S. Hrg. 113–96 

JPMORGAN CHASE WHALE TRADES: 

A CASE HISTORY OF DERIVATIVES 

RISKS AND ABUSES 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

VOLUME 1 OF 2 

MARCH 15, 2013 

Available via the World Wide Web: http://www.fdsys.gov/ 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
OF DERIVATIVES RISKS AND ABUSES—VOLUME 1 OF 2 

JPMORGAN CHASE WHALE TRADES: A CASE HISTORY 
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WASHINGTON : 

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80–222 PDF 2013

S. Hrg. 113–96 

JPMORGAN CHASE WHALE TRADES: 

A CASE HISTORY OF DERIVATIVES 

RISKS AND ABUSES 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

VOLUME 1 OF 2 

MARCH 15, 2013 

Available via the World Wide Web: http://www.fdsys.gov/ 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

THOMAS R. CARPER, Delaware Chairman 

CARL LEVIN, Michigan 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

MICHAEL B. ENZI, Wyoming 

KELLY AYOTTE, New Hampshire 

RICARD J. KESSLER, Staff Director 

KEITH B. ASHDOWN, Minority Staff Director 

TRINA D. SHIFFMAN, Chief Clerk 

LAURA W. KILBRIDE, Hearing Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan Chairman 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

KELLY AYOTTE, New Hampshire 

ELISE J. BEAN, Staff Director and Chief Counsel 

ZACHARY I. SCHRAM, Senior Counsel 

ALLISON F. MURPHY, Counsel 

HENRY J. KERNER, Minority Staff Director and Chief Counsel 

STEPHANIE HALL, Minority Counsel 

MARY D. ROBERTSON, Chief Clerk 
(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator McCain ................................................................................................ 7 

Senator Johnson ............................................................................................... 9 

Prepared statements: 

Senator Levin .................................................................................................... 91 

Senator McCain ................................................................................................ 98 

WITNESSES 

FRIDAY, MARCH 15, 2013 

Ina R. Drew, Former Head, Chief Investment Office, JPMorgan Chase & 

Co., New York, New York .................................................................................... 10 

Ashley Bacon, Acting Chief Risk Officer, JPMorgan Chase & Co., New York 

New York .............................................................................................................. 12 

Peter Weiland, Former Head of Market Risk, Chief Investment Office, 

JPMorgan Chase & Co., New York, New York .................................................. 13 

Michael J. Cavanagh, Head of JPMorgan Chase & Co. Management Task 

Force Reviewing CIO Losses, and Co-Chief Executive Officer, Corporate 

& Investment Bank, JPMorgan Chase & Co., New York, New York .............. 28 

Douglas L. Braunstein, Current Vice Chairman, Former Chief Financial Officer (2010–12), JPMorgan Chase & Co., New York, New York ......................... 30 

Hon. Thomas J. Curry, Comptroller of the Currency, U.S. Department of 

the Treasury ......................................................................................................... 61 

Scott Waterhouse, Examiner-in-Charge, OCC National Bank Examiners— 

JPMorgan Chase, Office of Comptroller of the Currency ................................. 62 

Michael Sullivan, Deputy Comptroller for Risk Analysis, Risk Analysis Department, Office of the Comptroller of the Currency ........................................ 63 

ALPHABETICAL LIST OF WITNESSES

Bacon, Ashley: 

Testimony .......................................................................................................... 12 

Prepared Statement ......................................................................................... 108 

Braunstein, Douglas L.: 

Testimony .......................................................................................................... 30 

Cavanagh, Michael J.: 

Testimony .......................................................................................................... 28 

Prepared Statement ......................................................................................... 117 

Curry, Hon. Thomas J.: 

Testimony .......................................................................................................... 61 

Prepared Statement ......................................................................................... 129 

Drew, Ina R.: 

Testimony .......................................................................................................... 10 

Prepared Statement ......................................................................................... 101 

Sullivan, Michael: 

Testimony .......................................................................................................... 63 

Prepared Statement ......................................................................................... 129 

Waterhouse, Scott: 

Testimony .......................................................................................................... 62 

Prepared Statement ......................................................................................... 129 

Weiland, Peter: 

Testimony .......................................................................................................... 13 

Prepared Statement ......................................................................................... 111 
Page

IV 

APPENDIX 

Report by the Permanent Subcommittee on Investigations Majority and Minority Staff entitled ‘‘JPMorgan Chase Whale Trades: A Case History of 

Derivatives Risks and Abuses,’’ March 15, 2013 ............................................... 150 

EXHIBIT LIST 

1. a. Growth of Synthetic Credit Portfolio, chart prepared by the Permanent 

Subcommittee on Investigations ................................................................. 511 

b. Synthetic Credit Portfolio Daily Profits and Losses, chart prepared 

by the Permanent Subcommittee on Investigations ................................. 512 

c. Synthetic Credit Portfolio Aggregate Profits and Losses, chart prepared 

by the Permanent Subcommittee on Investigations ................................. 513 

d. Synthetic Credit Portfolio Risk Limit Breaches, chart prepared by the 

Permanent Subcommittee on Investigations ............................................ 514 

e. Value-at-Risk for the CIO (10Q VaR), chart prepared by the Permanent Subcommitteeon Investigations ......................................................... 515 

f. Inaccurate Public Statements on April 13, 2012, chart prepared by 

the Permanent Subcommittee on Investigations ...................................... 516 

g. Synthetic Credit Portfolio Internal Profits and Loss Reports, JanuaryMay 2012, chart prepared by the Permanent Subcommittee on Investigations ....................................................................................................... 517 

h. 2011 CIO Compensation vs. Investment Bank Comparables, chart prepared by the Permanent Subcommittee on Investigations ...................... 518 

i. Timeline: Key Events in JPMorgan Chase Whale Trades, chart prepared by the Permanent Subcommittee on Investigations ...................... 519 

2. JPMorgan Chase presentation slides, Chief Investment Office—Organization, April 2012. [JPM–CIO–PSI 0001875–876, 879–880, 885] .................... 522 

Documents Related to Increasing Risk: 

3. Testimony of Jamie Dimon, Chairman & CEO of JPMorgan Chase & 

Co., before the Senate Committee on Banking, Housing and Urban Affairs, June 13, 2012 (This strategy, however, ended up creating a portfolio 

that was larger and ultimately resulted in even more complex and hardto-manage risks. This portfolio morphed into something that, rather than 

protect the Firm, created new and potentially larger risks.) .......................... 527 

4. JPMorgan Chase/OCC internal email, dated July 2012, re: CIO: Response 

to Regulator Requests on NBIA, Risk Tolerance and Follow-up VaR model 

questions, attaching Chief Investment Office New Business Initiative Approval Executive Summary. [OCC–SPI–00081611 and Excerpt of OCC– 

SPI–00081631] .................................................................................................. 531 

5. JPMorgan Chase & Co. Audit Department Report, CIO Global Credit 

Trading (Chief Investment Office (CIO) credit trading activities commenced in 2006 and are proprietary position strategies executed on credit 

and asset backed indices.). [JPM–CIO–PSI–H 0006022–023] ....................... 553 

6. JPMorgan Chase Summary of Positions (01/03/2011—$4 billion; 12/30/ 

2011—$51 billion; 03/30/2012—$157 billion). [JPM–CIO–PSI 0037609] ..... 555 

7. JPMorgan Chase internal emails, dated January 2012, re: International 

Credit Consolidated P&L 09 Jan-2012 (Let’s review the unwind plan 

to maximize p l. We may have a tad more room on rwa. Pls schedule 

asap.). [JPM–CIO–PSI 0000075–078] ............................................................. 556 

8. JPMorgan Chase internal emails, dated January 2012, re: Meeting materials for 11am meeting attaching J.P.Morgan Core Credit Book Highlights, January 2012. (As of COB 16th January 2012 the CIO calculated 

Core Credit Book RWA was USD20.9bln; This compares to average 

USD40.3bln RWA for December 2011 provided by QR). [JPM–CIO–PSI 

0000098–101] .................................................................................................... 560 

9. JPMorgan Chase internal email, dated January 2012, re: Credit book 

Decision Table—Scenario clarification (The fourth scenario is our Target 

scenario and the one we are hoping to implement again by midyear.). 

[JPM–CIO–PSI 0000105–106] ......................................................................... 564 

10. JPMorgan Chase internal email, dated January 2012, re: credit book 

last version, attaching J.P.Morgan Core Credit Book Highlights, January 

2012. (The trade that makes sense.). [JPM–CIO–PSI 0000159–173] ............ 566 
Page

V 

11. JPMorgan Chase internal emails, dated January 2012, re: update on 

core credit book (the only one I see is to stay as we are and let the 

book simply die. That we should take some hits because the markets 

might create noise in the P&L is a certain reality. Yet, the control of 

the drawdown now is generating issues that make the book only bigger 

than notional.). [JPM–CIO–PSI 0001223] ...................................................... 581 

12. JPMorgan Chase internal email, dated January 2012, re: update on core 

credit book (. . . notionals become scary and upside is limited unless 

we have really unexpected scenarios. In the meantime, we face larger 

and larger drawdown pressure versus the risk due to notional increases. 

Please let me know the course of action I should take here.). [JPM– 

CIO–PSI 0001766] ............................................................................................ 582 

13. JPMorgan Chase internal email, dated January 2012, re: hello, quick 

update in core credit . . . (. . . we can show that we are not at mids 

but on realistic level. * * * I went I 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.). [JPM–CIO–PSI 0001229] .......................................... 583 

14. JPMorgan Chase internal emails, dated January 2012, re: Core book 

p&l drawdown and main exposures (The current strategy doesn’t seem 

to work-out. . . . the book doesn’t behave as intended.). [JPM–CIO–PSI 

0000221–223] .................................................................................................... 584 

15. JPMorgan Chase internal email, dated March 2012, re: priorities (If we 

need to [a]ctually reduce the book, we will not be able to defend our 

positions. . . . We need to win on the methodology and then the diversification.). [JPM–CIO–PSI 0001219] ............................................................. 587 

16. a. JPMorgan Chase internal email, dated March 2012 re: CIO Core Credit P&L Predict [20 Mar]: –$39,686k (dly) –$275,424k (ytd). (. . . the 

lag in P&L is material ($600–800M).). [JPM–CIO–PSI 0016487–489] ... 588 

b. JPMorgan Chase internal email, dated March 2012 re: International 

Credit Consolidated P&L 20-Mar-2012 (. . . the lag in P&L is material ($600–800M).). [JPM–CIO–PSI 0019474–486] .................................. 591 

17. JPMorgan Chase Transcript of Call, March 2012, between Martin-Artajo 

and Iksil, (. . . 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 OK 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, and I explained that this is a lag 

that keeps going, that amounts to a potential of 800 bucks. . . .). [JPM– 

CIO–PSI–H 0006392–400] ............................................................................... 594 

18. JPMorgan Chase internal email, dated March 2012 re: CIO Core Credit 

P&L Predict [22 Mar]: +$82k (dly) –$276,990k (ytd). (Today we sold 

protection. . . .). [JPM–CIO–PSI 0016499–501] ............................................ 603 

19. JPMorgan Chase internal emails, dated March 2012 re: I would like 

to understand the increase in positions in credit (Ina is freaking—really! 

