced with 

calculations that the Synthetic Credit Portfolio was much riskier than the traders had portrayed, 

Mr. Weiland's first reaction was to dismiss the risk metric and seek reassurance from the traders.

In an effort to understand why the CRM results were much larger than expected, Mr. 

Weiland also contacted C.S. “Venkat” Venkatakrishnan, who was the new head of the bank’s 

Model Risk and Development Group and reported to Chief Risk Officer John Hogan. On March 

7, 2012, Mr. Venkatakrishnan explained in an email to Ina Drew, John Hogan, Ashley Bacon, 

Irvin Goldman, and Peter Weiland that the $3 billion increase in the CRM metric was due 

primarily to the $33 billion increase in the size of the CIO portfolio over the same period:

“There are two related issues. The first is the $3b[illio]n increase in CRM RWA 

between January and February, from $3.1bn to $6.3bn. The second is that your 

group believes that the absolute level of CRM RWA we calculate was high to 

begin with in Jan[uary]. The second question requires us to explain our models to 

the satisfaction of your team. I am in London and spoke with Javier today and we 

will make this an urgent matter.

Based on our models, though, we believe that the $3bn increase in RWA is 

entirely explained by a $33bn notional increase in short protection (long risk) in 

your portfolio between Jan[uary] and Feb[uary]. ...

Peter Weiland and your mid-office confirm this $33bn notional increase in long 

index risk. Further we both agree that this position change results in a change of 

about $150mm[million] (a decrease) in 10%CSW. Per our models, a roughly 

10% capital charge ($3bn) on this $33bn increase in risk is reasonable.

Also, to be clear, there has been no model change on our end; the change in RWA 

for tranches has hardly changed over the month.

 1081 3/2/2012 email from Kevin Krug, JPMorgan Chase, to Peter Weiland, CIO, and others, “CIO CRM Results,” 

JPM-CIO-PSI 0000338. 1082 3/2/2012 email from Peter Weiland, CIO, to Kevin Krug, JPMorgan Chase, and others, “CIO CRM Results,” 

JPM-CIO-PSI 0000338. 1083 3/2/2012 email from Peter Weiland, CIO, to Javier Martin-Artajo, CIO, and others, “CIO CRM Results,” JPMCIO-PSI-0000338. 1084 Subcommittee interview of Peter Weiland, CIO (8/29/2012).
190

I understand that we have to build your confidence in our models themselves but, 

given our models, we believe the increase in RWA is well explained by the build 

up in your risk positions.”1085

Mr. Venkatakrishnan attributed the increase in CRM directly to the additional long 

positions in the SCP, and denied any fault in the QR model. Ms. Drew emailed his explanation 

to Mr. Macris and Mr. Martin-Artajo, copying Mr. Goldman and Mr. Weiland, and added: “Not 

consistent with your take. Let’s discuss thurs.”1086 Expressing concern at the discrepancy, Mr. 

Macris forwarded the email exchange to Mr. Martin-Artajo appending the question: “what is 

going on here?”1087

The next day, March 8, 2012, Mr. Martin-Artajo disputed Mr. Venkatakrishnan’s 

explanation of the CRM calculation in an email to Ms. Drew and Mr. Macris, copied to Mr. 

Goldman and Mr. Weiland. He denied that the portfolio had increased by $33 billion and also 

asserted that SCP’s increased long index positions did not involve the type of credit tranche 

positions normally analyzed by the CRM:

“The change in notional is not correct and the CRM is therefore too high. We 

need to understand better the way they are looking at the scenario that creates the 

CRM and we also disagree with them on this. More work in progress until we 

can understand how to improve the number1088 but if the result of an increase is 

due to an increase in the long index but not on the tranches this makes no sense 

since this is not part of the CRM measure and once we reconcile the portfolio this 

should be very clear of what we would do. First, go back to the results of end of 

year so that we go to a more neutral position before trying to do what we have 

done with the reduction of RWA due to VAR and StressVAR. (We are getting 

positive results here in line with expectations).”1089

This exchange reveals that when confronted with a metric signaling a huge increase in risk, the 

CIO manager responsible for the Synthetic Credit Portfolio not only disputed the metric, but 

also, as with the VaR results in January, questioned the model itself.

The CRM results signaling increasing risk in the SCP throughout January and February 

weren’t circulated within the bank until early March. But, even then, had the CIO heeded them, 

it would have been in time to prevent the disastrously large synthetic credit trades made in the 

second half of March which increased the portfolio’s risk and subsequent losses. But the CIO 

 1085 3/7/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to Ina Drew, CIO, and others, “CIO CRM 

Results,” JPM-CIO-PSI 0001815. 1086 3/8/2012 email from Ina Drew, CIO, to Achilles Macris, CIO, and others, “CIO CRM Results,” JPM-CIO-PSI0001815.

1087 3/8/2012 email from Achilles Macris, CIO, to Javier Martin-Artajo, CIO, “CIO CRM Results,” JPM-CIO-PSI0001815.

1088 Four months earlier, in December 2011, Mr. Martin-Artajo had advocated taking steps to change the model used 

to calculate CRM to produce a $5 billion reduction in the CIO’s RWA. See 12/22/2011 email from Javier MartinArtajo, CIO, to Ina Drew, CIO, and others, “RWA – Tranche Book,” JPM-CIO-PSI 0000032. 1089 3/8/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, “CIO CRM Results,” JPM-CIOPSI 0000371.
191

traders, risk personnel, and management discounted the CRM’s warning. They simply did not 

believe that the SCP could be risking a $6.3 billion loss. By the time Mr. Venkatakrishnan 

prevailed upon Ms. Drew to accept the accuracy of the bank’s CRM model, it was too late. 

(c) Gaming the CRM Model

The CIO’s efforts to question the CRM results were not limited to challenging the 

accuracy of the $6.3 billion risk projection. The CIO also sought to game the method used to 

determine which assets in the Synthetic Credit Portfolio would be subjected to CRM analysis as 

well as to analysis using another key risk measure known as the Incremental Risk Charge or 

IRC. Like CRM, the IRC risk metric is used to calculate a bank’s Risk Weighted Assets (RWA) 

and its capital requirements.

1090 

As mentioned earlier, all three of these risk metrics were relatively new. The bank’s 

Quantitative Research (QR) personnel completed work on new models to calculate CRM and

IRC, as well as revised RWA outcomes in 2011, rolled them out bankwide that year, and were 

still fielding questions about the models and testing their accuracy.1091

On March 7, 2012, when the adverse CRM results for the SCP were first circulated, 

Patrick Hagan, the CIO’s head of quantitative analytics, sent an aggressive email to the QR 

criticizing the structure, mathematics, and merits of the new, bankwide CRM risk model. 

“Hoping that the model is somehow valid for extrapolating down to the 0.001 level risks is 

madness,” Mr. Hagan wrote, “the only conceivable excuse for it is institutional inertia.”1092 

After meeting with the QR analysts who defended the model as accurate,

1093 Mr. Hagan 

changed his tactics. On March 14, he began a campaign to convince the QR to reduce the CIO’s 

CRM and IRC totals, not by modifying its models, but by establishing a system for “optimizing” 

which of the CIO’s credit derivative positions would be subject to the CRM calculation and 

which positions would be subject to the IRC calculation.

While Federal regulators have allowed banks leeway in determining whether specific 

trading positions should be subject to the CRM or IRC calculation, the appropriate calculation to 

apply depends largely on the nature of the trades. According to Mr. Venkatakrishnan, credit 

tranche positions and their associated hedges should be subjected to the CRM calculation.1094 

He indicated that other, more liquid, credit derivative positions could appropriately undergo the 

IRC calculation. In practice, the CIO maintained two books, or “buckets,” inside the Synthetic 

Credit Portfolio: a tranche book that was subject to CRM, and an index book that was subject to 

IRC.

 1090 See, e.g., 12 C.F.R. Part 3, Appendix B (discussing calculation of both CRM and IRC).

1091 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).

1092 3/7/2012 email from Patrick Hagan, CIO, to Javier Martin-Artajo, CIO, and others, “New CRM numbers,” JPMCIO-E 00034181-182.

1093 See 3/7/2012 emails among QR personnel, “New CRM numbers,” JPM-CIO-E-00034180-182. 

1094 Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012).
192

Mr. Hagan sought to apply the CRM or IRC models to individual positions, not on the 

basis of which book they were in, or the nature of the trades, but rather on the basis of what 

arrangement would result in the lowest CRM and IRC totals and, therefore, the lowest RWA and 

the lowest capital charge for the bank. 

On March 21, 2012, Mr. Hagan outlined his approach in an email he sent to Mr. 

Goldman, Mr. Venkatakrishnan, and others, copying Mr. Martin-Artajo and Mr. Weiland. Under 

the subject heading, “Optimizing regulatory capital,” Mr. Hagan wrote:

“To optimize the firm-wide capital charge, I believe we should optimize the split 

between the tranche and index books. The bank may be leaving $6.3bn [billion] on 

the table, much of which may be recoverable ....

Here’s what I think can be done .... The split between the index book (subject to 

IRC) and the tranch[e] book (subject to CRM) should be a theoretical split, a 

matter of labeling for the capital calculations. If there is a natural split which helps 

us think about the positions, that’s different, but for the purposes of the capital 

calculation, the books should be combined and split on the optimal basis ....

But the idea would be for QR [Quantitative Research] to find the value ... which 

results in the minimum post-diversification capital charge for the bank as a whole

....

The new rules have too many arbitrary factors of three for the regulatory capital to 

rationally reflect our risks. I don’t think we should treat this as a regulatory 

arbitrage. Instead we should treat the regulatory capital calculation as an exercise 

of automatically finding the best results of an immensely arbitrary and complicated 

formula.”1095

Mr. Hagan’s email expressed the concern, pervasive at the CIO, that the regulatory capital 

models overstated the risks in the SCP, that they produced arbitrarily high results, and that the 

traders knew better. Mr. Hagan sought to engineer a way to get the capital calculations to better 

reflect the opinion of the traders. 

Some recipients of Mr. Hagan’s email were apparently uncomfortable seeing in writing a

strategy that depended in part on manipulating the grouping of trades to produce the lowest 

possible RWA and capital charges. That discomfort was expressed in recorded phone 

conversations with Mr. Hagan later that same day. Anil Bangia, a subordinate of Mr. 

Venkatakrishnan, called Mr. Hagan in London and warned him about sending the type of email 

he did:1096

 1095 3/21/2012 email from Patrick Hagan CIO, to Irvin Goldman, CIO, and others, “Optimizing regulatory capital,” 

JPM-CIO-E 00033994-995.

1096 The call was at 10:42 Eastern Daylight Savings Time, because UK daylight savings time didn’t start until March 

25, 2012. It was 2:42 Greenwich Mean Time, only four hours ahead, in London.
193

Mr. Bangia: “I think, the, the email that you sent out, I think there is a, just FYI, 

there is a bit of sensitivity around this topic. So –“

Mr. Hagan: “There, there is a lot of sensitivity.” 

Mr. Bangia: “Exactly, so I think what I would do is not put these things in email.”

Mr. Hagan: “That’s exactly what I was told. Javier, Javier is the guy that asked 

me to send out the email this morning. And then he found out from, from Pete and 

– yeah, and he found out from some – and Irv that this is ...”

Mr. Bangia: “Yeah, yeah, I wouldn’t put this you know in ....”1097

Later that day, despite Mr. Bangia’s qualms about sending written communications on

optimizing the CRM/IRC split, he nonetheless discussed pursuing the issue with Mr. Hagan:

Mr. Hagan: “Hi Anil, this is Pat.”

 

Mr. Bangia: “Hi Pat.”

Mr. Hagan: “Um, you know that email that I should not have sent?”

Mr. Bangia: “Um hum.”

Mr. Hagan: “Have you read it? Is that a feasible thing to do or is that 

impossible?”

Mr. Bangia: “Well it’s, in some ways it’s somewhat feasible, once we have a bit 

more of [indecipherable] development. So, a lot of the IRC tools that I was 

showing you are really based on a new model that is not in production yet. There 

is an old model that Bruce [Broder] has run, so that’s the official model. So that 

has a very different offline manual process that complicates things.” 

Mr. Hagan: “I see.”

Mr. Bangia: “And beyond that it’s a matter of also, how much you guys should 

do it independently versus what, how much we can actually do on optimizing it, 

right, so, there’s that side of that as well.”

Mr. Hagan: “Yeah, I mean, the feeling from the risk managers was that ... 

treating the capital charge is this incredibly complicated mathematical function 

that we’re, of course, going to optimize. And uh, they were less concerned about 

physically moving things from one physical book to another physical book.”

 1097 3/21/2012 recorded telephone conversation between Anil Bangia, JPMorgan Chase, and Patrick Hagan, CIO, 

JPM-CIO-PSI-A 0000089.
194

Mr. Bangia: “Yeah. Yeah. I think we should also make sure we don’t oversell 

this in the sense that the stability of this, we have to see over time. So I, I would 

also not quote any numbers on how much we think we can save, right?”

 

Mr. Hagan: “Yeah, the thing is I was hoping we could save about half that and 

that’s got to be split between the investment bank and us, so ...”

Mr. Bangia: “Hmm.”

Mr. Hagan: “It’s not clear, it’s not clear.”

Mr. Bangia: “Yeah, yeah, it’s not clear.”1098

The CIO’s Chief Market Risk Officer Peter Weiland also called Mr. Hagan:

Mr. Weiland: “I keep getting banged up .... I know you’ve had some emails 

back and forth with Venkat and Anil or whoever on the optimization of the IRC 

and CRM and everything else. Everyone is very, very – I told this to Javier the 

other day but maybe he didn’t mention it to you – everyone is very, very sensitive 

about the idea – writing emails about the idea of optimizing –“

Mr. Hagan: “I got that sort of mentioned. I’d say it was mentioned to me 

[laughter].”

Mr. Weiland: “Okay, so, I don’t know, Irv just came by again and said, Oh, 

Venkat was telling me he got another email from Pat you know –”

Mr. Hagan: “From me?”

Mr. Weiland: “Maybe it’s from a couple of days ago, I don’t know, but .... if 

you’re sensitive to it, that’s all I wanted to know.”

Mr. Hagan: “Okay.”

Mr. Weiland: “So I think we can talk about, you know, allocation –“

Mr. Hagan: “Okay, so nothing about allocation. I understand –“

Mr. Weiland: “Uh, you see, the work of the risk manager has very broad and 

unclear borders sometimes. Anyway –“

Mr. Hagan: “Okay. I did write an email message. I didn’t realize it was 

sensitive to that extent .... Ah, it’s all mathematics.”

 1098 3/21/2012 recorded telephone conversation between Patrick Hagan, CIO, and Anil Bangia, JPMorgan Chase, 

JPM-CIO-PSI-A 0000090.
195

Mr. Weiland: “– Yeah, well that’s, you know, the funniest thing is, the first time 

that someone mentioned it to me I said, you know, ‘I’m sure that Pat just sees this 

as like a math problem, an interesting and a complicated math problem. And all 

this other crap that goes on about, like, the implications of regulatory arbitrage 

and stuff like that is like, completely boring’ [laughter].”

Mr. Hagan: “– No it’s not that. I just get annoyed when I see us creating risks 

when there were no risks –”

Mr. Weiland: “Yeah, I know.”

Mr. Hagan: “– that’s annoying. Ok, I understand the sensitivity. Tell Irv I’m 

sorry.”1099

Over the next two weeks, Mr. Hagan worked with the QR analysts to come up with a way 

to categorize the CIO’s trades in a way that would reduce its CRM and IRC results. Ultimately,

the bank reached a compromise with Mr. Hagan over how to split the portfolio between the 

tranche and index books. At the end of March, Mr. Hagan was allowed to design the initial split 

of the portfolio as it existed in order to optimize RWA, but once a trade was placed in either the 

tranche or index book, it had to stay there. 1100 As new trades were made, the CIO would be 

allowed to categorize them in order to optimize RWA, but existing trades could not be recategorized.1101

The CIO’s efforts to understand and influence the CRM, IRC, and RWA models 

continued into April 2012. In an email dated April 3, 2012, Achilles Macris informed Ina Drew 

that a QR analyst “is now in our office and he is 100% involved with the RWA projections of 

our book and ways to bringing it lower.”1102 Ms. Drew forwarded the email to the CIO’s Chief 

Financial Officer John Wilmot who responded: “I don’t get the sense of clarity that we know 

what is driving the RWA (economic risk versus VaR, stress VaR, CRM and IRC) or the p&l 

[profit and loss] – or more importantly that either will be manageable going forward.”1103 Mr. 

Wilmot also wrote: “We haven’t made the case of how this book runs off and whether risk can 

be managed effectively.”1104

A recent article sponsored by the International Monetary Fund on why RWA totals differ 

across countries and banks observed that, due to the great variance in RWA totals, “Confidence 

in reported RWAs is ebbing.”1105

 1099 3/21/2012 recorded telephone conversation between Peter Weiland, CIO, and Patrick Hagan, CIO, JPM-CIOPSI-A 0000091.

 It discussed a wide range of factors contributing to RWA 

1100 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). See also, 2/4/2012 email exchanges among QR 

personnel, CIO personnel, and Mr. Hagan, CIO, “Final split?” JPM-CIO-E 00033939-941. (“For perfect clarity, I 

am forwarding back what I understand has been selected as the final split. Please let me know if this is not the 

correct one. Otherwise, this is what we’ll proceed with.”). 1101 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 1102 4/3/2012 email from Achilles Macris, CIO, to Ina Drew, CIO, no subject line, JPM-CIO-PSI 0000497-498. 1103 4/3/2012 email from John Wilmot, CIO, to Ina Drew, CIO, no subject line, JPM-CIO-PSI 0000497. 1104 Id. 1105 3/2012 “Revisiting Risk-Weighted Assets,” IMF Working Paper No. WP/12/90, Vanessa Le Leslé and Sofiya 
196

variances, mentioning near the end of the article, almost in passing, allegations that financial 

institutions might be “gaming the system”:

“The current set-up for RWA calculation leaves considerable scope for subjectivity and 

interpretation. Most banks rely on a combination of approaches to calculate RWAs, 

which inevitably brings complexity and opacity. Pillar 3 individual reports often refer to 

‘model changes,’ ‘data cleansing,’ ‘RWA optimization,’ ‘parameter update’ or other 

techniques that could suggest that banks may be ‘tampering’ with their RWAs in order to 

lower capital requirements. However, it is prudent to guard against any simplistic 

conclusion, and against inferring that any bank with a low RWA density is necessarily 

‘gaming the system.’”1106

At JPMorgan Chase, however, emails, telephone conversations, and internal presentations offer

evidence that efforts to manipulate RWA results to artificially lower the bank’s capital 

requirements were both discussed and pursued by the bank’s quantitative experts.

(3) Ignoring Repeated Breaches of Credit Spread Risk Limits

The VaR and CRM results were not the only risk metrics that warned the CIO of 

increasing risk in the Synthetic Credit Portfolio. So did two additional risk metrics that 

JPMorgan Chase used to track how its portfolios would perform based on changes in “credit 

spreads,” meaning risks linked to changes in credit derivative premiums. The credit spread risk 

limits were repeatedly breached in the first quarter of 2012, with the SCP exceeding one limit by 

100% in January, by 270% in early February, and by more than 1,000% in mid-April. But 

instead of heeding those risk warnings, which came on top of the VaR and CRM warnings, the 

CIO traders, risk managers, and management criticized the credit spread risk metrics as faulty 

and pushed for them to be replaced. 

The two credit spread risk metrics were known within the bank as, first, “Credit Spread 

Widening 01” (CS01), also often referred to as “Credit Spread Basis Point Value” (CSBPV) or 

Spr01; and second, the “Credit Spread Widening 10%” (CSW10%). As with VaR, each of these 

metrics produced a dollar value signifying the amount of money that could be lost by a portfolio 

in a single day under specified market conditions. The bank established the CS01 and CSW10%

risk limits for the CIO.1107 

 

Avramova, at 4, http://www.imf.org/external/pubs/ft/wp/2012/wp1290.pdf. 1106 Id., at 26. See also January 2013 “Regulatory consistency assessment programme (RCAP) – Analysis of riskweighted assets for market risk,” Basel Committee on Banking Supervision (documenting wide RWA variances 

across banks and countries); “Banks’ Risk Measurements Rarely Off By Much More Than A Factor Of Ten,” 

Dealbreaker.com, Matt Levine (1/31/2013), http://dealbreaker.com/2013/01/banks-risk-measurements-rarely-off-bymuch-more-than-a-factor-of-ten/, (discussing evidence that banks are “optimizing” their RWA models to artificially 

lower their RWA results and that each bank’s model is designed “to require as little capital as possible for its 

particular portfolio of assets”). 1107 Subcommittee interviews of Ina Drew, CIO (9/7/2012, 12/11/2012).
197

(a) Breaching CS01 Risk Limit

The Synthetic Credit Portfolio first breached the CS01 risk limit in January 2012.1108 To 

understand how the CS01 works, it helps to understand how positions on a credit index are 

priced. Most credit positions operate somewhat like insurance.1109 The “short” party makes 

periodic premium payments to the “long” party over a specified period of time to obtain credit 

protection. If a “credit event” like a bankruptcy or loan default takes place during the covered 

period, the long party is required to make a sizeable payment to the short party. 

The amount of the premium payments paid by the short party is typically expressed in 

basis points. A basis point is equal to one-hundredth of one percent. So if the CIO purchased a 

$1 billion short position in a credit index for 150 basis points, the CIO was required to pay its 

long counterparty $15 million per year (1.5% of $1 billion) for the credit protection. 

Credit positions are often priced by looking at the amount of position’s premium 

payment, also called the “coupon” payment or “credit spread.” If the credit spread “widens,” as 

happens in a worsening credit environment, it means the value of the existing short position

increases, because the premium amount that was contractually agreed to be paid for the existing 

position will be less than the premium required to obtain the same credit protection in the 

worsening marketplace. If the credit spread “narrows,” as happens in an improving credit 

environment, the value of the existing short position falls. That’s because the premium amount 

paid for that existing short position will likely be greater than the premium that could be paid to 

obtain the same type of credit protection in the improving market. In addition, because credit 

derivatives have to be marked-to-market on a daily basis, the credit spread movements and the 

corresponding changes in the market value of the affected positions have to be recorded in the 

daily profit and loss statements of the parties holding the positions.

At JPMorgan Chase, CS01 measured the expected profit or loss to a portfolio if the credit 

spread on a credit position widened by 1 basis point over the course of a day.

1110 The CIO used 

two CS01 measures, one for their global credit portfolio, and one more specific to their mark-tomarket (MTM) portfolio. According to JPMorgan Chase, “[t]he Global CIO MTM CS BPV 

(CS01) limit was $5,000,000 from mid-August 2008 through early-May 2012, when it was 

deactivated because management determined the limit was no longer valid in terms of measuring 

the risk appropriately.”1111 This limit meant that if the CIO held credit positions in its mark-tomarket book and the credit spread widened by 1 basis point, a loss of more than $5 million

would trigger a discussion as to whether the positions had to be unwound.

1112 

 1108 See 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Breach of firm var,” JPMCIO-PSI 0000141.

1109 For more information about credit products, see Chapter II. 1110 See 2013 JPMorgan Chase Task Force Report, at 80. 1111 12/7/2012 letter from JPMorgan Chase legal counsel to Subcommittee, PSI-JPMC-24-000001. 1112 1/20/2012 email from Keith Stephan, CIO, to Irvin Goldman, CIO, and others, “Breach of firm var,” JPM-CIOPSI 0000141. See also 2013 JPMorgan Chase Task Force Report, at 80 (“With respect to the Synthetic Credit 

Portfolio, it reflected an aggregation of the CSBPV sensitivities of all the credit products (e.g., investment-grade and 

high-yield), unadjusted for correlations.”).
198

A presentation later prepared by JPMorgan Chase shows that the CIO breached the $5 

million MTM CS01 limit in early January and quickly incurred more and more risk.1113

CIO MTM CS01 Limit Breaches, Sept. 2011-May 2012

 Source: JPMorgan Chase presentation entitled “CIO Global Credit CSBPV Limits,” JPM-CIO-PSI-H 0000811.

The Synthetic Credit Portfolio first breached the $5 million MTM CS01 limit on January 6, 

2012, a breach that continued for months, until the limit was replaced in May.1114 Over the same 

period of time, the CIO’s Global CS01 limit was $12 million. The SCP first breached the CIO 

Global CS01 limit on January 18, 2012, breached it again on January 25, and stayed in breach 

until May when that risk limit, too, was replaced.

1115 

In response to the January breaches, the CIO traders requested an increase in the CS01 

risk limits to end the breaches. On January 27, 2012, CIO trader Bruno Iksil, apparently 

confused over the level of the limit, emailed Mr. Martin-Artajo with the request: 

“I will need an increase in the CS01 limit in order to reduce further the notionals 

and set the book for a smoother P&L path. I am currently constrained by this 

limit of [$]10M[illion] CS01 that prevents me from having a decent convexity of 

spreads tighten mostly.”1116

According to the JPMorgan Chase Task Force Report, “At various times, beginning in 

February, CIO Market risk suggested a temporary increase in the mark-to-market (MTM) 

 1113 5/7/2012 email from Peter Weiland, CIO, to Ina Drew, CIO, and others, “CSBPV History,” attached presentation 

entitled “CIO Global Credit CSBPV Limits,” JPM-CIO-PSI-H 0000810-811, at 811. See also 2013 JPMorgan 

Chase Task Force Report, at 80 (indicating CSBPV limit was first breached on January 6, 2012). 1114 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information Needed,” JPM-CIOPSI-H 0000627, at 636. 1115 Id. 1116 Undated internal document authored by Bruno Iksil with his personal notes and comments on SCP trading 

activities from January to March 2012, JPM-CIO-PSI 0021884. See also 2013 JPMorgan Chase Task Force Report, 

at 37, footnote 48.
199

CSBPV limit, from $5 million to $20 million, $25 million or $30 million.” 1117 These Global 

CS01 limit increases were not granted. However, the CIO traders were also not required to exit 

any positions in order to end the breach. Instead, the dual CS01 breaches were allowed to 

continue and grew more and more egregious. In fact, despite written guidelines requiring the 

CIO to “take immediate steps toward reducing its exposure to be within the limit,”1118 the CIO 

traders pressed on in their trading strategy and continued to purchase additional credit 

derivatives. Indeed, on January 30, 2012, Mr. Iksil sent Mr. Martin-Artajo an email with the 

subject line, “there is more loss coming in core credit book,” warning of losses due to other 

market participant aligning against the CIO to “go for the fight.” Mr. Iksil wrote: “Now I just 

grow the exposure and the CS01 moves up.”1119

On February 13, 2012, Syed Hassan in the bank’s Market Risk Management group sent 

an email with the subject line, “CIO Global Credit spread BPV limit breach- COB 02/09/2012,” 

to Keith Stephan, the Chief Risk Officer in the CIO’s London office, and others, asking them 

about the ongoing CS01 breaches and requesting an explanation. Mr. Hassan wrote: 

“The following CIO Global Credit Spread BPV limits have been breaching since 

the aforementioned period. Can you please examine and confirm the breaches as 

valid? If so, please also provide some commentary surrounding the breaches. 

Thanks.”1120 

The email included a chart, excerpted below, showing that, starting on January 18, 2012, 

the $12 million “CIO Global Credit CSBPV” limit was repeatedly breached and, by the date of 

the email, had surpassed $20.5 million, a breach 70% greater than the limit. The chart also 

tracked the more granular “CSBPV–MTM” limit of $5 million, which was first breached on 

January 6; by January 18 it was in breach by more than 100%. On February 9, the CIO’s 

CSBPV-MTM exceeded $18.6 million, a breach of greater than 270%.1121 

 1117 2013 JPMorgan Chase Task Force Report, at 81. 1118 See, e.g., 3/2012 presentation prepared by JPMorgan Chase entitled, “Market Risk Limits,” at 13, OCC-SPI00117682.

1119 1/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, “there is more loss coming in core credit 

book,” JPM-CIO-PSI 0001225. 1120 2/13/2012 email from Syed Hassan, CIO, to Keith Stephan, CIO, and others, “CIO Global Credit spread BPV 

limit breach- COB 02/09/2012,” JPM-CIO-PSI 0001825. 1121 See, e.g., 2/2012 chart of CIO limit breaches prepared by Subcommittee using data provided by JPMorgan 

Chase, JPM-CIO-PSI 0001832 (reformatted for clarity). Note: because of a data error at the CIO North America 

desk, this document actually understates the Jan. 18th CIO Global Credit CSBPV limit utilization by $848,000; the 

error was later corrected by the CIO middle office. See 3/3/13 email from JPMorgan Chase outside counsel to the 

Subcommittee, “Crossing the t’s,” PSI-JPMC-37-000001.
200

Excerpt From JPMorgan Chase Chart

Tracking CIO MTM and Global CSO1 Breaches, January – February 2012

Date of Breach Limit Type Current Limit Limit Utilization

01/18/2012 CIO Global Credit CSBPV 12,000,000 12,476,463.89

01/25/2012 CIO Global Credit CSBPV 12,000,000 12,795,898.84

02/02/2012 CIO Global Credit CSBPV 12,000,000 14,015,706.12

02/09/2012 CIO Global Credit CSBPV 12,000,000 20,551,039.63

Date of Breach Limit Type Current Limit Limit Utilization

01/06/2012 CIO Global Credit CSBPV - MTM 5,000,000 5,767,816.27

01/18/2012 CIO Global Credit CSBPV - MTM 5,000,000 10,501,915.86

01/25/2012 CIO Global Credit CSBPV - MTM 5,000,000 10,974,965.09

02/02/2012 CIO Global Credit CSBPV - MTM 5,000,000 12,096,601.27

02/09/2012 CIO Global Credit CSBPV - MTM 5,000,000 18,659,019.36

Source: Subcommittee chart created from data provided by JPMorgan Chase, JPM-CIO-PSI 0001832.

Ms. Drew was informed of the CIO Global Spread CSBPV limit breaches in an email 

from Mr. Goldman on February 13, 2012.1122 In the email Mr. Goldman wrote: “We will need a 

one off limit increase.”1123 Ms. Drew replied later that day: “I have no memory of this limit. In 

any case it need[s] to be recast with other limits. [It is] old and outdated.”1124 

On February 15, 2012, the CIO’s Chief Market Risk Officer, Mr. Weiland, discussed the 

CS01 breaches in an email with the CIO’s Chief Risk Officer in London, Keith Stephan. His

email was, in part, seeking assistance in drafting language to request an increase in the Global 

CS01 limit. Mr. Weiland wrote:

“Since mid-January CIO has been in breach of its global csbpv limits, driven 

primarily by position changes in the tranche book.

The csbpv methodology adds the csbpv sensitivities of all of the credit products, 

unadjusted for correlations. As IG [Investment Grade credit index] and HY [High 

Yield credit index] positions have been added in January (with a hedge ratio of 

roughly 5x) the net csbpv prints a positive number even though on a beta-adjusted 

basis the book is relatively flat.

Market Risk is currently reviewing all limits and most likely will remove the 

csbpv limit to be replaced with a set of credit-spread-widening (CSW) limits to 

better reflect the risk of the portfolio in material market moves. Until the new 

 1122 2/13/2012 email from Irvin Goldman, CIO, to Ina Drew, CIO, “Csbpv limit- please read,” JPM-CIO-PSI-H 

0002936.

1123 Id. 1124 Id.
201

limits are implemented we will propose a one-off to the csbpv, as we find that the 

stress and csw measures are more appropriate indicators of the risk of the 

portfolio.”1125

At the time of this email, Mr. Weiland was the head of Market Risk management at the 

CIO. Though he reported to Irvin Goldman, Mr. Goldman had only been Chief Risk Officer at 

the CIO for a few weeks.

1126 As the CIO’s longstanding risk manager, and as someone who 

previously had the authority to approve Level 2 limit exceptions,

1127 Mr. Weiland might have 

been expected to raise concerns about the months-long breaches of the CS01 limits, but instead 

his reaction was to criticize the risk metric and recommend another limit increase. He 

downplayed the importance of the breaches, expressing the view that the Synthetic Credit 

Portfolio was “relatively flat,” and should not have triggered the breaches even though, by 

February, the size of the SCP was expanding rapidly, the CIO had already changed the VaR 

model to end that limit breach, and the CRM was climbing. 

The next day, February 16, 2012, in reply to Mr. Weiland, Mr. Stephan also downplayed 

the importance of the breaches and further challenged the value of the CS01 metric by including 

his own analysis that another risk metric, “10% CSW shows that the book has been reasonably 

balanced despite the headline [cs] bpv looking much longer.”1128 The following day, February 

17, Mr. Stephan sent the email chain regarding the CS01 breaches to Bruno Iksil, the CIO trader 

who had designed the trading strategy that was causing the risk limit breaches in the first place. 

Mr. Stephan wrote: “Bruno – can you read the below draft and let me know if you agree /w the 

points – think we need to get Javier on board w/ this before we send out formal limit 

request.”1129

According to the JPMorgan Chase Task Force Report:

“On March 1, Firm-wide Market Risk Management e-mailed Mr. Weiland and 

[Mr. Macris] (the signatories to the limit) requesting their approval to temporarily 

increase the aggregate and MTM CSBPV limits until March 31. Although Mr. 

Weiland agreed with the suggestion to increase the limit, neither he nor [Mr. 

Macris] approved the request for a temporary increase and no such increases were 

implemented. An email from Market Risk Management to the same signatories

on March 26 advised that CIO had been breaching its aggregate and MTM 

CSBPV limits from February 21 through March 21 and that the breaches were 

‘the result of portfolio and hedge rebalancing since start of 2012.’”1130

 1125 2/15/2012 email from Peter Weiland, CIO, to Keith Stephan, CIO, and others, “CIO Global Credit spread BPV 

limit breach – COB 02/09/2012,” JPM-CIO-PSI 0001824. 1126 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 1127 Id. 1128 2/16/2012 email from Keith Stephan, CIO, to Peter Weiland, CIO, and others, “CIO Global Credit spread BPV 

limit breach – COB 02/09/2012,” JPM-CIO-PSI 0001823.

1129 2/17/2012 email from Keith Stephan, CIO, to Bruno Iksil, CIO, and others, “CIO Global Credit spread BPV 

limit breach – COB 02/09/2012,” JPM-CIO-PSI 0001823. 1130 2013 JPMorgan Chase Task Force Report, at 81.
202

By March 30, 2012, the CIO had been in breach of the CS01 limit for 59 trading days, 

and the breach had grown to more than 900%.1131 Two weeks later, on April 17, 2012, a 

JPMorgan Chase close of business email notification stated: “MtM cs bpv limit is in excession 

by 1074% and has been in excession for 71 days.” 1132

By then, the whale trades had been exposed to the public, and the bank’s regulators began 

to take notice of the CS01 and other ongoing breaches. On April 19, James Hohl, a bank 

examiner with the OCC, emailed CIO Chief Market Risk Officer Pete Weiland about three 

different breaches, asking, “Would you have any color around some observations about the CIO 

VaR, the CSBPV, and stress results?”1133 That same day, Mr. Weiland responded:

“With respect to the CS01 limit, it is correct that we have been in excess for some 

time. This is a limit under review. ... We are working on a new set of limits for 

synthetic credit and the current CS01 will be replaced by something more sensible 

and granular.”1134

Instead of acting to reduce the risk in the SCP by exiting positions, CIO risk management 

indicated it planned to replace the risk metric. Nevertheless, any accurate metric would have 

shown the same thing: the risks in the SCP were increasing dramatically.

The CS01 is another example of a risk-related red flag that was disregarded. Though Mr. 

Weiland wrote in his email that team was reviewing, and would likely replace the CS01 limit, in 

fact, it was not replaced before the entire Synthetic Credit Portfolio was sunk by losses.1135 

Prior to May 2011, JPMorgan Chase policy required its lines of business to conduct an 

annual review of their major risk limits.1136 In May 2011, the policy was changed to require the 

reviews to be conducted semi-annually.1137 Contrary to both policies, however, the CIO failed to 

conduct any review of the adequacy of its risk limits “between 2009 and 2011.”1138 According to 

the bank, in the first quarter of 2012, Mr. Weiland was still developing a proposal to review and 

revise the CIO risk limits.1139 

Ultimately the plan to review the limits in 2012 was overtaken by events, and the CS01 

red flag was still waving when the Synthetic Credit Portfolio collapsed under its own weight. A 

later review of the CSBPV limits, conducted in May by Mr. Weiland, determined that the 

 1131 6/8/2012 email from Elwyn Wong, OCC, to Jairam Kamath, OCC, and others, “Weekly Capital and RWA 

Schedule,” OCC-SPI-00085027. 1132 4/19/2012 email from Jairam Kamath, OCC, to Fred Crumlish, OCC, and others, “CIO and firm VaR excessions 

COB 4 17 12,” OCC-SPI-00004177. 1133 4/19/2012 email from James Hohl, OCC, to Peter Weiland, CIO, “Info on VaR, CSBPV, and stress status and 

limits,” OCC-SPI-00022341. 1134 4/19/2012 email from Peter Weiland, CIO, to James Hohl, OCC, “Info on VaR, CSBPV, and stress status and 

limits,” OCC-SPI-00022340. 1135 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 1136 2013 JPMorgan Chase Task Force Report, at 101, footnote 112. 1137 Id. 1138 Id.

1139 Id., at 101.
203

CSBPV value had “increased dramatically as IG [Investment Grade credit index] positions were 

added.”1140

The Subcommittee was told that Mr. Weiland and others within the CIO criticized the 

CS01 metric in part because it did not take into account the correlations in credit spreads 

between positions in the SCP.1141 For example, investment grade (IG) indexes typically have 

much lower credit spreads than high yield (HY) indexes, so a market event that moves IG 

indexes by one basis point would likely move HY indexes by more than a basis point. The CS01 

in use by CIO assumed all of the positions moved by one basis point. 

This criticism doesn’t explain why the CIO didn’t use a version of the CS01 that took 

correlations into account. That metric, known as the “beta-adjusted” CS01, was already in use at 

JPMorgan Chase’s Investment Bank.1142 In fact, the CIO managed to report a beta-adjusted 

CS01 to senior management two days before the earnings call on April 13, 2012, indicating they 

easily could have devised one back in January.

1143 CIO risk managers claim to have disregarded 

the CS01 risk limit because it was a blunt instrument, but they could easily have sharpened it, 

instead of dismissing it. Likewise, the May review of CSBPV by Mr. Weiland found that, “The 

limit usage was calculated correctly; the issue was simply that we decided that given the mix of 

underlyings it would be better to look at sensitivities in a more granular way.” But those more 

granular limits were not implemented until May 1,

1144 and they would have been in breach had 

they been in place at the time.

JPMorgan Chase personnel, from Mr. Dimon on down, all told the Subcommittee that the 

risk limits at CIO were not intended to function as “hard stops,” but rather as opportunities for 

discussion and analysis. But when the CIO repeatedly breached the CS01 limits over the course 

of several months, exceeding those limits by 100%, 270%, even 1,000%, little discussion took 

place about the nature of the trades triggering the breaches. Instead, CIO personnel focused only 

on how high the limits should be reset and whether and how to replace the metric entirely.

(b) Breaching CSW10% Risk Limit

The second credit spread risk limit that was breached and then disregarded by the CIO

was the CSW10%. Whereas CS01 measured the expected profit or loss to a portfolio over the 

course of a single day if the credit spread on a credit position widened by one basis point,

CSW10% measured the expected daily profit or loss to a portfolio if the credit spread widened

by 10%.

1145

 1140 5/7/2012 email from Peter Weiland, CIO, to Ina Drew, CIO, and others, “CSBPV History,” attached presentation 

entitled “CIO Global Credit CSBPV Limits,” JPM-CIO-PSI-H 0000810-811, at 811.

 According to Mr. Weiland and Mr. Stephan, credit spread widening measures like 

CSW10% and CSW50% “better reflect[ed] the risk of the portfolio in material market 

1141 Mr. Weiland considered the non-beta-adjusted CS01 version unsophisticated, so he ignored it. Subcommittee 

interview of Elwyn Wong, OCC (8/20/2012); Subcommittee interview of Peter Weiland, CIO (8/29/2012).

1142 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 1143 See 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit 

information,” JPM-CIO-PSI 0001701. 1144 See 5/7/2012 email from Peter Weiland, CIO, to Ina Drew, CIO, and others, “CSBPV History,” attached 

presentation entitled “CIO Global Credit CSBPV Limits,” JPM-CIO-PSI-H 0000810-811, at 811. 1145 2013 JPMorgan Chase Task Force Report, at 3, 82. 
204

moves.”1146 Ms. Drew told the Subcommittee that she considered the CSW10% to be an 

“overriding” risk limit of key importance.1147

On March 22, 2012, the SCP breached the CIO’s mark-to-market CSW10% limit.

1148 

Ms. Drew expressed immediate concern.

1149 The next day, Ms. Drew halted all trading in the 

SCP, but the SCP remained in breach of the CSW10% limit for over a month, through April 

30.

1150 

Unlike the CS01 breach, which appears to have been simply ignored for several months, 

the CSW10% breach was promptly noticed and acted upon by Ms. Drew. At the same time, 

while Ms. Drew stopped the SCP from growing larger, neither she nor any other bank manager 

ordered the immediate reduction of any existing SCP position in order to end the CSW10%

breach. Instead the SCP was allowed to maintain its portfolio and continue to breach the 

CSW10% limit for another month – a breach which was on top of its CS01 breach. The order to 

dismantle existing SCP positions came only after the whale trades became public, lost billions of 

dollars, and drew the attention of investors, regulators, and policymakers.