Call me). [JPM–CIO–PSI 0000410–412] ......................................................... 606 

20. JPMorgan Chase transcript of instant message dated March 23, 2012 

(Bruno Iksil: this year for the first time, achilles started thinking i could 

be of use other than to make money . . . just to protect the whole group 

but here is the loss and it become too large and this is it. . . .). [JPM– 

CIO–PSI 0001240–246] .................................................................................... 609 

21. JPMorgan Chase transcript of instant message dated March 23, 2012 

(Bruno Iksil: . . .I am going to be hauled over the coals * * * you don’t 

lose 500M without consequences . . .). [JPM–CIO–PSI–H 0006438, 450– 

464] .................................................................................................................... 616 

22. JPMorgan Chase internal email, dated March 2012 re: Tranche Plan 

(Now that we have the new RWA increase, Ina would like to discuss 

the forward plan for reduction. She does not want any trades executed 

until we all discuss it.). [JPM–CIO–PSI 0001267] ......................................... 632 

23. JPMorgan Chase internal emails, dated March 2012, re: synthetic credit— 

crisis action plan (Clearly, we are in a crisis mode on this.). [JPM– 

CIO–PSI 0001220–222] .................................................................................... 633 

24. a. ‘London Whale’ Rattles Debt Market, April 6, 2012, The Wall Street 

Journal ......................................................................................................... 636 

b. JPMorgan Trader’s Positions Said to Distort Credit Indexes, April 

6, 2012, Bloomberg ...................................................................................... 638 

25. JPMorgan Chase internal emaisl, dated April 2012, re: Credit (A bit 

more than we thought). [JPM–CIO–PSI–H 0002276] .................................... 641 
Page

VI 

26. JPMorgan Chase internal email, dated April 2012, re: Net positions vs 

average trading volumes (The below table shows that CDX.IG.9 net position for CIO is $82.2bio, which is approximately 10–15 days of 100% 

of trading volume based on the 1m avg volume published by JPMorgan 

Research. ITX.9 net position for CIO is $35bio, which is approximately 

8–12 days of 100% trading volume based on the 1m avg volume.). [JPM– 

CIO–PSI 0001026–027] .................................................................................... 642 

27. OCC internal emails, dated May 2012, re: CIO call with Mike Brosnan 

(They took up a strategy to reduce their make believe voodoo magic ‘‘Composite Hedge.’’ . . .). [OCC–SPI–00021602–604] ............................................ 644 

Documents Related to Hiding Losses: 

28. Grout Spreadsheet, March 12–16, 2012. [JPM–CIO–PSI–H 00002812] ...... 647 

29. JPMorgan Chase internal emails, dated March 2012, re: update on Core 

PNL (The divergence has increased to 300 now). [JPM–CIO 0003475] ........ 648 

30. JPMorgan Chase internal emails, dated March 2012, re: Synthetic Book— 

URGENT (Option B: we settle with the IB . . . and have an impact 

on P/L that could be as large as –350MM.). [JPM–CIO–PSI 0000416] ....... 649 

31. JPMorgan Chase internal emails, dated April 2012, re: update (. . . if 

we exclude very adverse marks to our book the potential loss due to 

market moves or any economic scenario . . . would not exceed . . . –200 

MM USD. . . .). [JPM–CIO–PSI 0001429] .................................................... 650 

32. a. JPMorgan Chase transcript of call between Julien Grout and Bruno 

Iksil, dated March 16, 2012 (I can’t keep this going, we do a oneoff at the end of the month to remain calm. * * * I don’t know where 

he wants to stop, but it’s getting idiotic.). [JPM–CIO–PSI–H 0003820– 

822] ............................................................................................................... 651 

b. JPMorgan Chase transcript of instant message dated March 16, 2012 

(it is 300 now 1000 for month end? ouch well that is the pace). 

[JPM–CIO–PSI–H 0003815–819] ............................................................... 654 

c. Transcript of Audio Recording Produced to the Permanent Subcommittee on Investigations, call between Javier Martin-Artajo, Ina 

Drew, and Gina Serpico. Undated (likely April 2012) (Ms. Drew: It’s 

absolutely fine to stay conservative, but it would be helpful, if appropriate, to get, to start getting a little bit of that mark back.). [JPM– 

CIO–PSI–A 0000076.wav ............................................................................ 659 

d. JPMorgan Chase transcript of call between Javier Martin-Artajo and 

Alistair Webster, dated May 8, 2012 (So then when, if we roll forward 

to March, if the front office marks had migrated . . . to the aggressive 

side, most of them, not all of them, to the aggressive side, but they’ve 

also migrated from either mid to somewhere close to being at the, 

you know, the bounds of the bid or offer.). [JPM–CIO 0003631–636] ..... 662 

33. JPMorgan Chase internal email, dated April 2012, re: CIO Core Credit 

P&L Predict (10 Apr]: –$5,711k (dly) –$626,834k (ytd) (Daily P&L: 

–$5,710,991 * * * Daily P&L: –$394,735,120). [JPM–CIO 0003570–576] .. 668 

34. a. JPMorgan Chase internal emails, dated April 2012, re: Credit Index 

and Tranche Book (. . . CIO FO marked their book at the most advantageous levels. . . .). [JPM–CIO–PSI–H 0006636–639] ............................ 675 

b. JPMorgan Chase internal emails, dated April 2012, re: URGENT ::: 

Huge Difference for iTraxx & CDX (The desk marked the book at 

the boundary of the bid/offer spread. . . .). [JPM–CIO 0003582–3587] 679 

35. JPMorgan Chase internal emails, dated April 2012, re: Collateral Disputes (This isn’t a good sign on our valuation process. . . . I am going 

to dig further.). [JPM–CIO–PSI–H 0000108–109] ......................................... 685 

36. JPMorgan Chase internal memorandum, dated May 2012, re: Firm’s review of the valuation of its CIO EMEA credit portfolio in light of the 

current market conditions and dislocation that occurred in April 2012. 

[JPM–CIO–PSI–H 0006730–747] .................................................................... 687 

Documents Related to Disregarding Limits: 

Overview and Organization: 

37. J.P. Morgan slide presentation, Market Risk Limits, March 2012. (Business Unit must take immediate steps toward reducing its exposure to 

be within the limit, unless a One-off Approval is granted by all Grantors 

and Grantees of limits) [OCC–SPI–00117682] ............................................... 705 
Page

VII 

38. Document prepared by Bruno Iksil, including excerpts of JPMorgan 

Chase internal emails December 2011-March 2012. [JPM–CIO–PSI 

0021879–917] .................................................................................................... 709 

39. JPMorgan Chase internal emails, dated May 2012, re: Information needed 

(. . . please find the CIO excessions attached.). [JPM–CIO–PSI–H 

0000627–636] .................................................................................................... 748 

VaR Models and Limits: 

40. JPMorgan Chase internal emails, dated January 2012, re: JPMC 

Firmwide VaR—Daily Update—COB 01/09/2012 (Pat’s model is in line 

with the 70 VAR and has a much better explanation for these changes. 

Hopefully we get this approved as we speak.). [JPM–CIO–PSI 0000093– 

097] .................................................................................................................... 758 

41. JPMorgan Chase internal emails, dated January 2012, re: Breach of 

firm var (Below please find details of the VaR limit breach. The VaR 

increase is driven by Core Credit (tranche) in EMEA. The VaR has increased steadily since the end of December as positions in CDX.HY onthe-run indices have been added to the portfolio to balance the book, 

which has been taken longer risk. . . .). [JPM–CIO–PSI 0000141–145] ...... 763 

42. JPMorgan Chase internal email, dated January 2012, re:CIO VaR (FYI. 

Dual plan . . . as discussed keep the pressure on our friends in Model 

Validation and QR.). [JPM–CIO–PSI 0000151] ............................................. 768 

43. JPMorgan Chase internal emails, dated January 2012, re: CIO VaR 

heads up and update (Importantly, for the same COB 26 January, the 

*new/full revaluation methodology* shows VaR decreased ($1.3MM) from 

70.8mm to 69.5mm. I estimate that this would make CIO global VAR 

closer to $76MM vs. the currently reported number >$115. We anticipate 

final approval on Monday and that the *new methodology should become 

the official firm submission from Monday, for 27 Jan COB.* Limit issues 

should therefore cease beginning from Monday.). [JPM–CIO–PSI 

0000177–179] .................................................................................................... 769 

44. JPMorgan Chase internal emails, dated January 2012, re: draft of the 

MRG review of the HVAR methodology for the CIO core credit books 

(Operational Risk—The VaR computation is currently done off spreadsheets using a manual process. Thus it is error prone, and not easily 

scalable. * * * ACTION PLAN: CIO should re-examine the data quality 

and explore alternative data sources. For days with large discrepancies 

between dealer marks and IB marks, the integrity of the data used for 

HVAR calculation should be verified. * * * Please go ahead with the 

implementation of the new HVaR methodology for the CIO credit books.). 

[JPM–CIO–PSI 0000187–191] ......................................................................... 772 

45. JPMorgan Chase internal emails, dated April 2012, re: CIO VaR (FYI— 

we discovered an issue related to the VAR market data used in the 

calculation which we need to discuss. This means our reported standalone 

var for the five business days in the period 10–16th April was understated 

by apprx $10mm.). [JPM–CIO–PSI 0001205] ................................................. 777 

RWA, CRM and Optimization: 

46. JPMorgan Chase internal emails, dated December 2011, re: RWA— 

Tranche Book (The estimates of reductions will be: Model reduction QR 

CRM (ackno[w]ledged already) 5 [billion] (Pat estimate); Model reduction 

QR VAR 0.5 [billion] (Pat estimate); Model Reduction QR Stress 1.5 

[billion] (Pat estimate)). [JPM–CIO–PSI 0000032–034] ................................ 778 

47. JPMorgan Chase internal emails, dated March 2012, re: CIO CRM results 

(We got some CRM numbers and they look like garbage as far as I 

can tell, 2-3x what we saw before.). [JPM–CIO–PSI 0000338–339] .............. 781 

48. JPMorgan Chase internal emails, dated March 2012, re: New CRM numbers . . . (With their new model, QR is reporting that we have a stand 

alone CRM of roughly 6bn. This is radically higher than the worst loss 

we see at the same confidence level; the loss we see is far below 2bn.). 

[JPM–CIO–PSI 0036342–344] ......................................................................... 783 

49. JPMorgan Chase internal emails, dated March 2012, re: CIO CRM results 

(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 and Feb. * * * The change 

in notional is not correct and the CRM is therefore too high.). [JPM– 

CIO–PSI 0000371–372 ] ................................................................................... 786 
Page

VIII 

50. JPMorgan Chase internal emails, dated March 2012, re: Optimizing regulatory capital (To optimize the firm-wide capital charge, I believe we 

should optimize the split between the tranche and index books. * * * 

I don’t think we should treat this as 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.). [JPM–CIO–PSI 0011025–026] ........................................................ 788 

51. a. Excerpt from transcript of audio recording produced to the Permanent 

Subcommittee on Investigations, call between Anil Bangia and Patrick 

Hagan, dated March 21, 2012. [JPM–CIO–PSI–A 0000089] ................... 790 

b. Excerpt from transcript of audio recording produced to the Permanent 

Subcommittee on Investigations, call between Anil Bangia and Patrick 

Hagan, dated March 21, 2012. [JPM–CIO–PSI–A 0000090] ................... 791 

c. Excerpt from transcript of audio recording produced to the Permanent 

Subcommittee on Investigations, call between Peter Weiland and Patrick Hagan, dated March 22, 2012. [JPM–CIO–PSI–A 0000091] ............ 793 

52. JPMorgan Chase internal emails, dated April 2012 (We haven’t made 

the case of how this book runs off and whether risk can be managed 

effectively. . . .). [JPM–CIO–PSI 0000497–498] ............................................ 794 

Credit Spread Risk Metrics and Limits: 

53. JPMorgan Chase internal email, dated January 2012, re: there is more 

loss coming in core credit book (I reckon we have another 50M coming 

from CDX IG9 exposure. The guys have a huge skew trade on and they 

will defend it as much as we do.). [JPM–CIO–PSI 0001225] ........................ 796 

54. JPMorgan Chase internal emails, dated February 2012, re: Csbpv limit— 

please read (We have a global credit csbpv limit. It was set up at the 

initiation of the credit book. Unfortunately we have been breaching for 

most of the year. * * * I have no memory of this limit. In any case 

it need to be recast with other limits.). [JPM–CIO–PSI–H 0002936] ........... 797 

55. JPMorgan Chase internal email, dated February 2012, re: CIO Global 

Credit spread BPV limit breach-COB 02/09/2012 (Since mid-January 

CIO has been in breach of its global csbpv limits, driven primarily by 

position changes in the tranche book.). [JPM–CIO–PSI 0001823–825, 832] 798 

56. JPMorgan Chase internal emails, dated April 2012, re: CIO DAY 1 (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.). 