The CSW10% risk metric is also another example of a risk metric whose validity was 

challenged by CIO personnel and whose calculation by the CIO’s risk analysts just happened to 

result in lower risk results than when calculated by the bank’s risk analysts. Soon after the 

CSW10% limit was breached on March 22, 2012, the bank’s risk analysts discovered that the 

CIO differed from the Quantitative Research team in how it calculated the CSW10% metric. 

And as with VaR and CRM, the CIO’s CSW10% model produced a lower risk profile for the 

SCP than the bank’s standard approach.

1151 

On March 30, 2012, eight days into the CIO’s CSW10% limit breach, the head of the QR 

group, Mr. Venkatakrishnan, emailed Chief Risk Officer John Hogan, questioning the divergent 

results of the two models, but also noting that risk was increasing under both:

“John: CIO’s 10% CSW by my group’s model estimate is long 245mm of risk; 

their own models (run by Weiland) quote $145mm. I don’t understand the 

difference in the models and don’t know how good a measure of risk 10%CSW is 

for their book. But I spoke to Ashley and we agree that 10%CSW has been 

trending up for CIO, by either their model or ours.”1152

 1146 2/16/2012 email from Keith Stephan, CIO, to Peter Weiland, CIO, “CIO Global Credit spread BPV limit breach 

– COB 02/09/2012,” JPM-CIO-PSI 0001826-31. 1147 Subcommittee interview of Ina Drew, CIO (9/7/2012). 1148 See 5/10/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “Braunstein / Cutler call on CIO,” 

OCC-SPI-00000018 (“The CIO global credit 10% credit spread widening (CSW) limit was breached on March 22, 

2012. At that time CIO Ina Drew suspended active trading in the instruments.”). See also 2013 JPMorgan Chase 

Task Force Report, at 82. 

1149 Subcommittee interview of Ina Drew, CIO (12/11/2012). 1150 See 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information Needed,” JPMCIO-PSI-H 0000627, at 636. See also 2013 JPMorgan Chase Task Force Report, at 82. 1151 JPMorgan Chase did not have a standard CSW10% model that it applied bankwide, in the same sense as its VaR 

model. Instead, the QR team had developed a CSW10% calculation as part of another model. Subcommittee 

interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012).

1152 3/30/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to Oliver Vigneron, JPMorgan Chase, “CIO 10% 
205

A few days later, on April 2, 2012, Mr. Venkatakrishnan announced that he had identified one 

source of the discrepancy between the two versions of the CSW10% model: “One source of the 

model difference is that the capital models operate at the level of individual names but the CIO’s 

desk models operate at the level of indices---so the effect of name concentrations may be 

captured differently.”1153

When the Subcommittee asked the OCC about the two models, Michael Sullivan, the

OCC Deputy Comptroller for Risk Analysis, told the Subcommittee that the risk metric was a 

straightforward measure of price movements in derivatives, and there was no legitimate reason

for a discrepancy in how the CSW10% metric was calculated.

1154 As with the VaR and CRM, 

subsequent developments showed Mr. Venkatakrishnan’s model to be more accurate in 

measuring risk.

At the same time the accuracy of the CSW10% metric was under scrutiny, the trend in its 

movement was clear and should have been alarming. The graph reprinted below was developed 

by JPMorgan Chase and included in a May 2012 presentation to provide bank managers with

background on the risk profile of the Synthetic Credit Portfolio. In the graph, losses increase as 

the curve moves up the y-axis.1155

CIO Mark-to-Market CSW10% Breaches

January 2011-April 2012

Source: JPMorgan Chase presentation entitled “CIO Synthetic Credit: Risk background information 

for upcoming meetings,” slide entitled “Risk metrics and limits: CIO limits structure,” JPM-CIO-PSI-H 

0000551.

 

CSW,” OCC-SPI-00070715. 1153 4/2/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to John Hogan, JPMorgan Chase, and others, 

“CIO DAY 1,” OCC-SPI-00070715. 1154 Subcommittee interview of Michael Sullivan, OCC (11/7/2012). 1155 5/3/2012 email from Irvin Goldman, CIO, to Douglas Braunstein, JPMorgan Chase, and others, “CSW 10%,” 

with attached JPMorgan Chase presentation entitled “CIO Synthetic Credit: Risk background information for 

upcoming meetings,” slide entitled “Risk metrics and limits: CIO limits structure,” JPM-CIO-PSI-H 0000546-556, 

at 551.
206

The pattern of increasing risk is unmistakable beginning in January 2012, even as the CIO 

traders and risk managers were citing CSW10% as a more reliable risk indicator than the CS01.

(4) Overlooking Stress Loss Limit Breaches

On March 29, 2012, one week after the CSW10% limit was breached, the SCP’s credit 

derivative positions caused a breach in the CIO’s mark-to-market stress limits, the fourth type of 

CIO risk limit not yet exceeded.

1156 The 2013 JPMorgan Chase Task Force Report described this 

set of breaches as follows:

“Stress testing is used to measure the Firm’s vulnerability to losses under adverse 

and abnormal market environments. Its purpose is to assess the magnitude of 

potential losses resulting from a series of plausible events in these hypothetical 

abnormal markets. Stress testing is performed by applying a defined set of 

shocks, which vary in magnitude and by asset class, to a portfolio. For example, 

weekly testing stresses the Firm’s positions under a number of hypothetical 

scenarios such as a credit crisis, an oil crisis, and an equity collapse. 

On March 29, CIO exceeded its aggregate stress loss limit threshold, with the ‘oil 

crisis’ stress test resulting in the ‘worst case scenario.’ This excession and those 

that followed reflected the potential loss that was calculated by stressing the 

underlying positions. As described above, the notional value of the Synthetic 

Credit Portfolio grew over time during the months preceding March 29. The 

increase in notional value in turn resulted in a higher hypothetical stress loss when 

the Firm ran the Synthetic Credit Portfolio through its various stress scenarios. 

The stress loss excessions were reported in the first weekly stress report that 

followed, on April 6, 2012. CIO’s mark-to-market stress limit continued to be 

exceeded throughout April. By then, however, the trading that precipitated the 

losses in the Synthetic Credit portfolio had ceased.”1157

When the SCP exceeded its stress loss limit, the CIO should have reconfigured the 

SCP to end the breach; instead, the CIO allowed the breach to continue unabated for a 

month. With the breach of the CIO’s stress limits, the SCP had caused the breach of all 

of the Level 1 and Level 2 risk limits used by the bank to monitor the portfolio.

Mr. Macris analogized managing the Synthetic Credit Portfolio to flying a plane. Mr. 

Dimon’s public statements suggested that the flight alarms didn’t sound until too late.1158

 1156 See 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information Needed,” JPMCIO-PSI-H 0000627, at 636.

 But 

the risk metrics tell a different story. The VaR and CS01 alarms sounded in January; the CRM 

1157 2013 JPMorgan Chase Task Force Report, at 82-83. 1158 See, e.g., testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “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), http://www.cq.com/doc/congressionaltranscripts-4105471. 

(“CIO had its own limits around credit risk and exposure. At one point, in March, some of those limits were 

triggered.”).
207

sounded in early March; the CSW10% sounded three weeks later, and the stress loss limits 

sounded a week after that. An internal bank document listing the many breaches of the CIO’s 

risk limits is nine pages long.1159 But no one in the CIO or JPMorgan Chase risk management 

function heeded the multiple warnings and took action to exit the offending positions. It wasn’t 

an instrument failure that caused the portfolio to crash; it was the pilots’ decision to disregard the 

instrument readings that were provided.

(5) Disregarding Stop Loss Advisories

The four risk metrics discussed above are based on projections of how a portfolio will 

perform under certain market conditions. In contrast, stop loss advisories are risk limits 

established on the basis of actual daily profit and loss reports for a portfolio. A stop loss

advisory sets a limit on how much money a portfolio is actually allowed to lose over a specified 

period of time, typically one, five, or twenty days. An advisory also sets a threshold for 

increased risk monitoring. If one of the advisories is breached, in theory, the portfolio exceeding 

the advisory should receive increased monitoring and attention from senior management. Stop 

loss advisories are a longstanding, easy to understand, and effective risk limit. 

The CIO had one, five, and twenty-day stop loss advisories in place during the 

accumulation of the credit index positions in the Synthetic Credit Portfolio that produced the 

losses incurred by the bank. Over the course of the period under review, the one, five, and 

twenty-day loss advisories were set at the same level, a decision regulators would later question. 

In early December 2011 these stop loss advisory limits were increased from $60 million to $70 

million.

1160

However, like the CIO’s VaR, the procedure used by the CIO to calculate the losses for 

purposes of complying with the stop loss advisories understated the risks; and like the CRM, 

CS01 and CSW10% limits, even when the stop loss advisories were breached, the CIO made no 

serious effort to investigate or remediate the breaches. If the CIO stop loss advisories had been 

properly calculated and respected, the CIO losses could have been mitigated well before they 

became international headlines.

Calculating the utilization and breach of stop loss advisories should be straightforward. 

If a portfolio loses more money than the limit allows in a given day, for example, it has breached 

the one-day advisory. At the CIO, from December 2011 through March 2012, the one-day stop 

loss advisory for its mark-to-market portfolio was established at $70 million.1161

 1159 05/04/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information needed,” JPMCIO-PSI-H 0000627-636.

 Daily losses 

that exceeded this amount should have been treated as a breach of the stop loss limit. 

Calculating the five-day and twenty-day stop loss levels should have been as easy as adding up

the profit and loss reports for the SCP over five and twenty days, respectively. To the surprise of 

their regulators, however, JPMorgan Chase calculated it differently.

1160 12/01/2011 JPMorgan Chase spreadsheet “Position Limit and Loss Advisory Summary Report,” OCC-SPI00134805; 12/9/2011 JPMorgan Chase spreadsheet “Position Limit and Loss Advisory Summary Report,” OCCSPI-00134832. 1161 “Position Limit and Loss Advisory Summary Report,” OCC-SPI-00134902; “Position Limit and Loss Advisory 

Summary Report,” OCC-SPI-00024212.
208

After the CIO’s losses became public, OCC examiners reviewing JPMorgan Chase’s stoploss calculations for the CIO portfolio noticed a discrepancy. On May 17, 2012, Jairam Kamath, 

an OCC examiner on the Capital Markets team, emailed Lavine Surtani, a member of JPMorgan

Chase’s Corporate Market Risk Reporting group, to express his confusion:

“I know this should be fairly obvious but we’d like to know how MRM [Market 

Risk Management] defines 1-day, 5-days, and 20-days stop loss thresholds. From 

looking at some of the risk reports we are not getting a good sense of how the 5-

day and 20-day stop loss numbers are derived.”

On May 23, Ms. Surtani replied to Mr. Kamath, explaining CIO’s methodology:

“The five day loss advisory is an arithmetic sum of the last 5 1-day utilizations. 

Any of these underlying utilizations that have caused an excession are NOT 

included in the sum for the following reason: including utilizations that caused 

excessions would result in a double-penalty. A business would break both their 1 

day and five day loss advisory. Rather, this type of loss advisory is used to 

capture small leaks in loss over a larger period of time .... The same logic would 

be implemented for the 20-day.”1162

At the end of her explanation, Ms. Surtani included a comment minimizing the importance of 

stop loss advisories compared to another form of loss-limits: “while some LOBs [lines of 

business] continue to show the loss advisories as thresholds, Market Risk Management overall 

favors the Drawdown measure of P&L performance for limit purposes.”1163

Not satisfied with the explanation, Mr. Kamath emailed it to his supervisor, Senior Bank 

Examiner Fred Crumlish, noting:

“This makes no sense and gives a misleading picture of the 5-day and 10-day stop 

losses. Perhaps if they had reported cumulative losses in the 5-day and 20-day 

lines, management would have been apprised of the gravity of the situation much 

earlier.”1164

Mr. Kamath also observed: “Incidentally, CIO does not have drawdown limits.”1165

 1162 5/23/2012 email from Lavine Surtani, JPMorgan Chase, to Jairam Kamath, OCC, and others, “Stop Loss 

Definitions,” OCC-00003917. [emphasis in the original]

 In other 

words, JPMorgan Chase admitted calculating losses for the purpose of its stop loss advisories in 

a way that minimized the losses and therefore the number of notifications to management. By 

way of justifying that decision, Ms. Surtani referred instead to a limit that did not even exist for 

the portfolio in question. Mr. Kamath told the Subcommittee that JPMorgan Chase had 

deliberately structured the stop loss algorithm in this way, and that it was not merely an error in 

1163 Id. 1164 5/23/2012 email from Jairam Kamath, OCC, to Fred Crumlish, OCC, “Stop Loss Definitions,” OCC-00003917. 1165 Id. A drawdown is the measurement of the loss from a recent peak in the value of a position.
209

arithmetic. He said that the bank’s method of calculation didn’t make sense to anyone at the 

OCC.1166

Despite the fact that JPMorgan Chase’s aberrant stop loss calculations at times

underreported the relevant losses, the CIO International mark-to-market portfolio nevertheless

repeatedly breached the advisories.

1167 The five-day stop loss advisory was breached on March 

26, 2012. By March 29, the five-day stop loss utilization for the portfolio exceeded $180

million, while the limit was $70 million.1168 In addition, in June, JPMorgan Chase told the FDIC 

that, at the end of March: “The Mark-to-Market Stop-Loss limit was exceeded by 158% for 5 

business days.”1169 

Even if the stop loss advisories had been properly calculated, it’s not clear they would 

have curtailed the trading in the Synthetic Credit Portfolio. According to the FDIC, breaches in 

the stop loss advisories did not automatically trigger an active response.1170 The OCC told the 

Subcommittee that the CIO’s approach contrasted with that of the JPMorgan Chase Investment 

Bank which actively enforced its stop loss limits.1171 Another OCC Bank examiner told the 

Subcommittee that the evidence indicated JPMorgan Chase was either ignoring the stop loss

advisories, or simply not doing anything about the CIO breaches. He said that senior CIO traders 

had clearly been given leeway with respect to the stop loss advisories; in other words, the CIO 

was allowed to exceed them.

1172 

The stop loss advisories, like the VaR, CRM, and credit spread limits, became still more

flashing red lights that were disregarded by the bank. All told, from January 1 through April 30, 

2012, CIO risk limits and advisories were breached more than 330 times.1173 A list of those 

breaches also shows that, in the fourth quarter of 2011, the Synthetic Credit Portfolio caused the 

CIO to breach its risk limits only six times; in the first quarter of 2012, the risk limit breaches 

totaled 170; in April, the risk limit breaches totaled 160, almost as much in one month as the 

three prior months combined. But even that startling increase in the number of risk limit 

breaches was disregarded by both the bank and its regulator.

(6) Missing Concentration Limits

Like beta-adjusted CS01, JPMorgan Chase’s Investment Bank utilized other risk 

management tools that the CIO did not. The most important were concentration limits and the 

so-called “Single Name Position Risk” (SNPR, pronounced “snapper”) limit to restrict total 

 1166 Subcommittee interview of Jairam Kamath, OCC (8/24/2012). 1167 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information Needed,” JPM-CIOPSI-H 0000627, at 636. 1168 “Position Limit and Loss Advisory Summary Report,” OCC-SPI-00134902.

1169 6/2012 FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” FDICPROD-0001783, at 33. 1170 Id. (Breach of the SCP’s stop loss limit “was not escalated as this limit was only ‘advisory’ (e.g. not a hard limit 

which would require hedging or cutting of the positions).”). 1171 Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 1172 Id. 1173 See 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information Needed,” JPMCIO-PSI-H 0000627-636 (providing a list of CIO breaches).
210

exposures to specific credit instruments and counterparties.1174 The CIO initially lacked Single 

Name Position Risk limits, because prior to 2009, the CIO did not trade any single name credit 

default swaps. By 2011, however, the exposure was significant.

1175 Nevertheless, according to

the JPMorgan Chase Task Force Report, “There were no limits by size, asset type or risk factor 

for the Synthetic Credit Portfolio; indeed, there were no limits of any kind specific to the 

Synthetic Credit Portfolio.”1176 Such concentration limits, if appropriately set, would have 

prevented the CIO from taking on the outsized positions in specific credit derivative indices that 

later generated outsized losses. JPMorgan Chase’s Deputy Chief Risk Officer Ashley Bacon told 

the Subcommittee that if the CIO’s notional positions were perfectly hedged and netted out, then 

the size might not be very relevant, but at the least the concentration limits would have ensured 

that the growing positions would have drawn scrutiny from the risk managers.1177

Concentration limits, if used by the CIO, would not only have reduced risk, they might 

also have prevented the situation in which the CIO’s credit index positions became so large that 

they attracted market attention, began to raise questions and affect market prices, and eventually 

became the subject of news reports. The Wall Street Journal article that broke the story about 

the CIO’s investment activities was headlined, “‘London Whale’ Rattles Debt Market,” and 

reported: “In recent weeks, hedge funds and other investors have been puzzled by unusual 

movements in some credit markets, and have been buzzing about the identity of a deep-pocketed 

trader dubbed ‘the London whale.’”1178 The article identified the “London whale” as Bruno 

Iksil, reporting that, “Mr. Iksil has done so much bullish trading that he has helped move the 

index, traders say.”1179

After that and other articles were published on April 6, and in preparation for an earnings 

call on April 13, 2012, the bank’s Operating Committee was informed about the size of the 

positions in the Synthetic Credit Portfolio.1180 On April 11, 2012, the CIO’s Chief Financial 

Officer John Wilmot emailed Mr. Dimon a presentation about the portfolio that included an 

analysis of the notional positions. He wrote: “Attached please find a presentation on the 

synthetic credit book that was reviewed this afternoon with Doug [Braunstein], Jes [Staley], Ina 

[Drew], Barry [Zubrow] and John [Hogan]. It covers the relevant data requests from the past 

several days.”1181

 1174 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). A “single name” is a 

credit default swap with just one reference entity. 1175 2013 JPMorgan Chase Task Force Report, at 103. “By late 2011 and early 2012, CIO’s exposure to single 

names grew to the point that Mr. Weiland and Firm-wide Market Risk agreed that it made sense to include the 

calculation of that exposure within SNPR policy ....” The SCP collapsed, however, before the SNPR policy was 

implemented at CIO. 

1176 Id. 1177 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 1178 “‘London Whale’ Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne (4/6/2012). 

1179 Id. 1180 See 5/3/2012 JPMorgan Chase presentation, “CIO Synthetic Credit,” JPM-CIO-PSI-H 0000547, at 550 

(“Significant increase in net notional position (not indicative of risk position)”.).

1181 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit 

information,” JPM-CIO-PSI 0001701.
211

The first page of the presentation was entitled, “Synthetic Credit Summary: Notional 

Exposure.”1182 The presentation included the following bullet points:

“Gross external (to CIO, including IB) notional is $836bio [billion] long risk vs. 

$678bio short risk across all index and tranche products....

CDX.IG.9 net position for CIO is $82.2bio, which is approximately 10-15 days of 

100% trading volume[.]

ITX.9 net position for CIO is $35bio, which is approximately 8-12 days of 100% 

trading volume.”

JPMorgan Chase personnel acknowledged to the Subcommittee that these figures represented 

enormous concentrations in specific credit instruments, including an $82 billion net long position

in the IG9 credit index and a $35 billion net long position in the ITX.9 credit index. In addition, 

John Hogan and Douglas Braunstein separately explained to the Subcommittee that, while it is 

theoretically possible to trade 100% of the average daily volume of an instrument in a single day, 

it is impractical to do so, since a single party trading that volume in a day would cause 

significant adverse movements in the price of the instruments.1183 They explained that, while the 

IG9 and iTraxx indices were normally considered liquid instruments, in that they are easily 

traded, the massive volume of the CIO’s positions made them relatively illiquid in terms of how 

long it would take to exit the positions. Mr. Hogan said that if concentration limits like those in 

use at the Investment Bank had been in use at the CIO, it would have prevented the CIO from 

accumulating positions of that size.1184

On April 13, 2012, Mr. Hogan emailed Mr. Dimon that concentration limits similar to 

those at the Investment Bank would be implemented at the CIO within a matter of weeks:

“I spoke with Ashley [Bacon] this morning who is working with Achilles [Macris] 

to implement a similar limit/governance structure on this book to the one that we 

have in the IB [Investment Bank] – we will do this for all of CIO over coming 

weeks and I will keep you posted on that.”1185

Concentration limits are such a well-known, fundamental risk tool, that their absence at the CIO 

is one more inexplicable risk failure. 

 1182 Id., at 702. 1183 Subcommittee interviews of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) and Douglas 

Braunstein, JPMorgan Chase (9/12/2012).

1184 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 1185 4/13/2012 email from John Hogan, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, “CIO,” JPM-CIO-PSI 

0001753.
212

D. Responding to the Risk Limit Failures

In the aftermath of the Synthetic Credit Portfolio losses, the OCC conducted an 

examination of the CIO’s risk management practices. On November 6, 2012, the OCC sent 

JPMorgan Chase a Supervisory Letter outlining the shortcomings in CIO risk management that 

led to the losses. The OCC wrote:

“Management oversight of CIO was inadequate. Business management was 

allowed to operate with little effective challenge from either the board or 

executive management. Risk reports did not communicate the nature of risk or 

the pace of change in positions, and limits were inadequate for the risks. CIO 

management did not understand the magnitude of the risk and dismissed outside 

questions about the book. Senior management permitted CIO to operate under 

less stringent controls than permitted analogous activities in other parts of the 

bank. As a result, management allowed CIO synthetic credit desk to operate in an 

unsafe and unsound manner.

“CIO Risk Management was ineffective and irrelevant. Independent risk 

management lacked the requisite staffing and stature to effectively oversee the 

synthetic credit desk. Processes were inadequate for the nature of the risks, and 

the limit structure was insufficient and not effectively enforced.”1186

In total, the OCC identified 20 Matters Requiring Attention (MRAs) which required the bank to 

address risk, valuation, and model failures, among other problems.

1187

JPMorgan Chase did not dispute the November 6, 2012, OCC Supervisory Letter’s 

findings or recommendations. Instead, in response, the bank outlined the risk management 

changes it had implemented or was planning to implement.1188

One of the steps it took to address its shortcomings was to establish a suite of new risk 

measures and limits for the CIO.

1189 According to the bank, the “CIO now has in place a total of 

260 limits,” including “67 redesigned VaR, stress and non-statistical limits,” and new asset class, 

single name, and country concentration limits.1190 In addition, “29 new limits specific to the 

Synthetic Credit Book have been implemented to create consistency with JPMC’s IB 

[Investment Bank] approach.”1191

 1186 11/6/2012 OCC Supervisory Letter to JPMorgan Chase, “Examination of VaR Model Risk Management,” PSIOCC-17-000015 [Sealed Exhibit].

 All of these new SCP limits focused on the risks inherent in 

1187 See 8/14/2012 OCC Supervisory Letter, JPM-2012-37, PSI-OCC-17-000001 [Sealed Exhibit]; 8/31/2012 OCC 

Supervisory Letter, JPM-2012-40, PSI-OCC-17-000005 [Sealed Exhibit]; 11/6/2012 OCC Supervisory Letter, JPM2012-52, PSI-OCC-17-000015 [Sealed Exhibit]; 11/6/2012 OCC Supervisory Letter, JPM-2012-53, PSI-OCC-17-

000019 [Sealed Exhibit]; 11/27/2012 OCC Supervisory Letter, JPM-2012-59, PSI-OCC-17-000025 [Sealed 

Exhibit]; 12/12/2012 OCC Supervisory Letter, JPM-2012-66, PSI-OCC-18-000001 [Sealed Exhibit]. 1188 12/4/2012 letter from JPMorgan Chase to OCC, “Chief Investment Office Risk Management Review,” PSIOCC-17-000029.

1189 See 6/2012 FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 34, FDICPROD0001783. 5/18/2011 Risk Policy memo, “Market Risk Limits, Firm-wide,” JPMC-Senate/Levin 000157

1190 2013 JPMorgan Chase Task Force Report, at 115.

1191 See 6/2012 FDIC presentation, “JPMC & COMPANY CIO Synthetic Credit Portfolio,” at 34, FDICPROD-
213

credit derivatives. The new risk measures were designed to address six dimensions of risk: 

directionality (exposure to spread widening), curve (long versus short), decompression (IG 

versus HY), off-the-run (older versus newer credit derivative index issues), tranche risk (senior 

versus equity tranches), and risks caused by individual corporate defaults.

1192 While these 260 

risk limits promise to provide greater information to the bank’s risk managers, it is far from clear 

how they will solve the CIO’s risk management problems; after all, when the SCP had just five

risk metrics, CIO management and risk personnel generally ignored or rationalized the breaches

that took place.

To ensure more attention is paid to the breaches that occur, the bank reported that it has

also “strengthened its processes across all businesses to deal with limit excessions.” It explained 

that significant excessions would be escalated further and faster than before. For example, any 

excessions of greater than 30% or lasting three days or longer would have to be escalated to the 

line of business CEO, CRO, and Market Risk Head, “as well as to the Firm’s CEO, CRO, coCOO and Deputy CRO/Head of Firm-wide Market Risk, and to the Firm-wide Risk 

Committee.”1193 In addition, the bank explained that the CIO Risk Committee had been

reconstituted as a CIO, Treasury and Corporate Risk Committee, requiring weekly meetings of 

senior risk and corporate management.1194 Escalating breaches to senior management and 

broadening the CIO Risk Committee are of questionable utility, however, since the SCP breaches 

were already escalated to Mr. Dimon and other senior bank and CIO management, but did not 

result in anyone investigating or curbing the SCP’s risky holdings until the whale trades attracted 

media attention. If limits are to be meaningful, then a better approach would have been to 

require those alerted to a risk limit breach to investigate the cause, and to require the position 

causing the breach to be reduced or unwound to ensure the breach is ended within a few days, 

without raising the relevant risk limit.

A third set of risk management reforms reported by the bank focused on strengthening its 

“model risk policy,” including by “minimize[ing] model differences for like products,” 

cataloguing its models in a central database, and emphasizing “model implementation testing 

and comparisons to benchmark models.”1195 In addition, the bank reported that it had revamped 

the CIO’s risk managers and risk committee, and established four new firmwide risk committees 

focusing on risk policy and analytics, business activities, risk controls and audits, and risk 

management.1196 While each of these steps is important, the bank did not mention taking any 

steps to reduce the number of and variations in its risk models or to prohibit bank personnel from 

gaming its risk metrics and models to produce artificially lower risk profiles, RWAs, and capital 

requirements.

 

0001783. 

1192 Id., at 26. 

1193 2013 JPMorgan Chase Task Force Report, at 115.

1194 Id., at 116.

1195 Id., at 113.

1196 Id., at 116, 118-119.
214

E. Analysis

Despite JPMorgan Chase’s reputation for strong risk management, little attention was 

paid by bank personnel – including Mr. Dimon – to the many breaches and risk warning signals 

that should have led to an early review of the CIO’s risky trades. This lack of attention was due, 

in part, to the fact that Ina Drew exercised nearly unfettered discretion as a manager. She also 

granted broad discretion to her risk management personnel and traders. When risk limits are 

breached, bank management should react, not by dismissing the breach or questioning the risk 

metrics, but by requiring independent risk experts to investigate the risky activity, even when 

trusted managers are involved. Risk managers should verify the causes of the risk limit 

breaches. This trust-but-verify approach is essential to ensure breaches are investigated and 

corrective action taken. Regulatory oversight into the frequency and nature of risk breaches and 

how they are resolved, as examined in the next chapter, is also critical. 

Another problem involves modern reliance by both banks and regulators on mathematical

metrics and models to measure risk, especially with respect to synthetic derivatives, which are 

inherently hard to value, have no underlying assets to stem losses, offer unreliable past 

performance data, and often undergo split-second trading and price changes. Risk metrics and 

models with complex variations can proliferate at a financial institution with the size and variety 

of JPMorgan Chase, and the pressure on analysts to reconfigure those metrics and models to 

produce lower risk results is difficult to counteract. OCC regulations already contain numerous 

safeguards against manipulation, requiring risk models to be developed by independent experts, 

tested to see if they detect specific risk problems, and backtested for accuracy. Proliferation of 

models and metrics, however, make meaningful oversight and enforcement difficult. New 

models that produce dramatically lower risk profiles of derivatives trading activity compared to

prior models should be viewed with extreme skepticism by regulators who should require proof 

that the lower risk profiles are accurate. Regulators should also respond to evidence of risk 

model manipulation with severe consequences. 

In addition to risk models, banks should continue to employ such fundamental risk 

controls as stop loss limits and concentration limits to curb risky trading. Such controls, when 

breached, should be treated as requiring immediate corrective action, rather than casual 

conversation or study. Regulators should ensure those risk controls are established, used, and 

heeded.
215

VI. AVOIDING AND CONDUCTING OCC OVERSIGHT 

Prior to media reports of the whale trades in April 2012, JPMorgan Chase provided 

almost no information about the CIO’s Synthetic Credit Portfolio to its primary regulator, the 

Office of the Comptroller of the Currency (OCC), despite the SCP’s supposedly important role 

in offsetting the bank’s credit risks, its rapid growth in 2011 and 2012, and its increasingly risky 

credit derivatives. While the OCC, in hindsight, has identified occasional references to a “core 

credit portfolio” in bank materials, the OCC told the Subcommittee that the earliest explicit 

mention of the SCP did not appear until January 27, 2012, in a routine VaR report. By then, the 

SCP had already lost nearly $100 million. The lack of prior bank disclosures essentially 

precluded effective OCC oversight of the portfolio’s high risk excesses and unsafe and unsound 

practices.

Because the OCC was unaware of the risks associated with the SCP, it conducted no 

reviews of the portfolio prior to 2012. Both the OCC and JPMorgan Chase bear fault for the 

OCC’s lack of knowledge – at different points, the bank was not forthcoming and even provided 

incorrect information, and at other points the OCC failed to notice and follow up on red flags 

signaling increasing CIO risk in the reports it did receive from the bank. During 2011, for 

example, the notional size of the SCP grew tenfold from about $4 billion to $51 billion, but the 

bank never informed the OCC of the increase. At the same time, the bank did file risk reports 

with the OCC disclosing that the SCP repeatedly breached the CIO’s stress limits in the first half 

of 2011, triggering them eight times, on occasion for weeks at a time, but the OCC failed to 

follow up with the bank. Later in 2011, the CIO engaged in a $1 billion high risk, high stakes 

credit derivatives bet that resulted in a payout of roughly $400 million to the CIO. The OCC 

learned of the $400 million gain, but did not inquire into the reason for it or the trading activity 

behind it, and so did not learn of the extent of credit derivatives trading going on at the CIO.

In January 2012, in its first quarterly meeting with the OCC after disclosing the existence 

of the SCP, the CIO downplayed the portfolio’s importance by misinforming the OCC that it 

planned to reduce the SCP. Instead, over the course of the quarter, the CIO tripled the notional 

size of the SCP from $51 billion to $157 billion, buying a high risk mix of short and long credit 

derivatives with varying reference entities and maturities. The increase in the SCP’s size and 

risk triggered a breach of the CIO’s and bankwide VaR limits, which the bank disclosed to the 

OCC in routine risk reports at the time, but which did not trigger an inquiry by the agency. Also 

in January, the bank sent routine risk management notices which informed the OCC of the 

bank’s implementation of a new VaR model for the CIO that would dramatically lower the 

SCP’s risk profile, but the OCC did not inquire into the reasons for the model change, its impact 

on risk, or how the CIO was able to reduce its risk results overnight by 50%. 

In February and March, the bank began to omit key CIO performance data from its 

standard reports to the OCC, while simultaneously failing to provide timely copies of a new CIO 

management report. The OCC failed to notice the missing reports or request the new CIO 

management report until after the April 6 press articles exposed the CIO’s risky trades. By

minimizing the CIO data it provided to the OCC about the CIO and SCP, the bank left the OCC 

misinformed about the SCP’s risky holdings and growing losses. 
216

Beginning in January and continuing through April 2012, the SCP’s high risk

acquisitions triggered multiple breaches of CIO risk limits, including its VaR, credit spread, 

stress loss, and stop loss limits. Those breaches were disclosed on an ongoing, timely basis in

standard risk reports provided by the bank to the OCC, yet produced no reaction at the time from 

the agency. The Subcommittee found no evidence that the OCC reviewed the risk reports when 

received, analyzed the breach data, or asked any questions about the trading activity causing the 

breaches to occur.

On April 6, 2012, when media reports unmasked the role of JPMorgan Chase in the

whale trades, the OCC told the Subcommittee that it was surprised to read about them and 

immediately directed inquiries to the bank to obtain more information. The OCC told the 

Subcommittee that it initially received such limited data about the trades and such blanket 

reassurances from the bank about them that, by the end of April, the OCC considered the matter 

closed. 

It was not until May 2012, a few days before the bank was forced to disclose $2 billion in 

SCP losses in its public SEC filings, that the OCC learned of the problems besetting the 

portfolio. On May 12, OCC staff told staff for a member of the Senate Banking Committee that 

the whale trades would have been allowed under the draft Volcker Rule, an assessment that, a 

few days later, the OCC disavowed as “premature.” At the instruction of the OCC’s new 

Comptroller, Thomas Curry, the OCC initiated an intensive inquiry into the CIO’s derivatives 

trading activity. Even then, the OCC told the Subcommittee that obtaining information from 

JPMorgan Chase was difficult, as the bank resisted and delayed responding to OCC information 

requests and sometimes even provided incorrect information. For example, when the OCC 

inquired into whether the CIO had mismarked the SCP book, the bank’s Chief Risk Officer 

initially denied it and the bank delayed informing the OCC of later evidence indicating that CIO 

personnel had acted in bad faith and deliberately understated the SCP losses.

On January 14, 2013, the OCC issued a Cease and Desist order against the bank, on top 

of six Supervisory Letters it had issued in 2012, detailing 20 “Matters Requiring Attention” that 

required corrective action by the bank. In addition, the OCC conducted a review of its own 

missteps and regulatory “lessons learned,” described in an internal report completed in October 

2012. Among multiple failures, the OCC internal report concluded that the OCC had failed to 

monitor and investigate multiple risk limit breaches by the CIO and improperly allowed 

JPMorgan Chase to submit aggregated portfolio performance data that obscured the CIO’s 

involvement with derivatives trading.

The JPMorgan Chase whale trades demonstrate how much more difficult effective 

regulatory oversight is when a bank fails to provide routine, transparent performance data about 

the operation of a large derivatives portfolio, its related trades, and its daily booked values. 

JPMorgan Chase’s ability to dodge effective OCC oversight of the multi-billion-dollar Synthetic 

Credit Portfolio until massive trades, mounting losses, and media reports exposed its activities, 

demonstrates that bank regulators need to conduct more aggressive oversight with their existing 

tools and develop more effective tools to detect and stop unsafe and unsound derivatives trading. 

In addition, the bank’s lack of transparency and resistance to OCC information requests indicates 

that the OCC has failed to establish an effective regulatory relationship with the bank and must 

take new measures to recalibrate that relationship and ensure good faith cooperation by the bank 
217

with OCC oversight. The OCC has begun that effort by issuing the Cease and Desist order, 

multiple Supervisory Letters requiring corrective action, and a downgrade of the bank’s 

management rating, but more may be needed.

A. Overview of OCC’s Oversight Role

Because JPMorgan Chase Bank, N.A. holds a national charter, its primary Federal 

regulator is the OCC which oversees all nationally chartered banks in the United States.

1197 The 

OCC does not supervise the bank’s holding company, JPMorgan Chase & Co., which is overseen 

primarily by the Federal Reserve. Nor does the OCC supervise the holding company’s non-bank 

affiliates like J.P Morgan Broker-Dealer Holdings, J.P. Morgan Ventures Energy Corp, or Bear 

Stearns Companies, LLC, which are overseen primarily by the SEC. Since the Chief Investment 

Office (CIO) sits within the national bank, however, the OCC is the regulator with primary 

responsibility for supervising the CIO’s activities.

1198

Within the OCC, the Large Bank Supervision division, which typically regulates banks 

with assets of $50 billion or more, provides supervisory personnel to oversee JPMorgan 

Chase.1199 The OCC has assigned approximately 65 OCC examiners and related personnel to

JPMorgan Chase; all are physically located at the bank.

1200 The OCC supervisory team conducts

both ongoing supervision, such as monitoring routine reports to the bank’s board, management, 

and audit function, as well as regular reviews of the bank’s business performance, risk trends, 

and regulatory compliance. Also, the OCC conducts a continuous examination program at the 

bank, which consists of approximately 60 examinations each year targeting specific areas of 

operation at the bank, with each lasting approximately three to six weeks.1201

At the end of each examination, the OCC issues a Supervisory Letter to the bank’s senior 

management to communicate examination findings, and if appropriate, requirements or 

recommendations for improvements. If a Supervisory Letter identifies an apparent violation of 

law or a “Matter Requiring Attention” (MRA), the OCC requires the bank to promptly respond 

and remedy the problem. If the Supervisory Letter includes a “recommendation,” the OCC

encourages, but does not require, corrective action by the bank. In addition to Supervisory 

Letters, the OCC issues an annual Report on Examination summarizing its examinations over the 

prior year, provides a copy to the bank’s board of directors, and meets with the board members

on at least an annual basis to discuss specific concerns. 

 

The OCC’s examination effort at each national bank is headed by an Examiner-inCharge, and includes on-site examination staff, risk analysis division staff, and economic 

 1197 See “About the OCC,” OCC website, http://www.occ.gov/about/what-we-do/mission/index-about.html.

1198 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012); see also Subcommittee interview of Julie 

Williams, OCC (9/13/2012).

1199 Subcommittee briefing by OCC (7/30/2012). 1200 See 7/30/2012 OCC Large Bank Supervision presentation to Subcommittee re Chief Investment Office 

Discussion, at PSI-OCC-06-0000009; testimony of Thomas J. Curry, Comptroller of the Currency, “Implementing 

Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic Risk,” before the Senate Committee on 

Banking, Housing, and Urban Affairs, S.Hrg. 112-714 (June 6, 2012), at 26. 1201 See 7/30/2012 OCC Large Bank Supervision presentation to Subcommittee re Chief Investment Office 

Discussion, PSI-OCC-06-0000011.
218

experts.

1202 During the period in question, the OCC Examiner-in-Charge at JPMorgan Chase 

was Scott Waterhouse. The most senior member of the capital markets examination team, which 

had responsibility for overseeing derivatives and other trading activities by the CIO as well as 

the Investment Bank, was Fred Crumlish, Capital Markets National Bank Examiner.

1203 Mr. 

Crumlish had ten staff on the capital markets team, some of whom were assigned specific 

responsibilities regarding CIO activity, but the team spent most of its time on Investment Bank 

supervision since it held more assets than the CIO.

1204 The OCC also has a London office 

staffed in part by examiners with derivatives expertise, but did not task any of its London staff to 

conduct examinations of the CIO’s London operations.1205

The OCC’s senior leadership team also played a role in overseeing JPMorgan Chase. 

Mike Brosnan, then Senior Deputy Comptroller in charge of OCC Large Bank Supervision, and

Julie Williams, then OCC Chief Counsel, were informed of key developments and helped advise

OCC senior leadership regarding the Chief Investment Office and its Synthetic Credit Portfolio. 

During the first few years of the Synthetic Credit Portfolio’s existence, the OCC was headed by 

John C. Dugan. When he left office in 2010, he was replaced on an acting basis by John 

Walsh.

 

1206 On April 9, 2012, the Senate confirmed a new Comptroller of the Currency, Thomas 

Curry.1207 News of JPMorgan Chase’s whale trades broke three days before he took office.1208 

Mr. Curry later formed a two-pronged review: one led by the bank’s supervision team to 

evaluate the bank’s conduct, and the other an internal review effort headed by an OCC risk 

expert to evaluate the agency’s own actions.

1209 That second review issued an internal report in 

late October 2012, with recommendations for improving the OCC’s supervisory efforts.

1210

The OCC’s primary examination role is to ensure that banks operate in a safe and sound 

manner,

1211

 1202 Testimony of Thomas J. Curry, Comptroller of the Currency, “Implementing Wall Street Reform: Enhancing 

Bank Supervision and Reducing Systemic Risk,” before the Senate Committee on Banking, Housing, and Urban 

Affairs, S.Hrg 112-714 (June 6, 2012), at 17-18.

including by assessing and monitoring the risks that a bank poses to the FDIC’s 

Deposit Insurance Fund. The OCC told the Subcommittee that, while the CIO’s $6 billion losses 

were significant, the OCC’s overriding concern at JPMorgan Chase was that the bank was 

conducting very risky activity – derivatives trading financed with billions of dollars of bank 

deposits – in an unsafe and unsound manner. The OCC told the Subcommittee that it had 

1203 See 2012 OCC Organizational Chart, JPMC Resident Staff, OCC-00004227. 1204 Subcommittee interview of James Hohl, OCC (9/6/2012). James Hohl and Jaymin Berg were two of the OCC 

examiners assigned responsibility for overseeing CIO capital markets activity during the period reviewed by the 

Subcommittee.