[JPM–CIO–PSI 0000449–451] ......................................................................... 802 

57. JPMorgan Chase internal email, dated May 2012, re: CSBPV History 

(Early in 2012 net CSBPV increased dramatically as IG positions were 

added and offset between HY and IG grew). [JPM–CIO–PSI–H 0000810– 

811] .................................................................................................................... 805 

Documents Related to OCC Oversight: 

58. OCC internal email, dated January 2012, re: CIO Quarterly Meeting 

(The MTM Book is decreasing in size in 2012.). [OCC–SPI–00004695] ....... 807 

59. OCC internal emails, dated April 2012, re: CIO deck ([H]ave you still 

been getting the CIO deck? I don’t recall seeing it lately.). [OCC– 

00004720] .......................................................................................................... 808 

60. JPMorgan Chase/OCC email, dated April 2012, re: materials for Fed/ 

OCC/FDIC call at noon today, attaching Synthetic Credit Book Review 

for Briefing by CIO to OCC. [OCC–SPI–00009712–724] ............................... 809 

61. JPMorgan Chase/OCC emails, dated April 2012, re: CIO January 2012 

valuation memo and metrics (Apologies for not distributing the February 

valuation work. I just sent the February and March reports.). [OCC– 

00004735–736] .................................................................................................. 822 

62. JPMorgan Chase/OCC emails, dated April 2012, re: Quick questions pp 

4 and 5 of yesterday’s presentation (I believe there is modest long credit 

risk sensitivity to the portfolio now.). [OCC–SPI–00023815] ......................... 824 

63. OCC internal email, dated April 2012, re: JPM CIO / IG9 ′′whale′′ trade 

(JPM’s CIO has been using a synthetic credit (credit derivative) portfolio 

since 2007. It was initially set up to provide income to mitigate other 

significant credit losses that would surface under a broad credit stress 

scenario.). [OCC–00012521–523] ..................................................................... 825 
Page

IX 

64. JPMorgan Chase/OCC emails, dated April 2012, re: CIO EMR? (Does 

the CIO still produce an EMR? It wasn’t included in the January Treasury EMR, which is where I used to see it. I’m looking for the balance 

sheet information that was in it.). [OCC–00004723] ...................................... 828 

65. JPMorgan Chase/OCC emails, dated April 2012, re: Info on VaR, CSBPV, 

and stress status and limits (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.). [OCC–SPI–00022340–341] ............................. 829 

66. OCC internal emails, dated April 2012, re: Weekly Market Summary 

period ending 4/13 (The Whale Trade issue is considered closed—email 

went out to Senior Management yesterday). [OCC–SPI–00023057–060] ...... 831 

67. OCC internal email, dated April 2012, re: Weekly Market Summary period 

ending 4/20 (For the second consecutive week, CIO is breaching its $1.0bn 

stress limit. . . .). [OCC–SPI–00023753–755] ................................................ 835 

68. OCC internal emails, dated May 2012, re: CIO Synthetic Position (Doug 

Braunstein and John Hogan called to provide an update on the CIO 

position. * * * Current losses are approximately $1.6 billion.). [OCC– 

SPI–00021853] .................................................................................................. 838 

69. OCC internal email, dated May 2012, re: CIO information for Wednesday 

(However I asked James to first, put in a request for more granular 

daily P&L on the synthetic credit. . . . Bank will likely object to this. 

. . .). [OCC–SPI–00013737] ............................................................................. 839 

70. OCC internal emails, dated May 2012, re: My opinion on yesterday’s 

meeting (I wasn’t satisfied with the comments made about valuation process and thresholds yesterday, and so we have some followup here. * * * 

In addition to reserve, there were likely problems with the thresholds 

themselves. * * * Valuation was one of the things Hogan said they are 

looking at). [OCC–00005302–304] ................................................................... 840 

71. OCC internal emails, dated May 2012, re: J.P. Morgan Chase (We received a lot of pushback from the bank, Ina Drew in particular, regarding 

our comments. In fact, Ina called Crumlish when he was in London 

and ′′sternly′′ discussed our conclusions with him for 45 minutes. Basically 

she said that investment decisions are made with the full understanding 

of executive management including Jamie Dimon.). [OCC–00001746] ........ 843 

72. Morgan Chase/OCC emails, dated May 2012, re: CIO P&L reporting 

(We’d like to get the synthetic credit P&L for the past five weeks broken 

out on at least a weekly basis.). [OCC–00004759] .......................................... 844 

73. OCC internal emails, dated May 2012, (Does not add up. Collateral 

dispute of $700 mil versus a double digit reserves amount?). [OCC–SPI– 

00009335] .......................................................................................................... 845 

74. OCC internal emails, dated May 2012, re: Not Getting CIO daily P&L 

after only one day (I got one CIO daily P&L distribution and then didn’t 

yesterday.). [OCC–00004540] ........................................................................... 846 

75. OCC handwritten notes, dated May 2012, re: SBC Staff Briefing (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 

management risk.). [PSI–OCC–10–000001] .................................................... 847 

76. OCC internal emails, dated May 2012, re: CIO call with Mike Brosnan 

(I told Mike B that the Joe Sabatini emails with selected position information were sent by the bank after initial OCC and FRB enquiries. We 

concluded that this information was pretty much useless, as it did not 

tell us what was happening risk wise.). [OCC–SPI–00021628–631] ............. 848 

77. OCC internal emails, dated May 2012, re: cio var change (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.). [OCC–SPI–00021932] ..................................................... 852 

78. OCC internal emails, dated June 2012, re: 2nd Wilmer Hale Call (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 left puzzled over how a collateral dispute 

could be resolved by agreeing to the counterparties marks, without admitting your own marks were incorrect.). [OCC–SPI–00071386] ....................... 853 
Page

X 

Documents Related to Misinformation to Investors, Regulators, and 

the Public: 

79. a. JPMorgan Chase internal email, dated January 2012, re: JPMC 

Firmwide VaR—Daily Update—COB 01/19/2012 (The impact of the 

new VaR model based on Jan. 18 will be a reduction of CIO VaR 

by 44% to $57mm.). [JPM–CIO–PSI 0002457] .......................................... 856 

b. JPMorgan Chase internal email, dated January 2012, re: JPMC 95% 

10Q VaR—Limit Excession Notification (COB 1/19/12) (. . . reduction 

of CIO VaR by 44% to $57mm.). [JPM–CIO–PSI 0001890] ..................... 857 

c. JPMorgan Chase internal email, dated January 2012, re: APPROVAL 

NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval (. . . reduction of CIO VaR by 44% to $57mm.). [JPM–CIO–PSI 0004660–661] ..... 858 

d. JPMorgan Chase internal emails, dated January 2012, re: APPROVAL 

NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval (Jamie 

Dimon: I approve.) [JPM–CIO–PSI 0001337–338] ................................... 860 

e. JPMorgan Chase internal email, dated January 2012, re: : JPMC 

Firmwide VaR—Daily Update—COB 01/26/2012 (. . . reduction of 

CIO VaR by 44% to $57mm.). [JPM–CIO–PSI 0003346] ......................... 862 

f. JPMorgan Chase internal email, dated January 2012, re: : JPMC 

Firmwide VaR—Daily Update—COB 01/26/2012 (. . . reduction of 

CIO VaR by 44% to $57mm.). [JPM–CIO–PSI 0003715] .......................... 863 

g. JPMorgan Chase internal emails, dated January 2012, re: : JPMC 

Firmwide VaR—Daily Update—COB 01/26/2012 (A CIO model 

change is planed 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.). [JPM–CIO–PSI–H 0001675] ............... 864 

h. JPMorgan Chase internal emails, dated January 2012, re: JPMC 

Firmwide VaR—Daily Update—COB 01/27/2012 (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).). [JPM–CIO–PSI 0001339] ................................................................... 865 

80. JPMorgan Chase internal email, dated February 2012, re: CIO Business 

Review Materials. [JPM–CIO–PSI 0001940–942, 949–951, 958–961, 963] .. 866 

81. J.P.Morgan Directors Risk Policy Committee—CIO 2012 Opportunities 

and Challenges, March 2012. [JPM–CIO–PSI 0015015–018, 023] ............... 877 

82. JPMorgan Chase Audit Department Report, dated March 2012, Audit 

Rating: Needs Improvement. [JPM–CIO–PSI 0009289–296] ......................... 882 

83. JPMorgan Chase internal emails, dated April 2012, re: Jamie’s fine with 

this (Here are some revised points based on your comments.). [JPM– 

CIO–PSI 0000543–544] .................................................................................... 890 

84. a. JPMorgan Chase internal email, dated April 2012, re: CIO (Post December as the macro scenario was upgraded and our investment activities turned pro risk, the book was moved into a long position.). [JPM– 

CIO–PSI 0000539] ....................................................................................... 892 

b. JPMorgan Chase internal email, dated May 2012, (WHAT HAPPENED?). [JPM–CIO–PSI 0001212–214] ................................................. 893 

85. JPMorgan Chase internal email, dated April 2012, re: Synthetic Credit 

Summary (In Q4, we decided to neutralize the risk profile of this book.). 

[JPM–CIO–PSI 0001588–589] ......................................................................... 896 

86. JPMorgan Chase internal emails, dated April 2012, re: Deliverables for 

meeting tomorrow (Doug had the question of why we just didn’t reduce 

the HY position to reduce our risk rather than going long the IG 9 

(we discussed carry (ie associated p&l). . . .). [JPM–CIO–PSI 0001646– 

647] .................................................................................................................... 898 

87. JPMorgan Chase internal emails, dated April 2011, re: Credit risk limits 

(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.). [JPM–CIO–PSI 0001086] ................................................................ 900 

88. JPMorgan Chase internal emails, dated April 2012, re: Single names 

CDS basis relative to IG 9 CDS—URGENT update (. . . the market 

is quiet today. To[o] early to tell but so far about flat P/L. The tension 

has stopped now. The bank’s communications yesterday are starting to 

work.). [JPM–CIO–PSI–H 0002340, 342] ....................................................... 901 

89. JPMorgan Chase internal email, dated April 2012, re: updated (We are 

working on Jamie’s request for Correlation of the credit book against 

the portfolio. . . .). [JPM–CIO–PSI 0001077–078] ........................................ 903 
Page

XI 

90. JPMorgan Chase internal email, dated April 2012, re: synthetic credit 

information for April 13 earnings call, including SCP P&L scenarios. 