1205 See 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000045-046 [Sealed Exhibit]. 1206 See John G. Walsh, Office of the Comptroller of the Currency, http://www.occ.gov/about/who-weare/comptroller-of-the-currency/bio-john-walsh.html. 1207 See Thomas J. Curry, Office of the Comptroller of the Currency, http://occ.gov/about/who-we-are/comptrollerof-the-currency/bio-thomas-curry.html. 1208 See, e.g., “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg, Stephanie Ruhle, Bradley 

Keoun, and Mary Childs (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-issaid-to-distort-credit-indexes.html.

1209 Testimony of Thomas J. Curry, Comptroller of the Currency, “Implementing Wall Street Reform: Enhancing 

Bank Supervision and Reducing Systemic Risk,” before the Senate Committee on Banking, Housing, and Urban 

Affairs, S.Hrg. 112-714 (June 6, 2012), at 29-31; Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 1210 10/26/2012 Confidential Supervisory Report, PSI-OCC-13-000014 [Sealed Exhibit]. 1211 See “About the OCC,” OCC website, http://www.occ.gov/about/what-we-do/mission/index-about.html.
219

concluded, in particular, that the so-called “whale trades” had been conducted in an unsafe and 

unsound manner.

1212 More broadly, the OCC told the Subcommittee that the OCC’s internal 

review had concluded that internal control groups – both in the CIO risk management function as 

well as in bankwide valuation, risk, and audit functions – were ineffective; that the bank’s 

executive management “undercut” the effectiveness of the CIO’s risk limits; that the CIO VaR 

model change was not implemented with proper review; and that the bank used unapproved 

internal capital models.

1213

The OCC also initiated a review to determine whether similarly risky activities were 

being conducted in the asset management functions at other banks, but found “no activity similar 

to the scale or complexity” of the credit derivatives trading that took place at JPMorgan 

Chase.

1214

B. Pre-2012: Avoiding OCC Oversight As the SCP Develops

 

Prior to 2012, the OCC had very little understanding of the strategies, size, or risk profile

of the CIO’s Synthetic Credit Portfolio (SCP). The OCC’s lack of understanding was due 

primarily to a lack of disclosure by the bank about the SCP when it was established, when it 

delivered unexpected revenues, or when it began to increase in size and risk in 2011. The OCC 

told the Subcommittee that, in 2010, as part of an examination of the SCP’s investment 

portfolios, the examination staff had a vague understanding that a CIO portfolio had been 

established to provide stress loss protection for the bank and earn some profit,1215 as the CIO had 

done in the financial crisis, but did not know the portfolio’s name, the extent of its derivatives 

trading, or its risk profile. While the OCC, in hindsight, identified occasional references to a

“core credit portfolio” in bank materials, it determined that the earliest explicit mention of the 

SCP as a CIO portfolio was when it was mentioned in a routine bankwide Value-at-Risk (VaR)

report on January 27, 2012.

1216 That report identified the SCP for the first time as a distinct 

portfolio accounting for over 90% of the CIO’s VaR.1217 The lack of bank disclosures

essentially made it more difficult for OCC to effectively oversee this high risk portfolio in its 

early years.

 1212 Subcommittee interviews of Scott Waterhouse, OCC (9/17/2012), Fred Crumlish, OCC (8/28/2012) (describing 

a fundamental breakdown in basic OCC safety and soundness requirements, including inadequate risk management, 

auditing, reporting, and oversight by senior management), and Michael Kirk, OCC (8/22/2012). See also OCC 

Supervisory Letters issued to JPMorgan Chase, described below.

1213 10/26/2012 Confidential Supervisory Report, OCC at PSI-OCC-13-000014 [Sealed Exhibit]. 1214 Testimony of Thomas J. Curry, Comptroller of the Currency, “Implementing Wall Street Reform: Enhancing 

Bank Supervision and Reducing Systemic Risk,” before the Senate Committee on Banking, Housing, and Urban 

Affairs, S. Hrg 112-714, (June 6, 2012), at 27 (“Beyond JPMC, we have directed OCC examiners to evaluate the 

risk management strategies and practices in place at other large banks, and examiners have reported that there is no 

activity similar to the scale or complexity of JPMC. However, this is a continuing focus of our supervision.”).

1215 See 12/31/2010 OCC Report of Examination, OCC-SPI-00036145, at 163 [Sealed Exhibit] (“As part of its 

business mandate, the CIO is allowed to take discretionary positions within approved limits to manage economic 

returns. Appropriate limits are used to measure and control the risks in MTM positions.”). 1216 10/26/2012 Confidential Supervisory Report, OCC at PSI-OCC-13-000025 [Sealed Exhibit]. 1217 Id.; Subcommittee interview of Doug McLaughlin and Michael Sullivan, OCC (8/30/2012) (Mr. McLaughlin).
220

(1) 2006-2009: Minimizing OCC Oversight As SCP Expands

In 2006, JPMorgan Chase approved a request by the CIO to create a new credit 

derivatives trading portfolio as part of an internal “New Business Initiative Approval”

(NBIA).1218 Typically, the bank does not share NBIAs with the OCC, and the OCC told the 

Subcommittee that it was unaware of whether it received a copy of the 2006 NBIA that gave rise 

to the CIO’s Synthetic Credit Portfolio.

1219 The OCC also told the Subcommittee that, even if it 

had known at the time, it would have had no role in approving and could not have prohibited 

establishment of the new Synthetic Credit Portfolio as proposed in 2006,

1220 although it could 

have monitored its activities and development. The OCC told the Subcommittee that it did not 

know exactly when, after receiving approval, the CIO actually began to buy and sell credit 

derivatives. The OCC did determine that it was in 2008, that the CIO portfolio was given its

current name, the Synthetic Credit Portfolio.

1221 The OCC also determined that the 2006 NBIA 

was not updated then or later, even as the SCP significantly expanded its credit derivatives

trading activity.

1222

The OCC told the Subcommittee that one reason it had only a rudimentary understanding 

of the SCP was because the CIO made numerous name and organizational changes to its 

investment portfolios over the years, making them difficult to track.

1223 In addition, the SCP was 

not named in any portfolio lists that the CIO provided to the OCC from 2007 through 2012, 

although the CIO occasionally referred to a “core credit portfolio,”1224 which was one part of the 

SCP.1225

The bank and the OCC told the Subcommittee that, instead of focusing on the SCP, the 

CIO typically discussed its Tactical Asset Allocation (TAA) mark-to-market portfolio, a broader 

investment portfolio which included the SCP.1226 Consistent with that explanation, several 

internal CIO documents indicate that when CIO head Ina Drew discussed the CIO’s investment 

portfolios with the JPMorgan Chase Board of Director’s Risk Policy Committee, she talked 

about the larger TAA portfolio, and did not mention the SCP.1227

 1218 See 7/17/2006 New Business Initiative Approval Chief Investment Office, JPM-CIO-PSI-H 0001142; see also 

Chief Investment Office New Business Initiative Approval Executive Summary, JPM-CIO-PSI-H 0001354. 

 In addition, the CIO and OCC 

1219 Subcommittee briefing by the OCC (11/29/2012) (Fred Crumlish). See also, e.g., 5/16/2012 email from Fred 

Crumlish, OCC, to Elwyn Wong, OCC, “here is redline and new final,” OCC-00003507 at 508 (describing the 

OCC’s general awareness of a “macro-hedge against the credit risk of the bank’s balance sheet using credit default 

swaps” starting in 2007 and 2008).

1220 Subcommittee briefing by the OCC (11/29/2012) (Scott Waterhouse). 1221 See Subcommittee interview of Doug McLaughlin and Mike Sullivan, OCC (8/30/2012). 1222 Id. 1223 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). In addition, JPMorgan Chase has acknowledged 

to the Subcommittee that, despite years of operation, the CIO has never detailed the purpose or workings of the SCP 

in any document nor issued any specific policy or mandate for it. Levin Office briefing by JPMorgan Chase (Greg 

Baer) (8/15/2012).

1224 Subcommittee briefing by JPMorgan Chase (8/15/2012). 1225 One key OCC examiner for the CIO in early 2012 was not even familiar with the term, “core credit portfolio.” 

Subcommittee interview of Jaymin Berg, OCC (8/31/2012). 1226 Id. 1227 See, e.g., 12/2010 Presentation to the Directors Risk Policy Committee, prepared by Ina Drew, CIO, OCC-SPI00135422, at 2 (describing the “Tactical Investing & Risk Management” portfolio as one type of portfolio with a 

short term “investment horizon”). The presentation also explained that “Tactical Positioning” referred to the CIO 
221

told the Subcommittee that a few years earlier, the TAA portfolio had been called the 

“Discretionary Trading” portfolio.

1228 Moreover, the CIO told the Subcommittee that in January 

2012, it merged the TAA with another portfolio of mark-to-market assets called the Strategic 

Asset Allocation portfolio, and called the product of that merger the “MTM Overlay” 

portfolio.

1229 Ms. Drew said the frequent name changes and portfolio reconfigurations were 

made for business reasons and not to evade regulatory oversight.1230 

JPMorgan Chase also produced to the Subcommittee a sample of emails dating from 

2009 to 2012, reporting routine risk information, copies of which were sent to the OCC. One set 

of emails summarizing the bank’s daily VaR results contained references to the “EMEA Credit 

Tranche” and “CIO International credit tranche book.”1231 A second set of emails summarizing 

the bank’s weekly stress results contained one July 2011 email referencing the “synthetic tranche 

book”1232 and one November 2011 email referencing the “synthetics credit portfolio.”1233 These 

varying descriptions of the Synthetic Credit Portfolio provided multiple hints but, again, no 

straightforward, comprehensive disclosure of the SCP to the OCC. 

According to the OCC, it was very unusual for a bank to do what JPMorgan Chase did

with the SCP – use its excess deposits to engage in short term credit derivatives trading – an

approach no other major U.S. bank employs.

1234 JPMorgan Chase claimed that the SCP 

represented a “successful” way to hedge the bank’s credit risks.

1235 The bank was unable to 

explain, however, why it had failed for years to notify its primary regulator of that new and 

effective hedge, generate documents laying out the SCP’s hedging objectives and strategies, or

accumulate hedging related performance data.

1236

 

positioning its investments “tactically to complement the core investment portfolio. One example is a synthetic (or 

derivative) credit position established in 2008 to protect the Firm from the anticipated impact of a deteriorating 

credit environment.” Id., at 6.

 The bottom line is that the bank did not 

disclose and the OCC did not learn of the extent and associated risks of the CIO’s growing

1228 See Subcommittee interviews of Jaymin Berg, OCC (8/31/2012) and Ina Drew, CIO (9/7/2012); but see 1/2011 

Executive Management Report, OCC-SPI-00000250 (still reporting the TAA portfolio as “Discretionary” even after 

the name had changed.).

1229 Subcommittee interview of Ina Drew, CIO (9/7/2012). 1230 Id. 1231 JPMorgan Chase sample of emails provided to bank regulators, entitled “Firmwide Risk Daily,” emails dated 

2009-2012, JPM-CIO-PSI-H-BEP 0006817-895. 1232 7/16/2011 email from “JPMorgan Chase Market Risk Management – Reporting” to numerous JPMorgan Chase 

managers and colleagues and a “Regulatory Coordinator,” “Firm’s Stress Results – COB: July 7th, 2011,” JPM-CIOPSI-H-BEP 0006896-897. 1233 11/18/11 email from “JPMorgan Chase Market Risk Management – Reporting” to numerous JPMorgan Chase 

managers and colleagues and a “Regulatory Coordinator,” “Firm’s Stress Results – COB: November 10th, 2011,” 

JPM-CIO-PSI-H-BEP 0006898-899. 1234 Subcommittee interview of Fred Crumlish OCC (8/28/2012); testimony of Thomas J. Curry, Comptroller of the 

Currency, “Implementing Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic Risk,” before 

the Senate Committee on Banking, Housing, and Urban Affairs, S. Hrg 112-714, (June 6, 2012), at 27. 1235 2/13/2012 letter from Barry Zubrow, JPMorgan Chase, to Department of the Treasury, Board of Governors of 

the Federal Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and 

Office of the Comptroller of the Currency, “Comment Letter on the Notice of Proposed Rulemaking Implementing 

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” at 56-57, 

http://www.sec.gov/comments/s7-41-11/s74111-267.pdf. 1236 For more information on the bank’s description of the SCP as a hedge, see Chapter III. 
222

Synthetic Credit Portfolio until media reports on April 6, 2012 described the book’s outsized 

credit derivative holdings.

1237

(2) 2010: Resisting OCC Examination Results

In 2010, as part of its routine examination process, the OCC conducted a detailed review 

of the CIO’s investment activities, focusing in particular on the $350 billion Available for Sale 

portfolio, and warned that the CIO needed to do a better job documenting portfolio decisions and 

managing the risks associated not only with that investment portfolio but with several others as 

well. 

On December 8, 2010, after concluding its examination of the CIO’s investment 

activities, the OCC sent a Supervisory Letter to CIO head Ina Drew with its findings,

requirements, and recommendations.

1238 The Supervisory Letter included a Matter Requiring 

Attention (MRA) – meaning a matter that required corrective action by the bank – stating that 

CIO management needed to “document investment policies and portfolio decisions.”1239 The 

Supervisory Letter also found that the “risk management framework for the investment portfolios 

(Strategic Asset Allocation and Tactical Asset Allocation)” lacked “a documented 

methodology,” “clear records of decisions,” and other features to ensure that the CIO was 

making investments and controlling associated risks in line with the expectations of senior 

management and the appropriate Board of Directors committee.1240 The Supervisory Letter 

made no explicit mention of the Synthetic Credit Portfolio, but because the SCP was part of the

TAA portfolio, which was mentioned in the MRA, the MRA also applied to the SCP.

1241

Prior to the OCC’s issuance of a Supervisory Letter, it is standard practice for the OCC to 

hold a close-out meeting with the bank to discuss the examination findings, requirements, and

recommendations, and receive bank management’s response. The OCC’s head capital markets 

examiner at JPMorgan Chase held that meeting with CIO head Ina Drew, whom he said did not 

react well to the examination’s criticisms. According to a later email by his supervisor, the OCC 

Examiner-In-Charge, Ms. Drew “‘sternly’ discussed [the OCC’s] conclusions with him for 45 

minutes.”1242 The OCC told the Subcommittee that, among other objections, she complained 

that the regulator was trying to “destroy” JPMorgan Chase’s business, and that its requirements 

would take away necessary flexibility from the CIO.1243

 1237 Subcommittee interview of Doug McLaughlin and Michael Sullivan, OCC (8/30/2012).

 Moreover, according to the ExaminerIn-Charge’s email, Ms. Drew informed the OCC “that investment decisions are made with the 

1238 See 12/8/2010 Supervisory Letter JPM-2010-80, OCC-SPI-00011201 [Sealed Exhibit].

1239 Id. 1240 Id. 1241 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1242 5/11/2012 email from Scott Waterhouse, OCC, to Mike Brosnan, OCC, and Sally Belshaw, OCC, “J.P. Morgan 

Chase,” OCC-00001746. The OCC Capital Markets head examiner Fred Crumlish told the Subcommittee that the 

Waterhouse email provided an accurate description of his telephone call with Ms. Drew. Subcommittee interview of 

Fred Crumlish, OCC (8/28/2012). 

1243 Subcommittee interview of Fred Crumlish, OCC (8/28/2012).
223

full understanding of executive management including Jamie Dimon. She said that everyone 

knows what is going on and there is little need for more limits, controls, or reports.”1244

The OCC’s head capital markets examiner told the Subcommittee that he was “surprised”

at the time by her reaction, because that level of “pushback” for an MRA regarding “basic 

banking” expectations was “extreme.”1245 The OCC Examiner-In-Charge characterized Ms. 

Drew’s response as an attempt to invoke Mr. Dimon’s authority and reputation in order to try to 

avoid implementing formal documentation requirements.

1246 When asked about the meeting, 

Ms. Drew told the Subcommittee that her recollection was, while she disagreed with the OCC’s 

recommendations, it was a good “two way” discussion.1247

The CIO’s formal response to the OCC’s 2010 Supervisory Letter, signed by Ms. Drew

in January 2011, committed to documenting investment and risk decisions for the SAA portfolio, 

but never mentioned the TAA portfolio in which the SCP was then located.

1248 Ms. Drew told 

the Subcommittee that the failure to mention the TAA portion of the MRA was not intentional; 

the SAA was simply a bigger portfolio.1249 The OCC told the Subcommittee that it should have 

noticed at the time that the CIO’s response was limited to the SAA portfolio,1250 but said it did 

not, characterizing its failure to notice as an “oversight” by the OCC.1251

According to the OCC, it usually performs a check one year after an MRA is issued to 

evaluate whether the bank has taken the required corrective action. In this case, however, the 

OCC told the Subcommittee that it did not provide a timeframe for completion of the corrective 

action and did not check on the status of actions taken by the CIO to document its investment 

and risk decisions.

1252 The OCC told the Subcommittee that the MRA should have been 

reviewed by December 2011, but because of competing priorities, it had delayed conducting that 

review until the fall of 2012. The OCC also told the Subcommittee that it must officially “clear” 

any given MRA on its internal tracking system, and does not do so unless examiners confirm that 

the matter has been resolved.1253 Ms. Drew, however, told Subcommittee staff that she believed 

the MRA had been closed out,1254

 1244 5/11/2012 email from Scott Waterhouse, OCC, to Mike Brosnan, OCC, and Sally Belshaw, OCC, “J.P. Morgan 

Chase,” OCC-00001746; confirmed as an accurate description of the telephone call with Ms. Drew. See 

Subcommittee interviews of Fred Crumlish, OCC (8/28/2012) and James Hohl, OCC (9/6/2012).

though, in fact, it had not and the OCC had not told the bank it 

was closed. The OCC indicated that, while it had not cleared the CIO’s 2010 MRA and would 

have examined the status of the MRA as part of a CIO examination in the fall of 2012, an 

1245 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 1246 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1247 Subcommittee interview of Ina Drew, CIO (9/7/2012). 1248 1/7/2011 letter from Ina Drew, CIO, to Scott Waterhouse, OCC, OCC-SPI-00011198 at 199.

1249 Subcommittee interview of Ina Drew, CIO (9/7/2012). Other bank officials describing the difference between 

the two portfolios characterized the SAA as a high credit quality, liquid portfolio for investing excess corporate 

deposits, while the TAA was an “idea” book for “testing” new strategies. Subcommittee briefing by JPMorgan 

Chase (8/15/2012) (Greg Baer, Chetan Bhargiri).

1250 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 1251 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1252 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 1253 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1254 Subcommittee interview of Ina Drew, CIO (9/7/2012).
224

examination that was overcome by events, it still viewed its mishandling of the 2010 MRA as a 

“fail from OCC.”1255

When asked if the CIO’s aggressive reaction to the 2010 examination of the CIO was

unique, the OCC indicated that it was not. In fact, the OCC Examiner-In-Charge at JPMorgan 

Chase told the Subcommittee that it was “very common” for the bank to push back on examiner 

findings and recommendations.1256 He recalled one instance in which bank executives even 

yelled at OCC examiners and called them “stupid.”1257 In another example, in early 2012, 

according to the OCC, the most junior capital markets OCC examiner arrived at a meeting at the 

bank to discuss with his bank counterpart the results of a recent OCC stress examination.1258 But 

instead of meeting with a single risk manager, he was, in his words, “ambushed” by all the heads 

of risk divisions from all the lines of business at the bank, including JPMorgan Chase’s Chief 

Risk Officer, John Hogan.1259 Given the senior rank of the bank officials, the junior OCC 

examiner normally would not have led the meeting, but the bank officials pressed him to disclose 

the OCC’s preliminary conclusions. According to the OCC examiner, on every issue, the bank’s 

risk personnel criticized the OCC’s findings and recommendations,

1260 and the meeting assumed 

a loud and “combative” tone.1261 The OCC examiner recalled that Peter Weiland, the CIO’s 

Chief Market Risk Officer, agreed with the OCC’s suggestion on one point, which had the effect 

of quieting the executives in the room, but said it was the only issue on which anyone from the 

bank supported an OCC recommendation from that examination.1262 After the meeting ended, 

he said that, despite the bank’s aggressive response, the OCC issued its Supervisory Letter 

largely in line with the original conclusions the examiner had presented.1263

Still another instance involved profit and loss reports. The OCC said that, in August 

2011, the daily Investment Bank P&L report stopped arriving in OCC electronic inboxes. The 

OCC explained that when it brought up what it thought was simply a glitch in JPMorgan Chase’s 

email delivery, the bank responded that the bank would no longer be providing the Investment 

Bank’s daily P&L reports, because it was too much information to provide to the OCC.1264 The 

OCC said that the bank explained further that it had experienced a series of unauthorized data 

disclosures and the bank, not knowing who was leaking the data, sought to limit the information 

it provided to the OCC, even though OCC had not been responsible for the leaks.1265

 1255 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012).

 According 

to the OCC, when it requested resumption of the daily Investment Bank P&L reports, Douglas 

Braunstein, JPMorgan Chase’s Chief Financial Officer, agreed to the request, but had apparently 

not informed Mr. Dimon. At a meeting shortly thereafter, attended by Mr. Braunstein, Mr. 

1256 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1257 Id. 1258 Subcommittee interview of Jaymin Berg, OCC (8/31/2012). The examination was regarding the Firm Wide 

Stress Initiative, which concluded with an OCC Supervisory Letter. See 3/9/2012 OCC Supervisory Letter JPM2012-09 to JPMorgan Chase, “Examination of FSI Stress Testing Framework” [Sealed Exhibit]. 

1259 Subcommittee interview of Jaymin Berg, OCC (8/31/2012). 1260 Id. 1261 Id. 1262 Id. 1263 See 3/9/2012 OCC Supervisory Letter JPM-2012-09 to JPMorgan Chase, “Examination of FSI Stress Testing 

Framework” [Sealed Exhibit]; Subcommittee interview of Jaymin Berg, OCC (8/31/2012). 1264 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1265 Id.
225

Dimon, and OCC Examiner-in-Charge Scott Waterhouse, according to Mr. Waterhouse, when 

Mr. Braunstein stated that he had ordered resumption of the reports, Mr. Dimon reportedly raised 

his voice in anger at Mr. Braunstein.1266 Mr. Waterhouse said that Mr. Dimon then disclosed 

that he was the one who had ordered a halt to the reports and expressed the opinion that the OCC 

did not need the daily P&L figures for the Investment Bank.

1267

(3) 2011: Missing SCP Red Flags 

 The bank estimated that the 

OCC was without the reports for about two weeks altogether.

In 2011, the SCP expanded dramatically, acquired a complex mix of credit derivatives, 

and bankrolled a high risk series of credit trades that produced substantial unexpected revenues. 

Along the way, several red flags highlighted risks associated with the growing SCP, which

should have caught the OCC’s attention and led to a regulatory inquiry into the CIO’s growing 

synthetic credit trading, but the OCC missed those red flags.

In 2011, the SCP expanded tenfold in size, from about $4 billion in notional positions at 

the beginning of the year to $51 billion at the end of the year.

1268 As explained earlier, it 

acquired a complex mix of long and short credit instruments with varying reference assets and 

maturities, and the portfolio began to trigger breaches of the CIO’s stress loss limit.1269

For example, in the first half of 2011, the CIO reported multiple, sustained breaches of its

stress limits and attributed those breaches to increased activity in its “synthetic credit (tranche)

book.”

 

1270 The CIO’s stress limits were triggered eight times, sometimes for weeks at a stretch, 

from January to June 2011.1271 The bank notified the OCC about those stress limit breaches, like 

other internal risk limit breaches, in the bank’s regular Market Risk Management (MRM) 

Reporting emails which listed risk limit breaches and in its weekly Market Risk Stress Testing 

reports.

1272 In those reports, the CIO attributed all of the CIO’s stress limit breaches to changes 

in its “synthetic credit (tranche book).”1273 In the first breach of the year, for example, which 

occurred on January 27, 2011, the CIO continued to breach the limit for seven weeks in a row, 

peaking at 50% over the limit.1274

 1266 Id.

 

1267 Id. 1268 See “Summary of Positions by Type,” prepared by JPMorgan Chase in response to a Subcommittee request, 

JPM-CIO-PSI 0037609.

1269 Stress loss limits are dollar amounts projecting losses under specified “adverse and abnormal market 

environments.” 2013 JPMorgan Chase Task Force Report, at 82. Stress testing was applied on a weekly basis to the 

SCP to determine whether it would exceed its stress loss limit. If the limit was exceeded, the CIO was supposed to 

reconfigure the SCP to end the breach. For more information, see Chapter V.

1270 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012); 10/26/2012 OCC 

Confidential Supervisory Report, Appendix 4 (summary of CIO limit exceptions Jan. – June 2011), PSI-OCC-13-

000067 [Sealed Exhibit].

1271 See 10/26/2012 OCC Confidential Supervisory Report, Appendix 4 (summary of CIO limit exceptions Jan. –

June 2011) at PSI-OCC-13-000067 [Sealed Exhibit]. 1272 Id. 1273 Id. 1274 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012); 10/26/2012 OCC 

Confidential Supervisory Report, Appendix 4 (summary of CIO limit exceptions Jan. – June 2011), PSI-OCC-13-

000067 [Sealed Exhibit].
226

The CIO’s stress limit breaches were dramatic and sustained during the first half of 2011, 

yet when the OCC inquired into the reason for the breaches, the bank “failed to offer any details 

about the source,” and the OCC did not pursue additional information.

1275 In hindsight, the OCC 

identified its failure to follow up on the results of the stress limit breaches – whose very purpose 

was to identify portfolio risk – as “one of our misses.”1276 In fact, it was a major misstep. By 

failing to insist on bank answers about the synthetic credit tranche book, the OCC missed a key

opportunity to examine and perhaps curb the excesses of the SCP prior to its incurring losses in 

2012. The OCC also told the Subcommittee that the multiple breaches of the 2011 stress limit

provided evidence that the SCP was not, even then, providing stress loss protection to the bank, 

or acting as a hedge, but was engaging in a strategy to earn profits for the bank.

1277

Later in 2011, the SCP entered into a high risk derivatives bet which, due to an American 

Airlines declaration of bankruptcy, produced roughly $400 million in unexpected revenues for 

the CIO in late November.

 

1278 One of the CIO traders, Bruno Iksil, purchased tranches in a 

soon-to-expire credit index series, which leveraged the CIO’s position to produce the gain. The 

bank reportedly spent $1 billion acquiring those positions.

1279

In hindsight, the OCC characterized the trading profits as “outsized”

 Despite the enormous size of 

those transactions and the hundreds of millions of dollars they generated, the bank did not alert 

the OCC to the trading activity and the OCC did not inquire into the source of the gain. 

1280 and due to an

“idiosyncratic” trade that the CIO should not have been making, especially since the American 

Airlines loss protection had no link to any credit exposure at the bank.1281 Given that the bank 

admitted that the “CDX[.]HY positions were set up to take advantage of [a] key bankruptcy 

credit related event[],”1282

C. 2012: Dodging OCC Oversight While SCP Losses Mount

this $400 million gain was a red flag signaling high risk, proprietary 

trading by the CIO, but it was a red flag that, again, was missed by the OCC.

In its initial years of operation, the Synthetic Credit Portfolio did not attract OCC notice, 

in part because the CIO did not name the portfolio in any of its submissions to the agency. In 

January 2012, the CIO named the SCP in a VaR report to the OCC, only to inform the OCC that 

it was planning to reduce the portfolio. Despite that representation, in the first three months of 

the year, the CIO tripled the size of the SCP, buying tens of billions of dollars of a high-risk mix 

 1275See 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000042 [Sealed Exhibit]. 1276 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012) (Doug McLaughlin). 1277 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 1278 See 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI 

0000539 (“The fourth quarter 400 million gain was the result of the unexpected american airlines default.”). For 

more information about this bet, see Chapter III. 1279 OCC data analysis derived from DTCC data for JPMorgan Chase, described in “JPMC-CIO timeline of 

Significant Events and OCC Discovery,” prepared by the OCC, OCC-SPI-00038895, at 6 [Sealed Exhibit]; see also 

10/26/2012 OCC Confidential Supervisory Report, Appendix 11 at PSI-OCC-13-000113 [Sealed Exhibit]. 1280 5/31/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “QA,” OCC-SPI-00026410. 1281 Subcommittee interview of Fred Crumlish, OCC (8/29/2012); 10/26/2012 OCC Memorandum from Sally 

Belshaw, OCC, to Michael Brosnan, OCC, “Review of Events Surrounding Losses at CIO and Lessons Learned,” 

PSI-OCC-13-000003 [Sealed Exhibit] (identifying the American Airlines gain as an “outsize gain” that OCC should 

have “investigate[d].”).

1282 12/2011 “Chief Investment Office Executive Management Report,” JPMorgan Chase, OCC-SPI-0003247, at 

248.
227

of short and long credit derivatives in credit derivatives, only to see their value crash, resulting in

mounting losses. As the OCC later described it: “SCP was obscure but not hidden as it went

from operating outside of control limits in 2011 to operating out of control in 2012.”1283 Until 

the SCP’s losses escalated, the CIO minimized the data it provided to the OCC about the SCP, 

leaving the OCC misinformed and therefore blind to the portfolio’s excesses. In addition, the 

OCC failed to take notice of or act on the CIO’s multiple, sustained risk limit breaches.

(1) Misinforming OCC that SCP Book to be Reduced

In the last week of January 2012, OCC examiners set up a standard quarterly meeting 

with the CIO’s Chief Financial Officer John Wilmot to review the prior quarter and get an update 

on the CIO’s plans for the new quarter.

1284 One of the OCC examiners who attended the meeting

prepared notes summarizing what was discussed and circulated them among OCC staff with CIO 

supervision responsibility.1285 According to the OCC summary, during the meeting, Mr. Wilmot 

discussed the MTM book, which was the trading book whose assets were valued on a mark-tomarket basis and consisted mostly of the SCP.1286 He said that the CIO’s “MTM” book was 

“decreasing in size in 2012. It’s expected that RWA [Risk Weighted Assets] will decrease from 

$70B [billion] to $40B.”1287

The OCC told the Subcommittee that, as a result of this meeting, it understood that the

MTM book would be “de minimus” within a year or two.

 

1288

 1283 10/26/2012 OCC Confidential Supervisory Report, PSI-OCC-13-000020 [Sealed Exhibit].

 Another OCC examiner who 

1284 See 1/24/3012 email from James Hohl, OCC, to Jaymin Berg, OCC, “CIO meeting,” OCC-00004746; 

Subcommittee interview of Jaymin Berg, OCC (8/31/2012).

1285 See 1/31/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, “CIO Quarterly Meeting,” OCC-SPI00004695.

1286 Subcommittee interview of John Wilmot, CIO (9/11/2012) (explaining the name change from the TAA to the 

new name, MTM, a portfolio that was mostly the synthetic credit portfolio); Subcommittee interview of James Hohl, 

OCC (9/6/2012)..

1287 See 1/31/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, “CIO Quarterly Meeting,” OCC-SPI00004695. Mr. Wilmot told the Subcommittee that these notes were accurate. Subcommittee interview of John 

Wilmot, CIO (9/11/2012). The only contrary evidence provided to the OCC contradicting the representation made 

in the January 2012 meeting that the SCP would be “decreasing in size” was in a CIO internal audit report that was 

forwarded to the OCC two months later. See 2011 4th Quarter JPMorgan Chase CA Quarterly Summary of Global 

Chief Investment Office, OCC-SPI-00002481. This audit report stated: “Going into the new year [2012], the plan is 

to expand the derivatives trading book to nominal of at least $47 billion by the end of January 2011.” Id., at 2. 

When reviewing that audit report, Mr. Wilmot explained, first, that the date given in the report, “January 2011,” was 

likely a typographical error given that the document was prepared in the fourth quarter of 2011. Subcommittee 

interview of John Wilmot, CIO (9/11/2012). Secondly, he explained that the stated plan to increase the SCP by $47 

billion was not familiar to him; he stated there was no such plan to increase notionals. Id. From the OCC’s 

perspective, while the OCC did not directly confront the bank about the audit report’s plan for the SCP, Mr. Hohl 

told the Subcommittee that when the OCC received the fourth quarter 2011 audit in March 2012, it was already out 

of date, and he dismissed the stated plan to increase notionals because Mr. Wilmot had already told him differently 

at the end of January 2012. Subcommittee interview of James Hohl, OCC (9/6/2012).

1288 Subcommittee interview of Jaymin Berg, OCC (8/31/2012). During the meeting, the bank did not disclose, as it 

should have, just how enormous the Synthetic Credit Portfolio was at the time. It then included, for example, a $278 

billion notional position in the IG9 credit index, a $115 billion notional position in the HY10 and 11 credit indices; 

and a $90 billion notional position in the Main ITraxx S9 index. See 1/18/2012 email from Bruno Iksil, CIO to 

Julien Grout, CIO, “Meeting materials for 11am meeting,” conveying presentation entitled, “Core Credit Book 

Highlights” (January 2012), prepared by Mr. Iksil, at JPM-CIO-PSI 0000098, at 101. Reducing these positions to a 

de minimus amount would also have been very expensive; the CIO traders had earlier calculated that reducing the 
228

attended the meeting with Mr. Wilmot told the Subcommittee that Mr. Wilmot conveyed the 

CIO’s plan to reduce its MTM positions and decrease the volume of its trading.

1289 While Mr. 

Wilmot did not explain whether the CIO would reduce the portfolio’s RWA by selling positions 

or letting positions naturally expire, the OCC told the Subcommittee that its interpretation was 

that, overall, the notional size of the portfolio would decrease because RWA typically reflects the 

size of the book. The OCC told the Subcommittee that the converse scenario – reducing RWA 

by increasing notionals – would be “very unusual.”1290 The CIO’s counterintuitive strategy 

prompted even Mr. Dimon to ask later on: “Why didn’t they just sell vs offset[?]”1291 Likewise, 

the OCC’s Examiner-in-Charge at JPMorgan Chase told the Subcommittee that he had the same 

understanding: “We were informed at year end 2011 that they were going to ‘take the book 

down, reduce the risk.’ That meant getting RWA down. My understanding, in my mind, they 

were going to reduce the book.”1292 When asked about his statements to the OCC during the 

January 2012 meeting, Mr. Wilmot told the Subcommittee that when he spoke of “decreases,” it 

was only in terms of RWA, and that he was unaware of the tactics the CIO traders planned to use

to decrease the RWA.1293

A few days earlier on January 26, 2012, the CIO traders had proposed lowering the 

SCP’s RWA, not by reducing the size of the trading book, but by purchasing increased amounts 

of long credit instruments to offset the book’s short positions.

 

1294 The notes of the quarterly 

meeting do not contain any reference to that proposal, and the OCC examiners informed the 

Subcommittee that the bank never raised it.1295

Moreover, at the time of the quarterly meeting on January 31, 2012, CIO trader Bruno 

Iksil had already informed CIO management that the SCP had lost $100 million and was

expected to lose another $300 million.

 Because the bank’s strategy for reducing the 

CIO’s RWA – by adding long positions – would increase risk, and because it was contrary to 

usual practice for “decreasing” the portfolio, JPMorgan Chase should have told the OCC about 

its plans at the time.

1296 Together, that huge loss would eliminate the CIO’s 

entire fourth quarter 2011 gains and, according to the OCC examiner, constituted “material” 

information that the bank should have shared, but which Mr. Wilmot did not disclose.

1297

 

CIO’s RWA by just $10 billion would cost $516 million. 1/4/2012 email from Julien Grout, CIO, to Ina Drew, John 

Wilmot, and Javier Martin-Artajo, CIO, “RWA reduction for Core Credit- scenario analysis summary,” JPM-CIOPSI 0001259, at 260. The notes of the quarterly meeting do not contain any reference to that expense.

 Mr. 

Wilmot told the Subcommittee that, even though he was the CIO’s Chief Financial Officer, he 

did not review the SCP’s daily profit and loss numbers, and that even if he had, the profits and 

1289 Subcommittee interview of James Hohl, OCC (9/6/2012).

1290 Subcommittee interview of Jaymin Berg, OCC (8/31/2012). 

1291 4/13/2012 email from Jamie Dimon, JPMorgan Chase, to John Hogan, JPMorgan Chase, “CIO,” JPM-CIO-PSI 

0001753.

1292 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).

1293 Subcommittee interview of John Wilmot, CIO (9/11/2012).

1294 1/26/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, “credit book last version,” JPM-CIO-PSI 

0000159, conveying “Core Credit Book Highlights,” (1/2012), prepared by Mr. Iksil; Subcommittee interview of 

Peter Weiland, CIO (8/29/2012). For more information about this proposal and its approval, see Chapter III.

1295 Subcommittee interviews of Scott Waterhouse, OCC (9/17/2012) and Jaymin Berg, OCC (8/31/2012).

1296 1/26/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “credit book last version,” conveying “Core Credit 

Book Highlights,” (1/2012), prepared by Mr. Iksil, JPM-CIO-PSI-0000159. The $100 million in losses was also 

reported in the daily profit and loss reports recorded internally by the CIO.

1297 Subcommittee interview of Jaymin Berg, OCC (8/31/2012).
229

losses for the book would have “moved around.”1298

The bottom line is that the OCC’s quarterly meeting with the CIO took place at a critical 

time. Had the CIO disclosed the size, risk profile, losses, and plans for the SCP to its regulator

during the January 2012 meeting – rather than downplayed the portfolio by saying the CIO 

planned to reduce it – the OCC could have evaluated the trading strategy and raised questions 

about the rapid expansion in size and risk that took place over the next two months and later led 

to multi-billion-dollar losses.

 It was the first of many SCP losses that the 

bank did not disclose to the OCC, but should have. 

(2) Failing to Provide OCC with CIO Data

The CIO managed $350 billion in excess deposits, a portfolio whose size was second 

only to that managed by the Investment Bank within JPMorgan Chase. To keep apprised of CIO 

activity, the OCC required the bank to share a number of standard internal reports tracking the 

CIO’s asset, risk, and profit/loss data. In early 2012, however, the bank’s standard reports began 

to omit critical CIO data. Those data gaps meant the OCC did not have comprehensive or up-todate information about the CIO’s trading activities, including with respect to the SCP. 

Executive Management Reports. One of the regular reports the bank supplied to the 

OCC was a monthly Treasury Executive Management Report (EMR), which included a section 

with basic performance data for the CIO. According to the OCC, over time, those reports 

became thinner and thinner with less useful information about the CIO.

1299 The OCC told the 

Subcommittee that it approached JPMorgan Chase’s Chief Financial Officer, Douglas

Braunstein, as well as the bank’s Corporate Treasury division about the lack of sufficient 

information in the EMR.

1300 The OCC explained that it was concerned because “less 

information mean[t] less questions” that regulators could pose.1301 Then, in January 2012, the 

OCC noted that the usual monthly Treasury EMR did not include any section on the CIO, as it 

had in the past. The OCC said it later learned that, without any notice to the agency, the CIO had 

begun issuing its own Executive Management Report.

1302 The OCC said that the CIO did not 

provide the OCC with copies of the CIO’s new EMR in January, February, March, or April, the 

same four-month period during which the SCP losses exploded.

1303 When the OCC finally 

learned of and requested a copy of the CIO’s monthly EMR report in April, after the London 

whale stories appeared in the press,1304 it promptly received a copy.

1305

 1298 Subcommittee interview of John Wilmot, CIO (9/11/2012).

 It is difficult to 

understand how the bank could have failed to provide, and the OCC failed to request, basic CIO 

performance data for a four month period. 

1299 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 1300 Id. 1301 Id. 1302 4/19/2012 email from John Wilmot, CIO, to James Hohl, OCC, “CIO EMR?,” OCC-00004723. 1303 4/19/2012 email from James Hohl, OCC, to Geralynn Batista, OCC, “CIO portfolio,” OCC-SPI-00021700. The 

bank told the Subcommittee that it provided the new CIO EMR to the FDIC and Federal Reserve, and it was simply 

an oversight that it was not also sent to the OCC. 

1304 4/13/2012 email from Thomas Fursa, OCC, to James Hohl, OCC, “CIO Deck,” OCC-00004720. 1305 Subcommittee interview of Fred Crumlish, OCC (8/28/2012).
230

Valuation Control Group Reports. A second type of report that the bank routinely 

provided to the OCC was the CIO’s Valuation Control Group (VCG) reports, which were

monthly reports containing verified valuations of its portfolio assets. The OCC used these 

reports to track the performance of the CIO investment portfolios. But in 2012, the OCC told the 

Subcommittee that the CIO VCG reports for February and March failed to arrive.

1306 These are 

the same months during which it was later discovered that the CIO had mismarked the SCP book 

to hide the extent of its losses.1307 On April 13, 2012, after the London whale trades appeared in 

the press, the OCC requested copies of the February and March VCG reports, which were 

provided on the same day.1308 Again, it is difficult to understand how the bank could have failed 

to provide those basic reports on a timely basis, and how the OCC could have failed to notice, for 

two months, that the reports had not arrived. Moreover, when the March VCG report was later 

revised to increase the SCP liquidity reserve by roughly fivefold, that revised report was not 

provided to the OCC until May 17.