[JPM–CIO–PSI 0001701–709] ....................................................................... 905 

91. JPMorgan Chase internal email, dated April 2012, re: Synthetic Credit 

Materials (The way that we at CIO have book-run the Core Book to 

balance the negative carry cost of High yield Book overtime has been 

using Investment Grade strategies that gave us some carry or buying 

optionality (or both). . . .). [JPM–CIO–PSI 0001100–106] ......................... 914 

92. JPMorgan Chase internal email, dated April 2012, re: If asked about 

London / CIO and Volcker (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.). [JPM–CIO–PSI–H 0002418] ......................... 921 

93. JPMorgan Chase internal emails, dated April 2012, re: CIO (Doug and 

I asked that the first day. Answer was it most ′′efficient′′ way to do 

it. I would say they just wanted to improve the carry on the book 

by selling protection and taking in some premium.). [JPM–CIO–PSI 

0001753–757] .................................................................................................. 922 

94. Excerpt from April 13, 2012, JPM—Q12012 JPMorgan Chase & Co. 

Earnings Conference Call [JPM–CIO–PSI 0001151–160] ........................... 927 

95. JPMorgan Chase internal email, dated May 2012, re: 10-Q call—Buyside 

and sellside comments (2) (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). [JPM–CIO–PSI 0017754–758] ................................................ 937 

96. JPMorgan Chase & Co. (JPM) Business Update Call, 10-May-2012 .......... 942 

97. Correspondence from Douglas L. Braunstein, Vice Chairman, JPMorgan 

Chase & Co. to the Permanent Subcommittee on Investigations, dated 

February 4, 2013 (. . . my statements on April 13 regarding those hedging characteristics were references to the portfolio’s design and historical 

performance as a hedge. I was not commenting on the hedging effectiveness of the portfolio as of April 13.). [PSI–JPMC–35–000001] .................... 962 

98. Report of JPMorgan Chase & Co. Management Task Force Regarding 

2012 CIO Losses, January 16, 2013 .............................................................. 963 

99. Response provided by The Honorable Thomas Curry, Office of the Comptroller of the Currency, to question raised at the March 15, 2013 hearing .................................................................................................................... 1095 

100. a. Responses to supplemental questions for the record from Douglas 

Braunstein and Michael Cavanagh, JPMorgan Chase & Co., with 

attachment ................................................................................................. 1099 

100. b. SEALED EXHIBIT: Attachments to supplemental questions for the 

record from JPMorgan Chase & Co ......................................................... * 

101. Responses to supplemental questions for the record from The Honorable 

Thomas Curry, Scott Waterhouse and Michael Sullivan, Office of the 

Comptroller of the Currency, with attachments .......................................... 1113 

VOLUME 2 

102. Documents cited in footnotes to JPMorgan Chase Whale Trades: A Case 

History of Derivatives Risks & Abuses, the Report released in conjunction with the Subcommittee hearing on March 15, 2013. A Document 

Locator List provides bates numbers and document descriptions of the 

documents cited in the Report. Not included are documents related 

to Subcommittee interviews, which are not available to the public, and 

widely available public documents ................................................................ 1304 

(1) 

JPMORGAN CHASE WHALE TRADES: 

A CASE HISTORY OF DERIVATIVES 

RISKS AND ABUSES 

FRIDAY, MARCH 15, 2013 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:33 a.m., in room 

SD–G50, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, McCain, and Johnson. 

Staff present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; Zachary I. Schram, Senior Counsel; Allison F. Murphy, Counsel; David H. Katz, Counsel; Feras 

Sleiman, Law Clerk; Todd Phillips, Law Clerk; Elizabeth V. 

Baltzan, Former Congressional Fellow; Eric S. Walker, Former 

Detailee; Brian Egger, Detailee (GAO); Christopher Reed, Congressional Fellow; Combiz Abdolrahimi, Law Clerk; Aaron Fanwick, 

Law Clerk; Adam Goldberg, Law Clerk; Gigi Good, Intern; Alex 

Harisiadis, Law Clerk; Henry J. Kerner, Staff Director and Chief 

Counsel to the Minority; Stephanie Hall, Counsel to the Minority; 

Brad M. Patout, Senior Policy Advisor to the Minority; Scott D. 

Wittmann, Research Assistant to the Minority; and Rachael Weaver (Sen. Johnson). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Let me first begin by 

extending a special welcome to the new Ranking Member of this 

Subcommittee, a dear and longtime friend, Senator McCain. It is 

not the first time that we have worked side-by-side. He has been 

a longtime Member of the Subcommittee and was formerly Ranking 

Member on the Senate Armed Services Committee, and he has 

brought great energy and a bipartisan spirit to our work together, 

and we want to just welcome him as our new Ranking Member 

here. 

We also welcome Senator Johnson, as a new Member on our Subcommittee. Unlike Senator McCain who has been a Member of this 

Subcommittee for years, Senator Johnson has now joined us. We 

welcome him. 

In April 2012, Americans were confronted with a story of Wall 

Street excess and the derivatives disaster, now known as the 
2 

‘‘JPMorgan Chase whale trades.’’ The largest U.S. banks today are 

deep into derivatives, which are complex financial instruments that 

derive their value from other assets. The derivatives behind the 

JPMorgan whale trades were part of a so-called Synthetic Credit 

Portfolio (SCP), that made outsized bets on whether particular financial instruments or entities were creditworthy or would default 

during specified time periods. The bets were made by traders in the 

London office of the U.S. banking giant JPMorgan Chase. Their 

trades—meaning their bets—grew so large that they roiled the $27 

trillion credit derivatives market, singlehandedly affected global 

prices, and finally attracted a media storm aimed at finding out 

who was behind them. 

That is when the media unmasked JPMorgan’s Chief Investment 

Office (CIO), which, until then, had been known for making conservative investments with bank deposits. At first, JPMorgan’s 

Chief Executive Officer (CEO) Jamie Dimon claimed the April 

media reports about the whale trades were a ‘‘tempest in a teapot.’’ 

But a month later, the bank admitted the truth: That their credit 

derivative bets had gone south, producing not only losses that 

eventually exceeded $6 billion, but also exposing a litany of risk 

management problems at what had been considered one of America’s safest banks. 

JPMorgan Chase is the largest financial holding company in the 

United States. It is also the largest derivatives dealer in the world 

and the largest single participant in world credit derivatives markets. It has consistently portrayed itself as a risk management expert with a ‘‘fortress balance sheet’’ that ensures taxpayers have 

nothing to fear from its extensive dealing in risky derivatives. But 

that reassuring portrayal of the bank was shattered when whale 

trade losses shocked the investing public, not only with the magnitude of the losses, but because the financial risk had been largely 

unknown to bank regulators. 

The Subcommittee meets today after 9 months of digging into the 

facts behind the whale trades. To learn what happened, the Subcommittee collected nearly 90,000 documents, conducted over 50 

interviews and briefings, and has issued a 300-page bipartisan report. While the bank and its regulators have cooperated with our 

investigation, four key former JPMorgan employees directly involved in the derivatives trading declined to cooperate, and because 

they reside overseas, they remain beyond the Subcommittee’s subpoena authority. 

Our findings open a window into the hidden world of high-stakes 

derivatives trading by big banks. It exposes a derivatives trading 

culture at JPMorgan that piled on risk, that hid losses, that disregarded risk limits, that manipulated risk models, that dodged 

oversight, and that misinformed the public. 

Our investigation brought home one overarching fact: The U.S. 

financial system may have significant vulnerabilities attributable 

to major bank involvement with high-risk derivatives trading. The 

four largest U.S. banks control 90 percent of U.S. derivatives markets, and their profitability is invested, in part, in their derivatives 

holdings, nowhere more so than at JPMorgan. 

The whale trades demonstrate how credit derivatives, when purchased in massive quantities with complex components, can become 
3 

a runaway train barreling through every risk limit. The whale 

trades also demonstrate how derivative valuation practices are easily manipulated to hide losses, and how risk controls are easily manipulated to circumvent limits, enabling traders to load up on risk 

in their quest for profits. Firing a few traders and their bosses will 

not be enough to staunch Wall Street’s insatiable appetite for risky 

derivative bets or stop the excesses. More control is needed. 

Among the most troubling aspects of the whale trades case history is that JPMorgan traders, who were required to book the value 

of their derivative holdings every business day, used internal profit/loss reports to hide more than half a billion dollars in losses in 

just 3 months. Eventually, those misreported values forced 

JPMorgan to restate its earnings for the first quarter of 2012. But 

to this day, JPMorgan maintains that the mismarked values did 

not, on their face, violate bank policy or generally accepted accounting principles. But if derivative books can be cooked as blatantly 

as they were in this case without breaking the rules, then the rules 

need to be revamped. And given how much major U.S. bank profits 

remain bound up with the value of their derivatives, derivative 

valuations that cannot be trusted are a serious threat to our economic stability. 

The whale trades also demonstrate how easily a Wall Street 

bank can manipulate and avoid risk controls. The financial industry assures us that it can prudently manage high-risk activities because they are measured, monitored, and limited. But as the Subcommittee report demonstrates in detail, JPMorgan executives ignored a series of alarms that went off as the bank’s Chief Investment Office breached one risk limit after another. Rather than 

ratchet back the risk, JPMorgan personnel challenged and re-engineered the risk controls to silence the alarms. It is difficult to 

imagine how the American people can trust major Wall Street 

banks to prudently manage derivatives risk when bank personnel 

can readily game or ignore the risk controls that are meant to prevent financial disaster and taxpayer bailouts. 

The whale trades also provide another example of a major Wall 

Street bank’s misstatements and concealment. In fact, in January 

2012, the bank told the Office of the Comptroller of the Currency 

(OCC), inaccurately, that the portfolio was decreasing in size, when 

it was not. Most troubling of all, when the media spotlight hit, senior bank executives mischaracterized to investors and the public 

the nature of the whale trades and the extent of risk management 

and regulatory oversight, gambling apparently that the portfolio’s 

bad bets would recover before anyone took a closer look. 

Well, we took a closer look, and it is not pretty: a massive derivatives portfolio riddled with risk; a runaway train of derivatives 

trading blowing through risk limits; hidden losses; bank executives 

downplaying the bad bets; regulators who failed to act. 

Together, these facts are a reminder of what occurred in the recent financial crisis. We just cannot rely on a major bank to resist 

risky bets, honestly report derivative losses, or disclose bad news 

without a strong regulator looking over its shoulder, backed by 

laws that require transparency, risk limits, capital buffers against 

losses, and consequences for misconduct. 
4 

1See Exhibit No. 1a, which appears in the Appendix on page 511. 

That is the big picture, and here are some of the detailed findings from our investigation. 

First, JPMorgan’s Chief Investment Office rapidly amassed a 

huge portfolio of synthetic credit derivatives, in part using federally 

insured depositor funds, in a series of risky, short-term trades, disclosing the extent of the portfolio only after intense media exposure. 

Now, in just a few months during 2011, as shown on Exhibit 

1a1—and I think we can get Chart 1 up over here—the Chief Investment Office’s Synthetic Credit Portfolio grew from a net notional size of $4 billion to $51 billion, and then tripled in the first 

quarter of 2012 to $157 billion. That exponential growth in holdings and risk occurred with virtually no regulatory oversight. 