1309

P&L Reports. Though the bank provided P&L reports for the CIO on a monthly basis to 

the OCC, they failed to break out the Synthetic Credit Portfolio as a line item, which, the OCC 

explained, made reviewing that individual portfolio virtually impossible. In addition to omitting 

any mention of the SCP’s losses from the P&L reports supplied to the OCC, no senior bank 

official provided any separate oral or written disclosure to the OCC about the SCP’s mounting 

losses. For more than four months, the OCC remained uninformed about the hundreds of 

millions and then billions of dollars being lost. Those losses totaled $100 million in January, 

increased by $69 million in February, climbed another $550 million in March, and exploded with 

another $1.5 billion in April, producing a cumulative loss figure of $2.1 billion by the end of that 

month. The OCC told the Subcommittee that losses of that magnitude should have been 

disclosed by the bank to the OCC Examiner-in-Charge.

 

1310

For its part, the OCC did not insist on obtaining more detailed information about the SCP 

until May 2012, after the bank told the OCC that the SCP had lost $1.6 billion, and that the bank 

would “make some comment” about it in a public filing due in a few days.

1311 The OCC 

examiners then made multiple requests to the bank for SCP-level profit and loss data to monitor 

SCP performance going forward.1312

 1306 4/13/2012 email from John Bellando, JPMorgan Chase, to James Hohl, OCC, “CIO January 2012 valuation 

memo and metri[c]s,” OCC-00004735; Subcommittee interview of James Hohl, OCC (9/5/2012).

At the time, the OCC head capital markets examiner told 

1307 For more information about the mismarking that took place during these months, see Chapter 4. 1308 4/13/2012 email from John Bellando, JPMorgan Chase, to James Hohl, OCC, “CIO January 2012 valuation 

memo and metri[c]s,” OCC-00004735.

1309 Subcommittee interview of James Hohl, OCC (9/5/2012); 5/17/2012 email from George Banks, OCC, to Fred 

Crumlish, OCC, “CIO Valuation Summary Memo – March 2012 Months End Results REVISED,” OCC-SPI00035273 (“Just received a revised CIO March 2012 Valuation Summary .... Appears they are revised 1Q12 

results?”).

1310 Subcommittee interview of Scott Waterhouse, OCC (9/17/2013). 1311 5/4/2012 email from Scott Waterhouse, OCC, to Fred Crumlish, OCC, CIO Synthetic Position, OCC-SPI00021853 (“Doug Braunstein and John Hogan called to provide an update on the CIO position. ... Current losses are 

approximately $1.6 billion.”). SCP profit-loss reports indicate, however, that as of the day of the call, SCP 

cumulative losses were actually $2.3 billion. See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared 

by the Subcommittee in Chapter IV. 1312 See 5/16/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, OCC and others, “CSO1,” OCC-SPI00023929; 5/14/2012 email from James Hohl, OCC, to John Wilmot, CIO, “CIO P&L Reporting,” OCC-00004759 

(stating that an OCC request for SCP P&L for prior five weeks was made on May 7, 2012 and repeated on May 14, 
231

his colleagues, “[the] Bank will likely object to this.”1313

The OCC told the Subcommittee that when the bank finally provided daily P&L data for 

the CIO’s individual portfolios, it again provided aggregated data that made it difficult to track 

and analyze the trading activity and individual assets. The OCC noted that the aggregated SCP 

data was in marked contrast to the daily P&L data that JPMorgan Chase’s Investment Bank

provided to the OCC on a routine basis for the same types of credit derivatives.

That the OCC expected JPMorgan 

Chase to resist providing data about a portfolio losing billions of dollars and raising questions 

about the bank’s entire risk management system is disturbing evidence of not only the bank’s 

resistance to OCC oversight, but also the OCC’s failure to establish a regulatory relationship in 

which the bank accepted its obligation to readily provide data requested by its regulator.

1314

Later on, the OCC learned that the P&L reporting for the SCP included mismarked 

derivative values which produced quarter-end SCP losses that, as a whole, were understated by 

$660 million.

 

1315 While the OCC told the Subcommittee that it concluded that the bank had not 

undertaken a deliberate effort to mislead its regulator, the bank’s improper valuation practices 

had resulted in misleading P&L information being sent to the OCC.1316

Late, missing, and misleading CIO information in the EMR, VCG, and P&L reports sent 

to the OCC meant that the OCC was supervising the CIO using incomplete and inaccurate 

information.

 

1317

(3) Failing to Investigate Risk Limit Breaches

 The lack of accurate data also impeded effective OCC oversight of the high risk 

trading strategies used in the SCP that eventually caused the bank to lose over $6 billion. The 

absence of transparent, detailed, and accurate information about the Synthetic Credit Portfolio is 

exactly the type of documented investment and risk information that the OCC called for after its 

2010 examination of the CIO, information requirements which Ina Drew railed against as 

unnecessary and intrusive.

During the first quarter of 2012, while JPMorgan Chase omitted critical CIO data from 

key reports sent to the OCC and failed to send some reports altogether, it did regularly report to 

the OCC another type of data – ongoing breaches of the CIO’s risk limits – that warned of the 

 

2012); 5/17/2012 email from James Hohl, OCC, to Fred Crumlish, OCC, “Not Getting CIO Daily P&L after only 

one day,” OCC-00004540 (Mr. Hohl: “I got one CIO daily P&L distribution and then didn’t yesterday. I inquired 

about it this morning, but haven’t heard back.”).

1313 5/7/2012 email from Fred Crumlish, OCC, to Scott Waterhouse and others, OCC, “CIO information for 

Wednesday,” OCC-SPI-00013737, (“[W]e haven’t historically gotten P&L from them [CIO] as we do the IB 

[Investment Bank] .... However, I asked James [Hohl] to first, put in a request for more granular daily P&L on the 

synthetic credit to help us prepare for Wednesday’s meeting, and, more generally, put out the request that going 

forward we get daily P&L in a form such as they provide to (say) Ina Drew. Bank will likely object to this.”). 1314 See Subcommittee interview of Jairam Kamath, OCC (8/24/2012). 1315 See Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). For more information about this 

mismarking, see Chapter IV.

1316 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 1317 See 7/30/2012 OCC Large Bank Supervision presentation to Subcommittee re Chief Investment Office 

Discussion, at PSI-OCC-06-000003 (“We rely on bank MIS (CIO MIS was misleading.)”). “MIS” stands for 

Management Information Systems, that is, regular reports and data that the bank generates and provides to the OCC. 

See, e.g., 2012 Memo from Patti Spellacy, OCC, to Michael Brosnan, OCC, “Response to Senate Banking 

Committee,” OCC-SPI-00074914, at 11.
232

escalating risk in the CIO’s trading book. The OCC has acknowledged internally that its 

examiners received that data from the bank, but inexplicably failed to take notice of it or to 

investigate the causes of the ongoing breaches. 

In its October 2012 internal report summarizing oversight failures and lessons learned 

from the JPMorgan Chase whale trades, the OCC found that its examiners had received the 

bank’s regular market risk reporting emails on a daily basis, which included reported breaches of 

risk limits and risk advisories.

1318 For example, the Market Risk Reporting System (MaRRS) 

report provided the OCC with weekly stress loss data for different scenarios,1319 and Market Risk 

Management (MRM) Reporting emails provided notice of risk limit breaches.

1320 The MRM 

Reporting emails were typically sent to the OCC with attached spreadsheets detailing risk limits 

at different lines of business, including the CIO, and when those limits were breached. Thus, the 

OCC received contemporaneous notice when all five of the risk limits covering the SCP were 

breached in the first quarter of 2012: VaR, CS01, CSW10%, stress loss, and the stop loss 

advisories.1321

The bank began reporting the CIO breaches in January and continued to report multiple 

breaches for months. While the OCC maintained all of the bank’s regular reports, including the 

MaRRS and MRM reports, in a central database, the Subcommittee found no evidence that the 

OCC made use of the risk limit reports in its routine regulatory oversight efforts. For example, 

the Subcommittee found no evidence that OCC examiners analyzed the data to identify the most 

serious breaches or attempted to investigate why the breaches were occurring. Had the OCC 

reviewed it, the data would have disclosed over 330 risk limit breaches from January to April 

2012, including a jump from the fourth quarter of 2011 to the first quarter of 2012 of 6 to 170 

risk limit breaches.1322 Given that the OCC did not appear to notice when other regular CIO 

reports stopped arriving until press articles on April 6 drew attention to the CIO, as detailed 

above, it is possible that the OCC examiners were not even reviewing the regular MaRRS and

MRM reports during the first quarter of 2012.

The OCC also failed to inquire into the CIO’s implementation in January 2012, of a new 

VaR model that, overnight, lowered the CIO’s VaR by 50%. The bank’s regular MRM report

emails, which OCC received contemporaneously, provided the OCC with timely notice of three 

significant facts: that the CIO had breached the bankwide VaR limit for four days running in 

January; that the CIO was poised to implement a new VaR model on January 27; and that the 

 1318 See 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000042 [Sealed Exhibit]; Subcommittee 

interview of Jairam Kamath, OCC (8/24/2012).

1319 See, e.g., 4/13/2012 email from Jairam Kamath, OCC, to Fred Crumlish, OCC, “CIO stress loss trend chart,” 

OCC-SPI-00021724; Subcommittee interview of Jairam Kamath, OCC (8/24/2012); 4/5/2012 email from Jaymin 

Berg, OCC, to Fred Crumlish, OCC, “reports list,” OCC-00005405. 1320 See, e.g., 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000069 [Sealed Exhibit]. 1321 See, e.g., 4/4/2012 email from MRM Firmwide Reporting, JPMorgan Chase, to Fred Crumlish, OCC, and 

others, “Firmwide Risk Daily: Market Risk Limits and VAR Reports – Regulators (COB 4/3/2012),” at OCC-SPI00132363 (see tab: CIO_Global_Credit, listing VaR Limits, 10% Credit Spread Widening, Credit Spread BPV, and 

Stop Loss Advisory Limits for MTM One Day, Five Day, and Twenty Day, among other listed risk limits). For 

more information about the breaches of the CIO risk limits, see Chapter V.

1322 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, “Information Needed,” JPM-CIOPSI-H 0000627-636.
233

new model would significantly reduce the CIO’s VaR results.

1323 The Subcommittee found no 

evidence, however, that the OCC noticed the emails at the time they were sent, asked about the 

reasons for the VaR breach, requested information about the new model, or made any inquiry

into how the new model could produce such a dramatically lower VaR. About a month later, on 

March 1, 2012, according to OCC notes, the bank held a meeting with the OCC and mentioned 

the January CIO VaR model change, but the OCC’s notes contain no reference to the earlier 

bank reports about it and no indication that the OCC asked any questions about the model 

change, lower VaR, or earlier breach.

1324

The OCC was also aware that, although the VaR model had changed, the bank had not 

made any corresponding change in the VaR limit for the CIO, which meant that the CIO would 

be able to take on new risk.

 

1325 An OCC examiner told the Subcommittee that a model change 

was “typically” accompanied by a limit change, and the VaR model change was a “significant” 

one, so the VaR “limit should have changed” when the new VaR model was implemented.1326

Timely information on when a bank’s risk limits are breached provides a valuable, costeffective tool for regulators to monitor risk at a large financial institution. Had the OCC 

investigated the multiple breaches reported by the bank relating to the CIO, it is possible that the 

agency would have uncovered the SCP’s rapidly expanding holdings, examined the risks being

incurred, and placed limits on the unsafe and unsound derivatives trading in the SCP. The OCC 

appears not to have reviewed this data, because it viewed the CIO as low risk.

 

The OCC told the Subcommittee, however, that the bank proposed waiting to change the CIO 

VaR limit until it had revised all of CIO’s risk limits, and the OCC did not challenge that 

proposal. As a result, during the months of February, March, and April, the CIO’s VaR rose 

steadily, unimpeded by a limit that was effectively 50% too high. The OCC raised no objection

and allowed the bank to continue to delay revising the CIO VaR limit. 

1327 While OCC 

has internally concluded that the bank’s risk reports were “poor and non-transparent,”1328

 1323 See 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000042 [Sealed Exhibit] (“The change 

in the VaR model and its large reduction in measured risk was noted in reports received by the OCC.”); 5/21/2012 

email from Jairam Kamath, OCC, to Fred Crumlish, OCC, and others, “cio var change,” OCC-SPI-00021932 (“Here 

are a few comments from the days preceding the synthetic credit VaR model change that became effective 1/27/12. 

Note the reduction of CIO VaR by 44% to $57mm.”), citing to MRM Reporting emails from JPMorgan Chase, e.g., 

1/25/2012 email from MRM Reporting, JPMorgan Chase, to Peter Weiland, CIO, and others, “ACTION NEEDED: 

CIO International-One-Off Limits Approval,” JPM-CIO-PSI 0000157.

it 

needs to rectify its own approach to be more responsive to red flags where they do exist.

1324 See 3/1/2012 Memo from Jaymin Berg, OCC, to OCC File, “Market Risk Reporting,” OCC-SPI-00035322, at 

323 (memo from meeting with bank noted that “Firmwide VaR averaged $109mm in February versus $126mm in 

January. The decrease is due to CIO credit tranche methodology changes, which were implemented on January 

27th.”); meeting minutes were circulated in 3/6/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, James 

Hohl, OCC, and others, “Market Risk Minutes,” OCC-SPI-00035319-321. 1325 Subcommittee interviews of Fred Crumlish, OCC (8/28/2012) and Jairam Kamath, OCC (8/24/2012). For more 

information, see Chapter V.

1326 Subcommittee interview of Jairam Kamath, OCC (8/24/2012); see also Subcommittee interview of Scott 

Waterhouse, OCC (9/17/2012).

1327 10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and 

Lessons Learned,” at PSI-OCC-13-000003 [Sealed Exhibit] (“Our CIO supervisory strategy had been focused on 

what we perceived to be the higher risk areas. The CIO synthetic credit desk was understood to be a low risk, 

hedge-management activity, and thus not a high supervisory priority.”). 1328 Id.
234

(4) Miscasting Long Acquisitions As Risk Reducing

Contemporaneous OCC documentation indicates that many senior OCC personnel 

initially accepted the bank’s characterization of the SCP as a hedging mechanism intended to 

reduce bank risk. When questions arose about how the SCP could be characterized as a hedge 

when it purchased so many long credit derivative positions, OCC examiners initially accepted 

the bank’s explanation that the long positions were acquired in order to offset, or hedge, the 

SCP’s own existing short positions, which the CIO wanted to reduce, but viewed as too illiquid 

to simply sell off.1329 What was not offered as an explanation at the time, but which has become 

apparent in contemporaneous bank documents is that the CIO’s motive for purchasing IG long

credit derivatives in January 2012, was not just to offset the CIO’s short positions, but also to 

generate cash premiums, or “carry,” which it could then use to finance the purchase of still more 

high yield shorts.1330 As 2012 wore on, another motive for acquiring long derivatives was to use 

the incoming cash premiums to offset the daily mark-to-market losses the CIO was having to 

record for the SCP.1331

The OCC told the Subcommittee that its examination team was not aware that the CIO 

was purchasing IG longs, in part, to produce carry that could be used to purchase additional high 

 

 1329 See, e.g., 4/17/2012 email from Fred Crumlish, OCC, to Mike Brosnan, OCC, and others, “JPM/CIO / IG9 

‘whale trade,’” OCC-00012521 (“CIO managers thought it wouldn’t be possible to reduce the high yield credit 

derivative position by using the indices that created it; the best available hedge product was the IG 9 index.... This 

was the reason that JPMCB began selling IG 9 CDSs; going long IG9 credit risk (selling CDSs) would neutralize 

some of the short high yield credit risk position (long CDSs).”); 5/11/2012 email from Elwyn Wong, OCC, to Scott 

Waterhouse, OCC, “CDX IG Series 18 vs. CDX HY vs. CDX IG 9,” OCC SPI 00081266 (“Based on my 

understanding, CIO was trying to pare down their long protection (short credit risk) in HY. To do so, they would 

sell protection (long credit risk). ... [T]hey took the basis risk by continuing to be long HY protection and short IG 

protection as a proxy.”); 5/16/2012 email from Fred Crumlish, OCC, to Elwyn Wong, OCC, “here is redline and 

new final,” OCC-00003507, at 508 (attaching talking points, signed off by Mike Brosnan, head of OCC Large Bank 

Supervision, indicating: “As the economy improved, in late 2011 and early 2012 executive management felt that the 

credit cycle was less risky and made the strategic decision to reduce the high yield debt credit protection position. 

However, ... the markets for high yield indices were not, according to the bank, liquid enough to use to unwind the 

existing short credit protection position. Consequently, the bank looked for alternatives to offset the positions via 

other instruments that were presumed to have offsetting risk characteristics. ... The bank began selling IG 9 credit 

default swaps – going long on IG 9 credit risk (selling CDS) – to neutralize some of its short high yield credit risk 

position (the original credit default swaps).”). It is important to note, however, that purchasing longs to offset the 

SCP’s own shorts did not position the SCP as a whole to act as a hedge for bank credit losses outside the confines of 

the Synthetic Credit Portfolio. In fact, the CIO’s continued acquisition of long positions eventually converted the 

SCP from a net short to a net long posture, eliminating its ability to hedge loan or other credit losses incurred by the 

bank. For more information, see Chapters III and VII. 

1330 See discussion in Chapter III; 2013 JPMorgan Chase Task Force Report, at 30 (“The traders, in late January, 

also added to their long positions .... Those long positions generated premiums, and ... would help to fund highyield short positions ....”); 1/26/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, “credit book last version,” 

JPM-CIO-PSI 0000159, at 170 (showing estimated carry produced by key long positions). 1331 See discussion in Chapter III; JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial 

readout to the Subcommittee on 9/6/2012) (“We can lose money on a daily basis, but correct with carry of the book. 

Month-end is not as important as quarter-end.”); 2/22/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, 

CIO, and others, “core credit latest version,” JPM-CIO-PSI 0001784, at 800 (showing carry produced by three 

positions: iTraxx: 500,276; cdx ig: 891,954; cdx hy: -825,139, with the positive carry for cdx ig, which was 

generally a long position, barely offsetting the negative carry of the cdx hy, which was generally a short position); 

3/16/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo and Julien Grout, CIO, “strategy for core,” JPMCIO-PSI-H 0006017 (“IG trades will improve the carry[.]”).
235

yield shorts and offset SCP reported losses.1332 The OCC told the Subcommittee that its 

examiners had believed the bank’s assertion that the IG longs were acquired to offset the risks of 

its high yield shorts.1333

As late as September 2012, the OCC’s Chief Counsel, Julie Williams, was under the 

impression that the purpose of the IG longs was to offset the risks of the SCP’s high yield shorts

– in other words, to lower risk.

 

1334 When drafting an internal OCC memorandum explaining the 

SCP, for example, Ms. Williams wrote: “[T]he IG trades initially appear to have been designed 

to hedge market risks arising in connection with and related to the HY trades.”1335 When 

questioned by the Subcommittee, she was not aware of the CIO’s other motives for purchasing 

the IG longs and was surprised by evidence that CIO traders purchased the IG longs in order to 

finance the HY shorts. She responded to the Subcommittee by criticizing her earlier explanation, 

saying: “We wouldn’t say this [now]: We would say it was something more complicated.”1336 

By characterizing the SCP long purchases as offsets or hedges, the CIO was portraying 

them as trades undertaken to lower bank risk when, in fact, they raised risk. Characterizing the 

trades as lowering risk was critical to the CIO’s assertion that its trades were consistent with the 

Volcker Rule which bans high risk proprietary trading by federally insured banks, but permits 

“risk-mitigating hedging activities.”1337 Ms. Williams acknowledged to the Subcommittee that 

purchasing IG longs as a financing mechanism for other positions would not qualify as the type 

of “risk mitigating” hedge envisioned by the Volcker Rule.1338

D. 2012: Resisting OCC Oversight Even After Whale Trades 

 

Became Public

On April 6, 2012, the first major stories about JPMorgan Chase’s whale trades appeared 

in the media.1339

 1332 Subcommittee interview of Mike Sullivan, OCC (11/7/2012).

 The OCC told the Subcommittee that it was surprised by the stories and 

immediately directed inquiries to the bank to obtain more information. The OCC initially 

1333 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1334 Subcommittee interview of Julie Williams, OCC (9/17/2012). 1335 6/29/2012 email and attached undated memorandum from Julie Williams, OCC, to Thomas Curry, OCC, “JPMC 

Trades and the Volcker Rule Proposal,” OCC-SPI-00065656, at 9 (“[T]he IG trades initially appear to have been 

designed to hedge market risks arising in connection with and related to the HY trades. It was subsequently that the 

IG trades were not effective hedges due to what were described as market aberrations.”). During her interview, Ms. 

Williams explained that she edited this memorandum in late June 2012, drawing from a draft prepared by Ellen 

Broadman, Ursula Pfeil, and Roman Goldstein at the OCC. Subcommittee interview of Julie Williams, OCC 

(9/17/2012). She said that the memorandum was prepared at the request of Comptroller Curry, but was not finalized 

because of other ongoing OCC reviews. Id.

1336 Subcommittee interview of Julie Williams, OCC (9/17/2012). 1337 See Section 13 of the Bank Holding Company Act, added by Section 619 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act of 2010, P.L. 111-203 1338 Subcommittee interview of Julie Williams, OCC (9/13/2012). The Volcker Rule was enacted into law in 2010, 

and implementing regulations were proposed in 2011, but those regulations have yet to be finalized. The banking 

industry continues to press regulators about the contours of the final regulations and whether particular trading 

activities would continue to be allowed.

1339 See “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg (4/6/2012), 

http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-to-distort-credit-indexes.html; 

“London Whale Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne, (4/6/2012).
236

received such limited information about the trades and such blanket reassurances from the bank 

that it actually considered the matter closed in late April.

1340

(1) Providing OCC with Limited or Incorrect Information

 Not until May, when the bank was 

forced to disclose a $2 billion loss in its SEC filings, did the OCC begin to learn about the

severity of the SCP’s mounting losses, and actions taken by CIO traders in late March to “double 

down” on the CIO’s credit derivatives trading strategy in an effort to stem those losses. Despite 

that $2 billion disclosure, the spotlight of public attention, and repeated examiner requests, the 

OCC told the Subcommittee that obtaining the necessary information from the bank was not 

easy; the bank resisted and delayed responding to SCP requests and sometimes provided 

incorrect information. While the OCC eventually obtained the information it needed, it failed to 

impose any immediate penalty in response to the bank’s delays and obstructive actions.

After the media began to report on the whale trades in early April 2012, the OCC and 

Federal Reserve sought additional information about those trades from the bank, but were 

provided with inadequate information that delayed effective oversight. 

Positions Table. According to the OCC, on Monday, April 9, 2012, in the regulators’

first call with JPMorgan Chase following the media reports on the prior Friday, the bank 

downplayed the seriousness of the whale trades, reassuring its regulators, including the OCC,

that the bank was unconcerned about the SCP’s positions and possible losses.1341 The next day,

April 10th, in response to a request from the OCC and Federal Reserve for more information 

about the whale trades, the bank provided a table entitled, “Summary of Positions,” identifying

an incomplete group of CIO positions in various credit indices and tranches by notional 

amount.1342 The table did not provide basic P&L data for the positions or other risk information, 

leading OCC examiners to describe the table in an internal email as “useless”1343 and in a 

Subcommittee interview as “absolutely unhelpful” and seemingly designed to make regulators 

“go away.”1344

Dedicated Hedge. The bank also told the OCC that the SCP trades were a hedge

intended to lower bank risk. The April 10, 2012 email from the bank accompanying the 

Summary of Positions table stated: “The book, as a dedicated hedge, continues to be short HY 

and to provide default protection.”1345

 1340 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).

 On its face, however, calling the SCP book a “dedicated 

1341 See, e.g., 4/10/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “JPM CIO trades ---

JPMorgan’s Iksil May Spur Regulators to Dissect Trading – Bloomberg News – 4/9/12,” OCC-00001827 (“As you 

know we had a call with the Chief Investment Officer Ina Drew and others in JPM yesterday .... JPMC’s credit 

stress hedge is again where they want it, and there is no significant further trading planned on this strategy.”). 1342 See 4/10/2012 email from Joe Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, and others, 

“Background and Supporting Data for CIO Discussion of April 9, 2012,” OCC-SPI-00004312. 1343 5/18/2012 email from Michael Kirk, OCC, to Elwyn Wong, OCC, “CIO Call With Mike Brosnan,” OCC-SPI00021628 at 630 (quoting 05/17/2012 email from Fred Crumlish stating: “I told Mike B [Brosnan] that the Joe 

Sabatini emails with selected position information were sent by the bank after initial OCC and FRB enquiries. We 

concluded this information was pretty much useless, as it did not tell us what was happening risk wise.”).

1344 Subcommittee interview of Fred Crumlish, OCC (8/29/2012). 1345 4/10/2012 email from Joe Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, and others, 

“Background and Supporting Data for CIO Discussion of April 9, 2012,” OCC-SPI-00004312. See also 4/10/2012 

email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “JPM CIO Trades—JPMorgan’s Iksil May Spur 

Regulators to Dissect Trading – Bloomberg News- 4/9/12,” OCC-00004087 (“As you know we had a call with 
237

hedge” contradicted the Summary of Positions table which showed that the portfolio held an

overall net long position, the opposite of what would be expected for a hedge.

1346 Nearly one 

week later, when the bank was explaining in an email a nearly identical table in a more 

comprehensive presentation,1347 the Chief Financial Officer of the CIO confirmed that the book 

was in a net long position.1348 Moreover, in response to the bank’s assertion that the SCP was 

functioning as a “dedicated hedge,” the OCC repeatedly asked the bank to identify the bank 

assets being hedged by the SCP,

1349 but the bank did not provide the requested data.1350 The 

bank also never ran any stress scenarios against the Available-for-Sale (AFS) book, which the 

SCP was purportedly then hedging, to derive an estimated loss figure that needed to be

hedged.

1351

April Presentation. During the JPMorgan Chase earnings call with investors on April 

13, 2012, when asked about the whale trades, Mr. Dimon told investors the CIO stories in the 

press were a “complete tempest in a teapot,” and CFO Douglas Braunstein announced that “[w]e 

are very comfortable with our positions ....”1352

Three days later, on April 16, 2012, the bank provided a 13-page presentation to 

regulators about the whale trades, its first written description about what happened. In it, the

bank told regulators that the objective of the SCP was to “protect against a significant downturn 

in credit, offsetting natural credit exposures in CIO and the firm,”

 

1353

 

Chief Investment Officer Ina Drew and others in JPM yesterday. ... JPMC’s credit stress hedge is again where they 

want it. ... We asked the bank for a number of items yesterday that reflect details on the trades and support the stress 

loss hedge rationale associated with this specific strategy. We expect this sometime today.”).

though it did not describe 

the particular credit exposures being offset or the risks or vulnerabilities involved in the whale 

1346 See 4/10/2012 email from Joe Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, and others, 

“Background and Supporting Data for CIO Discussion of April 9, 2012,” OCC-SPI-00004312 (The far right 

column, entitled “grand total,” indicates positive totals, signifying long positions. The only negative subtotal, 

signifying a short position, was for “all other index positions,” and was smaller than any of the long positions, which 

meant that the overall net position remained long.).

1347 4/16/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, “materials for 

Fed/OCC/FDIC call at noon today,” OCC-SPI-00009712, at 716. 1348 See 4/17/2012 email from John Wilmot, CIO, to James Hohl, OCC, “Quick questions on pp 4 and 5,” OCC-SPI00023815 (“I believe there is a modest long credit risk sensitivity to the portfolio now.”). This email referenced “pp 

4 and 5” of the above presentation: 4/16/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna Iacucci, 

Federal Reserve, “materials for Fed/OCC/FDIC call at noon today,” OCC-SPI-00009712, at 716. 

1349 See, e.g., Subcommittee interview of Michael Kirk, OCC (8/22/2012); 4/10/2012 email exchange among 

Michael Kirk, OCC, Fred Crumlish, OCC, and others, “CIO info on elephant trade,” OCC-00004730 (Mr. Crumlish: 

“In my response on JPM email .... I also said it would be useful if they provided analytics or a summary that 

recapped the hedge strategy, such as the expected impact of the hedge on the projected stress loss identified. I asked 

for this on the call as well.”); 4/10/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, and others, 

“JPM CIO trades,” OCC-00004087 (“We asked the bank for a number of items yesterday that reflect details on the 

trades and support the stress loss hedge rationale associated with this particular strategy.”). 

1350 Subcommittee interviews of Michael Kirk, OCC (8/22/2012) and Scott Waterhouse, OCC (9/17/2012) 

(describing how OCC made multiple requests for documentation about what the SCP was hedging but never 

received the requested information). 

1351 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). For more information about the bank’s 

representation of the SCP as a hedge, see Chapter III.

1352 See 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIOPSI 0001151. 

1353 4/16/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, “materials for 

Fed/OCC/FDIC call at noon today,” OCC-SPI-00009712, at 714.
238

trades themselves.

1354

The OCC told the Subcommittee that its examiners knew at this point that, given the 

book’s long risk posture, the SCP was not performing a hedging function.

 This representation, which, again, portrayed the SCP book as designed to 

lower bank risk, was, again, inconsistent with the SCP book itself, since it continued to hold a 

net long position, meaning it was exposed to credit risk, just as the CIO’s portfolio and the bank 

as a whole were exposed to credit risk. 

1355 The OCC told the 

Subcommittee that the bank’s assertion that the SCP was a “dedicated hedge” had actually raised 

“alarm bells” for the OCC, because it should have been, but was not reported as such, like other 

instruments in the CIO that served a “dedicated hedge” function, such as the hedges against 

Mortgage Servicing Rights and interest rate risk.

1356

The OCC also told the Subcommittee that it later determined that the CIO’s April 16

presentation contained “material misrepresentations,”

 The OCC was unable to explain why it did 

not, at that point, confront the bank with its analysis that the SCP was not, in fact, a hedge.

1357 including a misrepresentation that the

2012 first quarter SCP losses totaled $580 million,

1358 when first quarter losses had actually been 

internally reported as $719 million.

1359 More significantly, at the time the bank briefed the OCC

in April, the SCP losses were more than double the $580 million figure provided by the bank; the 

bank should have told the OCC that the losses by then totaled $1.25 billion.

1360 The OCC told 

the Subcommittee that the bank’s presentation also included “unrealistic scenarios” for the 

second quarter, promising overly optimistic future recovery of the SCP assets’ value.

1361 The 

OCC told the Subcommittee that, at the time it received the presentation in April, it had viewed 

the presentation as providing additional information “in good faith.”1362

Risk and Stress Limit Breaches. A few days later, on April 19, the OCC asked the 

bank, for what appears to be the first time since the beginning of 2012, about the significance of 

information that the SCP had breached several risk and stress loss limits. After receiving

reassurances from the bank regarding these breaches, the OCC let the matter drop instead of 

investigating the trading activities that caused the breaches. 

In the OCC’s initial inquiry on April 19, 2012, an OCC examiner asked the CIO Market 

Risk Officer for additional information about data indicating that the CIO had breached three of 

the bank’s primary risk limits: 

 1354 Levin Office briefing by JPMorgan Chase (5/25/2012) (Greg Baer) (noting that if the regulators were 

comfortable as a result of that briefing, “we probably gave them reason to be comfortable.”).

1355 Subcommittee interview of James Hohl, OCC (9/6/2012). 1356 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 1357 Subcommittee interview of Michael Kirk, OCC (9/22/2012). 1358 4/16/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna Iacucci, Federal Reserve, and others, 

“materials for Fed/OCC/FDIC call at noon today,” OCC-SPI-00009712, at 724.

1359 See OCC spreadsheet, OCC-SPI-00000298, printed as a Subcommittee chart in Chapter IV. Numbers do not 

reflect restated P&L figures.

1360 SCP losses were internally reported to be $1.25 billion on April 13, a Friday, the last trading day before the 

April 16 briefing, which was a Monday. Id. 

1361 Subcommittee interview of Michael Kirk, OCC (9/22/2012). 1362 Subcommittee interview of Fred Crumlish, OCC (8/28/2012).
239

“Would you have any color around some observations about the CIO VaR

[Value-at-Risk], CSBPV [Credit Spread Basis Point Value, also known as the

CS01 risk limit] and stress results? I received the following from another 

examiner this morning. Thanks.

[‘]The increase in the Firm’s Var is primarily driven by CIO Synthetic Credit 

portfolio.

CIO aggregate stress is over 23% of its $15B [billion] limit. Also MtM [mark-tomarket] cs bpv limit is in excession by 1074% and has been in excession for 71 

days.[’]”1363

The CIO’s Chief Market Risk Officer, Peter Weiland, responded by email to the OCC’s 

inquiry, downplaying the significance of the breaches. First, Mr. Weiland wrote that the VaR 

breach was not related to new CIO trading activity, but to “market data,” essentially attributing

the breach to older SCP trades, even though those older trades were very risky and would 

continue to generate losses.

1364

Secondly, Mr. Weiland explained that the CIO had ended the stress breach by raising its

aggregate stress limit, so that the trades aggregating $12.67 billion were actually under rather 

than over its new $15 billion limit. He acknowledged, however, that the CIO’s $1 billion MTM 

(mark-to-market) stress limit (i.e., the stress limit that covered the SCP) was still in breach at 

$1.53 billion,

1365 but provided no explanation as to the reason for the breach or how the bank 

planned to get back under the limit. When asked why the OCC did not pursue the stress breach

at the time, an OCC examiner told the Subcommittee that he had assumed that Ms. Drew would 

have had to sign off on the breach of the MTM stress limit, which would have engendered a 

discussion about it within the bank.

1366

Lastly, in response to the CSBPV breach of 1074% over 71 days, Mr. Weiland told the 

OCC: “We are working on a new set of limits for synthetic credit and the current CS01 will be 

replaced by something more sensible and granular.”

Basically, he indicated that as long as the CIO knew

about the breach, the OCC had trusted the CIO to take appropriate steps to deal with it, and did 

not view the OCC as having an obligation to verify that the CIO’s risk management was actually 

doing its job. 

1367 He, again, downplayed the importance 

of the CSBPV breaches by promising a more “sensible” replacement limit in the near future. 

OCC examiners told the Subcommittee that they later realized the CSBPV breach was “a huge 

red flag,”1368 and “egregious,”1369

 1363 4/19/2012 email from James Hohl, OCC, to Peter Weiland, CIO, “Info on VaR, CSBPV, and stress status and 

limits,” OCC-SPI-00022340.

but acknowledged that, at the time, the OCC reacted by 

1364 Mr. Weiland explained that the increase in firm VaR “was not due to any new trades, but rather to market data.” 

4/19/2012 email from Peter Weiland, CIO, to James Hohl, OCC, “Info on VaR, CSBPV, and stress status and 

limits,” OCC-SPI-00022340. 1365 Id. 1366 Subcommittee interview of James Hohl, OCC (9/6/2012). 1367 4/19/2012 email from Peter Weiland, CIO, to James Hohl, OCC, “Info on VaR, CSBPV, and stress status and 

limits,” OCC-SPI-00022340 (stated by Peter Weiland). 1368 Subcommittee interview of Jairam Kamath, OCC (8/24/2012).
240

tolerating that and the other ongoing breaches, accepting the bank’s reassurance regarding their

insignificance, and failing to press the bank to identify and remedy the underlying risks. 

So, by late April 2012, the bank had provided the OCC with repeated assurances that the 

SCP functioned as a hedge designed to lower bank risk, supplied one “useless” chart and another 

less-than-complete briefing detailing the trades, and offered multiple excuses for the CIO’s 

breaching its risk limits. In addition, the bank did not disclose in April the portfolio’s escalating 

losses or the fact that it had lost money on most days since January. The OCC told the 

Subcommittee that the bank’s repeated expressions of unconcern about the SCP, together with 

the limited data provided about its size, risk profile, and losses, had persuaded the OCC to deem 

the whale trades issue “closed” in an internal email on April 23, 2012.1370

(2) Updating OCC Only When Losses About to Become Public

 Ultimately, OCC’s 

excessive trust in the bank allowed the bank to avoid scrutiny about the status of the SCP, and

was a central reason for the OCC’s failure to challenge the unsafe and unsound derivatives 

trading activity by the CIO.

At the same time it was reassuring its regulators, JPMorgan Chase ramped up its internal 

efforts to address the rapidly escalating losses in the SCP. As shown in the below chart tracking 

the SCP’s daily profit-loss reports, which the bank recorded but did not provide to the OCC at 

the time, the SCP went from a pattern of steady losses from January through most of March, to a 

volatile pattern of much larger losses starting on March 27, 2012.

1371 Those larger losses began

after the CIO traders had “doubled down” on the SCP’s credit derivatives trading strategy by 

placing a series of enormous trades in March, in which the CIO acquired $40 billion of notional 

long positions in several credit indices which rapidly lost value. Starting on April 27, 2012, the 

effort to understand and stop the SCP losses became, in the words of JPMorgan Chase’s Deputy 

Chief Risk Officer Ashley Bacon “all consuming.”1372

 1369 Subcommittee interview of Elwyn Wong, OCC (8/20/2012); see also Subcommittee interview of Fred Crumlish, 

OCC (8/28/2012) (describing the breaches as a big problem that should have been pursued.).

1370 See 4/23/2012 email from Jairam Kamath, OCC, to Geralynn Batista, OCC, “Weekly Market Summary Period 

Ending 4/13,” OCC-SPI-00023057-060, at 059. 1371 7/31/2012 chart included in a presentation prepared by the OCC for a Subcommittee briefing, at 8, PSI-OCC-06-

000026. 

1372 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012).
241

Source: 7/30/2012 OCC Large Bank Supervision presentation to Subcommittee re Chief Investment Office 

Discussion, at PSI-OCC-06-000026 (showing the MTM Stop Loss Advisory as a horizontal line).

For ten days, from April 9 to April 19, the bank repeatedly assured the OCC that the CIO 

whale trades were nothing to worry about. JPMorgan Chase did not update the OCC again until 

May 4, 2012,1373 despite, as the above chart shows, increasing losses and breaches of the CIO’s

MTM stop loss limit. The OCC told the Subcommittee that the bank should have alerted the 

agency when the SCP losses intensified. The bank also did not update the OCC on Achilles 

Macris’ request at the end of March that JPMorgan employees, Ashley Bacon and Olivier 

Vigneron, who worked in the Investment Bank, be diverted “for help with the synthetic credit 

book,” because Mr. Macris had “lost confidence” in his team.1374

 1373 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).

In addition, the bank did not 

update the OCC, as it should have, on then-$500 million in CIO collateral disputes indicating 

1374 See 3/30/2012 email from Achilles Macris, CIO, to John Hogan, JPMorgan Chase, “synthetic credit- crisis 

action plan,” JPM-CIO-PSI 0001220. Mr. Macris’ request was granted.
242

that the CIO may have been overvaluing SCP assets and understating its losses.

1375 According to 

the OCC, for nearly three weeks, the bank did not call, email, or otherwise update the OCC about 

any aspect of the SCP’s worsening status.

1376

Then, on May 4, 2012, a few days before JPMorgan Chase had to file a 10-Q report with 

the SEC publicly disclosing its first quarter financial results, two senior bank executives 

telephoned the OCC Examiner-In-Charge to inform the OCC that the SCP had incurred “current 

losses” of “approximately $1.6 billion.”

 

1377 According to the OCC, the bank’s Chief Financial 

Officer, Douglas Braunstein, told the OCC during the call that the losses were the result of 

“positions established some time ago,”1378 a characterization that, according to OCC, was “not 

accurate” because the losses were largely caused by derivative purchases made in the first 

quarter of 2012.1379 The Examiner-In-Charge told the Subcommittee that he was taken aback at 

the time, since the bank should have updated him about the mounting losses prior to that 

telephone call.1380

As a later OCC email explained, the bank had indicated in an April briefing that it was 

conducting its own review into the trades, and the OCC had asked to be kept informed:

“Ina Drew indicated that they had begun looking into what happened ... and would keep 

us informed. ... We told the bank to keep us informed and we would like to see the 

results. ... The bank didn’t provide an incremental update on their work as we 

requested.”1381

The OCC had apparently decided to wait for the results of the bank investigation without 

initiating its own inquiry. While it was waiting, on April 25, 2012, the OCC received a weekly 

summary showing that the CIO’s mark-to-market losses had climbed to $1.4 billion.

 

1382 The 

OCC told the Subcommittee that amount of loss was “material” and should have prompted an 

immediate OCC communication to the CIO.

1383

 1375 See, e.g., 4/20/2012 email from Mark Demo, JPMorgan Chase, to John Wilmot, CIO, and others, “Largest OTC 

Collateral Call Dispute Report plus Update on Collateral Disputes Reported to Supervisors,” JPM-CIO-PSI-H 

0000141-151, at 142 (reporting that the CIO collateral disputes involving the London trades were over $500 

million.”). This email was forwarded to Ina Drew, CIO, and Irvin Goldman, CIO, on 4/23/2012. Id., at 141. 

 While the OCC examiner who normally

1376 See 5/6/2012 email from Fred Crumlish, OCC, to James Hohl, OCC, and others, “CIO Synthetic Position,” 

OCC-SPI-00021853; Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 1377 5/4/2012 email from Scott Waterhouse, OCC, to Fred Crumlish, OCC, “CIO Synthetic Position,” OCC-SPI00021853 (“Doug Braunstein and John Hogan called to provide an update on the CIO position. ... Current losses are 

approximately $1.6 billion.”). In fact, according to SCP profit-loss reports, as of the day before the call, SCP 

cumulative losses were actually $2.3 billion. See OCC spreadsheet, OCC-SPI-00000298, printed in a chart prepared 

by the Subcommittee in Chapter IV. 1378 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012) (referencing his own notes of the call from Mr. 