Second, once the whale trades were exposed, JPMorgan claimed 

to regulators, investors, and the public that the trades were designed to hedge credit risk. But internal bank documents failed to 

identify the assets being hedged, how they lowered risk, or why the 

supposed credit derivative hedges were treated differently from 

other hedges in the Chief Investment Office. If these trades were, 

as JPMorgan maintains, hedges gone astray, it remains a mystery 

how the bank determined the nature, size, or effectiveness of the 

so-called hedges and how, if at all, they reduced risk. 

Third, the Chief Investment Office internally concealed massive 

losses in the first several months of 2012 by overstating the value 

of its synthetic credit derivatives. It got away with overstating 

those values within the bank, even in the face of disputes with 

counterparties and in the face of two internal bank reviews. 

As late as January 2012, the CIO had valued its credit derivatives by using the midpoint in the daily range of bids and asks offered in the marketplace. That is the typical way to value derivatives. But beginning in late January, the traders stopped using 

midpoint prices and started using prices at the extreme edges of 

the daily price range to hide escalating losses. In recorded phone 

conversations, one trader described these marks as ‘‘idiotic.’’ 

At one point, traders used a spreadsheet to track just how large 

their deception had grown by recording the valuation differences 

between using midpoint and more favorable prices. In just 5 days 

in March, according to the traders’ own spreadsheet, the hidden 

losses exceeded $400 million. The difference eventually exceeded 

$600 million. Counterparties to the derivative trades began disputing the CIO’s booked values involving hundreds of millions of 

dollars in March and April. 

Despite the obvious value manipulation, on May 10—the same 

day JPMorgan announced that the whale trades had lost $2 billion—the bank’s controller concluded a special review and signed 

off on the CIO’s derivative pricing practices as ‘‘consistent with industry practices.’’ JPMorgan leadership has continued to argue 

that the values assigned by its traders to the Synthetic Credit Portfolio were defensible under accounting rules. 

Yet in July 2012, the bank reluctantly restated its first quarter 

earnings. It did so only after an internal investigation listened to 
5 

phone conversations, routinely recorded by the bank, in which its 

traders mocked their own valuation practices. 

Now, their mismarked values were not wrong simply because the 

traders intended to understate losses; they were wrong because 

they changed their pricing practices after losses began piling up, 

stopped using the midpoint prices that they had used up until January, and they began using aggressive prices that consistently 

made the bank’s reports look better. Until JPMorgan and others 

stop their personnel from playing those kinds of games, derivative 

values will remain an imprecise, malleable, and untrustworthy set 

of figures that call into question the derivative profits and losses 

reported by our largest financial institutions. 

Fourth, when the CIO’s Synthetic Credit Portfolio breached five 

key risk limits, rather than reduce the risky trading activities, 

JPMorgan either increased the limits, changed the risk models that 

calculated risk, or turned a blind eye to the breaches. 

As early as January 2012, the rapid growth of the Synthetic 

Credit Portfolio breached one common measure of risk, called 

‘‘Value-at-Risk’’ (VaR), causing a breach not just at the CIO, but for 

the entire bank. That 4-day breach was reported to top bank officials, including CEO Jamie Dimon, who personally approved a temporary limit increase, and voila, the breach was ended. CIO employees then hurriedly pushed through approval of a new VaR 

model that overnight dropped the CIO’s purported risk by 50 percent. Regulators were told about that remarkable reduction in the 

CIO’s purported risk, but raised no objection to the new model at 

the time. 

The credit derivatives portfolio breached other risk limits as well. 

In one case, it exceeded established limits on one measure, known 

as ‘‘Credit Spread 01 (CS01),’’ by 1,000 percent for months running. 

When regulators asked about the breach, JPMorgan risk managers 

responded that it was not a ‘‘sensible’’ limit and allowed the breach 

to continue. When still another risk metric, called ‘‘Comprehensive 

Risk Measure,’’ projected that the Synthetic Credit Portfolio could 

lose $6.3 billion in a year, a senior CIO risk manager dismissed the 

result as ‘‘garbage.’’ It was not garbage; that projection was 100 

percent accurate, but the derivatives traders thought they knew 

better. Downplaying risk, ignoring one risk warning after another, 

and pushing to re-engineer risk controls to artificially lower risk results flatly contradict JPMorgan’s claim to prudent risk management. 

Fifth, at the same time the portfolio was losing money and 

breaching risk limits, JPMorgan dodged the oversight of the OCC. 

It omitted CIO data from its reports to the OCC; it failed to disclose size, risk, and losses of the Synthetic Credit Portfolio; and it 

delayed or tinkered with OCC requests for information by giving 

the regulator inaccurate or unresponsive information. In fact, when 

the whale trades first became public, the bank offered such blanket 

reassurances that the OCC initially considered the matter closed. 

It was only when the losses exploded that the OCC took another 

look. 

The failure of regulators to act sooner cannot be excused by the 

bank’s behavior. The OCC also fell down on the job. It failed to investigate multiple, sustained risk limit breaches; it tolerated in-
6 

1See Exhibit No. 1f, which appears in the Appendix on page 516. 

complete and missing reports from JPMorgan; it failed to question 

the bank’s new value-at-risk model that dramatically lowered the 

CIO’s risk rating; it accepted JPMorgan’s protests that the media 

reports about the portfolio were overblown. It was not until May 

2012, after a new Comptroller of the Currency took the reins at the 

OCC, that the OCC officials instituted their first intensive inquiry 

into the Synthetic Credit Portfolio. 

Again, with the lessons of the 2008 financial crisis so painfully 

fresh, it is deeply worrisome that a major bank should seek to 

cloak its risky trading activities from regulators and doubly worrisome that it was able to succeed so easily for so long. 

And, finally, when the whale trades went public, JPMorgan misinformed regulators and the public about the Synthetic Credit Portfolio. JPMorgan’s first public response to the April news reports 

about the whale trades was when its spokesperson, using prepared 

talking points approved by senior executives, told reporters on 

April 10 that the whale trades were risk-reducing hedges that were 

known to regulators. A more detailed description came in a conference call held on April 13 with investment analysts. During that 

call, Chief Financial Officer (CFO) Douglas Braunstein made a series of inaccurate statements about the whale trades, and that is 

shown in Exhibit 1f.1

He said the trades had been put on by bank risk managers and 

were fully transparent to regulators; he said the trades were made 

on a very long-term basis; he said the trades were essentially a 

hedge; he said the bank believed the trades were consistent with 

the Volcker Rule which prohibits high-risk proprietary trading by 

banks. Those public statements on April 13 were not true. As late 

as May 10, bank CEO Jamie Dimon repeatedly described the synthetic credit trades as hedges made to offset risk, despite information showing the portfolio was not a hedge. 

The bank also neglected to tell investors the bad news that the 

derivatives portfolio had broken through multiple risk limits, losses 

had piled up, and the head of the portfolio had put management 

of the portfolio into ‘‘crisis mode.’’ 

It was recently reported that the eight biggest U.S. banks have 

hit a 5-year low in the percentage of deposits used to make loans. 

Their collective average loan-to-deposit ratio has fallen to 84 percent in 2012, down from 87 percent a year earlier and 101 percent 

in 2007. JPMorgan has the lowest loan-to-deposit ratio of the big 

banks, lending just 61 percent of its deposits out in loans. Apparently, it was too busy betting on derivatives to issue the loans 

needed to speed economic recovery. 

Based on its investigation into the JPMorgan whale trades, our 

report makes the following recommendations: 

First, when it comes to high-risk derivatives, Federal regulators 

need to know what major banks are up to. We should require those 

banks to identify internal investment portfolios that include derivatives over a specified size, require periodic reporting on derivative 

performance, and conduct regular reviews to detect undisclosed derivatives trading. 
7 

Next, when banks claim they are trading derivatives to hedge 

risks, we need to require them to identify the assets being hedged, 

how the derivatives trade reduces the risk associated with those assets, and how the bank tested the effectiveness of its hedging strategy in reducing risk. 

Next, we need to strengthen how derivatives are valued to stop 

inflated values. Regulators should encourage banks to use independent pricing services to stop the games; require disclosure of 

valuation disputes with counterparties; and require disclosure and 

justification when, as occurred at JPMorgan, derivative values deviate from midpoint prices. 

Next, when risk alarms go off, banks and their regulators should 

investigate the breaches and take action to reduce risky activities. 

Next, Federal regulators should require disclosure of any newly 

implemented risk model or metric which, when implemented, materially lowers purported risk, and investigate the changes for evidence of model manipulation. 

Next, 3 years ago, Congress enacted the Merkley-Levin provisions of the Dodd-Frank Act, also known as the Volcker Rule, to 

end high-risk proprietary betting using federally insured deposits. 

Financial regulators ought to finalize the long-delayed implementing regulations. 

Next, at major banks that trade derivatives, regulators should 

ensure the banks can withstand any losses by having adequate 

capital charges for derivatives trading. It is way past time to finalize the rules implementing stronger capital bank standards. 

The derivatives trading that produced the whale trades damaged 

a single bank. But the whale trades expose problems that reach far 

beyond one London trading desk or one Wall Street office tower. 

The American people have already suffered one devastating economic assault rooted largely in Wall Street excess. They cannot afford another. When Wall Street plays with fire, American families 

get burned. The task of Federal regulators, and of this Congress, 

is to take away the matches. The whale trades demonstrate that 

task is far from complete. 

Senator McCain. 

OPENING STATEMENT OF SENATOR MCCAIN 

Senator MCCAIN. Thank you, Mr. Chairman, and let me begin by 

saying what an honor it is to serve on this Subcommittee, which 

has a long history of bipartisanship and a celebrated legacy of uncovering waste, fraud, abuse, and outright corruption. And before 

I move forward, I want to express my gratitude to you and the 

members of your staff for your unyielding and dedicated efforts in 

this investigation. 

I would also like to recognize the work of my predecessor on the 

Subcommittee, Senator Coburn, for his contributions prior to my 

arrival. This investigation into the so-called whale trades at 

JPMorgan has revealed startling failures at an institution that 

touts itself as an expert in risk management and prides itself on 

its fortress balance sheet. 

The investigation has also shed light on the complex and volatile 

world of synthetic credit derivatives. In a matter of months, 

JPMorgan was able to vastly increase its exposure to risk while 
8 

dodging oversight by Federal regulators. The trades ultimately cost 

the bank billions of dollars and its shareholders value. These losses 

come to light not because of admirable risk management strategies 

at JPMorgan or because of effective oversight by diligent regulators. Instead, these losses came to light because they were so 

damaging that they shook the market and so damning that they 

caught the attention of the press. 

Following the revelation that these huge trades were coming 

from JPMorgan’s London office, the bank’s losses continued to 

grow. By the end of the year, the total losses stood at a staggering 

$6.2 billion. 

This case represents another shameful demonstration of a bank 

engaged in wildly risky behavior. The ‘‘London Whale’’ incident 

matters to the Federal Government because the traders at 

JPMorgan were making risky bets using excess deposits, portions 

of which were federally insured. These excess deposits should have 

been used to provide loans for Main Street businesses. Instead, 

JPMorgan used the money to bet on catastrophic risk. 

Through an extensive bipartisan investigation, this Subcommittee has uncovered a wealth of new information. Internal 

emails, memos, and interviews reveal that these trades were not 

conducted by a group of rogue traders, but that their superiors 

were well aware of their activities. 

Traders at JPMorgan’s Chief Investment Office, the CIO, adopted a risky strategy with money they were supposed to use to hedge, 

or counter, risk. However, even the head of the CIO could only provide a ‘guesstimate’ as to what exactly the portfolio was supposed 

to hedge. And JPMorgan’s CEO Jamie Dimon admitted that the 

portfolio had ‘‘morphed’’ into something that created new and potentially larger risks. In the words of JPMorgan’s primary Federal 

regulator, it would require ‘‘make-believe voodoo magic’’ to make 

the portfolio actually look like a hedge. 

Top officials at JPMorgan allowed these excessive losses to occur 

by permitting the CIO to continually breach all of the bank’s own 

risk limits. When the risk limits threatened to impede their risky 

behavior, they decided to manipulate the models. 

Disturbingly, the bank’s primary regulator, the OCC, failed to 

take action even after red flags warned that JPMorgan was breaching its risk limits. These regulators fell asleep at the switch and 

failed to use the tools at their disposal to effectively curb 

JPMorgan’s appetite for risk. 

However, JPMorgan actively impeded the OCC’s oversight. The 

CIO refused to release key investment data to the OCC and even 

claimed that the regulator was trying to ‘‘destroy’’ the bank’s business. 

After these losses were uncovered by the press, JPMorgan chose 

to conceal its errors and, in doing so, top officials at the bank misinformed investors, regulators, and the public. In an April 2012 

earnings call, then Chief Financial Officer Douglas Braunstein 

falsely told investors and the public that the bank had been ‘‘fully 

transparent to regulators.’’ 

The deception did not end there. During the same earnings call, 

Mr. Dimon tried to downplay the significance of the losses by infamously characterizing them as ‘‘a complete tempest in a teapot.’’ 
9 

The truth of the matter is that $6 billion, some of which is federally insured, is an inexcusable amount of money to be gambled 

away on risky bets. This investigation potentially reveals systemic 

problems in our Nation’s financial system. The size of the potential 

losses and the accompanying deception echo the misguided and dishonest actions that the banks took during the financial crisis 4 

years ago. 

Let me be clear: JPMorgan completely disregarded risk limits 

and stonewalled Federal regulators. It is unsettling that a group of 

traders made reckless decisions with federally insured money and 

that all of this was done with the full awareness of top officials at 

JPMorgan. This bank appears to have entertained—indeed, embraced—the idea that it was ‘‘too big to fail.’’ In fact, with regard 

to how it managed the derivatives that are the subject of today’s 

hearing, it seems to have developed a business model based on that 

notion—the notion that they are too big to fail. 

It is our duty to the American public to remind the financial industry that high-stakes gambling with federally insured deposits 

will not be tolerated. In 2012, the ‘‘London Whale’’ trades resulted 

in a $6 billion loss. What if it was $60 billion? Or $100 billion? 

Does JPMorgan operate under the assumption that the taxpayer 

will bail them out again? What place does taxpayers’ underwriting 

of the big banks’ disregard for ‘‘moral hazard’’ have in the proper 

operation of a truly free market? 

I look forward to hearing from our witnesses today as we examine what went wrong at JPMorgan. 

Senator LEVIN. Thank you very much, Senator McCain. 

Senator Johnson, do you have an opening comment or statement? 

OPENING STATEMENT OF SENATOR JOHNSON 

Senator JOHNSON. I really do not have anything prepared, but I 

think what is interesting about this whole process is what Senator 

McCain just pointed out, that JPMorgan appears to have developed 

its business model around the fact that they are too big to fail. And 

I have always said that the fact that we have institutions that simply are too big to fail shows how regulation already failed us. We 

had regulation in place that probably should have prevented that 

years ago. 

So, again, I am looking forward to hearing the testimony just to 

really highlight the fact that regulators in general are very incapable of preventing all these things, and I am really looking forward 

to the recommendations in terms of how we can get regulation up 

to speed so we can prevent these things in the future. 

Senator LEVIN. Thank you very much, Senator Johnson. 

Now we will call on our first panel of witnesses, but before we 

do that, let me make a comment about the procedures here today. 

We are anticipating a long hearing, and so we are going to call the 

first panel, witnesses with the most firsthand knowledge of the 

whale trades that are the central concern of the hearing. And then 

after taking their testimony and asking questions of them, there 

will be a very short break. We are going to return then and broaden the panel by adding two senior executives from the bank—one 

who was responsible for public disclosures about the trades, and 

the other who led the management postmortem review. 
10 

1The prepared statement of Ms. Drew appears in the Appendix on page 101. 

And then when that panel, that extended panel, concludes, there 

will be another very short break, and we will then hear from the 

final panel with representatives from the Office of the Comptroller 

of the Currency. 

So now I will call our first panel of witnesses. It is Ms. Ina Drew, 

the former Chief Investment Officer at JPMorgan; Ashley Bacon, 

the Acting Chief Risk Officer, JPMorgan; and, finally, Peter 

Weiland, the former head of market risk for JPMorgan’s Chief Investment Office. 

We appreciate all of you being with us here this morning. We 

look forward to your testimony. 

Pursuant to Rule VI of this Subcommittee, all witnesses who testify are required to be sworn, so I would ask each of you to please 

stand and raise your right hand. Do you swear that the testimony 

that you are about to give to this Subcommittee will be the truth, 

the whole truth, and nothing but the truth, so help you, God? 

Ms. DREW. I do. 

Mr. BACON. I do. 

Mr. WEILAND. I do. 

Senator LEVIN. We will be using a timing system today. About 

1 minute before the red light comes on, you will see the light 

change from green to yellow. It will give you an opportunity to conclude your remarks. And your written testimony, of course, will be 

printed in the record in its entirety. We would appreciate your limiting your oral testimony to no more than 5 minutes. 

Ms. Drew, if you have a prepared statement, we will have you 

go first, followed by Mr. Bacon, finish up with Mr. Weiland, and 

then we will turn to questions. 

So, Ms. Drew, please proceed. You can keep your microphones 

on, if you would. 

TESTIMONY OF INA R. DREW,1 FORMER HEAD, CHIEF INVESTMENT OFFICE, JPMORGAN CHASE & CO., NEW YORK, NEW 

YORK 

Ms. DREW. Good morning, Chairman Levin, Ranking Member 

McCain, and Members of the Subcommittee. My name is Ina Drew. 

Thank you for the opportunity to provide my perspective on the 

losses incurred in the Synthetic Credit Portfolio of the Chief Investment Office. As you know, I have submitted a written statement 

discussing many details which I find important. 

I would like to take a moment, though, to talk about my career. 

I spent over 30 years at JPMorgan and its predecessor institutions 

in the field of asset and liability management. I joined shortly after 

receiving a B.A. from the Johns Hopkins University and a Master’s 

degree from Columbia University. 

Over the course of my career, I had the privilege of working for 

truly great CEOs, such as Walter Shipley, William Harrison, and 

most recently, Jamie Dimon. During this time, I helped build what 

I believe to be a world-class asset and liability management organization. 

I am very proud of the many successes we had in protecting the 

bank’s balance sheet, offsetting risk, and investing prudently. I had 
11 

wonderful mentors who helped me grow and develop my leadership 

skills, and to them I am very grateful. This was my life’s work. 

Through at least seven mergers and many financial crises, I always tried to do my best and what was right for the Firm in a 

thoughtful, diligent manner. I loved the work and the institution 

and gave it my all while raising a family, balancing my home life, 

charitable and educational board work, and many other demands. 

On Friday night, May 11, 2012, I walked into the office of Mr. 

Dimon, with whom I had a close and respectful relationship. I told 

him of my decision to resign from JPMorgan. It was a devastating 

and very difficult decision for me. It marked the end of three decades of hard work at an institution I loved. We talked about the 

decision and how important I believed it was to let the company 

move forward with new leadership. I accepted responsibility for the 

events that happened on my watch in one of the portfolios in my 

division. My overwhelming sadness and concern was extended to 

the 400 people who worked for me, many for more than 20 years. 

It also went to my colleagues throughout the Firm who are now 

leading the company going forward. 

There were many people from the front office, Risk, Finance, and 

Quantitative Research (QR) who worked on and analyzed the Synthetic Credit Portfolio. In particular, I relied on the experts, Achilles Macris and Javier Martin-Artajo, to vet and supervise trading 

in that book and elevate important concerns to me. 

Ultimately, my oversight of the synthetic credit book was undermined by two critical facts that I have come to learn only recently 

based on the company’s public statements: First, the company’s 

new VaR model was flawed and significantly understated the real 

risks in the book that were reported to me; and, second, some 

members of the London team failed to value positions properly, and 

in good faith, minimized reported and projected losses, and hid 

from me important information regarding the true risks of the 

book. 

Throughout these events, I did what I tried to do at all times 

during my career: Face difficult issues with dignity and integrity. 

I have had many months to think long and hard about what happened. I do not have all the answers. But what I can tell you is 

that I always tried to do my best. I tried at all times to approach 

the issues presented to me thoroughly, thoughtfully, and transparently. 

Clearly, mistakes were made. The fact that these mistakes happened on my watch has been the most disappointing and painful 

part of my professional career. 

I thank you for the opportunity to appear today, and I will be 

happy to answer any questions you may have. 

Senator LEVIN. Thank you very much, Ms. Drew. 

And now we will call on Mr. Bacon. 
12 

1The prepared statement of Mr. Bacon appears in the Appendix on page 108. 

TESTIMONY OF ASHLEY BACON,1 ACTING CHIEF RISK 

OFFICER, JPMORGAN CHASE & CO., NEW YORK, NEW YORK 

Mr. BACON. Good morning, Chairman Levin, Ranking Member 

McCain, and Members of the Subcommittee. My name is Ashley 

Bacon, and I am the Acting Chief Risk Officer of JPMorgan. I have 

been at JPMorgan for 20 years and have spent 6 years in the 

Firm’s Risk Management function. 

I appreciate the opportunity to come before you today as part of 

your inquiry into the CIO Synthetic Credit Portfolio and tell you 

what I observed after being asked in late April to independently assess the CIO trades. Let me first start by expressing the entire 

Firm’s commitment to the importance of effective risk management. 

And turning to the CIO portfolio at issue, at the request of senior 

Firm management, I was brought in from outside of the Chief Investment Office in late April 2012, along with other individuals 

from the Investment Bank, to lead a team of professionals conducting a detailed assessment of the Synthetic Credit Portfolio. The 

purpose of that review was to understand the persistent losses 

being experienced and to help chart a course forward. The team 

worked long hours and reported back to senior Firm management 

at least on a daily basis. After initial reports, we were asked to 

take over responsibility for the day-to-day management of the Synthetic Credit Portfolio—a responsibility that we held until a new 

CIO management team took over. 

The Firm also requested that my colleague Michael Cavanagh 

lead a Task Force to investigate these trades. Later today, I believe 

Mr. Cavanagh will speak in some detail about that effort and to 

the remedial steps identified by the Task Force in response. I will 

simply discuss a few key steps we have taken as a Firm to improve 

our Firm-wide risk management and risk management within CIO. 

First, the Firm appointed a new Chief Risk Officer for CIO in 

May 2012. Additionally, the Firm took steps to ensure Risk’s independence and the appropriateness of staffing levels. The new CIO 

Chief Risk Officer’s actual reporting practices now conform to his 

functional reporting line. He reports to me. His compensation and 

career advancement are controlled by Risk, with input from the 

business and others about his performance, as appropriate. 