Braunstein and Mr. Hogan at 5/5/2012 email from Scott Waterhouse, OCC, to Fred Crumlish, OCC, and others, 

“CIO Synthetic Position,” OCC-SPI-00021853). 1379 Subcommittee interview of James Hohl, OCC (9/6/2012). 1380 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1381 5/17/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “Your request of last night, re OCC 

response on cio,” OCC-00005554. 1382 4/25/2012 email from Geralynn Batista, OCC, to Fred Crumlish, OCC, and others, “Weekly Market Summary 

period ending 4/20,” OCC-SPI-00023753. 1383 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).
243

reviewed that weekly report was then on vacation, his subordinates failed to notice the size of the 

loss and no one made any call to the bank to ask about it.

1384

After the bank’s telephone call on May 4 disclosed that the SCP’s “current losses” were

$1.6 billion, the OCC began to meet with the bank on a daily basis to gain a better understanding 

of the SCP and its risks to the bank.

 

1385 The OCC told the Subcommittee that, even then, the 

bank often provided limited information, with one OCC examiner characterizing the reporting as 

“terrible.”1386 For example, later in May 2012, the OCC asked for a comprehensive set of SCP 

positions, instead of the scant summary table provided in April.1387 The OCC told the 

Subcommittee that the bank responded by providing a long list of 60,000 positions1388 in a 

format useless for data analysis purposes, frustrating the OCC’s efforts to understand the 

portfolio.1389 Ultimately, after repeated requests, the OCC told the Subcommittee it believed it 

received the necessary information.1390 While the OCC’s difficulty in obtaining information

offers additional proof of the bank’s unacceptable conduct, they also highlight, once again, the 

OCC’s failure to establish an effective regulatory relationship with JPMorgan Chase. The OCC 

has since cited the bank for its inadequate provision of information about the whale trades in a 

Supervisory Letter, detailing the problem in a Matter Requiring Attention specifically 

referencing the time period in April and early May 2012.

1391

(3) Hiding Problems with the Marks

In the spring of 2012, one of the key OCC oversight issues involved questions regarding 

the accuracy of the profit and loss (P&L) figures for the SCP and whether the CIO had been 

reporting overly favorable valuations of SCP assets to hide losses. Beginning in late January 

2012, the CIO had begun to mismark the SCP book, providing more favorable asset valuations 

than its usual practice and understating its losses.

1392

 1384 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012); Subcommittee interview of Fred Crumlish, 

OCC (8/28/2012) (noting that no one at the OCC had been watching this report while he was on vacation at this 

time).

 Despite growing evidence of the problem,

when the OCC inquired about possible mismarking, the bank initially denied the allegations and 

only months later acknowledged what had happened. 

1385 5/6/2012 email from Fred Crumlish, OCC, to James Hohl, OCC, and others, “CIO Synthetic Position,” OCCSPI-00021853 (“But at this point, the remaining position is too large and the bank is trying to reduce risk. ... The 

bank is taking action now to further reduce the exposure.”). 1386 Subcommittee interview of Fred Crumlish, OCC (8/29/2012); see also 5/15/2012 email from Fred Crumlish, 

OCC, to Scott Waterhouse, OCC, “May 15 CIO,” OCC-SPI-00010657 (“This update wasn’t supported by 

quantitative information requested yesterday.”). 1387 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012) (explaining that the OCC 

rarely looks at individual positions and does not have any access to position data without making a specific request 

to the bank.) 1388 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012).

1389 See 5/17/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, OCC, and others, “History of Trades” 

OCC-00004035; Subcommittee interview of Elwyn Wong, OCC (8/20/2012).

1390 Subcommittee interview of Elwyn Wong, OCC (8/20/2012).

1391 See 12/12/2012 OCC Supervisory Letter JPM-2012-66, at PSI-OCC-18-000001, at 003 [Sealed Exhibit].

1392 For more information about the mismarking, see Chapter IV. 
244

On May 9, 2012, the OCC held a meeting with JPMorgan Chase about the CIO, which 

was attended by the bank’s Chief Risk Officer John Hogan.1393 At the meeting, an OCC 

examiner asked Mr. Hogan when he realized the SCP books had been mismarked, and according 

to the examiner, Mr. Hogan responded that the books were not mismarked.1394 The OCC told 

the Subcommittee that it was not satisfied that his response was accurate.1395 The bank later

conceded that the SCP positions were mismarked.1396

The OCC told the Subcommittee that Mr. Hogan’s quick dismissal of the mismarking 

allegation was surprising at the time. Criticisms of the CIO’s valuation practices had been 

reported by the bank’s internal auditors1397 and OCC1398 since the beginning of the year. In 

addition, by the time of the meeting in May, the CIO was facing multiple collateral disputes with 

counterparties claiming the CIO was overvaluing the SCP assets, disputes which, at their largest 

point, totaled $690 million.

1399 As one OCC examiner said at the time, “Does not add up.”1400 

Either the CIO’s counterparties in the collateral dispute were wrong, or the CIO’s pricing was 

wrong,

1401 and its reserves were inadequate.1402

 1393 See, e.g., 5/10/2012 email from Michael Kirk, OCC, to Fred Crumlish and James Hohl, OCC, “My opinion on 

yesterday’s meeting,” OCC-00005302, at 303 (“I wasn’t satisfied with the comments made about the valuation 

process and thresholds yesterday, so we have some follow up here. ... Valuation was one of the things Hogan said 

they are looking at.”); Subcommittee interview of Michael Kirk, OCC (8/22/2012).

 Not more than a week later, the CIO began to 

1394 Subcommittee interview of Michael Kirk, OCC (8/22/2012); 5/9/2012 email from Michael Kirk, OCC, to Fred

Crumlish, OCC, “today’s meeting,” OCC-00005509. See also 6/29/2012 email from Michael Kirk, OCC, to Elwyn 

Wong, Scott Waterhouse, and Fred Crumlish “2nd Wilmer Hale Call,” OCC-SPI-00071386 (“On that very first 

daily call, Hogan discussed that earlier there had been a large collateral dispute with their counterparties. I 

questioned him on how it was resolved and he said JPM eventually agreed to the counterparties marks.... I then 

followed with a question relating to what I described as mismarked books to which Hogan forcefully stated JPM 

books were not mismarked; leaving both Elwyn and me ... puzzled over how a collateral dispute could be resolved 

by agreeing to the counterparties marks, without admitting your own marks were incorrect.”). 1395 Subcommittee interview of Michael Kirk, OCC (8/22/2012).

1396 See 2013 JPMorgan Chase Task Force Report, at 89.

1397 See March 2012, 2012 Continuous Audit Quarterly Summary of Global Chief Investment Office, OCC-SPI00004614, at 618 (identifying as a problem “CIO VCG practices where risk & valuation models have not been 

reviewed by Model Review Group and included the absence of a formally applied price sourcing hierarchy, 

insufficient consideration of potentially applicable fair value adjustments (e.g. concentration reserves for significant 

credit indices positions) and the lack of formally documented/consistently applied price testing thresholds.”).

1398 Subcommittee interview of Jaymin Berg, OCC (8/31/2012); 3/9/2012 Supervisory Letter JPM-2012-09 from 

Scott Waterhouse, OCC, to Ashley Bacon, JPMorgan Chase, “Examination of FSI Stress Testing Framework,” 

(citing a Matter Requiring Attention: “Methodology for valuation should be described”) [Sealed Exhibit].

1399 See, e.g., 5/14/2012 email from James Hohl, OCC, to Fred Crumlish, OCC, and others, “May 14 minutes,” 

OCC-SPI-00025835. For more information about these collateral disputes, see Chapter IV. 1400 5/15/2012 email exchange among Fred Crumlish, Scott Waterhouse, Elwyn Wong, and others, OCC, “FW:,” 

OCC-SPI-00009335 (stated by Elwyn Wong). See also 6/29/2012 email from Michael Kirk, OCC, to Elwyn Wong, 

Scott Waterhouse, and Fred Crumlish, “2nd Wilmer Hale Call,” OCC-SPI-00071386. 1401 Subcommittee interview of Elwyn Wong, OCC (8/20/2012). The OCC’s logic was the same as that used by 

others at JPMorgan Chase, as when Daniel Pinto, then a senior executive with JPMorgan Chase’s Investment Bank, 

argued with SCP trader Javier Martin-Artajo that the Investment Bank’s marks were accurate because, unlike the 

CIO, the Investment Bank had no collateral disputes. See 3/23/2012 recorded telephone conversation among 

Achilles Macris and Javier Martin-Artajo, CIO, and Daniel Pinto, Investment Bank, JPM-CIO-PSI-A 0000140. 1402 5/18/2012 email from Mike Kirk, OCC, to Elwyn Wong, OCC, and others, “CIO Valuation Summary Memo,”

OCC-SPI-00021894 (“When we questioned the lack of reserves the bank missed the point ...”).
245

settle its collateral disputes by agreeing to the prices demanded by its counterparties,

1403 but it 

took another two months for JPMorgan Chase to reveal to the OCC, as well as to the public, that 

the CIO traders had, in fact, been mispricing the SCP assets.

1404 The bank told the 

Subcommittee that it had believed the CIO was using good faith marks for the SCP book until it 

began reviewing telephone calls by CIO personnel in June and decided it had to restate the SCP 

values.1405

The OCC examiners picked up on red flags signaling that the bank may have been 

engaged in mispricing, such as its collateral disputes and low reserves amount. What the OCC 

did not know at that point was whether the mismarking was the result of inadequate procedures 

and policies at the bank or a deliberate effort to hide or downplay losses in the SCP. While Mr. 

Hogan may have been sincere in his May 9 assertion that the CIO’s books were not mismarked, 

others at the bank knew better. Yet it was not until July 2012 that the bank came clean. One

OCC examiner told the Subcommittee that by withholding information about how the CIO 

traders had mismarked SCP assets, the bank had “lied to” and “deceived” its regulator.

 

1406

E. OCC Aftermath

The whale trades were made public three days before Thomas Curry took office as the 

new Comptroller of the Currency and head of the OCC. By early May 2012, hardly a month into 

his new position, Thomas Curry was confronted with the need to initiate an investigation into the 

whale trades, determine what happened at the bank, and decide what the OCC should do about it. 

On May 11, 2012, the day after JPMorgan Chase announced publicly the unexpected 

increase in losses associated with the whale trades, the head of the OCC’s Large Bank 

Supervision division, Michael Brosnan, advised Comptroller Curry to view the trades as little 

more than an embarrassing incident: “[O]bviously there isn’t a safety issue with these numbers, 

but there is an embarrassment issue for bank leadership which has overtly expressed pride in 

their ability to measure and control risk.”1407 The new Comptroller replied: “Isn’t it a little more 

than an embarrassment issue?”1408

 1403 See 5/14/2012 email from James Hohl, OCC, to Fred Crumlish, OCC, “May 14 Minutes,” OCC-SPI-00025835 

(“At the time of original valuation, the bank thought the book was valued correctly, but have changed their view and 

have agreed to counter party levels.”).

Mr. Brosnan disagreed, responding: “At end of day they are 

good at financial risk mngt. But they are human and will make mistakes (big loan losses, trading 

1404 See JPMorgan Chase Press Release, “JPMorgan Chase to Amend Interim Financial Statements for 2012 First 

Quarter,” (7/13/2012), http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?ReleaseID=691703 

(reporting that the bank would reduce its previously-reported net income for the 2012 first quarter by $660 million --

$459 million after taxes -- due to increased CIO losses); JPMorgan Chase Form 8-K (7/13/2012) (“The restatement 

relates to valuations of certain positions in the synthetic credit portfolio in the Firm’s Chief Investment Office 

[CIO]. ...[T]he recently discovered information raises questions about the integrity of the trader marks, and 

suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being 

incurred the portfolio during the first quarter.”). For more information, see Chapter IV.

1405 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012). For more information, see 

Chapter IV.

1406 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 1407 5/11/2012 email from Senior Deputy Comptroller for Large Bank Supervision Mike Brosnan, OCC, to Thomas 

Curry, OCC, “J.P. Morgan Chase,” OCC-SPI-00000031, at 032. 1408 5/11/2012 email from Thomas Curry, OCC, to Mike Brosnan, OCC “J.P. Morgan Chase,” OCC-SPI-00000031.
246

losses, litigation etc).”1409 Even though JPMorgan Chase had kept the OCC in the dark about the 

existence of the SCP for years, hid its escalating losses from the agency, rejected the OCC’s 

questions about the mismarking of the book, and provided relatively little useful information 

about the SCP in response to OCC requests, Mr. Brosnan expressed no misgivings and did not 

wait to express his confident judgment that JPMorgan Chase was “good at financial risk 

mngt.”1410 The bank later proved him wrong by publicly admitting a “material weakness” in its

“internal control over financial reporting,”1411and stating that “CIO Risk Management was 

ineffective.”1412

Over the next few days, the U.S. Senate Committee on Banking, Housing, and Urban 

Affairs sought information from federal financial regulators about the whale trades reported in 

the press. One issue of concern was whether the whale trades should be viewed as hedges that 

lowered bank risk or as proprietary bets geared to produce bank profits. That issue was of 

particular interest, because the Dodd-Frank Wall Street Reform and Consumer Protection Act of 

2010 included the Merkley-Levin provisions, known as the Volcker Rule, that prohibited high 

risk proprietary trading by insured banks, but permitted “risk mitigating” hedges. In 2011, 

regulations were proposed to implement the Volcker Rule, but have yet to be finalized.1413 On 

May 12, 2012, when staff for Senator Robert Corker, a member of the Senate Banking 

Committee, asked the OCC if the proposed Volcker Rule would have permitted the CIO’s whale

trades, the OCC responded that it would, based upon information provided by Mr. Brosnan.

1414 

On Monday, May 14, when Senator Corker, who had been briefed by his staff using the 

information from the OCC, said as much to the media,

1415 the OCC had to backtrack, stating it 

was “premature to conclude” whether or not the Volcker Rule would allow such activity.1416

 1409 5/11/2012 email from Michael Brosnan, OCC, to Thomas Curry and Julie Williams, OCC, “J.P.Morgan Chase,” 

OCC-00001746. 1410 Id. 1411 7/13/2012 Form 8-K, JPMorgan Chase & Co., at 4, http://investor.shareholder.com/jpmorganchase/ 

secfiling.cfm?filingID=1193125-12-301391. 1412 See 7/13/2012 Form 8-K, JPMorgan Chase & Co., at Exhibit 99.3, p. 2. 

http://files.shareholder.com/downloads/ONE/1934577619x0xS19617-12-248/19617/filing.pdf. 1413 See, e.g., Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships with, 

Hedge Funds and Private Equity Funds, 76 Fed. Reg. 68846 (11/7/2011).

1414 See 5/12/2012 email from Carrie Moore, OCC, to Michael Bright, with Senator Corker, “JPM,” OCC-00005121 

(“These trades would have been allowed even if the Volcker Rule was in place.”); Subcommittee interview of Julie 

Williams, OCC (9/13/2012) (stated by Carrie Moore); see also 4/20/2012 email from Michael Brosnan, OCC, to 

Sally Belshaw and Scott Waterhouse, OCC, “Pls read, edit and send back. Thx,” OCC-00002135 (“[T]hey are not 

running afoul of inappropriate ‘proprietary trading’ issues.”); 5/15/2012 email from Michael Brosnan, OCC, to 

Bryan Hubbard, OCC, and others, “updated talking points on site team is good with this version various,” OCC00002263 (“Corker was right. It is us/me that will now be reserved and leave some room for interpretation etc 

later.”).

1415 See, e.g., “JPMorgan Losses: Senators Levin, Corker Debate Implementing Financial Regulation,” PBS News 

Hour (5/14/2012), at http://www.pbs.org/newshour/bb/politics/jan-june12/wallstreet_05-14.html (Senator Corker: 

“We have been in conversations all weekend with the OCC, the Office of [the Comptroller of the] Currency, and ... 

they have been very adamant that even if the Volcker rule, which the senator was referring to, was fully 

implemented, that this would have been permitted activity. During the course of the day, we were just talking, they 

have altered their position and said that this is more complex than they thought and they really want to hold off.”). 1416 See 5/14/2012 email from Bryan Hubbard, OCC, to Al Zibel, Dow Jones, Ben Protess, New York Times, and 

others, “OCC on JPMC Trading,” OCC-00001361 (“It is premature to conclude whether the Volcker Rule in the 

Dodd-Frank Act would have prohibited these trades and the hedging activity conducted by JPMC. ... Previous 
247

On May 18, 2012, multiple Federal financial regulators held a general briefing for Senate 

staff, hosted by the Senate Banking Committee, regarding issues related to the CIO losses. Ms. 

Williams, the OCC’s Chief Counsel, prepared handwritten talking points for her use at the 

briefing. Her talking points stated in part: “JPMC transactions at issue involved an effort to 

hedge the bank’s credit risk. Hedging credit risk is not uncommon, and if done properly, reflects 

sound risk management.”1417

Later press accounts reported that, according to Senate staff in attendance at the briefing,

Ms. Williams characterized the CIO trades as a “risk reducing hedge that would be allowable 

under the Volcker Rule.”1418 When asked about her remarks, however, Ms. Williams told the 

Subcommittee that she did not refer to the Volcker Rule during the briefing, asserting that she 

would not have opined on that issue at all.

1419

The initial reactions of Ms. Williams and Mr. Brosnan, two of the OCC’s then-most 

senior officials, were to view JPMorgan Chase as an effective risk manager and to view the 

Synthetic Credit Portfolio as a hedge that would lower bank risk. The skepticism and demand 

for hard evidence that might be expected of bank regulators were absent. Also, the OCC did not 

question JPMorgan Chase’s resistance to providing critical information needed for effective bank 

oversight. 

Whether or not she referred to the Volcker Rule, 

her talking points indicate that she had already reached a conclusion that the SCP functioned as a 

“hedge,” despite significant evidence to the contrary.

Since the spring of 2012, the OCC has strengthened its oversight of the CIO and 

JPMorgan Chase. First, it increased the level of staffing, including expert staffing in derivatives, 

at the bank.

1420 The OCC did not have derivatives experts on their supervision team with CIO 

responsibility until roughly April, when the lead capital markets examiner tapped one, then two 

OCC examiners with derivatives expertise.1421

 

positions attributed to OCC staff were based on incomplete details.”); “JPMorgan’s Trades Probed by U.S. National 

Bank Regulator,” Bloomberg News, Cheyenne Hopkins (5/14/2012), http://www.bloomberg.com/news/2012-05-

14/u-s-national-bank-regulator-examining-jpmorgan-s-risky-trading.html.

 Most of the credit derivatives in the SCP have 

since been transferred out of the CIO to the Investment Bank; only a relatively limited group of 

relatively uncomplicated credit index investments remain. Final implementation of the Volcker 

Rule will require the OCC to evaluate the remaining portfolio of synthetic credit derivatives to 

determine whether they, in fact, hedge specific bank assets or function as proprietary trading. 

1417 5/18/2012 handwritten notes of Julie Williams, OCC, “SBC Staff Briefing,” PSI-OCC-10-000001. 1418 See “Closed-Door Battle Over Volcker Spills Into Public View,” American Banker, Kevin Wack (5/22/2012), 

http://www.americanbanker.com/issues/177_98/Gary-Gensler-Mary-Schapiro-Volcker-Rule-JPMorgan-Chase1049494-1.html (“OCC Chief Counsel Julie Williams argued at the briefing that the trades were a risk-reducing 

hedge that would be allowable under the Volcker Rule, though she did not provide information to support that view, 

according to a Democratic aide who was in attendance.”).

1419 Subcommittee interview of Julie Williams, OCC (9/13/2012). 1420 Fred Crumlish added examiners Elwyn Wong and Mike Kirk. See Subcommittee interview of Fred Crumlish, 

OCC (8/28/2012); Subcommittee interview of Elwyn Wong, OCC (8/20/2012); Subcommittee interview of Mike 

Kirk, OCC (8/22/2012). 

1421 See 5/17/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, “Your request of last night,” OCC00005554.
248

Secondly, the OCC examination team initiated a more rigorous examination of the CIO 

and related controls through its on-site supervision team. That team conducted reviews of the 

“level of risk, the quality of risk management, audit coverage, model control processes, 

regulatory capital reporting, and position valuations” at the CIO.1422 As a result, in July 2012, 

OCC downgraded the bank’s CAMELS management rating for its “lax governance and oversight 

in the Chief Investment Office,” as well as other “oversight deficiencies.”1423 In a Supervisory 

Letter summarizing its examination of CIO oversight and governance structures, the OCC

concluded that the JPMorgan Chase “board and management failed to ensure that CIO 

management was properly supervised, and that an adequate risk management and control 

infrastructure was in place.”1424

Altogether, the OCC issued six Supervisory Letters related to the problems detected in 

connection with the whale trades.

1425 The Supervisory Letters include 20 Matters Requiring 

Attention (MRAs) which the bank must address by undertaking corrective action, and in some 

cases, has already taken required steps. Among them, the OCC criticized CIO risk management, 

which “allowed CIO synthetic credit trading desk to operate in an unsafe and unsound 

manner.”1426 In its review of the CIO’s “VaR Model Risk Management,” the OCC concluded 

that the CIO’s practices were not only “weak and constitute[d] an unsafe and unsound bank 

practice,” but also that they resulted in two regulatory violations.1427 Additionally, the OCC 

found “unsafe and unsound practices” in the CIO’s valuation processes, especially noting that 

“[t]he CIO did not use collateral differences with its trading counterparties as an information 

source for potential valuation issues.”1428 The OCC also explicitly criticized the bank for 

providing inadequate information about the whale trades.1429 Outside the CIO, OCC criticized 

JPMorgan Chase’s audit coverage and practices for failing to “identify unsafe and unsound 

practices in the CIO.”1430

 1422 10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and 

Lessons Learned,” PSI-OCC-13-000001 [Sealed Exhibit]. 

 

1423 7/27/2012 OCC Supervisory Letter JPM-2012-33, “JPMorgan Chase Bank, N.A. Management Rating,” PSIOCC-17-000003 [Sealed Exhibit]. 1424 12/12/2012 OCC Supervisory Letter JPM-2012-66, “CIO Oversight and Governance Examination,” PSI-OCC18-00001 [Sealed Exhibit]. 1425 10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and 

Lessons Learned,” at PSI-OCC-13-000011-012 [Sealed Exhibit]; Subcommittee briefing by the OCC (11/29/2012). 

The OCC Supervisory Letters address “Model Approvals and Risk Weighted Assets,” “Audit Coverage of CIO 

Activities,” “CIO Risk Management Review,” “Examination of VaR Model Risk Management,” “Examination of 

CIO Valuation Governance,” and “CIO Oversight and Governance.” 

1426 11/6/2012 OCC Supervisory Letter JPM-2012-52, “Chief Investment Office Risk Management Review,” PSIOCC-17-000015 [Sealed Exhibit]. 1427 11/6/2012 OCC Supervisory Letter JPM-2012-53, “Examination of VAR Model Risk Management,” PSI-OCC17-000019 [Sealed Exhibit]; see also 8/14/2012 OCC Supervisory Letter JPM-2012-37, “Model Approvals and Risk 

Weighted Assets,” PSI-OCC-17-000001 [Sealed Exhibit]. 1428 11/27/2012 OCC Supervisory Letter JPM-2012-59, “CIO Valuation Governance Examination,” PSI-OCC-17-

0000025 [Sealed Exhibit].

1429 See 12/12/2012 OCC Supervisory Letter JPM-2012-66, at PSI-OCC-000001, at 003. 1430 8/31/2012 OCC Supervisory Letter JPM-2012-40, “Audit Coverage of the Chief Investment Office,” PSI-OCC17-000005 [Sealed Exhibit].
249

On January 14, 2013, the OCC took a formal enforcement action by issuing a Cease and

Desist order against the bank, to which the bank consented.

1431 The OCC is authorized to issue 

Cease and Desist orders under 12 U.S.C. § 1818(b), which allows the OCC to take action if it has 

reasonable cause to believe that an insured depository institution has violated a law or regulation, 

or engaged in unsafe business practices.1432 The order requires and the bank has consented to 

undertake a number of actions to strengthen its risk management and derivatives trading 

practices, actions which the OCC will need to monitor to ensure needed reforms are made. For 

example, in one case, the bank has promised to respond to risk limit breaches by requiring “the 

business [to] promptly take steps to reduce exposure to within limit, unless a one-off approval for 

a limited period of time is granted,”1433

In addition, Comptroller Curry has taken steps to strengthen the OCC’s regulatory

culture. As a first step, he initiated an independent internal review of both the bank and the OCC 

supervision, looking to gain “lessons learned.”

a measure which merely restates the same policy the 

bank had in place prior to the whale trades. Regulators must ensure our largest financial 

institution strengthens its procedures and policies.

1434 With respect to the bank, the OCC’s internal 

review identified a number of problems with both the CIO and JPMorgan Chase, such as the 

bank’s use of certain unapproved risk models, and the poor performance of the bank’s 

Legal/Compliance department, which delayed responses to OCC inquiries and provided 

sometimes incomplete or even incorrect answers.1435 The OCC appears to have begun the hard 

work of recalibrating its relationship with JPMorgan Chase to ensure the bank meets its 

regulatory obligations. For its part, JPMorgan Chase has stated in its Task Force Report that it is 

working towards a more transparent relationship with its regulators.1436

The OCC internal review also presented six recommendations for improvements to its

Large Bank Supervision division, which accepted all six. The recommendations required the 

Large Bank Supervision division to improve its use of appropriate resources, such as derivatives 

trading experts; incorporate practices to minimize regulatory surprises to the OCC, such as by 

periodically reviewing desk level reports to catch inconsistencies in information given to senior 

management; proactively examine banks’ regulatory capital models; and institute more 

disciplined MRA follow-up, among other reforms.1437 The internal report’s analysis and 

recommendations have been the subject of presentations by the OCC to both U.S. and 

international regulators in addition to internal OCC groups of examination staff.1438

 1431 1/14/2013 In the Matter of JPMorgan Chase, N.A., OCC Consent Order, http://occ.gov/news-issuances/newsreleases/2013/nr-occ-2013-7a.pdf 1432 12 U.S.C. § 1818(b) (2011). 1433 1/11/2013 letter from John Hogan, JPMorgan Chase, to Scott Waterhouse, OCC, “JPM-2012-66 CIO Oversight 

and Governance Examination,” PSI-OCC-22-000001, at 006. 1434 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000014 [Sealed Exhibit]; Subcommittee 

interview of Michael Sullivan, OCC (8/30/2012) (report sought by Mr. Curry). 1435 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000037-038 [Sealed Exhibit]. 1436 2013 JPMorgan Chase Task Force Report, at 111. 1437 10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and

Lessons Learned,” PSI-OCC-13-000001-013 [Sealed Exhibit]. 1438 Id.
250

F. Analysis

The whale trades provide a striking case history of how a major bank, with 65 bank 

examiners on site, can keep a multi-billion-dollar derivatives portfolio off the radar screen of its

regulator for years, at least until it begins to lose money. For nearly six years, JPMorgan Chase

failed to disclose key information to its primary regulator about the CIO’s Synthetic Credit 

Portfolio, even though the bank claimed it played an important role in hedging the bank’s credit 

risk. The bank failed to report the existence of the portfolio to the OCC when it was created, 

during a 2010 examination of CIO investment portfolios, when it expanded in size by tenfold in 

2011, and when it produced approximately $400 million in 2011 profits. Along the way, at 

times, bank personnel lectured OCC examiners about being overly intrusive. The bank first 

reported the SCP to the OCC in January 2012, when it began breaching the bank’s VaR limit and 

incurring losses, but even then the bank misinformed the OCC about its significance by 

describing plans to reduce its size. As SCP losses mounted during the first few months of 2012, 

the bank failed to include information about the SCP in routine reports to the OCC. When the 

CIO repeatedly breached internal risk and stress limits, the bank downplayed their significance 

and allowed the breaches to continue. After the whale trades attracted media attention, the bank

still resisted providing detailed SCP information to the OCC, disclosing the extent of the SCP 

losses only when it was legally compelled to disclose its financial results in an SEC filing. The 

OCC’s repeated requests were often ignored and not adequately enforced.

The questionable bank practices that came to light when the whale trades were disclosed 

includes the CIO’s creation of a high risk trading portfolio using bank deposits, using valuation 

practices to hide losses, disregarding breaches of risk limits, manipulating risk and capital 

models to artificially lower the portfolio’s risk profile, and dodging OCC oversight. Because 

JPMorgan Chase provided such limited information about the SCP, the OCC remained in the 

dark about the size and risks of the portfolio for years. When losses began rolling in, it had to 

exercise oversight on the basis of incomplete, inaccurate, and misleading information. The 

bank’s practices impeded the OCC’s ability to detect and stop unsafe and unsound derivatives 

trading practices.

At the same time, not all the fault should be laid at the foot of the bank. Over the past 

two years, the OCC failed to notice or investigate bank reports of CIO risk limit breaches, failed 

to realize when monthly CIO reports weren’t delivered, failed to insist on detailed trading data 

from the CIO needed for effective oversight, and failed to take firm action when the bank 

delayed or denied its requests for information. The OCC tolerated resistance by JPMorgan 

Chase to regulatory requests and failed to establish a regulatory relationship that mandated the 

bank’s prompt cooperation with OCC oversight efforts. The new Comptroller appears to be 

taking actions to correct that fundamental oversight problem. In its 2012 examinations of the 

CIO, for example, the OCC adopted a “clean slate” approach, requiring the bank to produce 

basic information about the CIO from the ground up to support all assertions about its 

operations.

1439

 1439 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 

 The question is whether the OCC can recalibrate its regulatory relationship to 

achieve effective oversight, not only with JPMorgan Chase, but also other large financial 

institutions.
251

VII: MISINFORMING INVESTORS, REGULATORS AND THE PUBLIC

To ensure fair, open, and efficient markets for investors, Federal securities laws impose 

specific disclosure obligations on market participants. Public statements and SEC filings made 

by JPMorgan Chase in April and May 2012 raise questions about the timeliness, completeness, 

and accuracy of information presented about the CIO whale trades.

The CIO whale trades were not disclosed to the public in any way until April 2012, 

despite more than $1 billion in losses and widespread problems affecting the CIO and the bank, 

as described in the earlier chapters of this Report. On April 6, 2012, media reports focused 

public attention on the whale trades for the first time; on April 10, which was the next trading

day, the SCP reported internally a $415 million loss. The bank’s communications officer and 

chief investor liaison circulated talking points and, that same day, April 10, met with reporters 

and analysts to deliver reassuring messages about the SCP. Their primary objectives were to 

communicate, among other matters, that the CIO’s activities were “for hedging purposes” and 

that the regulators were “fully aware” of its activities, neither of which was true. The following 

day, April 11, one of the traders told Ms. Drew, “The bank’s communications yesterday are 

starting to work,” suggesting they were quieting the markets and resulting in reduced portfolio 

losses.

At the end of the week, on April 13, 2012, JPMorgan Chase filed an 8-K report with the 

SEC with information about the bank’s first quarter financial results and also hosted an earnings 

call. On that call, JPMorgan Chase Chief Financial Officer Douglas Braunstein reassured 

investors, analysts, and the public that the CIO’s trading activities were made on a long-term 

basis, were transparent to regulators, had been approved by the bank’s risk managers, and served 

a hedging function that lowered risk and would ultimately be permitted under the Volcker Rule 

whose regulations were still being developed. CEO Jamie Dimon dismissed the media reports 

about the SCP as “a complete tempest in a teapot.” 

A month later, in connection with its May 10, 2012 10-Q filing finalizing its first quarter 

financial results, the bank announced that the SCP had lost $2 billion, would likely lose more, 

and was much riskier than earlier portrayed. The 10-Q filing stated: “Since March 31, 2012, 

CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio 

has proven to be riskier, more volatile and less effective as an economic hedge than the Firm 

previously believed.” Though the markets did not react against JPMorgan Chase’s stock after 

the reassuring April 13 8-K filing and earnings call, the bank’s stock did drop after the May 10 

10-Q filing and call. It dropped again after its announcement on May 15 that Ina Drew was

departing the bank,

1440

Given the information that bank executives possessed in advance of the bank’s public 

communications on April 10, April 13, and May 10, the written and verbal representations made 

declining from $40.74/share on May 10 to $33.93/share one week later on

May 17, a drop of 17%. The stock continued to decline to $31/share on June 4, representing an 

overall decline of 24%, without any other apparent intervening event during that time period. 

 1440 See 5/15/2012 JPMorgan Chase & Co., Form 8-K, at 3, http://files.shareholder.com/downloads/ONE/ 

2275559219x0xS1193125-12-233374/19617/filing.pdf (“On May 14, 2012, JPMorgan Chase & Co. (“JPMorgan 

Chase” or the “Firm”) announced that Ina R. Drew, the Firm’s Chief Investment Officer, had made the decision to 

retire from the Firm.”). 
252

by the bank were incomplete, contained numerous inaccuracies, and misinformed investors, 

regulators, and the public about the CIO’s Synthetic Credit Portfolio.

More than a Tempest in a Teapot. In the April 13 earnings call, in response to a 

question, Mr. Dimon dismissed media reports about the SCP as a “complete tempest in a teapot.” 

While he later apologized for that comment, his judgment likely was of importance to investors 

in the immediate aftermath of those media reports. The evidence also indicates that, when he 

made that statement, Mr. Dimon was already in possession of information about the SCP’s 

complex and sizeable portfolio, its sustained losses for three straight months, the exponential 

increase in those losses during March, and the difficulty of exiting the SCP’s positions. 

Mischaracterizing Involvement of Firmwide Risk Managers. Mr. Braunstein also 

stated on the April 13 earnings call that “all of those positions are put on pursuant to the risk 

management at the firm-wide level.” The evidence indicates, however, that in 2012 JPMorgan 

Chase’s firmwide risk managers knew little about the SCP and had no role in putting on its 

positions. For example, JPMorgan Chase’s Chief Risk Officer John Hogan told the 

Subcommittee that prior to the April press reports, he had been unaware of the size and nature of 

the SCP, much less its mounting losses. Virtually no evidence indicates that he, his predecessor, 

or any other firmwide risk manager played any role in designing or approving the SCP positions 

acquired in 2012 until well after the April 13 earnings call when the bank’s risk managers 

effectively took over management of the SCP. In addition, Mr. Braunstein’s statement omitted 

any mention of the across-the-board risk limit breaches triggered by the SCP during the first 

quarter of 2012, even though those breaches would likely have been of interest to investors. 

Mischaracterizing SCP as “Fully Transparent to the Regulators.” In the bank’s 

April 13 earnings call, Mr. Braunstein said that the SCP positions were “fully transparent to the 

regulators,” who “get information on those positions on a regular and recurring basis as part of 

our normalized reporting.” In fact, the SCP positions had never been disclosed to the OCC in 

any regular bank report. The bank had described the SCP’s positions to the OCC for the first 

time, in a general way, only a few days earlier and failed to provide more detailed information 

for more than a month. Mr. Braunstein’s statement also omitted the fact that JPMorgan Chase 

had dodged OCC oversight of the SCP for years by failing to alert the agency to the 

establishment of the portfolio and failing to provide any portfolio-specific information in CIO 

reports. During the April 13 call, the bank led investors to believe that the SCP operated under 

close OCC supervision and oversight, when the truth was that the bank had provided barely any 

SCP data for the OCC to review. 

Mischaracterizing SCP Decisions as “Made on a Very Long-Term Basis.” On the 

bank’s April 13 earnings call, Mr. Braunstein also stated that with regard to “managing” the 

stress loss positions of the Synthetic Credit Portfolio, “[a]ll of the decisions are made on a very 

long-term basis.” In fact, the CIO credit traders engaged in daily derivatives trading, and the 

bank conceded the SCP was “actively traded.” An internal CIO presentation in March 2012, 

provided to the bank’s executive committee a month before the earnings call, indicated that the 

SCP operated on a “short” time horizon. In addition, many of the positions producing SCP 

losses had been acquired just weeks or months earlier. Mr. Braunstein’s characterization of the 

SCP as making long-term investment decisions was contrary to both the short-term posture of the 
253

SCP, as well as how it actually operated in 2011 and 2012. His description was inaccurate at 

best, and deceptive at worst.

Mischaracterizing SCP Whale Trades As Providing “Stress Loss” Protection. 

During the April 13 call, Mr. Braunstein indicated that the SCP was intended to provide “stress 

loss” protection to the bank in the event of a credit crisis, essentially presenting the SCP as a 

portfolio designed to lower rather than increase bank risk. But in early April, days before the 

earnings call, Ms. Drew told the bank’s executive committee that, overall, the SCP was “long” 

credit, a posture that multiple senior executives told the Subcommittee was inconsistent with 

providing protection against a credit crisis. Moreover, a detailed analysis reviewed by senior 

management two days before the April 13 earnings call showed that in multiple scenarios 

involving a deterioration of credit, the SCP would lose money. While the bank may have sought 

to reassure investors that the SCP lowered the bank’s credit risk, in fact, as then configured, the 

SCP would have amplified rather than reduced the bank’s losses in the event of a credit crisis. 

The bank’s description of the SCP was simply erroneous.

Asserting SCP Trades Were Consistent With the Volcker Rule. The final point made 

in the April 13 earnings call by Mr. Braunstein was: “[W]e believe all of this is consistent with 

what we believe the ultimate outcome will be related to Volcker.” The Volcker Rule is intended 

to reduce bank risk by prohibiting high-risk proprietary trading activities by federally insured 

banks, their affiliates, and subsidiaries. However, the Volcker Rule also allows certain trading 

activities to continue, including “risk-mitigating hedging activities.” Mr. Braunstein’s statement 

gave the misimpression that the SCP was “hedging” risk. When the Subcommittee asked the 

bank for any legal analyses regarding the Volcker Rule and the SCP, the bank responded that 

none existed. On the day prior to the earnings call, Ina Drew wrote to Mr. Braunstein that “the 

language in Volcker is unclear,” a statement that presumably refers to the fact that the 

implementing regulation was then and still is under development. In addition, the bank had 

earlier written to regulators expressing concern that the SCP’s derivatives trading would be 

“prohibited” by the Volcker Rule and asking for a change to the proposed rule to ensure it would 

be permitted. The bank omitted that analysis to investors, when asserting that the CIO would be 

allowed under the Volcker Rule to continue operating the SCP as before.

Omitting VaR Model Change. Near the end of January, the bank approved use of a 

new CIO Value-at-Risk (VaR) model that cut in half the SCP’s purported risk profile, but failed 

to disclose that VaR model change in its April 8-K filing, and omitted the reason for returning to 

the old model in its May 10-Q filing. JPMorgan Chase was aware of the importance of VaR risk 

analysis to investors, because when the media first raised questions about the whale trades, the 

bank explicitly referred analysts to the CIO’s VaR totals in its 2011 annual 10-K filing, filed on 

February 29, 2012. Yet, days later, on April 13, the bank’s 8-K filing contained a misleading 

chart that listed the CIO’s first quarter VaR total as $67 million, only $3 million more than the 

prior quarter, without also disclosing that the new figure was the product of a new VaR model 

that calculated much lower VaR results for the CIO than the prior model. An analyst or investor 

relying on the disclosed VaRs for the end of 2011 and the first quarter of 2012 would likely have 

believed that the positions underlying those VaRs were similar, since the VaR totals were very 

similar. The change in the VaR methodology effectively masked the significant changes in the 

portfolio. 
254

When asked in a May 10 call with investors and analysts why the VaR model was 

changed, Mr. Dimon said the bank made “constant changes and updates to models, always trying 

to get them better,” but did not disclose that the bank had reinstated the old CIO VaR model 

because the “update[d]” CIO VaR had understated risk by a factor of two, was error prone, and 

suffered from operational problems. The May 10-Q filing included a chart showing a revised 

CIO VaR for the first quarter of $129 million, which was twice the VaR amount initially 

reported for the first quarter, and also twice the average amounts in 2011 and 2010. The only

explanation the May 10-Q filing provided was that the revised VaR “was calculated using a 

methodology consistent with the methodology used to calculate CIO’s VaR in 2011.” 

Together, these misstatements and omissions about the involvement of the bank’s risk 

managers in putting on SCP positions, the SCP’s transparency to regulators, the long-term nature 

of its decisionmaking, its VaR results, its role as a risk-mitigating hedge, and its supposed 

consistency with the Volcker Rule, misinformed investors, regulators, and the public about the 

nature, activities, and riskiness of the CIO’s credit derivatives during the first quarter of 2012. 

A. Public Disclosure of Whale Trades and SCP

Prior to the media reports in early April 2012, the Synthetic Credit Portfolio (SCP) had 

not been mentioned by name in any JPMorgan Chase public filing; over the next month, the SCP

received sustained attention in the bank’s public filings, investor calls, and media 

communications. In response to media inquiries, the bank initially characterized the SCP as 

engaged in long-term, risk-reducing hedging activities that were known to its risk managers and 

regulators, and downplayed its losses. A month later, the bank completely revised its description 

of the SCP, characterizing it as having “morphed” into a risky trading activity that was poorly 

conceived and vetted, and which had caused billions of dollars in losses with more to follow. 