Second, the Firm has overhauled the CIO Risk Committee. The 

committee now meets on a weekly basis, and attendees include 

other members of senior management, from within and outside of 

CIO. It has been reconstituted as the CIO, Treasury, and Corporate 

Risk Committee to reflect its broader responsibilities and increased 

participation. 

Third, CIO implemented numerous new or restructured risk limits covering a broad set of risk parameters. What remained of the 

Synthetic Credit Portfolio was transferred to the Firm’s Investment 

Bank, where it is subject to appropriate oversight and detailed 

analysis. 

Last, JPMorgan has conducted a comprehensive self-assessment 

of the Risk organization, and as a result, we are implementing a 

series of improvements both Firm-wide and within our lines of 
13 

1The prepared statement of Mr. Weiland appears in the Appendix on page 111. 

2See Exhibit No. 81, which appears in the Appendix on page 877. 

business. In addition to working to improve model development, review, approval, and monitoring, the Firm is reaffirming and, where 

appropriate, revising its market risk limits across all of its lines of 

business. We have introduced additional granularity and portfoliolevel limits, and will continue to do so as appropriate. We have 

strengthened processes for limit excessions to provide for more 

rapid escalation and more effective review. We have established a 

Firm-wide Risk Committee, improved the operation of the Risk Operating Committee and the Risk Governance Committee, and enhanced our reporting to the Board of Directors’ Risk Policy Committee. 

A risk organization must constantly look for ways to improve. 

The steps I have described reflect our fundamental belief in how 

the Firm’s risk profile should be overseen with effective challenge 

and with the right level of information available to address risk 

issues effectively. 

Thank you for the opportunity to appear before you today, and 

I welcome any questions you have. 

Senator LEVIN. Thank you very much. Now, Mr. Weiland. 

TESTIMONY OF PETER WEILAND,1 FORMER HEAD OF MARKET 

RISK, CHIEF INVESTMENT OFFICE, JPMORGAN CHASE & CO., 

NEW YORK, NEW YORK 

Mr. WEILAND. Good morning, Chairman Levin, Senator McCain, 

and Members of the Subcommittee. My name is Peter Weiland, and 

I was head of Market Risk Management for the Office of the CIO 

from 2008 to 2012. I am here today to help explain some of the 

facts surrounding the events in question to the best of my knowledge and recollection. 

Senator LEVIN. Thank you very much. 

Let me start with you, Ms. Drew. If you would take a look at Exhibit No. 81,2 which is in front of you. 

We will have 12-minute rounds, if that is OK. We will have probably more than a round or two with this first panel. We will switch 

after 12 minutes from me to Senator McCain and then Senator 

Johnson and any others who may show up. 

Do you have Exhibit No. 81? 

Ms. DREW. Yes. 

Senator LEVIN. This is a presentation which you gave to your 

Board of Directors’ Risk Policy Committee on March 20, 2012, 

about the CIO. On page 1, you provided a chart listing nine investment portfolios at the CIO, and you indicated whether they had 

longer or shorter investment horizons. 

Now, where is the SCP on that chart? 

Ms. DREW. The SCP is on the right side, on the bottom, where 

it is noted that the portfolio was being reduced, reducing capitalintensive credit securities positions. 

Senator LEVIN. All right. So it is at the shorter end of the investment horizon. Is that correct? 

Ms. DREW. At that time, that is correct. It was in the process of 

being reduced. 
14 

Senator LEVIN. I am not asking you whether it was being reduced at that time. I am asking you whether or not it was at the 

shorter end of the investment horizon. Is that correct? 

Ms. DREW. That is correct. 

Senator LEVIN. OK. So that in 2012, the Synthetic Credit Portfolio was being actively traded, right? Every week, sometimes every 

business day, CIO traders were buying and selling credit derivatives on behalf of the portfolio. Is that correct? 

Ms. DREW. Yes. 

Senator LEVIN. And if the portfolio grew from $51 to $157 billion, 

is it correct that by the time of your presentation by the Board of 

Directors on March 20, 2012, most of the positions would have been 

purchased during the first quarter? 

Ms. DREW. That is correct. 

Senator LEVIN. So these were not investments that were made 

on a very long term basis. 

Your horizon here is a shorter investment horizon, and they were 

bought and sold regularly and frequently. Is that correct? 

Ms. DREW. That is correct; however, the core position in the 

book, which was a short, high-yield position, was a long-term position that had been held for many years, and the intention was to 

be held longer. 

Senator LEVIN. All right. But when this portfolio grew in the first quarter from $51 to $157 billion, I take it most of those positions 

had been purchased during that quarter. Is that correct? 

Ms. DREW. They had. 

Senator LEVIN. Is that correct? 

Ms. DREW. That is correct. 

Senator LEVIN. And these trades were made out of London, but 

when there were losses, for instance, that $6.2 billion in losses that 

took place over 2012, that affected JPMorgan’s balance sheet and 

its earnings. Is that correct? Those losses, even though the trades 

were made in London—— 

Ms. DREW. Yes, certainly it did. 

Senator LEVIN. OK. Did the London traders have to get approval 

of the CIO risk managers like you to put on positions? 

Let me ask Mr. Weiland that question. Did the London traders 

get the approval of CIO risk managers like you to put on these positions? 

Mr. WEILAND. Not for individual trades. The traders in London 

worked within a set of delegated limits. 

Senator LEVIN. All right. And so they did not get approval from 

you for the positions they were putting on? 

Mr. WEILAND. Not individual trades. As long as they were working within their limits. 

Senator LEVIN. Is that what you call ‘‘positions? ’’ 

Mr. WEILAND. Is what I call ‘‘positions? ’’ Sorry. 

Senator LEVIN. The individual trades, the positions they were 

taking, they did not get your approval. Is that correct? 

Mr. WEILAND. Not one by one, no. 

Senator LEVIN. On January 30, 2012, the CIO met with the OCC 

at their standard quarterly meeting to discuss the CIO’s upcoming 

plans. The CIO’s chief financial officer, John Wilmot, represented 

the bank at the meeting with the OCC. 
15 

1See Exhibit No. 58, which appears in the Appendix on page 807. 

2See Exhibit No. 1a, which appears in the Appendix on page 511. 

Now, Ms. Drew, take a look, if you would, at Exhibit No. 58.1 Exhibit No. 58 is the OCC’s summary of that January 30 meeting, 

and in interviews both the OCC examiner, Mr. Berg, who attended 

the meeting and wrote the summary, and Mr. Wilmot, who attended, confirmed to the Subcommittee that the notes were accurate. 

About two-thirds down that page, Exhibit No. 58, the OCC reports what it was told by JPMorgan: ‘‘The MTM book’’—that is the 

mark to market book, consisted primarily of the Synthetical Credit 

Portfolio—‘‘is decreasing in size in 2012. It is expected that the 

risk-weighted assets (RWA) will decrease from $70 billion to $40 

billion.’’ 

Do you see that note two-thirds down the page on Exhibit No. 

58 where it says, ‘‘The MTM book is decreasing in size in 2012? ’’ 

Do you see that? 

Ms. DREW. Yes. 

Senator LEVIN. OK. Now, Ms. Drew, in fact, the SCP was rapidly 

increasing in size in the first quarter of 2012. Is that correct? You 

can see on the chart over here, Exhibit No. 1a.2 Is that correct? 

Ms. DREW. In the first quarter, that is correct. 

Senator LEVIN. So, again, this meeting took place January 31, 

and the OCC was told that the book was decreasing in size. In fact, 

it was increasing in size. 

Now, also in the first quarter of 2012, the CIO stopped sending 

standard data to the OCC that might have alerted the agency to 

the portfolio’s growth. For 4 key months, from January to April, 

the CIO did not send to the OCC its Executive Management Report 

with its financial data. In February and March, it did not send 

to the OCC its Valuation Control Group reports with verified 

profit/loss data for the Synthetic Credit Portfolio. 

Is that true, Ms. Drew? Those reports were not sent during those 

months. Is that true? 

Ms. DREW. I do not know, Senator. I had no part of reports being 

sent to any regulators. Certainly, if I had known they were not 

being sent, I would have considered that is the wrong thing to do. 

Senator LEVIN. All right. So you do not know whether they were 

sent or not? 

Ms. DREW. I do not. 

Senator LEVIN. And if they were not sent, you do not know why. 

Ms. DREW. I do not. 

Senator LEVIN. And who was in charge of getting those reports 

to the OCC that suddenly were missing during February and 

March? 

Ms. DREW. It is my understanding that both Risk and Finance 

are—— 

Senator LEVIN. People. Give us the names of people, if you 

would. Who would have been in charge of that? 

Ms. DREW. I do not have a specific person, but within the Risk 

and the Finance organizations, any and all contact was made with 

the OCC. 
16 

1See Exhibit No. 47, which appears in the Appendix on page 781. 

2See Exhibit No. 49, which appears in the Appendix on page 786. 

Senator LEVIN. Mr. Weiland, do you know the answer to that 

question? 

Mr. WEILAND. I do not. 

Senator LEVIN. Do you know why those reports suddenly were 

not sent? 

Mr. WEILAND. I do not know why they were not sent, no. 

Senator LEVIN. Who was in charge of sending them? 

Mr. WEILAND. I do not know the people who were responsible for 

sending the reports to the regulators, the individual people. My understanding is that normally that is part of the Finance function. 

Senator LEVIN. OK. Maybe we can find out later from our next 

witnesses as to why reports suddenly were not being sent to the 

OCC during those critical months. 

Mr. Weiland, take a look at Exhibit No. 47,1 would you? 

Mr. WEILAND. Sure. 

Senator LEVIN. This is an email dated March 2, 2012. It was sent 

to you by one of the quantitative analysts at the bank, Mr. Krug, 

talking about CIO ‘‘comprehensive risk measure (CRM) results.’’ 

The OCC now requires all national banks to use this risk measure 

to calculate how much money could be lost in a year in a worstcase scenario. It was not a requirement in 2012, but it was about 

to become a requirement. And in anticipation of that, when this 

email was written, JPMorgan had already begun requiring its offices to start calculating their comprehensive risk measure. So that 

was in part because the OCC was also going to, and now does, require banks to use their CRM results to calculate their capital requirements—in other words, how much money has to come from 

shareholders and retained earnings. 

Now, Mr. Weiland, on March 2, you received this email—again, 

Exhibit No. 47—notifying you at the bottom of the first page that 

‘‘CRM numbers have increased significantly’’ at the CIO. And you 

responded: ‘‘These results, if I understand them, suggest that there 

are scenarios where the CIO tranche book’’—another name for the 

Synthetic Credit Portfolio—‘‘could lose $6 billion in 1 year.’’ 

You then forwarded the email to Javier Martin-Artajo in London, 

who is the head of credit trading, and you called the result ‘‘garbage.’’ You wrote: ‘‘We got some CRM numbers. They look like garbage, as far as I can tell, 2 to 3 times what we saw before.’’ 

You and your colleagues in the CIO complained about the CRM 

analysis to the head of Quantitative Research for the whole bank, 

a man whose full name is Mr. Venkatakrishnan, known as ‘‘Mr. 

Venkat.’’ If you look at Exhibit No. 49,2 which includes an email 

dated March 7 at the bottom of the page from Mr. Venkat to all 

three of you, and others, explaining that the CIO’s portfolio had 

gotten $33 billion bigger in January and February, which is why 

the risk of losing so much money also shot up. 