The earliest evidence identified by the Subcommittee of information about the SCP in the 

public sphere is an April 5, 2012, internal bank email which informed bank management that

reporters from Bloomberg and the Wall Street Journal were planning to publish news articles

about trades involving the Synthetic Credit Portfolio and the Chief Investment Office. JPMorgan 

Chase’s chief spokesperson, Joe Evangelisti, managing director and head of worldwide corporate 

communications and media relations, sent the email warning bank executives, including Jamie 

Dimon, that the media stories “are saying that JPMorgan basically has a large proprietary trading 

shop hidden in its CIO .... [and] that with increased capital rules and the upcoming Volcker 

Rule, these activities could come under pressure.”1441

“I’d like us to hit hard the points that the CIO’s activities are for hedging purposes 

and that the regulators are fully aware of our activities. I’d like to give them the 

following on the record:

 He recommended that the bank convey 

the following message about the SCP and CIO: 

• The Chief Investment Office is responsible for managing and hedging the 

firm’s liquidity, foreign exchange, interest rate and other structural risks.

• Gains in the CIO offset and hedge losses in other parts of the firm.

 1441 4/5/2012 email from Joseph Evangelisti, JPMorgan Chase, to Ina Drew, CIO, Douglas Braunstein, JPMorgan 

Chase, and others, “WSJ/Bloomberg CIO Stories,” JPM-CIO-PSI 0000543, at 544.
255

o The investments and positions undertaken by the CIO are to hedge 

positions and losses in other parts of the firm and are done in the 

context of our overall company risk management framework. 

Hedging gains reflected in our financial statements represent one 

side of a transaction that is hedging a loss in one of our main 

businesses.

• We cooperate closely with our regulators, and they are fully aware of our 

hedging activities.”

Later that same day, Mr. Evangelisti revised the talking points based on comments he 

received from firm executives, and sent them to Jamie Dimon and Douglas Braunstein, among 

others.1442 The revised talking points included two key changes. First, instead of stating that 

“Gains in the CIO offset and hedge losses,” he wrote that the “CIO is focused on managing the 

long-term structural liabilities of the firm and is not focused on short-term profits. Our CIO 

activities hedge structural risks and invest to bring the company’s assets and liabilities into better 

alignment.”1443 Secondly, he changed the statement, “We cooperate closely with our regulators, 

who are fully aware of our hedging activities,” by removing the word “fully.”1444 Mr. Dimon 

responded to Mr. Evangelisti’s proposed talking points with “Ok.”1445

The Evangelisti email and talking points indicate that, from the beginning of the bank’s 

public discussion of the SCP in April 2012, JPMorgan Chase planned to describe the portfolio as 

a risk-reducing hedge that was transparent to the bank’s regulators, even though neither 

characterization was accurate. Furthermore, by tempering the points about hedging and 

transparency to regulators, the revision shows that bank was aware that its initial 

characterizations were not entirely true. 

 

The next day, Friday, April 6, 2012, media reports disclosed that a CIO trader had 

accumulated massive positions in CDX indices, especially the Investment Grade Series 

9. Bloomberg’s article was entitled, “JPMorgan Trader Iksil’s Heft Is Said to Distort Credit 

Market”;

1446 the Wall Street Journal’s article was entitled, “London Whale Rattles Debt 

Market.”1447 Both focused on how enormous trades by the CIO were roiling world credit 

markets and affecting prices. The Wall Street Journal article also stated that a “person familiar 

with the matter” indicated that any reduction in Mr. Iksil’s position could result in losses for the 

bank.1448 On April 9, 2012, another Bloomberg

 1442 4/5/2012 email from Douglas Braunstein, JPMorgan Chase, to Joseph Evangelisti, JPMorgan Chase, “Revised: 

WSJ/Bloomberg CIO stories,” JPM-CIO-PSI 0000543.

article entitled, “JPMorgan Trader Iksil Fuels 

Prop-Trading Debate With Bets,” linked the controversy over the CIO trades to implementation 

1443 Id., at JPM-CIO-PSI 0000543-544. 1444 Id. 1445 Id. 1446 “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg, Stephanie Ruhle, Bradley Keoun and 

Mary Childs (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-todistort-credit-indexes.html. 1447 “‘London Whale’ Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne (4/6/2012). 

See also “JPMorgan Trader Accused Of ‘Breaking’ CDS Index Market With Massive Prop Position,” Zero Hedge

[blog], “Tyler Durden” (4/5/2012), http://www.zerohedge.com/print/446043. 1448 “‘London Whale’ Rattles Debt Market,” Wall Street Journal, Gregory Zuckerman and Katy Burne (4/6/2012).
256

of the Volcker Rule, quoting legal counsel representing certain banks as stating, “I wouldn’t be 

surprised if the pro-Volcker folks used this as a test case.”1449

JPMorgan Chase’s press and investor relations offices fielded a number of questions after 

the articles were published. Sarah Youngwood, head of investor relations, used Mr. 

Evangelisti’s narrative the following day in a conversation with Ben Hesse,

 

1450 a research analyst 

at Fidelity, a JPMorgan Chase shareholder.1451 According to her email at the time, she told him:

“Members of the CIO take long-term hedging positions in the context of our overall 

asset/liability management,” “[h]edging is core to the bank’s activities,” the CIO is “not focused 

on short-term profits,” and “CIO results are disclosed in our quarterly earnings reports and are 

fully transparent to our regulators.”1452

On Tuesday, April 10, the first trading day after the article was published, the Synthetic 

Credit Portfolio reported internally a loss of $415 million, the biggest SCP loss to date in 

2012.

 The Subcommittee is unaware of any action taken by any 

personnel within the bank to correct this description of the SCP.

1453 JPMorgan Chase told the Subcommittee that it had expected a large loss due to the

press reports, which the bank viewed as exposing its trading positions and making the CIO more

vulnerable.1454

On the same day as the loss, April 10, Messrs. Braunstein and Hogan were scheduled to 

provide a “backgrounder” with the 

 

Wall Street Journal.

1455 Mr. Evangelisti informed them that 

JPMorgan Chase had provided additional “background and on-the-record statements explaining 

the hedging activities of our CIO and putting these activities in the context of our overall asset 

and liability management. We also said that we now feel that our risks are effectively 

balanced.”1456 In addition, Sarah Youngwood, head of investor relations, reported that the bank 

had “4 more conversations on CIO articles” with analysts; she noted that “[a]ll of them 

understand our CIO activities. Joe [Evangelisti]’s statements [were] very helpful to the 

conversations.”1457

 1449 “JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets,” Bloomberg, Shannon D. Harrington, Bradley 

Keoun and Christine Harper (4/9/2012), http://www.bloomberg.com/news/2012-04-09/jpmorgan-trader-iksil-fuelsprop-trading-debate-with-bets.html. 1450 4/6/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “CIO 

articles – Calls (2),” JPM-CIO-PSI 0000554. 1451 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1452 4/6/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon and others, JPMorgan Chase, “CIO 

articles – Calls (2),” JPM-CIO-PSI 0000554. On her last point, however, CIO results were not separately disclosed 

in the bank’s quarterly earnings reports but rather were reported as part of “Corporate” earnings. See 4/5/2012 email 

from Ina Drew, CIO, to Joseph Evangelisti, JPMorgan Chase, and Barry Zubrow, JPMorgan Chase, “Jamie’s fine 

with this[,]” JPM-CIO-PSI 0000543 (“We do not disclose cio earnings – part of corporate”). 1453 See chart, prepared by the Subcommittee and printed in Chapter IV, tracking SCP’s daily reported profit and 

loss (P&L) from January 3 to May 15, 2012, derived from an OCC spreadsheet, OCC-SPI-00000298-304, at 302. 

Numbers do not reflect restated P&L figures after JPMorgan Chase’s restatement in July 2012. 

1454 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1455 4/10/2012 email from Joseph Evangelisti, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, and 

others, “WSJ call,” JPM-CIO-PSI 0017427. 1456 4/10/2012 email from Joseph Evangelisti, JPMorgan Chase, to Operating Committee, JPMorgan Chase, “WSJ 

tomorrow,” JPM-CIO-PSI 0001066. 1457 4/10/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “CIO 

articles – Calls (7), JPM-CIO-PSI 0001024.
257

The following day, Javier Martin-Artajo, head of the CIO’s equity and credit trading 

operations, wrote to Ms. Drew, describing how JPMorgan Chase’s response to the press articles

was successfully reducing market pressure:

“Ina, the market is quiet today. To[o] early to tell but so far about flat P/L

[profit/loss]. The tension has stopped now. The bank’s communications 

yesterday are starting to work. I hope that it keeps this way tomorrow.”1458

At the end of that day, the CIO reported a final loss total of only $6 million, compared to 

$415 million in losses the prior day, and $5 million the next day,1459

The next day, April 13, 2012, one week after the initial news reports about the SCP,

JPMorgan Chase filed a Form 8-K with the SEC and held an earnings call with analysts, 

investors, the media, and others to discuss its expected first quarter earnings. The bank’s filing 

and written materials did not address the SCP or the whale trades directly,

which seemed to 

confirm that the bank’s communications were calming the market. 

1460

On the call, Mr. Braunstein stated that he wanted to “talk about the topics in the news 

around CIO, and just sort of take a step back and remind our investors about that activity and 

performance.”

but Mr. Braunstein

volunteered a number of comments about them during the earnings call.

1461

“[W]e also need to manage the stress loss associated with that portfolio, and so 

we have put on positions to manage for a significant stress event in Credit. We

have had that position on for many years and the activities that have been reported 

in the paper are basically part of managing that stress loss position, which we 

moderate and change over time depending upon our views as to what the risks are 

for stress loss from credit. 

 In his remarks, Mr. Braunstein described the CIO and its excess deposits

portfolio. He then went on to state:

All of those decisions are made on a very long-term basis. They are done to keep 

the Company effectively balanced from a risk standpoint. We are very 

comfortable with our positions as they are held today. 

And I would add that all of those positions are fully transparent to the regulators. 

They review them, have access to them at any point in time, get the information 

on those positions on a regular and recurring basis as part of our normalized 

 1458 4/11/2012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, “Single names CDS basis relative to IG 9 

CDS – URGENT update,” JPM-CIO-PSI-H 0002340 [emphasis in original]. 1459 See chart, prepared by the Subcommittee and printed in Chapter IV, tracking SCP’s daily reported profit and 

loss (P&L) from January 3 to May 15, 2012, derived from an OCC spreadsheet, OCC-SPI-00000298-304, at 302. 

Numbers do not reflect restated P&L figures after JPMorgan Chase’s restatement in July 2012. It is unclear whether 

the CIO calculated these losses using midpoint prices or more favorable prices to minimize the total reported losses. 

1460 The 8-K filing did, however, contain a chart tracking the CIO’s VaR totals, as discussed below. See 4/13/2012 

JPMorgan Chase & Co., Form 8-K, at 42, http://files.shareholder.com/downloads/ONE/2063348229x0xS1193125-

12-161533/19617/filing.pdf. 1461 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151. See also “Transcript of Audio Recording of JPMorgan Chase Earnings Call With Media on April 13, 

2012,” prepared by the Subcommittee (transcribing a telephone call earlier in the day in which Mr. Braunstein 

volunteered similar statements about the SCP). 
258

reporting. All of those positions are put on pursuant to the risk management at the 

firm-wide level.

The last comment I would make is that ... we believe all of this is consistent with 

what we believe the ultimate outcome will be related to Volcker.”1462

Mr. Dimon made the following statements during the April 13, 2012 earnings call about 

the SCP in response to a reporter’s question:

“It’s a complete tempest in a teapot. Every bank has a major portfolio. In those 

portfolios, you make investments that you think are wise, that offset your 

exposures. Obviously, it’s a big portfolio. We’re a large company and we try to 

run it. It’s sophisticated, well, obviously, a complex thing. But at the end of the 

day, that’s our job, is to invest that portfolio wisely and intelligently to – over a 

long period of time to earn income and to offset other exposures we have.”1463

After the call, the bank’s internal communications indicate that, of all the issues 

discussed on the call, bank personnel focused in particular on gauging the reaction to the bank’s 

CIO commentary, likely because the bank’s goal was to reassure the market. Ms. Youngwood 

emailed Mr. Dimon and Mr. Braunstein several hours after the call with a summary of calls from 

analysts, noting in the first line of her email: “We are now getting calls. Tone positive. No 

questions on CIO.”1464 Later that evening, she emailed them that there were “[v]ery few 

questions on CIO” on the “[l]ast batch of calls.”1465

“Positive signs start to appear since Jamie and Doug’s comments on Friday: [t]he 

market has stopped going against our positions in an aggressive way. We have 

not seen the positions trading against us since Apr 10 and we have seen since 

Friday encouraging signs .... There is finally selling interest on IG 9 5 Yr, 

though not significant to reverse our loss but significant for the first time since the 

beginning of April and specially since our loss on Apr 10.”

 Three days later, on April 16, the first 

trading day after the earnings call of April 13, Julien Grout, one of the SCP traders, emailed two 

other SCP traders, Bruno Iksil and Luis Buraya, crediting the April 13 statements for turning the 

market around: 

1466

In describing the SCP on the earnings call, both Mr. Dimon and Mr. Braunstein omitted 

mention of a number of key facts that they declined to share with investors on the call. First, 

compared to the prior quarter, the SCP had tripled in size from about $51 billion to $157 billion 

and contained many new credit derivatives.

1467

 1462 Id., at 7. 

 Mr. Dimon, Mr. Braunstein, and other 

1463 Id., at 10. 1464 4/13/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon and Douglas Braunstein, JPMorgan 

Chase, “1Q12 calls – Buyside and Sellside comments (3),” JPM-CIO-PSI 0001137 (She also pointed out one 

particular analyst’s feedback: “Thought CIO comments were very helpful; no questions the topic.”). 1465 4/13/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon and Douglas Braunstein, JPMorgan 

Chase, “1Q12 calls – Buyside and Sellside comments (6),” JPM-CIO-PSI 0001200. 1466 4/16/2012 email from Julien Grout, CIO, to Luis Buraya and Bruno Iksil, CIO, “CIO Core Credit P&L Predict 

[16 April]: -$31,405k (dly) -$1,094,241k (ytd),” JPM-CIO-PSI 0017022, at 026. 1467 “Summary of Positions by Type and Series,” prepared by JPMorgan Chase in response to a Subcommittee 

request, JPM-CIO-PSI 0037609. Prior to the April 13 earnings call, Mr. Braunstein had specifically requested and 
259

executives were specifically told how the portfolio’s largest position would take 10-15 days of 

selling at 100% trading volume to exit, so the executives knew that exiting some of the 

portfolio’s positions would take weeks or months.

1468 Messrs. Dimon, Braunstein, and other 

executives were also informed that the SCP had switched its overall position from short to 

long,

1469 a direction inconsistent with its purported hedging purpose, as discussed further below. 

Since the head of the CIO and member of the bank’s operating committee, Ina Drew, had 

forbidden additional trading in the portfolio on March 23, its positions were locked in.

1470 In 

addition, by that date, all of the risk limits governing the SCP had been breached.1471 On March 

30, 2012, Achilles Macris, who supervised the SCP trading, told the bank’s Chief Risk Officer

that he had “lost confidence” in his team and was operating in “crisis mode.”1472 Also on March 

30, the bank’s internal audit department issued a report criticizing CIO’s risk management 

department, with copies sent to Mr. Braunstein, Mr. Hogan, and others.1473

After the earnings call, the bank sought to reduce the risk and losses of the SCP, but did 

not share any information publicly about those efforts until it filed its required 10-Q form with 

the SEC on May 10, finalizing its first quarter results. In the midst of preparing for that 

disclosure, on May 2, Ms. Drew wrote a note about the bank’s internal deliberations: “We are 

working through the 10-Q disclosure and Doug [Braunstein] and Jamie [Dimon] are weighing 

the risk reward to the communication plan around a press release and anal[y]st meet[]ing and the 

 Finally, the SCP had 

undergone three straight months of escalating losses, which worsened dramatically in March. 

None of these facts relating to the SCP’s size, risk profile, or losses were mentioned in the April 

13 earnings call.

 

received data on the growth of the positions in the SCP over the first quarter. On or about April 9, he asked for 

“some history relative to current positions (long and shorts).” 4/9/2012 email from John Wilmot, CIO, to Ina Drew, 

CIO and others, “Deliverables for meeting tomorrow,” JPM-CIO-PSI 0001646. Later that day, Mr. Macris sent Mr. 

Braunstein a presentation that included a chart of the notional amounts of trade positions as of January, February, 

March, and the current date. See 4/9/2012 email from Achilles Macris, CIO, to Douglas Braunstein, JPMorgan 

Chase, and Ina Drew, CIO, “Synthetic Credit Presentation,” JPM-CIO-PSI-H 0002204, at 212. On April 12, Ms. 

Drew sent Mr. Braunstein and other members of senior management an email with a simplified version of the 

information, showing position increases from January to the current date. 4/12/2012 email from Ina Drew, CIO, to 

Jamie Dimon and others, JPMorgan Chase, “Synthetic Credit Materials,” JPM-CIO-PSI 0001100, at 103. 1468 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit 

information,” JPM-CIO-PSI 0001701, at 702; see also Chapter V discussion, citing Subcommittee interviews of 

John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012) and Douglas Braunstein, JPMorgan Chase (9/12/2012). 

Mr. Hogan and Mr. Braunstein each explained to the Subcommittee that, while it is theoretically possible to trade 

100% of the average daily volume of an instrument in a single day, it is economically unwise to do so, since a single 

party trading that volume in a day would cause significant adverse movements in the prices of the instruments. 1469 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, 

and others, “CIO,” JPM-CIO-PSI 0000539. 1470 Subcommittee interviews of Ina Drew, CIO (9/7/2012, 12/11/2012). Mr. Dimon told the Subcommittee that he 

was not aware at the time that Ms. Drew had ordered the trading to stop. See Subcommittee interview of Jamie 

Dimon, JPMorgan Chase (9/19/2012).

1471 See Chapter V, describing the breaches of CIO VaR, CS01, and CSW10%, among other risk limits. 1472 3/30/2012 email from Achilles Macris, CIO, to John Hogan, JPMorgan Chase, “synthetic credit- crisis action 

plan,” JPM-CIO-PSI 0001220. 1473 See 3/30/2012 email from William McManus, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, and 

others, “Audit Report: EMEA CIO Credit- Market Risk and Valuation Practices (Rating Needs Improvement),” 

JPM-CIO-PSI 0009289. Mr. Braunstein told the Subcommittee that he did not recall reading the report at this time. 

Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 
260

potential impact on the market and our ability to reduce this position.”1474

Despite the bank’s increasing grasp of the SCP’s concentrated, complex, and 

deteriorating positions, after the April 13 earnings call the bank did not publicly discuss the SCP

again until nearly a month later, on May 10, 2012, when the bank filed its 10-Q form with the 

SEC finalizing its first quarter financial results. That day, it also held a “business update” call 

with analysts, investors, the media, and others. In contrast to the views provided on April 13, 

2012, the 10-Q filing and call presented a much more negative picture of the SCP. JPMorgan 

Chase reported that the SCP had incurred a $2 billion loss in the second quarter, and additional 

losses were expected.

 Her note indicated 

that bank executives were evaluating the consequences of public disclosures related to the SCP, 

including the financial fallout upon releasing damaging information about the SCP. 

1475 In addition, the 10-Q provided a chart on the CIO’s VaR totals, 

showing a revised quarter-end VaR total that was nearly double the earlier reported figure.

1476

During the business update call, Mr. Dimon spoke at length about the SCP: 

 

“We are also amending a disclosure in the first quarter press release about CIO’s 

VAR, Value-at-Risk. We’d shown average VAR at 67. It will now be 129. In 

the first quarter, we implemented a new VAR model, which we now deemed 

inadequate. And we went back to the old one, which had been used for the prior 

several years, which we deemed to be more adequate. ...

Regarding what happened, the synthetic credit portfolio was a strategy to hedge 

the Firm’s overall credit exposure, which is our largest risk overall .... We’re 

reducing that hedge. But in hindsight, the new strategy was flawed, complex, 

poorly reviewed, poorly executed and poorly monitored. The portfolio has 

proven to be riskier, more volatile and less effective [an] economic hedge than we 

thought. ...

We have more work to do, but it’s obvious at this point that there are many errors, 

sloppiness and bad judgment. I do remind you that none of this has anything to 

do with clients. ... 

[W]e’ve already changed some policies and procedures, as we’ve gone along. In 

addition you should know that all appropriate corrective actions will be taken, as 

necessary, in the future. ... 

The portfolio still has a lot of risk and volatility going forward. ... It could cost 

us as much as $1 billion or more. ... 

These were grievous mistakes, they were self inflicted, we were accountable and 

we happened to violate our own standards and principles by how we want to 

 1474 5/2/2012 email from Ina Drew, CIO, to Ina Drew, CIO, [no subject], JPM-CIO-PSI 0001212-214, at 214. 1475 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 1-2, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf. 1476 See 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 73, 

http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=19617-12-213. 
261

operate the company. ... [W]e admit it, we will learn from it, we will fix it, we 

will move on, hopefully in the end, it will make us a better company.”1477

In response to questions during the call, Mr. Dimon also said:

“You should assume that we try to keep our readers update[d] about what we 

know and when we know it and it’s just a constant practice of the company. And 

when I said, it was caught, we started [to] dig into this more and more, most of the 

things were bearing big losses in the second quarter. And of course, when you 

start to see something like that you act probably – obviously we should have acted 

sooner.

[Analyst question]: [W]hen did the losses accumulate? [W]as this something that 

happened most recently or this was an era in the past and is just updating your risk 

amount now?

[Mr. Dimon]: There were small ones in the first quarter, but real ones that we 

talked about the $2 billion were all in the second quarter. And it kind of grew as 

the quarter went on. And obviously it got our attention, that and other things, 

which came to our attention.”1478

In July, the bank restated its earnings to increase its first quarter losses attributed to the SCP by 

$660 million, which the bank said fell to $459 million after taxes.

1479

B. Securities Laws

To ensure fair, open, and efficient markets for investors, Federal securities laws impose 

specific disclosure obligations on market participants. Under Securities and Exchange 

Commission Rule 10b-51480 and Section 17(a) of the Securities Act of 1933,

1481 it is against the 

law for issuers of securities to make untrue statements or omissions of material facts in 

connection with the sale or purchase of securities. In the JPMorgan Chase case study examined 

by the Subcommittee, the bank, as an issuer, has made disclosures that raise significant concerns 

about the accuracy of the information it provided to investors and about omissions of key

information. 

 1477 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2-3, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf. 1478 Id., at 4.

1479 7/13/2012 JPMorgan Chase & Co., Form 8-K, 

http://files.shareholder.com/downloads/ONE/1934577619x0x582872/d38931ff-a849-41ed-a804-

a94aff313272/Restatement_8-K_Cover.pdf (“On July 13, 2012, JPMorgan Chase & Co. reported that it will restate 

its previously-filed interim financial statements for the first quarter of 2012. The restatement will have the effect of 

reducing the Firm’s reported net income for the 2012 first quarter by $459 million (after-tax). The restatement 

relates to valuations of certain positions in the synthetic credit portfolio of the Firm’s Chief Investment Office.”).

1480 SEC Rule 10b-5 makes it unlawful to “make any untrue statement of a material fact or to omit to state a material 

fact necessary in order to make the statements made, in the light of the circumstances under which they were made, 

not misleading.” 17 C.F.R. Section 240.10b-5(b) (2011), adopted by the SEC pursuant to Section 10(b) of the 

Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C § 78(j)(b) (2006).

1481 15 U.S.C. § 77q(a) (1976).
262

(1) Rule 10b-5

Materiality. Disclosures are of concern under Federal securities laws when they involve 

“material” information. The Supreme Court has ruled that information is “material” when there 

is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the 

reasonable investor as having significantly altered the ‘total mix’ of information made 

available.”1482 Another court characterized the standard as follows: “Material facts include 

those that ‘affect the probable future of the company and [that] may affect the desire of investors 

to buy, sell, or hold the company's securities.’”1483 Courts have found that information about 

earnings estimates is generally material,1484 including any misrepresentation of a company’s 

earnings.1485 Changes in share price are also relevant to a materiality inquiry.1486 “[W]ith 

respect to contingent or speculative information or events, ... materiality ‘will depend at any 

given time upon a balancing of both the indicated probability that the event will occur and the 

anticipated magnitude of the event in light of the totality of the company activity.’”1487

In connection with buying or selling securities. Disclosures raising concerns under 

Federal securities laws must also be made in connection with the buying or selling of securities. 

Courts have held that a statement is made “in connection with” the purchase or sale of securities 

when it “is reasonably calculated to influence the average investor[.]”1488 In actions brought by 

the SEC, this approach “remains as broad and flexible as is necessary to accomplish the statute’s 

purpose of protecting investors.”1489 For example, statements in press releases, annual reports, 

quarterly and annual public SEC filings, and news articles can satisfy the “in connection with” 

element, because investors rely on such documents.1490 False and misleading statements in 

analyst calls associated with quarter-end earnings releases are also considered “in connection 

with” the purchase or sale of securities.1491 A longstanding SEC Release has warned that the 

prohibitions against false or misleading statements in Rule 10b-5, as well as Section 17 of the 

Securities Act of 1933, “apply to all company statements that can reasonably be expected to 

reach investors and the trading markets, whoever the intended primary audience.”1492

 1482 Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 

449 (1976)).

1483 Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 180 (2d Cir. 2001) (quoting SEC v. Texas Gulf Sulphur 

Co., 401 F.2d 833, 849 (2d Cir. 1968)). 1484 In re J. Douglas Elliott, Securities Exchange Act Rel. No. 34-40043 (May 29, 1998). 1485 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). 1486 See Crowell v. Ionics, Inc., 343 F. Supp. 2d 1 (D. Mass. 2004). 1487 Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 240 (1988) (citing SEC v. Texas Gulf Sulphur Co., 401 F. 2d 

833, 849 (2d Cir. 1968).). 1488 SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) (quoting SEC v. Hasho, 784 F.Supp. 1059, 1106 

(S.D.N.Y. 1992)). 

1489 Id.

1490 See, e.g., In re Ames Dep't Stores Stock Litig., 991 F.2d 953, 969 (2d Cir.1993) (annual reports, public 

statements, SEC filings).

1491 See SEC v. Koenig, No. CIV.A. 04-3370, at *2 (S.D. Tex. 2004) (final judgment); see also 8/25/2004 SEC 

Litigation Rel. No. 18849, “SEC Charges Mark E. Koenig, Former Executive Vice-President and Director of 

Investor Relations at Enron,” http://www.sec.gov/litigation/litreleases/lr18849.htm (alleging false and misleading 

statements on an analyst call associated with a quarter-end earnings release). 

1492 “Public Statements by Corporate Representatives,” Securities and Exchange Commission Rel. No. 6504 (Jan. 

13, 1984) (“The antifraud provisions of the federal securities laws [citing Section 17 of the Securities Act of 1933 

and Section 10(b) of the Exchange Act, and the rules thereunder, particularly Rule 10b-5] apply to all company 
263

Scienter. In addition to the required components of materiality and a connection to the 

purchase and sale of securities, disclosures are of concern under Rule 10b-5 only when the issuer

has the requisite scienter.1493 The Supreme Court has ruled that the scienter requirement can be 

met “by showing that the defendant acted intentionally or recklessly.”1494 One common 

definition of “reckless conduct” is “highly unreasonable [conduct], involving not merely simple, 

or even inexcusable negligence, but an extreme departure from the standards of ordinary care, 

and which presents a danger of misleading buyers or sellers that is either known to the defendant 

or is so obvious that the actor must have been aware of it.”1495 Recklessness can be the result of 

management making statements made on the basis of deficient corporate management systems. 

In such instances, companies “either must refrain from making any such statements about future 

performance or must disclose the basis on which any such statements are made and any other 

material information necessary to make such statements not misleading.”1496

Even if a corporation “discloses[s] the true situation” “within months,” it does not 

prevent a finding of scienter. In 

 

Makor Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), the 

court stated that the CEO “may have thought that there was a chance that the situation ... would 

right itself. If so, the benefits of concealment might exceed the costs[,]” analogizing his conduct 

to “embezzling in the hope that winning at the track will enable the embezzled funds to be 

replaced before they are discovered to be missing.”1497

 

statements that can reasonably be expected to reach investors and the trading markets, whoever the intended primary 

audience. Thus, as with any communications to investors, such statements should be not materially misleading, as 

the result of either misstatement or omission. To the extent that the standard for accuracy and completeness 

embodies in the antifraud provisions is not met, the company and any person responsible for the statements may be 

liable under the federal securities law.”).

1493 Aaron v. SEC, 446 U.S. 680, 695 (1980).

1494 Tellabs, Inc. v. Makor Issues & Rights, Ltd, 551 U.S. 308, 319 n.3 (2007) (“Every Court of Appeals that has 

considered the issues has held that a plaintiff may meet the scienter requirement by showing that the defendant acted 

intentionally or recklessly, though the Circuits differ on the degree of recklessness required.”)

1495 Sunstrand Corp. v. Sun Chem Corp., 553 F.2d 1033, 1045 (7th Cir. 1977). This standard is frequently cited by 

the courts, which have also either heightened or lowered it. See Donna M. Nagy et al., Securities Litigation and 

Enforcement, Cases and Materials, 3d Ed., at 116. See also Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 

(2d Cir.), cert. denied, 439 U.S. 1039 (1978) (defining reckless conduct in nearly identical language: “Reckless 

conduct is, at the least, which is ‘highly unreasonable’ and which represents ‘an extreme departure from the 

standards of ordinary care ... to the extent that the danger was either known to the defendant or so obvious that the 

defendant must have been aware of it.’”). The court in Rolf continued: “A representation certified as true .... when 

knowledge there is none, a reckless misstatement, or an opinion based on grounds so flimsy as to lead to the 

conclusion that there was no genuine belief in its truth, are all sufficient upon which to base liability.” Id., at 48 

(citing State Street Co. v. Ernst, 15 N.E. 2d 416, 418-19 (1938)).

1496 In the Matter of Waste Management, Inc., Securities Exchange Act Rel. No. 42968 (June 21, 2000), at *28-29 

(“The fact that the deficiencies in WMI's systems prevented management from receiving timely and reliable data 

about the company's performance does not excuse the company for making statements without a reasonable basis or 

without disclosing material facts necessary to make the statements not misleading.”). 

1497 Makor Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), 513 F. 3d 702, 709-710 (7th Cir. 2008) (“The critical 

question ... is how likely it is that the allegedly false statements ... were the result of merely careless mistakes at the 

management level based on false information fed it from below, rather than an intent to deceive or a reckless 

indifference to whether the statements were misleading. ... Against all this the defendants argue that they could have 

had no motive to paint the prospects for the 5500 and 6500 systems in rosy hues because within months they 

acknowledged their mistakes and disclosed the true situation of the two products, and because there is no indication 

that [the CEO] or anyone else who may have been in on the fraud profited from it financially. The argument 
264

(2) Section 17(a) of the Securities Act of 1933

In addition to Rule 10b-5, Section 17(a) of the Securities Act of 1933 forbids issuers from 

making misleading statements in connection with the offer or sale of securities. The courts have 

determined that Rule 10b-5 and Section 17(a) “prohibit essentially the same type of conduct.”1498 

Specifically, Section 17(a) makes it unlawful “in the offer or sale of any securities ... (1) to 

employ any device, scheme, or artifice to defraud; (2) to obtain money or property by means of 

any untrue statement of a material fact or any omission to state a material fact necessary to make 

the statement made not misleading; or (3) to engage in any transaction, practice, or course of 

business which operates or would operate as a fraud or deceit upon the purchaser.”1499 It applies 

to “any fraudulent scheme in an offer or sale of securities, whether in the course of an initial 

distribution or in the course of ordinary market trading.”1500 Unlike Rule 10b-5, however, 

Sections 17(a)(2) and 17(a)(3) do not require a finding of scienter.1501

C. Disclosures and Key Omissions Raising Concerns

JPMorgan Chase’s statements to investors, analysts, and the public in its press 

statements, earnings calls, and securities filings raise multiple questions about whether the bank 

met its obligations to disclose accurate material information about the Synthetic Credit Portfolio 

and the activities of its Chief Investment Office in 2012. Issues of concern involve primarily the 

April 2012 public disclosures which included: (1) mischaracterizing the involvement of the 

bank’s risk managers in SCP positions; (2) mischaracterizing the SCP as “fully transparent to the 

regulators;” (3) mischaracterizing SCP decisions as “made on a very long-term basis;” (4) 

mischaracterizing the SCP as a hedge; (5) asserting the SCP whale trades would be allowed 

under the Volcker Rule; and (6) omitting disclosure of a key VaR model change at the CIO. The 

mischaracterization of the SCP as a hedge was repeated again publicly in May 2012. 

(1) Mischaracterizing the Involvement of Firmwide Risk Managers 

On April 13, 2012, Mr. Braunstein, the bank’s Chief Financial Officer, speaking on 

behalf of JPMorgan Chase on an earnings call, stated that “[a]ll of those positions are put on 

 

confuses expected with realized benefits. [The CEO] may have thought there was a chance the situation regarding 

the two key products would right itself. If so, the benefits of concealment might exceed the costs.”).

1498 In the Matter of Leaddog Capital Markets, LLC, F/K/A Leaddog Capital Partners, Inc., Securities Exchange Act 

Rel. No. 468 (Sept. 14, 2012), at *28 (citing United States v. Naftalin, 441 U.S. 768, 778 (1979); SEC v. Pimco 

Advisors Fund Mgmt. LLC, 341 F. Supp. 2d 454, 469 (S.D.N.Y. 2004)).

1499 15 U.S.C. § 77q(a) (1976). 1500 U.S. v. Naftalin, 441 U.S. 768, 778 (1979); see also S.E.C. v. Am. Commodity Exch., Inc., 546 F.2d 1361, 1366 

(10th Cir. 1976) (“Because 17(a) applies to “offer[s] or sale[s] ... actual sales [are] not essential for a Section 17(a) 

claim.”); see also Donna M. Nagy et al., Securities Litigation and Enforcement, Cases and Materials, 3d Ed., at 338 

(“Section 17(a) provides the SEC with a powerful litigation weapon. Not only can liability be imposed on someone 

who was merely careless (under Sections 17(a)(2) and (a)(3)), whether in the context of an initial offering or in 

secondary market trading.”). 1501 Aaron v. SEC, 446 U.S. 680, at 697, 701-02 (1980); S.E.C. v. Pimco Advisors Fund Management LLC, 341 

F.Supp.2d 454, 469 (S.D.N.Y. 2004) (internal citations omitted) (“To establish a violation of Section 17(a), the SEC 

must demonstrate essentially the same elements required by a claim under Exchange Act Section 10(b) and Rule 

10b-5 thereunder, although no showing of scienter is required for the SEC to obtain an injunction under subsections 

(a)(2) or (a)(3) of Section 17(a).”).
265

pursuant to the risk management at the firm-wide level.”1502

JPMorgan Chase’s Chief Risk Officer John Hogan told the Subcommittee that, prior to 

the April 2012 media reports, he had been unaware of the size and nature of the SCP, much less 

its mounting losses.

 The evidence indicates, however, 

that in 2012, JPMorgan Chase’s firmwide risk managers knew little about the SCP and had no 

role in putting on its positions. In addition, at the moment Mr. Braunstein made his statement on 

April 13, the SCP had triggered all five of its risk limits, but that key fact was not mentioned. 

His statement may have misled investors concerned about the recently reported credit derivative

positions into believing that the firm’s respected risk management team had approved those 

positions.

1503 He had been appointed to the position in January 2012, and told the 

Subcommittee that he had been given only an initial introduction to the CIO.1504 On March 20, 

2012, the Risk Policy Committee of JPMorgan Chase’s Board of Directors held a meeting to 

discuss risk issues, which Mr. Hogan and his deputy, Ashley Bacon, attended, but neither the 

Synthetic Credit Portfolio trading strategy nor its mounting losses were discussed.1505 Mr. 

Hogan told the Subcommittee that the articles about the “London Whale,” which first appeared 

on April 6, 2012, surprised him.1506 Mr. Hogan said that the SCP was not on his radar in an 

“alarming way” prior to that date.1507

Moreover, to the extent that Mr. Braunstein may have been relying on CIO risk 

management, which reports to the firmwide risk management office, he was careless in doing so, 

given the deficiencies he knew existed in the CIO’s risk management office. Structurally, the 

CIO did not have a clear Chief Risk Officer until Irvin Goldman was appointed in January 

2012.

 Virtually no evidence indicates that he, his predecessor, or 

any other firmwide risk manager played a role in designing, analyzing, or approving the SCP 

positions acquired in 2012. 

1508 Mr. Goldman had no risk management experience and was still learning the job during 

the first quarter of 2012. In addition, although JPMorgan Chase’s written policy was to 

reevaluate the risk limits on an annual basis in all its lines of business,1509 CIO risk management 

had failed to review the CIO’s risk limits for three years.1510

 1502 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151 (stated by Douglas Braunstein).

 

1503 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 1504 Id. 1505 3/20/2012 presentation for JPMorgan Chase Directors Risk Policy Committee meeting, JPM-CIO-PSI 0013890. 1506 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 1507 Id. 1508 See Chapter V, “CIO Risk Management Personnel” section on the lack of clarity about the role of the CIO Chief 

Risk Officer prior to 2012.

1509 6/29/2010 JPMorgan Chase & Co., “Risk Policy: Model Risk Policy” JPMC-Senate/Levin 000026, at 33 

(“Annual Review. Each LOB must ensure all of its models are re-assed annually in light of: new developments in 

the literature or internal or commercially available models; changes in the market for the product (e.g. availability of 

liquid quotes for model input or major growth in volume); change in the features of the product or portfolio; backtesting of the model and experience with effectiveness of its application; the materiality of model risk.”). 1510 Prior to Mr. Braunstein’s statement, risk limits were last reviewed in 2009. See 2013 JPMorgan Chase Task 

Force Report, at 101, footnote 112, (“Under the Market Risk Limits Policy applicable to CIO before May 2011, the 

review of limits and limit utilizations was required only annually, as opposed to semi-annually. Notwithstanding 

this requirement, prior to May 2011, the last review of all CIO limits was conducted by CIO in 2009.”). 
266

At the same time, as described in Chapter V, the CIO had allowed the SCP to repeatedly 

breach the risk limits and metrics it had in place. Rather than react to those breaches by reducing 

the risky trading activities and assets in the SCP, the CIO traders instead reacted to the breaches

– of Value-at-Risk, Comprehensive Risk Measure, CS01, CSW10%, and stop loss limits – by

disregarding the limit or metric, raising the relevant limit to end the breach, or changing the 

model evaluating the risk to lower the SCP’s risk profile.

1511 In one case, the CIO’s risk officers 

allowed the CIO to breach a credit spread risk limit by more than 1,000% for over two 

months.

1512

In addition to problems with its risk limits and metrics, the CIO had an overdue Matter 

Requiring Attention from the OCC from 2010, regarding its need to document its portfolio 

decisionmaking process,

 

1513 and had recently been told in an Internal Audit report that its asset 

valuation practices “need[ed] improvement.”1514 Two days before the April 13 earnings call, 

Chief Risk Officer John Hogan emailed Mr. Braunstein and others about the discrepancy 

between CIO’s risk management procedures and the more robust Investment Bank (IB) system: 

“This is the governance used in the IB to control what is currently going on in CIO. We 

(obviously) need to implement this in CIO as soon as possible.”1515

In the April 13 8-K filing and earnings call, Mr. Braunstein made no mention of the CIO 

or SCP risk deficiencies or the many risk limit breaches triggered by the SCP during the first 

quarter of 2012, even though investors likely would have wanted to know that the whale trades 

had breached all of the relevant risk limits during the first quarter, and some of those breaches 

were ongoing. That information would have certainly weighed against the false impression that 

Mr. Braunstein imparted: that the whale trades were known to and had been approved by the 

bank’s risk managers. 

 

A month later, in the May 10 10-Q business update call, Mr. Dimon admitted serious risk 

management failings in connection with the SCP.

1516 That those risk management deficiencies 

were of interest to investors and analysts was shown, not only by the questions asked during the 

May 10 call, but also in later communications with the bank. JPMorgan Chase emails show that, 

after the May 10 call, analysts specifically asked about the bank’s risk management efforts.

1517

 1511 See Chapter V, “Disregarding CIO Risk Metrics.” 

 

1512 See 4/19/2012 email from Peter Weiland, CIO, to James Hohl, OCC, “Info on VaR, CSBPV, and stress status 

and limits,” OCC-SPI-00022340 (discussing CSBPV breach of 1074% over 71 days). 1513 See 12/8/2010 Supervisory Letter JPM-2010-80, OCC-SPI-00011201 [Sealed Exhibit]. The letter was copied to 

Jamie Dimon, Douglas Braunstein, Barry Zubrow, Stephen Cutler, and others. For more information about this 

letter, see Chapter VI. 

1514 See 3/30/2012 email from William McManus, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, and 

others, “Audit Report: EMEA CIO Credit- Market Risk and Valuation Practices (Rating Needs Improvement),” 

JPM-CIO-PSI 0009289. Mr. Braunstein told the Subcommittee that he did not recall reading the report at that time. 

Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). He also noted that the CIO wasn’t 

given the lowest rating that it could have been given on the Internal Audit’s rating spectrum. Id. 1515 4/11/2012 email from John Hogan, JPMorgan Chase, to Jes Staley, IB, Douglas Braunstein, JPMorgan Chase, 

and others, “Credit risk limits,” JPM CIO PSI 0001086.

1516 See 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 4, http://i.mktw.net/_newsimages/pdf/ 

jpm-conference-call.pdf. 1517 See, e.g., 5/10/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and 

others, “10Q call – Buyside and sellside comments (1),” JPM-CIO-PSI 0014783; 5/11/2012 email from Sarah 

Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10Q call – Buyside and sellside 
267

For example, hours after the May 10 call, one analyst asked the bank’s head of investor relations,

“who was watching the CIO? Doesn’t internal audit monitor this?”1518 Another analyst 

commented: “Pretty big confidence blow for best risk manager; very puzzling.”1519

Ultimately, the bankwide risk management function did take over the management of the 

Synthetic Credit Portfolio, but that did not occur not until April 27, two weeks after Mr. 

Braunstein’s statement. On April 27, Chief Risk Officer John Hogan sent his deputy, Ashley

Bacon, with Mr. O’Rahilly from the Investment Bank, to the CIO London trading office to 

analyze the portfolio’s transactions.1520

The bank and CEO Jamie Dimon have long touted its best-in-business approach to risk 

management which it claims contributes to its “fortress balance sheet.”1521

(2) Mischaracterizing SCP as “Fully Transparent to the Regulators” 

 By telling investors 

that its credit derivatives trades had been run by the bank’s respected firm risk management

team, Mr. Braunstein likely sought to instill investor confidence in the trades as ones where firmlevel risk experts had evaluated the positions on the basis of potential risk and signed off on 

them. The problem with this representation, however, is that it was not true.

On the April 13, 2012 earnings call, Mr. Braunstein also said the following with respect 

to the CIO’s Synthetic Credit Portfolio: 

“And I would add that all those positions are fully transparent to the regulators. 

They review them, have access to them at any point in time, get the information 

 

comments (3),” JPM-CIO-PSI 0017712 (“all, here are a few comments/themes regarding today’s calls ... questions 

around broader risk management issues ....”); 5/10/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, “10Q call – Buyside and sellside comments (2),” JPM-CIO-PSI 0017754 (“Is 

this something that we should be concerned about in terms of the culture or risk management across the firm?”). 1518 Id.

1519 Id. 1520 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Harry Weiss); Subcommittee interview of John Hogan 

and Ashley Bacon, JPMorgan Chase (9/4/2012) (describing how Mr. Bacon’s role with respect to the whale trades 

became “all consuming” on April 27).

1521 See, e.g., “America’s Traditional Strengths Will Win Out,” Fortune, Jamie Dimon (4/9/2009, last updated 

4/22/2009) http://money.cnn.com/2009/04/19/news/companies/dimon.fortune/index.htm (“Ultimately, however, it is 

up to us to manage our own companies wisely. That is why we have what I call a fortress balance sheet. What that 

means is a significant amount of capital; high quality of capital; strong liquidity; honest, transparent reporting; and 

excellent risk measurement and management. ... We have to balance risk taking with doing what's right for our 

customers and shareholders. I always say my grandma could have made those crazy profits by taking more risk. But 

are you building a better business?”); testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., First 

Public Hearing before the Financial Crisis Inquiry Commission, at 1-2 (January 13, 2010) http://fcicstatic.law.stanford.edu/cdn_media/fcic-testimony/2010-0113-Dimon.pdf (“As a result of our steadfast focus on risk 

management and prudent lending, and our disciplined approach to capital and liquidity management, we were able 

to avoid the worst outcomes experienced by others in the industry. ... We have always ... been acutely focused on 

maintaining a fortress balance sheet.”); JPMorgan Chase, “Our Business Principles,” at 5, 

http://www.jpmorganchase.com/corporate/About-JPMC/document/business_principles.pdf (“Create and maintain a 

fortress balance sheet.”).
268

on those positions on a regular and recurring basis as part of our normalized 

reporting.”1522

This statement by Mr. Braunstein had no basis in fact. The bank never provided the OCC 

with “a regular and recurring” report on the Synthetic Credit Portfolio trading positions. In fact, 

it was not until a month later, on May 17, 2012, that in response to an OCC special request, the 

bank provided the agency for the first time with specific SCP position level data.1523

Contrary to Mr. Braunstein’s representation, the bank was not “fully transparent” with its 

regulators regarding the SCP. As detailed in Chapter VI, although the SCP was established in 

2006, the bank did not include the name of the Synthetic Credit Portfolio in any document given 

to the OCC until January 2012.

 

1524 At the end of January 2012, CIO executives told OCC 

examiners that the Synthetic Credit Portfolio was being reduced in size,1525 leading the OCC to 

believe that the bank was planning to phase it out entirely within a year or two, when in truth the

bank was already engaged in a strategy to increase the portfolio’s size. At the same time the 

SCP was growing, the bank had ceased sending several regular CIO reports to the OCC during 

the first quarter of 2012.1526 As SCP losses mounted in March and April, the bank did not update 

the OCC about what was happening. Instead, the bank gave notice to the agency of the SCP’s 

problems in early May, only days before it disclosed such losses publicly as part of its 10-Q

filing.1527

By telling investors that the Synthetic Credit Portfolio positions were “fully transparent” 

to regulators, the bank likely sought to reassure investors about the risky whale trades that the 

 

 1522 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151 (stated by Douglas Braunstein). In his statement, Mr. Braunstein used the word, “fully,” to describe the 

bank’s SCP disclosures to regulators, even though that word had been deliberately removed from the bank’s initial 

talking points about the whale trades, as discussed above.

1523 See 5/17/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, OCC, and others, “History of Trades,” 

OCC-00004035; Subcommittee interview of Elwyn Wong, OCC (8/20/2012); Subcommittee interview of Michael 

Sullivan, OCC (8/30/2012); 5/18/2012 email from Michael Kirk, OCC, to Elwyn Wong, OCC, “CIO Call With 

Mike Brosnan,” OCC-SPI-00021628 at 630 (quoting 5/17/2012 email chain from Fred Crumlish: “I told Mike B 

[Brosnan] that the Joe Sabatini emails with selected position information were sent by the bank after initial OCC and 

FRB enquiries. We concluded this information was pretty much useless, as it did not tell us what was happening 

risk wise.”) (referencing the “Joe Sabatini emails:” 4/10/2012 email from Joseph Sabatini, JPMorgan Chase, to Fred 

Crumlish, OCC, and others, “Background and Supporting Data for CIO Discussion of April 9, 2012,” OCC-SPI00004312).

1524 10/26/2012 OCC Confidential Supervisory Report, PSI-OCC-13-000025 [Sealed Exhibit] (“The firmwide VaR 

report for this date [January 27, 2012] is the first one that identifies SCP as a distinct risk taking unit in CIO and it 

accounts for over 90% of the CIO VaR.”).

1525 See discussion in Chapter VI, citing, e.g., 1/31/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, 

“CIO Quarterly Meeting,” OCC-SPI-00004695. 1526 See discussion in Chapter VI, citing to 4/19/2012 email from James Hohl, OCC, to Geralynn Batista, OCC, 

“CIO portfolio,” OCC-SPI-00021700 (regarding missing Executive Management Reports); 4/13/2012 email from 

John Bellando, JPMorgan Chase, to James Hohl, OCC, “CIO January 2012 valuation memo and metri[c]s,” OCC00004735 (regarding missing CIO Valuation Control Group reports); Subcommittee interview of James Hohl, OCC 

(9/5/2012) (regarding missing CIO Executive Management Reports and missing CIO Valuation Control Group 

reports).

1527 See discussion in Chapter VI, citing, e.g., 5/4/2012 email from Scott Waterhouse, OCC, to Fred Crumlish, OCC, 

CIO Synthetic Position, OCC-SPI-00013763 (“Doug Braunstein and John Hogan called to provide an update on the 

CIO position. . . . Current losses are approximately $1.6 billion.”).
269

media had characterized as large enough to “driv[e] prices in the $10 trillion market.”1528

(3) Mischaracterizing SCP Decisions as “Made on a Very 

 It 

would be reasonable for investors to want to know if such large positions were known to the 

bank’s regulators. Investors might have reasoned that such trades, if known to regulators, could 

not have been overly risky; but if hidden, investors might have worried they were high risk 

transactions that regulators might otherwise have challenged. 

Long-Term Basis”

On the April 13, 2012 earnings call, Mr. Braunstein indicated that the SCP book provided 

stress loss protection against credit risk and that with regard to “managing” the stress loss 

positions, “[a]ll of those decisions are made on a very long-term basis.”1529

In general, the Synthetic Credit Portfolio did not have a “long-term” investment horizon. 

To the contrary, since at least 2010, CIO head Ina Drew’s presentations to her colleagues at the 

bank, including Mr. Braunstein, showed that the Synthetic Credit Portfolio, which was part of the 

larger Tactical Asset Allocation portfolio, had the shortest investment horizon of all of the 

portfolios in the CIO.

 His statement 

suggested that the SCP had no short-term trading strategies or tactics to guide the portfolio. In 

fact, however, many of the SCP trading strategies and tactics employed a short time horizon, 

changing on a monthly or even day-to-day basis. Mr. Braunstein’s statement was inconsistent 

with both the overall short-term posture of the portfolio, as well as the portfolio’s 

decisionmaking since at least 2011. It was contrary to the facts.

1530 One of those presentations by Ms. Drew, reprinted below, took place 

in March 2012, just a month before the earnings call.1531

 1528 “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg, Stephanie Ruhle, Bradley Keoun & 

Mary Childs (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-todistort-credit-indexes.html (“A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of 

corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside 

the firm said.”).

1529 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151. 1530 See, e.g., 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” presentation 

prepared by Ina Drew and Irvin Goldman, CIO, JPM-CIO-PSI 0015015; 2/28/2012 email from John Wilmot, CIO, 

to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and others, “CIO Business Review Materials,” JPM-CIOPSI 0001940, at 8; 9/2010 “Chief Investment Office Presentation to the Directors Risk Policy Committee,” 

presentation prepared by Ina Drew, CIO, OCC-SPI-000032575, at 576 (showing an earlier version of the same page 

regarding short-to-long term investment horizon, with “Tactical Investing,” which included the Synthetic Credit 

Portfolio, as the portfolio in CIO with the shortest investment horizon). 

1531 See 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” presentation prepared 

by Ina Drew and Irvin Goldman, at CIO, JPM-CIO-PSI 0015016.
270

Source: 3/2012 “Directors Risk Policy Committee – CIO 2012 Opportunities and Challenges,” presentation 

prepared by Ina Drew and Irvin Goldman, CIO, JPM-CIO-PSI 0015016. Synthetic Credit Portfolio was in “International”
271

Secondly, Mr. Braunstein’s “long-term” characterization is belied by the sheer volume of 

short-term trading in the SCP. For example, on January 27, 2012, the CIO traders engaged in 

139 trades involving the SCP book.

1532 On that date, the traders repeatedly bought and sold 

positions in the IG9 10-year credit index at a range of prices; the number of those transactions 

alone exceeded 26.

1533 Buying and selling the same credit positions on the same day at a variety 

of prices is not consistent with making investment decisions on a long-term basis. Altogether in 

the first quarter of 2012, traders executed over 4,300 trades.1534 In addition, in 2011, the CIO

traders engaged in a massive trading strategy that was designed to last only a few months near 

the end of the year; as part of that strategy, the CIO traders increased the exposure of the 

Synthetic Credit Portfolio by 10,000% to the HY credit index over the span of a single month, 

from October to November 2011.1535 Overall, in the first three months of 2012, the CIO tripled 

the size of the SCP book, taking it from $51 billion to $157 billion, in a buying spree that was 

not motivated by decisionmaking on a “very long-term basis.” When asked about these types of 

trades, JPMorgan Chase conceded to the Subcommittee that the SCP book was “actively” 

traded.1536

Moreover, as discussed earlier, in the first quarter of 2012, the SCP book was being 

managed to meet a number of short-term trading objectives. One was to produce short-term 

“carry” to offset some of the losses associated with its high yield credit protection, the value of 

which was deteriorating because of the market rally.1537 Another was to enter into trades that 

would substantially lower the SCP’s Risk Weighted Assets.1538 In January 2012, CIO trader 

Bruno Iksil noted in an internal presentation that the “trades that made sense” included “turn[ing] 

the position[s] over to monetize volatility.”1539 Turning over a position to “monetize” volatility 

meant that the trading strategy was to flip the position, that is, buy low, and sell high.1540

Whether or not Mr. Braunstein was aware of that level of detail in the CIO trading 

operations, on the day before the April 13 earnings call, Ina Drew briefed him that the SCP book

 Each 

of these trading strategies is inconsistent with long-term decisionmaking.

 1532 Undated spreadsheet of trades from 10/3/2011 to 5/14/2012 produced by JPMorgan Chase in response to a 

Subcommittee request, JPM-CIO-PSI 0037501. 1533 Id. 1534 Undated spreadsheet of trades from 10/3/2011 to 5/14/2012 produced by JPMorgan Chase in response to a 

Subcommittee request, JPM-CIO-PSI 0037501. 1535 See data analysis by OCC, using DTCC data for the bank. “JPMC-CIO timeline of Significant Events and OCC 

Discovery,” OCC-SPI-00038895, at 6. See also 10/26/2012 OCC Confidential Supervisory Report, Appendix 11-B, 

“Caveman Trade,” PSI-OCC-13-000121. For more information on this 2011 trading strategy, see Chapter III. 1536 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot); Subcommittee interview of Peter 

Weiland, CIO (8/29/2012).

1537 See Chapter III, “SCP Trading” on the strategy implemented by CIO traders. 1538 See 1/19/2012 email from Achilles Macris, CIO, to Ina Drew, CIO, and others, “Credit book Decision Table –

Scenario clarification,” JPM-CIO-PSI 0000152. Ms. Drew told the CIO traders to reduce RWA while still 

maintaining profit levels, that is, “review the unwind plan to maximize p l [profit-loss].” See 1/10/2012 email from

Ina Drew, CIO, to Javier Martin-Artajo, CIO, and others, “International Credit Consolidated P&L 09-Jan-2012,” 

JPM-CIO-PSI 0000075.

1539 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 0000161. 1540 See Subcommittee interview of Michael Sullivan, OCC (8/30/2012).
272

had increased in size since January and had changed from a net short to a net long posture,

1541

signaling short-term changes in the portfolio’s size and strategy. In addition, Achilles Macris, 

who oversaw the SCP trading, emailed Mr. Braunstein on April 8, 2012 that: “the most 

rewarding, short-term catalyst for CIO would be an MBIA related default event[.]”1542

Telling investors that “all of the decisions” in the SCP were made on a “very long-term

basis” appears to have been an attempt to signal that the portfolio was handled in a conservative 

manner without the risks associated with short-term trading activities. It was also a description 

at odds with the facts, given that the SCP had tripled in size in just three months and had 

acquired billions of dollars in new credit derivative holdings in March alone which shifted the 

portfolio from a net short to a net long posture. Investors were not told that from 2011 to 2012, 

there were major strategic changes in the portfolio’s goals, tactical changes about how to 

accomplish those goals, and daily position transactions, sometimes of substantial volume, 

followed by escalating losses. They also weren’t told that, on March 23, 2012, Ms. Drew 

ordered SCP trading halted altogether so that the bank could analyze and gain control of the 

portfolio. By April 13, 2012, it was a portfolio in disarray, not one whose every decision had 

been made on a “very long term basis.”

 His email 

did not discuss any “very long-term” decisionmaking measures regarding the SCP. 

(4) Mischaracterizing SCP Whale Trades As Hedges 

In early April 2012, as the bank was responding to media inquiries about the whale 

trades, it made multiple statements that the purpose of the CIO’s Synthetic Credit Portfolio was 

to hedge the bank’s risks. For example, one article reported the following: 

“Joe Evangelisti, a spokesman for J.P. Morgan, declined to comment on specific 

trades, or Mr. Iksil, except to say that recent trades were made to hedge the firm’s 

overall risk. The group ‘aims to hedge the bank’s global structural risks and the 

unit’s investments are directly related to managing those risks,’ he said. The bank 

views its recent selling in the context of a range of related positions and feels its 

risk is now effectively balanced, added Mr. Evangelisti.”1543

Two days later, during the bank’s April 13 earnings call, Mr. Braunstein explained: 

“[W]e also need to manage the stress loss associated with that portfolio and – so 

we have put on positions to manage for a significant stress event in credit. We've 

had that position on for many years, and the activities that have been reported in 

the paper are basically part of managing that stress loss position, which we 

moderate and change over time, depending upon our views as to what the risks 

are for our stress loss from credit. All of those decisions are made on a very longterm basis. They’re done to keep the company effectively balanced from a risk 

 1541 See 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and others, 

“Synthetic Credit Materials,” at JPM-CIO-PSI 0001103 (see table comparing “main exposures” of the book in 

January and Current). 

1542 4/8/2012 email from Achilles Macris, CIO, to Ina Drew, CIO, and others, “Synthetic Credit Summary,” JPMCIO-PSI 0001588 [underline in original]. 1543 “Making Waves Against ‘Whale,’” Wall Street Journal, Katy Burne (4/11/2012). 
273

standpoint. We are very comfortable with our positions as they are held 

today.”1544

When Mr. Dimon was asked about the Synthetic Credit Portfolio on April 13, he said that 

it “offset” other bank exposures: 

“It’s a complete tempest in a teapot. Every bank has a major portfolio. In those 

portfolios, you make investments that you think are wise, that offset your exposures. 

Obviously, it’s a big portfolio. ... But at the end of the day, that’s our job, is to invest 

that portfolio wisely and intelligently to – over a long period of time to earn income and 

to offset other exposures we have.”1545

A month later, during the May 10 business update call, Mr. Dimon three times described 

the Synthetic Credit Portfolio as a hedge:

“[T]he synthetic credit portfolio was a strategy to hedge the Firm’s overall credit 

exposure, which is our largest risk overall .... We’re reducing that hedge. ... 

The portfolio has proven to be riskier, more volatile and less effective [an] 

economic hedge than we thought.”1546

While their language varied, these communications all made the same point, which is that the 

SCP was a counterbalance to potential losses in other parts of the bank. Given the briefing 

materials executives had, however, it was inaccurate for the bank to describe the SCP as a hedge,

because it did not reflect the true nature of the portfolio and its potential for losses at that time.

No Clear Offsets. As described in Chapter III, the purpose of the SCP was 

undocumented, unclear, and changed over time.1547 The assets that the SCP was purportedly 

hedging were not identified or defined in writing, and calculating the size and nature of the 

hedge was treated as a “guesstimate.”1548 Days before the April 13 earnings call, Mr. Dimon 

asked his colleagues, including Mr. Braunstein, for the correlation between the SCP and the 

portfolio the SCP was meant to hedge.1549 Mr. Dimon told the Subcommittee that he did not 

recall if he received a response.1550 Ms. Drew, who had told her colleagues she was “working on 

Jamie’s request for correlation,”1551 told the Subcommittee that so many events were unfolding 

at the time, that she did not recall if the correlation analysis was sent to him.1552

 1544 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151.

 The 

Subcommittee found no evidence that it was. Mr. Hogan also requested a correlation analysis to 

1545 Id., at 10. 1546 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf. In addition, Mr. Dimon characterized the portfolio as a hedge five more times when responding 

to questions on the May 10 call.

1547 See Chapter III, section entitled “Purpose of the Synthetic Credit Portfolio: Undocumented, Unclear, and Subject 

to Change.”

1548 Subcommittee interview of Ina Drew, CIO (9/7/2012).

1549 See 4/11/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “updated,” JPM-CIOPSI 0001077 (“[w]e are working on Jamie’s request for [c]orrelation of the credit book against the portfolio”).

1550 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1551 See 4/11/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “updated,” JPM-CIOPSI 0001077 (“[w]e are working on Jamie’s request for [c]orrelation of the credit book against the portfolio”).

1552 Subcommittee interview of Ina Drew, CIO (12/11/2012).
274

respond to regulators’ questions about the SCP, and included Mr. Braunstein on his email,1553

but JPMorgan Chase never produced it.1554

Net Long Posture. Mr. Braunstein explained to the Subcommittee that JPMorgan 

Chase, by its very nature as a bank which loans money, was “long” credit, because when credit 

deteriorated, the bank lost money.

 

1555 In contrast, a portfolio that held a “short” credit position

generally gained money when credit deteriorated. On April 5, 2012, in anticipation of the press 

articles due to be published the following day,1556

“The book has been extremely profitable for the company .... Going into the 

[financial] crisis we used the book to hedge ... credit widening .... Post December 

as the macros scenario was upgraded and our investment activities turned pro risk, 

the book was moved into a long position.”

Ms. Drew sent Mr. Dimon, Mr. Braunstein, 

and other members of the JPMorgan Chase Operating Committee an email on April 5 stating:

1557

Mr. Braunstein told the Subcommittee that he was sure he read the email, though he was not 

aware of this particular sentence.1558

The Subcommittee staff asked JPMorgan Chase’s officials to reconcile how the SCP 

could simultaneously be both “long,” and serve as a hedge in 2012, when the bank itself was 

“long.” If the SCP had the same overall long exposure as the bank overall, the SCP would lose 

money when the bank lost money, instead of offseting the bank’s losses. The Chief Risk Officer 

for the firm, John Hogan, and his deputy, Ashley Bacon, conceded that they could not reconcile 

the SCP holding a long position and also functioning as a hedge for the bank.

 

1559 Similarly, John 

Wilmot, the Chief Financial Officer of the CIO, was unable to do so.1560 Joseph Bonocore, the 

former Chief Financial Officer for the CIO and the former Treasurer for JPMorgan Chase, stated 

that he did not believe the book could both be long and maintain a hedge against losses in a 

credit crisis.1561

 1553 4/10/2012 email from John Hogan, JPMorgan Chase, to John Wilmot, CIO, Douglas Braunstein, JPMorgan 

Chase, Jamie Dimon, JPMorgan Chase, and others, “Materials for FED/OCC Questions,” JPM-CIO-PSI 0001021.

 Mr. Iksil told an internal bank investigation that he believed the book needed to 

1554 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). See also Subcommittee interview of Michael 

Kirk, OCC (8/22/1012); 4/10/2012 email from Michael Kirk, OCC, to Fred Crumlish, OCC, and others, “CIO info 

on elephant trade,” OCC-00004730 (Mr. Kirk: “What would be helpful would be to see the stress scenarios without 

these assets, and with these assets so one can understand the impact. ... It would also be helpful if the CIO could 

provide some indication of a present target level they are trying to achieve, and hence the change of activity that 

resulted in the same (in other words results prior to and after recent trades.).” Mr. Crumlish: “In my response on 

JPM email .... I also said it would be useful if they provided analytics or a summary that recapped the hedge 

strategy, such as the expected impact of the hedge on the projected stress loss identified. I asked for this on the call 

as well.”); see 4/10/2012 email from Fred Crumlish, OCC to Scott Waterhouse, OCC, and others, JPM CIO trades, 

OCC-00004087 (“We asked the bank for a number of items yesterday that reflect details on the trades and support 

the stress loss hedge rationale associated with this particular strategy.”).

1555 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1556 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI 

0000539 (“I want to update the operating committee on what is going on with the credit derivatives book in CIO 

especially given a wsj article which will come out tomorrow.”)

1557 Id. 1558 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).

1559 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 1560 Subcommittee interview of John Wilmot, CIO (9/11/2012). 1561 Subcommittee interview of Joseph Bonocore, CIO (9/11/2012).
275

be long in order to be stable, but recognized that having the book be long was inconsistent with 

its mission.1562

In contrast, Mr. Braunstein told the Subcommittee that the SCP book could both be long 

and provide a “fat tail hedge.”

 

1563 Mr. Dimon concurred.1564 However, Mr. Dimon conceded 

that the email from Ms. Drew described the SCP book as long and did not indicate that it 

nevertheless provided a fat tail hedge.1565 When Mr. Braunstein was asked how he knew the 

book provided a fat tail hedge, he said there may have been discussions about it and, in any 

event, how the book was characterized on the earnings call on April 13 was how “we” thought 

the book was at the time.1566

Other JPMorgan Chase personnel told the Subcommittee that the SCP book had stopped 

functioning as a hedge well before April 13. Irvin Goldman, former Chief Risk Officer for the 

CIO, explained that the book had stopped being a “macro hedge” in December 2011, when they 

decided the capital costs of synthetic derivatives exceeded their economic value.

 

1567 Javier

Martin-Artajo, head of CIO equity and credit trading, told an internal bank investigation that 

when a question arose as to whether the book would be unwound in January 2012, his 

supervisor, Achilles Macris, told him that the book no longer needed to hedge tail risk and that it 

did not need to provide a “payout.”1568 CIO head Ina Drew – who characterized the book as 

“long” on April 5 – told the Subcommittee that when the SCP was a “pure” high yield short, it 

qualified as a hedge under the Volcker Rule, but that the SCP had “morphed” and was no longer 

a pure high yield short; at that point, it should not qualify as, and was not, a hedge.1569 Mr. 

Dimon expressed a similar sentiment when asked about the Synthetic Credit Portfolio at a Senate 

hearing in June 2012; he testified that, over time, the “portfolio morphed into something that 

rather than protect the firm, created new and potentially larger risks.”1570 Even Mr. Braunstein 

admitted that “there is a point where [the portfolio] ceased to perform in a manner to protect 

credit positions” of the firm.1571

The bank’s regulators, the OCC, also expressed skepticism about the SCP functioning as 

a hedge. In a May 2012 internal email, one OCC examiner referred to the SCP as a “make 

believe voodoo magic ‘composite hedge.’”1572 

Scenario Analysis Showed SCP Was Not a Hedge. The statements by Mr. Braunstein 

and Mr. Dimon were also contradicted by an internal bank analysis that both received two days 

 1562 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 8/27/2012). 1563 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1564 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1565 Id. 1566 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1567 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 1568 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the Subcommittee on 

9/6/2012).

1569 Subcommittee interview of Ina Drew, CIO (9/7/2012). 1570 Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “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), http://www.cq.com/doc/congressionaltranscripts-4105471. 1571 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1572 5/18/2012 email from Elwyn Wong, OCC, to Michael Kirk, OCC, “CIO call with Mike Brosnan,” OCC-SPI00021602.
276

before the earnings call. That analysis clearly depicted the SCP as in a long posture and likely to 

lose money in a negative credit environment – which meant it was not operating as a hedge to 

offset the bank’s other credit risks.

On April 11, 2012, an internal CIO presentation prepared for senior management, 

including Messrs. Dimon and Braunstein, reinforced Ms. Drew’s April 5 characterization of the 

book as long.1573 The presentation was prepared by the CIO traders with input from the head of 

JPMorgan Chase’s Model Risk and Development Group, as well as his deputy, who had 

previously been a credit trader in the Investment Bank.1574 On page 3 of that presentation, 

entitled “Synthetic Credit Summary: Risk & P&L Scenarios,” reprinted below, a table showed

that in multiple credit spread widening environments – i.e., situations in which credit deteriorated

and the risk of default increased – the SCP would lose money.1575 

 1573 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, “synthetic credit 

information,” JPM-CIO-PSI 0001701. 1574 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC-35-000001 

(explaining that the presentation was prepared “with input from C.S. Venkatakrishnan and Olivier Vigneron”). 

1575 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and others, 

“synthetic credit information,” JPM-CIO-PSI 0001701, at 704.
277

Source: 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and 

others, “synthetic credit information,” JPM-CIO-PSI 0001701, at 704 [emphasis added with arrows and circle].

Specifically, the presentation showed that, if credit spreads widened by one basis point, 

the book would lose $46 million. This result is shown in the first table on the left, reprinted 

above, in the first column captioned “Spr01,” in the row captioned, “Synthetic Total.” The table 

also showed that if credit spreads widened by 10%, the book would lose $163 million. This 

result is shown in the next column, captioned “Spr+10%,” in the bottom-most entry. Finally, the 

table showed in the last column that, if credit spreads widened by 50%, the book would lose 

$918 million – nearly $1 billion. 

The SCP book was not always projected to lose money in a negative credit environment. 

As recently as February 2012, in another internal CIO presentation reprinted below, when the 

SCP book was characterized as hedging “tail risk,” if credit spreads widened by 50%, the book 

was expected to generate $100 million in gains, and it was expected to roughly break even if 

credit spreads widened by 10%.

1576 Mr. Braunstein, who received this presentation, told the 

Subcommittee he did not focus on this page.1577

 1576 2/2012 “CIO February 2012 Business Review,” JPM-CIO-PSI 0000289, at 311. 1577 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).
278

Source: 2/2012 “CIO February 2012 Business Review,” JPM-CIO-PSI 0000289, at 311 [emphasis added with circle 

around line graph].
279

As the February chart above indicates, the SCP book was projected to lose a small 

amount of money until spreads widened more than 10%, and then when spreads widened by 

50%, the book’s profits were projected to increase dramatically. But by April 11, as shown in 

the earlier presentation, the SCP book’s assets had changed, the book’s net position had shifted 

from net short to net long, and it no longer was projected to generate money when spreads 

widened. To the contrary, by April 11, the SCP was projected to lose money not only when 

spreads widened by 10%, but also when they widened by 50%. 

When asked to explain how he could have believed that the book continued to provide 

stress loss protection given the information on page 3 of the April 11 presentation, Mr. 

Braunstein told the Subcommittee that he had not relied on that part of the presentation, but 

rather on three other scenarios on a subsequent page.1578 He referred the Subcommittee staff to 

page 7 of the April 11 presentation, reprinted below, and stated that he relied on the three

scenarios that, collectively, were projected to have an “80% likelihood” of occurring.1579

 1578 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).

1579 Id. (referring to 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, Douglas 

Braunstein, JPMorgan Chase, and others, “synthetic credit information,” JPM-CIO-PSI 0001701, at 708).
280

Source: 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, 

JPMorgan Chase, and others, “synthetic credit information,” JPM-CIO-PSI 0001701, at 708 [emphasis added with 

circle and box around existing text].
281

The three scenarios he referenced, numbered 4, 5, and 6, above, considered what would 

happen in the event of a “New Financial Crisis,” if the “Status Quo” continued, or if a “Central 

Scenario” took place. But contrary to Mr. Braunstein’s statement, all three scenarios indicated

that the SCP book had stopped providing stress loss protection and would likely lose money. 

Scenario 4, labeled “New Financial Crisis,” considered what would happen if credit 

spreads widened by 25%, and projected that, in that scenario, the SCP would lose $250 million. 

Several JPMorgan Chase officials had told the Subcommittee that a financial crisis continued to 

be the “tail event” that the book was meant to hedge.1580 Mr. Dimon explained that it was the 

original purpose of the hedge,

1581 and that the SCP had made money for JPMorgan Chase during 

the 2008 financial crisis as a hedge against credit widening.1582

Scenario 5 considered what would happen under the “Status Quo.” In this scenario, as 

the name indicated, credit spreads did not tighten or widen, yet the SCP was projected to lose 

$150 million. In fact, the narrative below the chart indicated that, under this scenario, the SCP

would lose $300 million, but those losses would be partially offset by the book’s positive carry –

that is, the premiums the book would take in from having sold long credit protection to short 

parties.

 Yet by April 11, 2012, the bank 

projected that the SCP would lose money in just such a scenario, a projection inconsistent with a 

book intended to provide protection against stress loss from credit risk.

1583

Scenario 6 considered what would happen under the so-called “Central Scenario.” In this 

scenario, credit spreads tightened by 15%, and the SCP book was projected to make a profit of 

$350 million. In other words, the SCP book would make money during a bull market when the 

credit environment improved. That is the opposite of what Ms. Drew had described as the 

purpose of the book – that when it was a hedge, the book provided protection against credit 

spread widening events.1584

These three scenarios in the April 11 presentation indicated that when the credit 

environment improved, the SCP would make money, and that when credit deteriorated (or stayed

the same), the SCP would lose money. Far from indicating that the SCP provided stress loss 

protection associated with credit risk, the April 11 presentation showed that the SCP book held 

the same long position as the bank and did not support Mr. Braunstein or Mr. Dimon’s 

descriptions of the SCP as an offset of the bank’s other credit exposures or as stress loss 

protection.

 1580 Subcommittee briefing by JPMorgan Chase (8/15/2012) (stated by Gregg Gunselman). 1581 Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., “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), http://www.cq.com/doc/congressionaltranscripts-4105471 (“[W]hat I'm 

told is they thought what they were doing is a more cost-efficient way to reduce the exposure and maintain some of 

hedge against back-tail events.”). 1582 As Ina Drew herself pointed out to Mr. Braunstein and other members of the operating committee a week before 

the earnings call: “Going into the [financial] crisis we used the book to hedge ... credit widening.” See 4/5/2012 

email from Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, “CIO,” JPM-CIO-PSI 0000539. 1583 See 4/11/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “updated,” JPM-CIOPSI 0001077, with chart entitled “Synthetic Credit Summary,” at 078 (“-300MM due to ‘duration extension’ as we 

project that the short-dated short risk duration in IG will contract as expiry approaches”). 1584 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, “CIO,” JPM-CIO-PSI 

0000539.
282

During his interview, the Subcommittee asked Mr. Dimon to reconcile Mr. Braunstein’s 

public statements with the fact that none of the scenarios that Mr. Braunstein himself said he 

relied on indicated that the book functioned as a hedge. First, Mr. Dimon contended that the 

bank’s investors – the target audience of the earnings call – would not have cared if the book was 

a hedge, implying that Mr. Braunstein would have had no reason to discuss, on an earnings call, 

whether or not the book functioned as a hedge.1585 The bank knew, however, that it did matter to 

investors if the SCP was a hedge, as the head of investor relations emailed to Mr. Dimon after 

the May 10 call: “Need to manage this in DC because the hit there is going to be a lot bigger than 

the hit on earnings.”1586 Secondly, Mr. Dimon noted that he himself had been told it was a 

hedge, and “[n]obody said [to Mr. Braunstein] ‘Why don’t you go out there and lie.’”1587 At that 

point, JPMorgan Chase’s General Counsel intervened and denied that Mr. Braunstein had, on the 

earnings call, said that the book functioned as a hedge.1588

Mr. Braunstein subsequently sent a letter to the Subcommittee seeking to “clarify” 

whether he had, in fact, told the Subcommittee that he had relied on the three specific scenarios 

on page 7 of the April 11 presentation in developing his view of the hedging status of the 

SCP.

 

1589 The letter stated that it sought to “clarify one aspect of my interview with you and 

others on September 12, 2012, as to which I understand from discussions with my counsel that 

there may be some misunderstanding.”1590

SCP’s History. As noted above, during the interview with Mr. Dimon, JPMorgan 

Chase’s General Counsel denied that Mr. Braunstein had characterized the SCP book as a hedge 

during the April earnings call.

 The letter offered two additional explanations for Mr. 

Braunstein’s comments on the earnings call, which are described below.

1591 In the letter, Mr. Braunstein did not repeat that denial. Rather, 

he explained that his “statements on April 13 regarding those hedging characteristics were 

references to the portfolio’s design and historical performance as a hedge.”1592

Mr. Braunstein’s comments on April 13 did not indicate, however, that he was speaking 

about the portfolio’s “design and historical performance as a hedge.” Mr. Braunstein’s 

comments were in the present tense, referred to recent press articles, and conveyed a description 

 1585 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1586 5/10/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10-

Q call – Buyside and sellside comments (2),” JPM-CIO-PSI 0017754, at 756 (summarizing questions from analysts 

after the call about hedging, e.g., ‘Have a lot of contacts in Washington who said this is going to be a big deal for 

Volcker; need to manage this in DC because the hit there is going to be a lot bigger than the hit on earnings.”). See 

also, e.g., 5/11/2012 email from Sarah Youngwood to Jamie Dimon, JPMorgan Chase, and others, “10-Q call 0 

Buyside and sellside comments (5),” JPM-CIO-PSI 0014833 (“What did the CIO-related loss stem from? A hedge 

position or a prop trade?”).

1587 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1588 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012) (intervention by Stephen Cutler, 

JPMorgan Chase).

1589 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC-35-000001 

(clarifying statements made about the Synthetic Credit Portfolio during the 9/12/2012 interview with the 

Subcommittee). 

1590 Id. 

1591 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012).

1592 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC-35-000001 

(clarifying statements made about the Synthetic Credit Portfolio during the 9/12/2012 interview with the 

Subcommittee). 
283

of the SCP as it stood on that day, not at some historical date. As Mr. Braunstein said on the 

call: “We ... need to manage the stress loss associated with that portfolio .... We have put on 

positions to manage for a significant stress event in credit .... the activities that have been 

reported in the paper are basically part of managing that stress loss position[.]”1593 He also 

stated: “They’re done to keep the company effectively balanced from a risk standpoint. We are 

very comfortable with our positions as they are held today.” Use of the word, “today,” indicates 

that Mr. Braunstein was not presenting a historical view. Moreover, if he had not been speaking 

about the SCP’s current function as a hedge, it is unclear why he then said that the SCP trading

“is consistent with what we believe the ultimate outcome will be related to Volcker.”1594

In addition, while Mr. Braunstein’s letter discussed only his own statements, other 

statements made by Mr. Dimon and Joseph Evangelisti, the bank’s senior spokesperson, were 

also framed in the present tense.

 

1595 In fact, even one month later, on May 10, Mr. Dimon 

continued to mischaracterize the SCP as a “hedge.”1596

No “Fat Tail Hedge.” In addition to contending that he was discussing the SCP’s 

function as a hedge in a historical sense, Mr. Braunstein’s letter to the Subcommittee also 

explained that he had described the SCP as a hedge after “receiv[ing] information from a number 

of sources regarding the CIO/London Whale issue” including “numerous conversations with Ina 

Drew, J.P. Morgan’s Chief Investment Officer, and members of her London-based team, 

including the CIO’s Chief Risk Officer and Chief Financial Officer, as well as John Hogan, J.P. 

Morgan’s Chief Risk Officer.” He also “specifically recalled” the April 11 presentation, 

described above.1597 These sources do not provide a reasonable basis, however, for Mr. 

Braunstein’s characterization of the SCP as a hedge.

On April 5, Ina Drew emailed Mr. Braunstein and other executives, including Jamie 

Dimon, to explain the CIO’s derivatives activity. She wrote: “Post December [2011] as the 

macro scenario was upgraded and our investment activities turned pro risk, the book was moved 

into a long position.”1598 As detailed in Chapter III, holding a net “long position” is not 

consistent with the SCP being a hedge.

Achilles Macris, the head of the “London-based team” from which Mr. Braunstein said 

he gathered information, provided a more detailed update in the following email: 

 1593 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151. 

1594 Id. 

1595 See, e.g., “Making Waves Against ‘Whale,’” Wall Street Journal, Katy Burne (4/11/2012) (“The bank views its 

recent selling in the context of a range of related positions and feels its risk is now effectively balanced, added Mr. 

Evangelisti.”); 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 10, 

JPM-CIO-PSI 0001151 (Mr. Dimon: “But at the end of the day, that's our job, is to invest that portfolio wisely and 

intelligently to -- over a long period of time to earn income and to offset other exposures we have.”). Neither 

statement referred to historical performance, but to the current status of the portfolio. 

1596 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2, 10, 12, and 18, 

http://i.mktw.net/_newsimages/pdf/jpm-conference-call.pdf. 1597 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC-35-000001 

(referring to 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, 

JPMorgan Chase, and others, “synthetic credit information,” JPM-CIO-PSI 0001701, at 708).

1598 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, “CIO,” JPM-CIO-PSI 

0000539.
284

“The synthetic credit book, as a dedicated hedge to our credit longs, continues to 

be short HY. In Q4 [2011], we decided to neutralize the risk profile of this 

book for two reasons: a) the large realized gains around the AMR [American 

Airlines bankruptcy] events, and b) given our large investment program in cash 

credit securities and related view.”1599

In other words, while the SCP book continued to have some short, high yield positions, the 

addition of over $100 billion in investment grade longs “neutralized” the SCP book, and resulted 

in the portfolio’s becoming, as Ina Drew indicated in her April 5 email, net long.

 

1600 

Those longs were also purchased by the SCP to produce “carry” from the short parties in 

order to finance the purchase of additional positions and help offset the losses being incurred by 

the portfolio. Mr. Wilmot, the CIO CFO, another person from whom Mr. Braunstein said that he 

gathered information, explained to Mr. Braunstein that the long positions were purchased for 

carry, that is, profit.

1601 Mr. Hogan, the bank’s Chief Risk Officer, emailed a similar explanation 

to Mr. Dimon: “I would say they just wanted to improve the carry on the book by selling 

protection [i.e. long positions] and taking in some premium.”1602 Ms. Drew also informed both 

Mr. Braunstein and Mr. Dimon that the “Investment Grade strategies” were to provide “some 

carry.”1603 Nowhere, however, in the bank’s press statements, earnings call commentary, or SEC 

filings did the bank disclose this trading strategy to investors – that the SCP was purchasing long

credit derivatives in part to produce carry and use that carry to finance other trades and offset 

short term losses from its high yield short positions. 

Finally, the rest of the April 11 presentation does not support Mr. Braunstein’s claim that 

the SCP was a hedge. The presentation examined the SCP’s holdings relating to individual 

corporations, but did not identify or assess any offsetting exposures at the bank that were being

 1599 4/8/2012 email from Achilles Macris, CIO, to Ina Drew, CIO and others, JPMorgan Chase, “Synthetic Credit 

Summary,” JPM-CIO-PSI 0001588 [emphasis added]. 1600 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, “CIO,” JPM-CIO-PSI 

0000539. 

1601 On the day before the earnings call, in response to a question by Mr. Braunstein as to why the CIO had not 

simply reduced its high yield positions instead of adding the IG9 long positions, the CIO’s Chief Financial Officer 

John Wilmot answered that the book sought to produce “carry (ie associated p&l).” 4/9/2012 email from John 

Wilmot, CIO, to Ina Drew, CIO and others, “Deliverables for meeting tomorrow,” JPM-CIO-PSI 0001646. In other 

words, the CIO bought the $100 billion in long positions in part to generate “carry” or premiums from the short 

parties which the CIO could then use to offset some of the losses being incurred by the book’s other positions. 

1602 4/13/2012 email from John Hogan, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, “CIO,” JPM-CIO-PSI 

0001753. 

1603 See 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan Chase, and others, 

“Synthetic Credit Materials,” JPM-CIO-PSI 0001100, at 101 (“The way that we at CIO have book-run the Core 

book to balance the negative carry cost of the High yield Book overtime has been using Investment Grade strategies 

that gave us some carry or buying optionality (or both) ....”). In other words, Ms. Drew’s email indicated that the 

SCP book was purchasing IG9 tranches, not to hedge a bank credit risk, but to produce “carry” or premiums to 

finance the purchase of some of the short positions in the High Yield credit indices. Mr. Braunstein told the 

Subcommittee that he was familiar with that paragraph of her email. Mr. Braunstein conceded in his interview that 

the investment grade long positions “helped pay for the carry for the high yield positions” and that they may also 

have been used to “cover” the high yield short positions. He also said that the purpose “may have both and it 

depends when.” Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012).
285

counterbalanced.

1604 If the presentation were analyzing a hedging portfolio, the bank analysis

should have identified the assets or portfolios being hedged and evaluated the SCP’s positions in 

that light. No such analysis was provided in the April 11 presentation. Mr. Braunstein told the 

Subcommittee that the presentation was prepared “with input from C.S. Venkatakrishnan,”1605

however, Mr. Venkatakrishnan told the Subcommittee that he did not know what, if anything, the 

SCP was hedging.1606

The bottom line is that the SCP, as a whole, was not a hedge. It was net long and was 

projected to lose money when the credit markets worsened. In the April 11 presentation, 

information on pages 3, 5, and 7 predicted gain or loss figures for the entire synthetic credit 

portfolio, and showed that the bank itself predicted that the SCP would lose money in credit 

stress scenarios, thereby amplifying the bank’s losses, rather than hedging, offsetting, or 

providing stress loss protection against them. Mr. Braunstein and Mr. Dimon reviewed that

information two days before the earnings call, yet they told investors on April 13 that the SCP 

was a hedge. Mr. Dimon repeated that description on May 10, even though by then he knew 

even more details of the SCP and knew, as he later put it, the SCP had “morphed” into something 

else.

(5) Asserting SCP Trades Were Consistent With the Volcker Rule 

The final point made in the April 13 earnings call by Mr. Braunstein involved the 

Volcker Rule. Mr. Braunstein stated: 

“The last comment that I would make is that based on, we believe, the spirit of the 

legislation as well as our reading of the legislation, and consistent with this longterm investment philosophy we have in CIO we believe all of this is consistent 

with what we believe the ultimate outcome will be related to Volcker.”1607

The Volcker Rule, codified at Section 619 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, is intended to reduce bank risk by prohibiting high-risk proprietary 

trading activities by federally insured banks, their affiliates, and subsidiaries. At the same time, 

the Volcker Rule is intended to allow certain bank trading activities to continue, including “risk-

 

 1604 Pages five and six are entitled, “Single Name Risk & Forward Jump to Default Risk.” JPM-CIO-PSI 0001706-

707. These pages estimated the revenues that the CIO would earn in the event certain individual corporations 

defaulted on their loans or declared bankruptcy, as well as the CIO’s likely exposure to losses upon expiration in 

December 2012, of certain credit protection that it once held. Id. Nowhere are the defaults by individual 

corporations correlated to the portfolios that the SCP was purportedly hedging – either the available-for-sale 

portfolio in the CIO nor to any other portfolio held by the bank more generally. The OCC Examiner-in-Chief told 

the Subcommittee that the CIO’s available-for-sale portfolio did not have any exposure to defaults by individual 

corporations and so would not have needed that type of hedge in any event. Subcommittee interview of Scott 

Waterhouse, OCC (9/17/2012). The former Chief Risk Officer for the CIO also confirmed that for the 

Subcommittee. Subcommittee interview of Irvin Goldman, CIO (9/15/2012).

1605 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC-35-000001 

(referring to 4/11/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, 

JPMorgan Chase, and others, “synthetic credit information,” JPM-CIO-PSI 0001701, at 708). 1606 Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012). 1607 4/13/2012 “Edited Transcript JPM - Q1 JPMorgan Chase & Co. Earnings Conference Call,” at 7, JPM-CIO-PSI 

0001151. 
286

mitigating hedging activities,” meaning hedging activities that reduce, rather than increase, a 

bank’s risk of losses. 

The basis for Mr. Braunstein’s prediction that the SCP’s trading activities would be found 

to be “consistent with” the Volcker Rule is unclear. When the Subcommittee asked JPMorgan 

Chase if it had any legal opinion examining how the Volcker Rule would affect the bank’s 

business, including the SCP, it responded that no such analysis had been performed.

1608 At the 

time Mr. Braunstein made his statement on April 13, the Volcker Rule’s implementing 

regulation was still in draft form. Earlier in the year, on February 2, 2012, representatives of the 

bank had met with the OCC to voice the bank’s views on the draft regulation.

1609 According to 

both the bank and the OCC, at no point did the discussion turn to the Synthetic Credit Portfolio, 

so the regulators could not have given the bank any guidance on the effect of the Volcker Rule

on the SCP during that meeting.

1610 On February 13, 2012, the bank submitted an official 

comment letter to the OCC and other bank regulators criticizing the draft regulation 

implementing the Volcker Rule and offering recommendations for changes.

1611 Among other 

criticisms, JPMorgan Chase’s comment letter expressed concern that the Volcker Rule’s 

proposed regulation might not permit the CIO to continue to manage the Synthetic Credit 

Portfolio. The comment letter stated: “Under the proposed rule, this activity [i.e., credit 

derivatives] could have been deemed prohibited proprietary trading.”1612

In addition, when Ina Drew provided briefing materials to Mr. Braunstein the day before 

the earnings call, she provided no support for the notion that the synthetic credit trades would be 

permitted under the Volcker Rule. She sent him a “Questions and Answers” document, and with 

respect to the Volcker rule, wrote: 

 This analysis directly 

contradicts Mr. Braunstein’s statement during the earnings call that the bank had concluded that

the SCP would be found to be “consistent with” the Volcker Rule.

“[Question:] In your view, could this trading fall afoul of Volcker under a 

narrow definition (or even a broad one)?

[Answer:] As Barry Zubrow pointed out in our comments to the Regulators in 

February, the language in Volcker is unclear as it pertains to anticipatory hedging 

needs on the ALM side. The condition for the hedging exception appears to have 

 1608 See Subcommittee briefing by JPMorgan Chase (8/23/2012) (Neila Radin and Greg Baer).

1609 “Chronology of JPMC Regulator Meetings,” table provided by JPMorgan Chase at Subcommittee briefing by 

JPMorgan Chase (8/23/2012) (attended by Greg Baer, Ina Drew, Irvin Goldman, Neila Radin, John Wilmot and 

Barry Zubrow).

1610 Subcommittee interview of Michael Sullivan, OCC (8/30/2012) (stating that there was no mention of the 

synthetic credit portfolio).

1611 2/13/2012 letter from JPMorgan Chase, to Department of the Treasury, Board of Governors of the Federal 

Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Office of the 

Comptroller of the Currency, “Comment Letter on the Notice of Proposed Rulemaking Implementing Section 619 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act,” JPM-CIO-PSI 0013270. 1612 Id., at JPM-CIO-PSI 0013326 (indicating that “the use of credit derivatives,” that is, the Synthetic Credit 

Portfolio, was among the bank’s “ALM activities that were crucial during the financial crisis [that] would have been 

endangered by the proposed rule.”). 
287

been drafted with trading desks in mind, where both sides of a hedge are marked 

to market. It is a poor fit with A[sset] L[iability] M[anagement].”1613

Ms. Drew’s analysis, which describes the Volcker Rule’s language as “unclear” and a “poor fit” 

for the SCP, is also contrary to the positive assessment provided by Mr. Braunstein during the 

earnings call.

Ms. Drew’s suggested “answer” to a Volcker Rule question references the bank’s official 

comment letter, which was signed by Barry Zubrow. Mr. Zubrow also sent an email to Mr. 

Braunstein on the day before the earnings call, but suggested a more positive response to a 

Volcker Rule question than did Ms. Drew. Mr. Zubrow wrote: 

“If asked about London / CIO and Volcker[,] I suggest you add the 

following thoughts: 

1.) Activity was NOT short term trading

2.) Was part of LONG TERM hedging of the bank[’]s portfolio

3.) We do not believe that our activity in any way goes against the law as 

passed by Congress, nor the spirit or proposed rule as written.”1614

Mr. Zubrow did not disclose or explain in the email why his view differed from the bank’s 

official comment letter, which he had signed and which stated that the proposed Volcker Rule 

“could have [] deemed” the CIO’s credit derivatives trading as prohibited. He nevertheless 

recommended a positive response, and Mr. Braunstein appears to have followed his advice. 

Apart from Mr. Zubrow’s email, the Subcommittee was unable to uncover any other evidence to 

support Mr. Braunstein’s statement. 

A key, ongoing issue related to the SCP is whether it should be viewed as a risk-reducing 

hedge or as a high-risk proprietary bet that the Volcker Rule is meant to stop. Investors would 

likely consider, as one piece of information important in the overall mix, whether the CIO would 

be permitted under the law to continue operating the SCP as before or whether the SCP would 

have to be shut down, and a reasonable investor might have been reassured by Mr. Braunstein’s 

confident statement on this issue. Mr. Braunstein should have known, however, that he could 

not rely on Mr. Zubrow’s brief, three-point email which directly contradicted the bank’s 68-page 

official comment letter that had been vetted by the bank’s counsel and other senior officials. Mr. 

Zubrow’s email apparently had no other support in any bank legal analysis or regulatory 

communication. Mr. Braunstein’s optimistic assessment during the April 13 earnings call may 

have reassured investors, but that is no justification for misinforming the public about the bank’s 

official position that the Volcker Rule might prohibit the SCP as an example of high-risk 

proprietary trading. 

 1613 4/12/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, 

and others, “Synthetic Credit Materials,” JPM-CIO-PSI 0001100, at 104 [emphasis in original]. 1614 4/12/2012 email from Barry Zubrow, JPMorgan Chase, to Douglas Braunstein, JPMorgan Chase, Jamie Dimon, 

JPMorgan Chase, and others, “If asked about London / CIO and Volcker,” JPM-CIO-PSI-H 0002418.
288

(6) Omitting VaR Model Change 

A final issue involves, as noted above in Chapter V, one of the key metrics used within 

JPMorgan Chase to monitor risk, called “Value-at-Risk” or “VaR.” OCC regulations require 

national banks to use VaR risk metrics. JPMorgan Chase uses a number of different VaR models 

to test different types of risk with different confidence levels, including a historical VaR model 

with a 99% confidence level (VaR-99) whose results are used in its RWA model to determine the 

bank’s capital requirements; a stress VaR model that focuses on risk results in stressed economic 

conditions; and a historical VaR model with a 95% confidence level (VaR-95) which the bank 

uses to track and set a limit on the amount of money that can be lost by the relevant business unit 

over the course of a day in ordinary economic conditions.

1615

From a regulatory standpoint, VaR is important for satisfying safety and soundness 

requirements, as a basis for OCC oversight, and to ensure adequate disclosure to investors. VaR 

models are reviewed, approved, and monitored by OCC examiners. VaR is also one option, 

among several alternatives, for banks to fulfill their disclosure obligations under SEC rules, 

which “require comprehensive disclosure about the risks faced by a public company,”

 JPMorgan Chase uses the VaR-95 

model to report its VaR results in its public filings with the SEC. 

1616

including disclosure when banks change a VaR “model characteristics, assumptions, and 

parameters.”1617 In June 2012, then Chairman of the SEC, Mary Schapiro, testified before

Congress that the SEC had an ongoing investigation into the extent of JPMorgan Chase’s VaR 

disclosure.1618

 JPMorgan Chase’s Form 10-K explains that the bank “maintains different levels of limits. 

Corporate-level limits include VaR and stress limits. Similarly, line-of-business limits include 

VaR and stress limits[.]”1619

 1615 JPMorgan Chase used a 95% confidence level in the VaR results it reported publicly in its SEC filings. It used a 

slightly different formula, with a 99% confidence level, when incorporating VaR results into its RWA calculations. 

Subcommittee interview of Patrick Hagan, CIO (2/7/2013).

 The report also explained the VaRs for the different lines of 

business, including the CIO: “CIO VaR includes positions, primarily in debt securities and 

1616 Testimony of Mary Schapiro, “Examining Bank Supervision and Risk Management in Light of JPMorgan 

Chase’s Trading Loss,” before the U.S. House of Representatives Committee on Financial Services, Serial No. 112-

136 (June 19, 2012). In addition, OCC rules require disclosure of VaR. See 12 C.F.R. Part 3, Appendix b, Section 

12.

1617 SEC Regulation S-K, Quantitative and qualitative disclosures about market risk, 17 C.F.R. § 229.305. See also 

prepared statement of Mary Schapiro, “Examining Bank Supervision and Risk Management in Light of JPMorgan 

Chase’s Trading Loss,” before the U.S. House of Representatives Committee on Financial Services, Serial No. 112-

136 (June 19, 2012) (describing Regulation S-K, Section 305: “If a company chooses to use the VaR disclosure 

alternative to comply with this market risk exposure requirement, it must disclose changes to key model 

characteristics, assumptions and parameters used in providing the quantitative information about market risk, 

including the reasons for the changes.”); 6/28/2012 email from Elwyn Wong, OCC, to Scott Waterhouse, OCC, and 

others, “2nd WilmerHale Call,” OCC-SPI-00071386 (generally describing bank obligations with respect to VaR 

disclosure under SEC rules).

1618 Testimony of Mary Schapiro, “Examining Bank Supervision and Risk Management in Light of JPMorgan 

Chase’s Trading Loss,” before the U.S. House of Representatives Committee on Financial Services, Serial No. 112-

136 (June 19, 2012) (“Our rules do require that changes to the value-at-risk model, the assumptions of parameters, 

have to be disclosed. So part of what we're investigating is the extent of that disclosure, whether it was adequate, 

among other things.”).

1619 2/29/2012, JPMorgan Chase & Co., Form 10-K, at 162, http://files.shareholder.com/downloads/ONE/ 

2275559219x0xS19617-12-163/19617/filing.pdf. 
289

credit products, used to manage structural and other risks including interest rate, credit and 

mortgage risks arising from the Firm’s ongoing business activities.”1620 In addition, JPMorgan 

Chase’s Form 10-K provided a table, reprinted below, of VaR-95 totals for key lines of business, 

including the Investment Bank (IB) and the CIO.

Source: 2/29/2012, JPMorgan Chase & Co., Form 10-K, at 159 [emphasis added with text box and circles to denote 

CIO VaR]. 

The 2011 table showed that the CIO reported an average VaR-95 total of $61 million in 

2010, and $57 million in 2011, meaning those were the total amount of losses that the CIO was 

projected to be at risk of losing in a single day in those years, with a 95% confidence level. The 

CIO’s VaR totals were less than those shown for the Investment Bank (IB) which reported VaR 

totals of $87 million in 2010 and $76 million in 2011. The narrative in the report explained that 

the CIO VaR had decreased in 2011 due to “a decline in market volatility ... as well as position 

changes.”1621

In January 2012, JPMorgan Chase allowed the CIO to change its VaR-95 model, but did 

not announce this change until May 10. As discussed in Chapter V, JPMorgan Chase 

implemented the new CIO VaR methodology at the end of January 2012,1622

 1620 Id., at 159.

to end a four-day 

breach of the bankwide VaR limit that was caused by the CIO. The new model immediately 

1621 Id., at 160. 1622 See 1/30/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, “draft of the MRG review of 

the HVAR methodology for the CIO core credit books,” JPM-CIO-PSI 0000187.
290

recast the CIO’s VaR-95 total, dropping it by 50% on the day it was put into place.1623

Several months later, on April 6, 2012, media reports disclosed for the first time that the 

CIO was engaged in large credit derivative trades.

 Neither 

the VaR model change nor its effect on the CIO’s VaR total was publicly disclosed at the time.

1624

Question: “Kush Goel – Neuberger (Buyside) . . . What was the specific credit 

position discussed in the article; where are these derivatives disclosed? . . . 

 On April 11, 2012, when asked about the 

CIO’s credit holdings, a JPMorgan Chase official, Sarah Youngwood, head of investor relations,

pointed an analyst to the CIO’s VaR: 

Answer: “CIO VaR is disclosed in the Market Risk section of the 10K with a 

brief description of the activities . . . .”1625

In other words, to assuage the analyst’s concern about the CIO’s large credit positions, 

JPMorgan Chase directed him to the bank’s public disclosures regarding the CIO’s VaR 

results in its 2011 Annual Report. Those results showed that the 2011 VaR total had 

actually decreased from the prior year and indicated that the most the CIO had at risk was 

$57 million, a relatively small sum in comparison to the bank’s total holdings.

Two days later, on April 13, 2012, JPMorgan Chase filed its Form 8-K with the SEC and 

held its earnings call.1626 In its 8-K filing, JPMorgan Chase included another chart, reprinted 

below, reporting the VaR results for the CIO and Investment Bank.1627

 1623 Levin Office briefing by JPMorgan Chase (7/19/2012); ”CIO 10QVaR,” JPMC-Senate/Levin 000155 (decrease 

of 50% from $132 million to $66 million on January 27, 2012).

1624 See “JPMorgan Trader’s Positions Said to Distort Credit Indexes,” Bloomberg, Stephanie Ruhle, Bradley 

Keoun & Mary Childs (4/6/2012), http://www.bloomberg.com/news/2012-04-05/jpmorgan-trader-iksil-s-heft-issaid-to-distort-credit-indexes.html; “‘London Whale’ Rattles Debt Market,” Wall Street Journal, Gregory 

Zuckerman and Katy Burne (4/6/2012).

1625 4/11/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon and others, JPMorgan Chase, “CIO 

articles – Calls (9),” JPM-CIO-PSI 0001093. 1626 4/13/2012 JPMorgan Chase & Co., Form 8-K, 

http://files.shareholder.com/downloads/ONE/2063348229x0xS1193125-12-161533/19617/filing.pdf. 1627 Id., at 42.
291

Source: 4/13/2012 JPMorgan Chase & Co., Form 8-K, at 42 [emphasis added to denote CIO VaR]. 

This chart indicated that the CIO’s average VaR for the first quarter of 2012 was $67 million, 

which represented a decline of $3 million from the previous quarter at the end of 2011.

1628 

Again, by comparison, the Investment Bank’s VaR was larger at $81 million.1629

An investor viewing the 8-K chart might have reasonably concluded that, since the 2011 

fourth quarter VaR and the 2012 first quarter VaR were so similar, at $67 million and $69 

million respectively, that the risk had not changed at the CIO or in its underlying portfolios. In 

fact, the risk had changed, and the SCP book was radically different. The 2012 portfolio was 

three times larger, with $157 billion in credit derivative notional value compared to $51 billion in 

2011. In addition, the SCP held a new, complex mix of derivatives which had dramatically 

increased the portfolio’s risk since the end of 2011. The fact that the CIO had replaced its VaR 

model with a new version that artificially lowered its VaR total overnight by 50% was nowhere 

mentioned in the 8-K filing. By omitting any mention of the model change and its significant 

impact on the CIO’s VaR results, the information about the CIO VaR that was provided by the 

bank on April 11, by Sarah Youngwood to investors and analysts, and in the April 13 form 8-K

 

 1628 Id.

1629 Id.
292

and accompanying earnings call to the public, provided an incomplete and erroneous picture of 

the risks then facing the CIO.

The failure to disclose the change in methodology on April 13, either in the 8-K filing or 

during the earnings call, occurred even though the evidence indicates that both Mr. Braunstein

and Mr. Dimon had been informed of the change at the time it was made in January 2012. Each 

had received multiple email communications about the expected reduction to be provided by 

CIO’s new VaR model. They had received the emails in the context of the CIO’s four-day 

breach of the bankwide VaR limit in January 2012 and were assured that the new CIO VaR 

model, which fed into the bankwide VaR, would produce a lower VaR result and so end the 

bankwide VaR breach.

1630 Under JPMorgan Chase policy, Mr. Dimon had to personally respond 

to breaches of the bankwide VaR limit and, in this case, approve a temporary VaR limit increase 

to end the CIO’s breach. When the request was made of Mr. Dimon to temporarily increase the 

VaR limit, and he responded, “I approve” in an email, the rationale provided to him for raising 

the limit and ending the breach was that the CIO was going to soon have a new model that would 

reduce its VaR by 44%.

1631

 1630 1/23/2012 email from Market Risk Management – Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, “APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval,” JPM-CIO-PSI 

0001337-38; 1/20/2012 email from Market Risk Management – Reporting, JPMorgan Chase, to Jamie Dimon, 

JPMorgan Chase, and others, “JPMC 95% 10Q – VaR – Limit Excession Notification (COB 1/19/12),” JPM-CIOPSI 0000150; 1/20/2012 email from Market Risk Management – Reporting, JPMorgan Chase, to Jamie Dimon, 

JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, “JPMC Firmwide VaR – Daily Update – cob 

01/19/2012,” JPM-CIO-PSI 0002457; 1/27/2012 email from Market Risk Management – Reporting, JPMorgan 

Chase, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, “JPMC Firmwide 

VaR- Daily Update – COB 01/26/2012,” JPM-CIO-PSI-H 0001675 (“The new VaR model for CIO was approved by 

MRG and is expected to be implemented prior to month-end.”); 1/28/2012 email from John Hogan, JPMorgan 

Chase, to Jamie Dimon, JPMorgan Chase, “JPMC Firmwide VaR – Daily Update – COB 01/26/2012,” JPM-CIOPSI-H 0001675 (“This should be the last day of firmwide VaR breach. A CIO model change is planned to go in this 

week-end. New VaR methodology approved (and now the same methodology as IB) reduces standalone Credit VaR 

by approx. $30 mio.”); 1/30/2012 email from Market Risk Management – Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, “JPMC Firmwide VaR – Daily Update 

– COB 1/27/2012,” JPM-CIO-PSI 0001339 (“The Firm's 95% 10Q VaR as of cob 01/27/2012 is $108mm of the 

$125mm limit, a decrease of $53mm from the prior day's revised VaR, driven by CIO (implementation of newly 

approved VaR model for synthetic credit).”); 2/2012 “CIO February 2012 Business Review,” JPM-CIO-PSI 

0000289, at 290 (“Today’s Attendees, Operating Committee, Jamie Dimon, Doug Braunstein,” and others.).

 Despite having received multiple emails and having approved a 

1631 See 1/20/2012 email from Market Risk Management – Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, “JPMC Firmwide VaR – Daily Update – COB 01/19/2012,” JPM-CIO-PSI 0002457 (noting that 

the CIO’s “improved VaR model” will reduce the CIO’s VaR “by 44%”); 1/20/2012 email from Market Risk 

Management – Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “JPMC 95% 10Q VaR –

Limit Excession Notification (COB 1/19/12),” JPM-CIO-PSI 0001890 (noting that the CIO’s “improved VaR 

model” will reduce the CIO’s VaR “by 44%”); 1/20/2012 email from Market Risk Management – Reporting, 

JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “JPMC 95% 10Q – VaR – Limit Excession 

Notification (COB 1/19/12),” JPM-CIO-PSI 0000150 (noting that the CIO’s “improved VaR model” will reduce the 

CIO’s VaR “by 44%”); 1/23/2012 email from Market Risk Management – Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, “APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval,” 

JPM-CIO-PSI 0004660 (noting that the CIO’s “improved VaR model” will reduce the CIO’s VaR “by 44%”); 

1/23/2012 email from Jamie Dimon, JPMorgan Chase, to John Hogan, JPMorgan Chase, and others, “APPROVAL 

NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval,” JPM-CIO-PSI 0001337 (Dimon expressing “I approve” 

to an email requesting an increase in the CIO’s VaR limit); 1/24/2012 email from Market Risk Management –

Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, 

“JPMC Firmwide VaR – Daily Update – COB 01/20/2012,” JPM-CIO-PSI 0003346 (noting that the CIO’s 

“improved VaR model” will reduce the CIO’s VaR “by 44%”); 1/24/2012 email from Market Risk Management –
293

temporary VaR limit increase, Mr. Dimon told the Subcommittee that he did not recall the CIO’s 

change to its VaR model and that he became aware of the issue only after “things blew up.”1632 

He told the Subcommittee that he had relied on his risk management staff to inform him about 

VaR model issues and provide additional details if there were a problem.

1633 Mr. Braunstein told 

the Subcommittee that he, too, despite receiving the emails, was not sure if he was aware in 

January that a new CIO VaR model had been adopted that month.

1634

In February 2012, the CIO’s VaR model change was again addressed during a CIO 

February Business Review meeting attended by both Mr. Braunstein and Mr. Dimon.

1635

 

Reporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, 

“JPMC Firmwide VaR – Daily Update – COB 01/23/2012,” JPM-CIO-PSI 0003715 (noting that the CIO’s 

“improved VaR model” will reduce the CIO’s VaR “by 44%”).

 Prior 

to the meeting, Mr. Braunstein and Mr. Dimon each received a presentation, reprinted below,

which included a section entitled, “VaR Highlights,” describing the CIO’s new VaR model. 

1632 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1633 Id. 1634 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1635 2/2012 “CIO February 2012 Business Review,” JPM-CIO-PSI 0000289, at 290 (“Today’s Attendees, Operating 

Committee, Jamie Dimon, Doug Braunstein,” and others.).
294

Source: 2/2012 presentation slide prepared by the CIO, “CIO Summary Risk Metrics,” which was part of a larger 

CIO presentation “CIO February 2012 Business Review,” at 17, JPM-CIO-PSI 0000241 [emphasis added with 

circles and arrow to denote changes in CIO VaR results].
295

The “VaR Highlights” section explained that an “[e]nhanced VaR methodology ... [is] helping to 

reduce VaR and RWA usage” at the CIO.1636 It also provided a line graph showing the trend in 

the CIO’s “Global” VaR totals, as reported in its 10-Q filings going back to January 2011. The 

line graph showed the VaR total peaking in January 2012 at $120 million, followed by a 

precipitous decline.

1637

Mr. Dimon told the Subcommittee that he did not specifically recall the February 

meeting, but stipulated that he saw the presentation.

That decline was the result of the new VaR model which had reduced

the CIO’s risk rating by 50%.

1638 Mr. Braunstein told the Subcommittee 

that he attended the February Business Review, but that attendees usually did not go over every 

page of the presentation at the meeting and he did not recall the VaR highlights section.

1639 

However, Irvin Goldman, then Chief Risk Officer for the CIO, told the Subcommittee that he 

specifically remembered going over the implementation of the new VaR methodology at the 

February meeting, and that there were no questions on it.1640

No public disclosure of the January 27 change in CIO VaR methodology was made until 

May 10, 2012, the day that JPMorgan Chase also disclosed that the SCP had lost nearly $2 

billion and was expected to lose more. On that date, Mr. Dimon described the change in the VaR 

models during a business update call.

 

1641

 1636 Id.

 On that same day, JPMorgan Chase filed its 10-Q 

quarterly report, finalizing its first quarter financial results. The 10-Q report included a chart, 

reprinted below, with revised VaR results for the CIO during the first quarter, but unlike the 

business update call, did not publicly disclose and explain the CIO VaR model changes.

1637 Id. 1638 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012) (describing the “CIO February 2012 

Business Review,” JPM-CIO-PSI 0000289).

1639 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 1640 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 1641 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 2-3, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf (Mr. Dimon: “We are also amending a disclosure in the first quarter press release about CIO’s 

VAR, Value-at-Risk. We’d shown average VAR at 67. It will now be 129. In the first quarter, we implemented a 

new VAR model, which we now deemed inadequate. And we went back to the old one, which had been used for the 

prior several years, which we deemed to be more adequate.”).
296

Source: 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 73 [emphasis added with text box and outline of footnote

to denote CIO VaR information].

In the chart, JPMorgan Chase disclosed a revised first quarter CIO VaR of $129 million, 

stating in a footnote that “CIO VaR presented above ... supersedes the Firm’s VaR disclosures 

included in its Form 8-K filed on April 13, 2012.”1642 The revised first quarter CIO VaR in the 

10-Q was nearly double in size from what had been reported in the April 8-K filing, which had 

reported CIO VaR totals of $69 million in the first quarter of 2012, and $67 million in the fourth 

quarter of 2011.

1643

The 10-Q filing contained only a limited explanation for the revised CIO VaR results. A 

footnote provided an opaque statement that the new total was “calculated using a methodology 

consistent with the methodology used to calculate CIO’s VaR in 2011.” In addition, using 

language that did not appear in prior quarterly reports, the 10-Q filing stated: “The Firm’s VaR 

models are continuously evaluated and enhanced in response to changes in the composition of 

 

 1642 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 73, 

http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=19617-12-213. 1643 4/13/2012 JPMorgan Chase & Co., Form 8-K, at 42, 

http://files.shareholder.com/downloads/ONE/2063348229x0xS1193125-12-161533/19617/filing.pdf. See also 

2/29/2012, JPMorgan Chase & Co., Form 10-K, at 160, 

http://files.shareholder.com/downloads/ONE/2275559219x0xS19617-12-163/19617/filing.pdf (disclosing CIO 

average VaR in 2011 to be $57 million, and in 2010, $61 million).

The May 10 10-Q reported that 

average 1st Quarter CIO VaR was 

$129 million, double the average 

2011 VaR of $60 million.
297

the Firm’s portfolios, changes in market conditions and dynamics, improvements in the Firm’s 

modeling techniques, systems capabilities, and other factors.”1644

Together, the 10-Q statements do not plainly disclose that the CIO had replaced its old 

VaR model with a new one in January 2012, used that new model to calculate a much lower VaR 

for the CIO in the bank’s April 8-K filing, and then decided to stop using the new model and 

reinstate the prior model to calculate the CIO’s VaR total for the May 10-Q filing. In addition, 

the bank omitted disclosing in its 10-Q filing that the bank had determined the original first 

quarter VaR was inaccurate and had understated the SCP risk by a significant amount. The bank 

also omitted any mention of the operational problems it had discovered in connection with the 

discarded VaR model. CIO management had discovered those problems only a few days after 

the April 8-K was filed, but waited nearly a month to publicly correct the CIO’s VaR results.

 

1645

On May 10, 2012, the day the 10-Q report was filed, JPMorgan Chase also held a 

“business update call” with analysts, investors, the media, and others. At the outset of the call, 

Mr. Dimon explained orally what wasn’t explained in the 10-Q filing: “In the first quarter, we 

implemented a new VAR model, which we now deemed inadequate. And we went back to the 

old one, which had been used for the prior several years, which we deemed to be more 

adequate.” In addition, when asked why the bank had made the VaR model change “in the first 

place,” Mr. Dimon responded: “There are constant changes and updates to models, always 

trying to get them better than they were before. That is an ongoing procedure.”

 

1646 In both

explanations, Mr. Dimon omitted any mention of the fact that the CIO VaR model adopted in 

January 2012 was not just “inadequate,” but had been determined by the bank to have 

understated the risk of loss by the SCP. The January VaR model had indicated, for example, that 

the most money the CIO could lose in a day was $67 million, yet on March 30, 2012, the SCP

reported internally a daily loss of $319 million, four times greater than the VaR had predicted. 

On April 10, 2012, the SCP reported internally a daily loss of $415 million, a nonpublic figure 

five times larger than the original VaR. The developer of the new CIO VaR model told the 

Subcommittee that the loss of $415 million meant that the CIO VaR “model [wa]s wrong.”1647

Mr. Dimon stated during the May 10 call: “You should assume that we try to keep our 

readers update[d] about what we know and when we know it and it’s just a constant practice of 

the company.”1648

 1644 5/10/2012 JPMorgan Chase & Co., Form 10-Q, at 74, 

 When making this statement, Mr. Dimon did not disclose that bank 

management had been aware of the significant impact of CIO’s VaR model change in January, 

but did not tell investors about the change. That information could and should have been, but 

http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID=19617-12-213. 1645 See 4/18/2012 email from Keith Stephan, CIO, to Achilles Macris, CIO, and others, “CIO VaR,” JPM-CIO-PSI 

0001205 (“FYI-we discovered an issue related to the VAR market data used in the calculation .... This means our 

reported standalone var for the five business days in the period 10-16th April was understated by apprx $10 

[million].”). For more information, see Chapter V.

1646 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 14, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf (in response to this question by an analyst: “And what caused you to change the VaR model in 

the first place? I mean you had something that was working and you changed it.”). 1647 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). 1648 5/10/2012 “Business Update Call,” JPMorgan Chase transcript, at 4, http://i.mktw.net/_newsimages/pdf/jpmconference-call.pdf.
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was not, included in the bank’s April 8-K report, which was issued after word first broke about 

the whale trades. 

Ultimately, both Mr. Braunstein and Mr. Dimon claimed to the Subcommittee to have 

been personally unaware of the CIO’s VaR model change in January 2012, even though both 

executives received multiple email communications about the proposed new CIO VaR model, 

and the 44% reduction it would have on the CIO’s VaR, later received a CIO presentation on 

how the model change had dramatically lowered the CIO’s VaR results, and, in at least one case, 

had the model change explained to them in person by the CIO’s Chief Risk Officer, Irvin 

Goldman, in February 2012. In the case of Mr. Dimon, he was informed about the new VaR 

model as part of his responsibility as CEO to approve breaches of Level 1 risk limits as well as a 

temporary increase in the bank’s VaR limit, a responsibility that the bank created as part of its 

risk management system and informed investors was in place. 

Earlier information on the timing and dollar impact of the new VaR model would have 

helped investors evaluate the risks and possible dollar losses associated with the CIO’s enlarged 

credit derivative holdings. The size of the change in the CIO’s VaR was sufficiently large that it 

likely would have attracted notice and prompted questions from investors as soon as it was 

disclosed. On April 13, a week after media reports exposed vulnerable SCP positions, which 

only the bank knew had wiped out the SCP’s 2011 profits, investors were likely interested in 

accurately estimating the amount of money that could be lost by the CIO. The 8-K filing

indicated that the maximum value-at-risk was $67 million, despite the fact that three days earlier, 

on April 10, the SCP had reported internally a daily loss of $415 million.

When the change in CIO VaR was disclosed on May 10, along with the dramatically 

higher VaR results, it attracted questions from the marketplace.1649 The bank’s head of investor 

relations received many questions about both CIO VaR models from different analysts, 

including: “When did you change VaR model?,”1650 “What would have happened if we [the 

bank] had not changed the VaR model?,”1651 “How long was the 2012 model data tested?,”1652

 1649 See, e.g., 5/11/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and 

others, “10-Q call - Buyside and sellside comments (6),” JPM-CIO-PSI 0014803 (summarizing questions from 

analysts); 5/11/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and 

others, “10-Q call - Buyside and sellside comments (2),” JPM-CIO-PSI 0017754 (“What was the sequence of the 

events? When did you back to the old model?”); Id., at 755 (“Did you restate the 12/31 VaR? Did Jamie say that 

the old model was inadequate?” and “Restated VaR. On what?”); 5/14/2012 email from Sarah Youngwood, 

JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10-Q call - Buyside and sellside comments (10),” 

JPM-CIO-PSI 0018241 (“When you put out your 2011 10K, did you use the 2011 model for VaR? In April did you 

disclose that you changed models? ... Is the increase in VaR all from the CIO office? Is it all related to the articles 

of the London Whale?”); 5/11/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, “10-Q call - Buyside and sellside comments (4),” JPM-CIO-PSI 0017987 (“Regarding the 

escalation of the issue, if you were using the old VaR model, do you think this would have hit the dashboard 

earlier?”).

and, “As an analyst, you displayed a VaR under a model and didn’t disclose the new model and 

would have loved to know what the difference was in the VaR using the two different 

1650 5/11/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10-

Q call - Buyside and sellside comments (6),” JPM-CIO-PSI 0014803. 1651 Id. 1652 5/11/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10-

Q call - Buyside and sellside comments (4),” JPM-CIO-PSI 0017987.
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models.”1653

In explaining the VaR to the Subcommittee, Mr. Dimon downplayed its importance to 

investors as a risk measure, characterizing it as “deceptive,” but he also admitted that a VaR of 

$150 million would have caused investors to possibly “ask about it.”

 Had the same VaR information been disclosed in April, it would likely have been 

of interest then, as well. 

1654 The OCC Examiner-InCharge at JPMorgan Chase, Scott Waterhouse, also thought that a big VaR change would have 

triggered questions. As Mr. Waterhouse explained, a change in VaR from $69 million to $67 

million is not important, but a change from $69 million to $129 million would have led him to 

“ask questions: Why did it go up? Did the model change? Did they buy something?”1655

D. Analysis

 

JPMorgan Chase’s April 13 VaR disclosure – coming on the heels of the media reports about the 

whale trades – masked the risk increase in the CIO in a way that likely fended off potential 

questions from investors.

As 2012 unfolded, the losses associated with the Synthetic Credit Portfolio continued to 

mount. When asked why its April statements were so positive in light of the ongoing, serious 

problems with the SCP, multiple senior JPMorgan Chase executives told the Subcommittee that 

the bank, like the traders, initially believed the SCP positions would “mean revert,” that is, return 

to their prior profitability.1656 Bank representatives explained that the credit derivative markets 

were not behaving in line with historic norms, and it was likely that the norms would return, and

with them, the SCP gains.

1657 The markets, however, were not behaving in line with historic 

norms, in large part because the CIO traders had distorted them by engaging in massive trades

and accumulating massive positions of synthetic instruments in markets with few 

participants.

1658 When the CIO traders finally stopped buying and started to exit their positions, 

changes in the value of the very indices that the CIO had overwhelmed made it even more 

difficult to exit them without incurring huge losses.

1659

 1653 5/14/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, “10-

Q call - Buyside and sellside comments (10),” JPM-CIO-PSI 0018241. 

 

1654 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1655 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 1656 See, e.g., Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012); 2013 JPMorgan Chase 

Task Force Report, at 5, 65 n.79, 68, 71, & 89. Some bank representatives also explained that the bank was 

sensitive to providing position information that could be used against it in the marketplace, but that reasoning offers 

no defense to volunteering misleading information to investors. “Rule 10b-5(b) do[es] not create an affirmative duty 

to disclose any and all material information. Disclosure is required under th[is] provision only when necessary ‘to 

make ...statements made, in light of the circumstances under which they were made, not misleading .... Even with 

respect to information that a reasonable investor might consider material, companies can control what they have to 

disclose under these provisions by controlling what they say to the market.” Matrixx Initiatives, Inc. v. Siracusano, 

131 S. Ct. 1309, 1321-21 (2011). 1657 Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9/12/2012) and Michael Cavanagh, 

JPMorgan Chase (12/12/2012). 1658 See discussion in Chapter III. For example, an April 2012 analysis stated that, at the end of March, the SCP held 

an $82 billion long position in the IG9 index alone, which comprised nearly half the market in that index. See 

DTCC presentation to Subcommittee (9/27/2012) at 2, PSI-DTCC-01-000001 (showing total CDX IG9 untranched 

trading to total approximately $150 billion).

1659 A chart prepared by the bank shows a general decline in credit spreads for the IG9 credit index from January 

2012 until March 23, 2012, the day Ina Drew told the traders to stop trading, after which the prices began to 
300

When the SCP’s massive trades were made public on April 6, 2012, the bank initially 

responded by volunteering an inaccurate description of the SCP. The extensive problems

surrounding the SCP as discussed throughout this Report – the tripling of the portfolio’s size, its 

concentrated positions that required weeks or months to exit, its escalating losses that were being 

underreported, its ongoing risk limit breaches, and the risk models that masked the SCP’s true 

risk profile – were concealed behind expansive statements that the bank was comfortable with its

positions and that the concerns raised in the media were a tempest in a teapot. The evidence

suggests that the bank initially mischaracterized or omitted mention of the SCP problems, not 

just because it believed the SCP would recover, but also because JPMorgan Chase likely 

understood the market would move against it even more if those facts were known. And once 

those facts were known, that is exactly how the market reacted, dropping the value of the bank’s 

stock by 25% in the weeks following the SCP disclosures in the bank’s May 10-Q filing. The 

bank’s initial claims that its risk managers and regulators were fully informed and engaged, and 

that the SCP was invested in long-term, risk-reducing hedges allowed by the Volcker Rule, were 

fictions irreconcilable with the bank’s obligation to provide material information to its investors

in an accurate manner.

 

rebound. See, e.g., undated chart entitled, “Credit Spreads on IG9 Index,” prepared by JPMorgan Chase, JPM-CIOPSI 0002062, reprinted in Chapter III.