Now, here is what he wrote, which is at the bottom of that page 

on Exhibit No. 49: ‘‘Based on our models, though, we believe that 

the $3 billion increase in RWA’’—which was referenced to the 

CRM—‘‘is entirely explained by a $33 billion notional increase in 
17 

short protection (long risk) in your portfolio between January and 

February.’’ ‘‘Peter Weiland and your mid-office confirm this $33 billion notional increase in long index risk.’’ 

Mr. Weiland, since the SCP portfolio increased in size by about $33 billion in January and February, the SCP was not decreasing, 

as the CIO told the OCC on January 30. It was increasing. Is that 

correct? And Ms. Drew has already indicated that. Do you agree 

with that, it was increasing? 

Mr. WEILAND. Yes, they were purchasing long positions. 

Senator LEVIN. But the portfolio was also increasing. Is that correct? 

Mr. WEILAND. Yes. 

Senator LEVIN. Mr. Weiland, the bank’s quantitative experts said 

the portfolio’s comprehensive risk measure, numbers shot up to $6 

billion in large part because its portfolio shot up in size. I understand that you had questions about that explanation at the time. 

Do you now believe that the analysts had it right, especially since 

the portfolio actually did lose $6.2 billion in a year? You now acknowledge that they got it right. 

Mr. WEILAND. Yes, I acknowledge it now with all the information 

we have today that was correct. 

Senator LEVIN. All right. And do you think it was a coincidence that the CRM predicted a $6 billion loss in a year in a worst-case 

scenario and then that is what happened? Do you think that is a 

coincidence? 

Mr. WEILAND. It is hard to believe that it was complete coincidence. I do not know the details of the scenarios that generated the 

number at the time, but it certainly agrees with the way things unfolded. 

Senator LEVIN. Senator McCain. 

Senator MCCAIN. Mr. Chairman, if it is OK, Senator Johnson has 

to go, so could I yield to him? 

Senator LEVIN. Of course. 

Senator JOHNSON. Thanks, Mr. Chairman and Senator McCain. 

Mr. Bacon, seeing as you were brought in kind of to assess what 

happened here and do the postmortem, I would like to ask you a 

question. Did the management of JPMorgan and people at the 

trading desk, was there basically a pervasive attitude that 

JPMorgan was too big to fail and they could drive up their risk 

portfolio? 

Mr. BACON. I do not believe that played a part at all. I think this 

was a set of egregious mistakes that are much regretted and not 

at all placing reliance on too big to fail, no. 

Senator JOHNSON. Do you believe that the Dodd-Frank Act either 

ended too big to fail or has any chance of ending too big to fail? 

Mr. BACON. Yes, I think the work that is going on should end up 

in that place, and I think it is to the benefit of JPMorgan and the 

system generally if we do end up in that place. 

Senator JOHNSON. So do you believe it has already ended too big 

to fail or has the potential of ending it? 

Mr. BACON. I think it has potential. I do not know whether it has 

ended it. I believe the work is ongoing, but I am not the individual 

working on that process most knowledgeably from JPMorgan. 
18 

Senator JOHNSON. Do you have quite a fair amount of contact 

with bank regulators yourself in your position? 

Mr. BACON. A fair amount. 

Senator JOHNSON. Do you believe bank regulators are really up 

to the task of understanding the complexity of these transactions 

and understanding the limited? 

Mr. BACON. I think the answer is generally yes, but when something like this occurs, and we do not understand it ourselves, I 

think it makes it incredibly difficult for them to understand the details and the context. 

Senator JOHNSON. OK. Well, Mr. Chairman, my time is short, 

but I guess I would just like to sum up by saying that I think the 

fact that we are even having this hearing would be evidence that 

we have not ended too big to fail, that we are still concerned about 

the activities of banks that could pose a systemic risk and danger. 

I think the goal of Congress should be to get the American taxpayer off the hook for what happens at the banks. I think the only 

people that should worry or, care at all whether JPMorgan lost $5 

or $6 billion on their London trading desk would be JPMorgan 

management and JPMorgan shareholders, and not Members of 

Congress. So I am certainly hoping that, these types of hearings 

and this type of investigation can get to the bottom of it so that 

we can actually end too big to fail. 

Thank you for your indulgence. 

Senator LEVIN. Thank you very much, Senator Johnson. Senator 

McCain. 

Senator MCCAIN. Thank you, Mr. Chairman. 

Mr. Weiland, you said you did not know who was responsible for 

the reports that were supposed to be made to the OCC? 

Mr. WEILAND. That is correct. I do not know who sends the reports. 

Senator MCCAIN. Do you know the office that was responsible for 

sending these reports? 

Mr. WEILAND. As I said, my understanding is that the financial 

function, part of the CFO function, is responsible, the primary responsibility for interaction with the regulators. 

Senator MCCAIN. But you do not know who that individual might 

have been? 

Mr. WEILAND. I do not. 

Senator MCCAIN. JPMorgan is just so big that you really do not 

know who would have a very serious responsibility to make required reports to the OCC. Is that correct? 

Mr. WEILAND. That is correct. 

Senator MCCAIN. Well, do you know the individual who should 

have been responsible. You do not know who that is. 

Mr. WEILAND. I do not know. 

Senator MCCAIN. Ms. Drew, your former boss, Jamie Dimon, 

criticized the performance of the SCP saying, quote, made a terrible egregious mistake, no excuse for it, we knew we were sloppy, 

we know we were stupid, we know there was bad judgment. 

Do you share your former boss’ assessment of the SCP? 

Ms. DREW. Now that I understand all that transpired during that 

time, including deception and risk control issues, yes, I do agree. 
19 

Senator MCCAIN. You have maintained that the SCP existed to 

hedge risk, but in a Subcommittee interview, you could only provide a ‘‘guesstimate’’ when asked exactly what the portfolio was designed to hedge. Do you stand by that statement as well? 

Ms. DREW. Well, certainly that was not the best word I could have chosen. I would say that in a $2.5 trillion balance sheet, 

macro hedges, which are fluid as the balance sheet changes, do 

change. And that is why in the response to Senator Levin I said 

the positions go up and down. They have to. It is a dynamic process. So it was a poor choice of words, but I would not know the 

exact amount per se of each individual hedge versus the balance 

sheet. All I know is that any hedges were limited to the balance 

sheet and its components. 

Senator MCCAIN. Mr. Weiland, you indicated in an interview 

with the Subcommittee that it was not your job to enforce the risk 

limits, even though you were the senior risk officer at the SCP. 

Well, then, whose job was it, then, to enforce the risk limits? 

Mr. WEILAND. I saw the way that was written in the report. It 

is not my recollection that I said those words. Certainly it was my 

job to enforce the risk limits in cooperation and partnership with 

the other senior management of the business. We did not—I did 

not make unilateral decisions about how to respond to risk limit 

excesses, but certainly it is part of my job. 

Senator MCCAIN. Mr. Bacon, as early as March 30, you and your 

boss, Mr. Hogan, were notified that the international chief investment officer in London had ‘‘lost confidence’’ in his team, that the 

CIO needed help with the synthetic credit book, and that they were 

clearly ‘‘in a crisis mode.’’ Yet Mr. Hogan said that he was surprised by the April media reports about the losses. 

Doesn’t this email indicate otherwise and suggest they should 

have acted sooner? 

Mr. BACON. So I recall the email you are referring to. What I 

took it be referring to at the time—and I still stand by this—is that 

they had lost faith in their ability to manage their RWA number, 

that the technicals around the modeling techniques and the additional trades to add to the book and so on were something they 

were not handling well at all, and they had asked for modeling expertise to be inserted into their group. And I arranged for that to 

happen. 

Senator MCCAIN. Ms. Drew, in January 2012, the CIO’s chief financial officer, Mr. Wilmot, assured the OCC that you planned on 

reducing the portfolio’s risk-weighted assets from $70 billion to $40 

billion, yet it tripled in size instead. Tell us what happened there. 

How does that transpire? You assure the OCC that you plan on reducing the portfolio, and yet in actuality it tripled in size. How 

does that happen? Or was the OCC misled? 

Ms. DREW. I do not think so, Senator. If you will allow me to explain, I was not in the meeting when Mr. Wilmot met with the 

OCC. However, the plan, as signed off by all senior management, 

including myself, was to reduce the RWA over the course of the 

total 2012. We had asked for, and received, permission to have a 

slightly higher capital number for the first quarter before then embarking on a rapid reduction from the second quarter forward. And 

things went terribly wrong, as we all know, and the very large pur-
20 

chases that were made at the end of March were not brought to 

my attention on time. 

Senator MCCAIN. Was it your responsibility to fully disclose the 

true nature of the SCP and its increasing size to the OCC? And did 

you? 

Ms. DREW. It is always my responsibility—— 

Senator MCCAIN. Was it? 

Ms. DREW [continuing]. To be fully transparent, but it was not 

my responsibility to discuss information directly with the OCC, no, 

sir. 

Senator MCCAIN. Mr. Weiland, you were warned in early 2012— 

I think it is a matter of record—that risk measures predicted massive losses. After the bank lost over $6 billion, do you stand by your 

statement that the risk measures were ‘‘garbage’’ and not ‘‘sensible? ’’ 

Mr. WEILAND. So you are referring to two different risk measures. The results of the testing, which I called ‘‘garbage’’—which is 

not an appropriate word and not typical of my response to these 

things, which I take very seriously—that was part of a process that 

we were working on to develop a model for the new CRM regulatory capital requirements, and that was a very first reaction to 

a number that, was 2 to 3 times what we had seen previously and 

after some changes that we had made. So my first reaction was it 

does not look right. Clearly, as we discussed a little earlier, it 

turned out to be predictive. 

With respect to the CS01, which is the second reference that you 

made, in fact, when that limit was first breached, it is true that 

the methodology we were using was not appropriate. It was decided 

to make a change. But a mistake was made in not making the 

change immediately. And that was a missed opportunity for us. 

The CS01 was a sign of something that we did not see at the time. 

Senator MCCAIN. Back to a later email, you said, ‘‘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.’’ 

Mr. Bacon, there are Firm-wide risk limits at JPMorgan. Is that 

true? 

Mr. BACON. Yes. 

Senator MCCAIN. Well, were those breaches ignored? 

Mr. BACON. No, the breaches were not ignored. Specifically the 

one I expect you are referring to is the VaR breach in January at 

a Firm-wide level. It was not ignored. It caused action and escalation. It was a situation where we relied upon the explanation 

that turned out to be wrong about the new VaR model, an implementation that was agreed by the risk management in place at the 

time, by model review, all of which failed, but reliance was erroneously placed on that. 

Senator MCCAIN. Well, let me tell you what is hard to explain 

to my constituents when their tax dollars are insuring their deposits. They are going to ask, How could we possibly balloon up to a 

$6 billion loss? And basically there was not only ignoring the facts 

but sort of endorsing the behavior. And it seemed that the traders 

seemed to have more responsibility and authority than the higherup executives. 
21 

1See Exhibit No. 1d, which appears in the Appendix on page 514. 

I have to go to a town hall meeting in Arizona. You tell me what 

I am supposed to tell my constituents who with their tax dollars 

some of these deposits were insured, this kind of gambling went on, 

when, by the way, they are also having extreme difficulty in getting their home loan mortgages consummated and obtained. But 

tell me, Mr. bacon, what should I say? 

Mr. BACON. I think, first of all, we should be clear that this 

whole thing is regrettable and unacceptable, and, we believe, isolated. But the onus of proof is on us now to demonstrate how this 

cannot happen in other places, how we weathered the financial crisis well everywhere else, and how we can make the entire Firm a 

safer place to the satisfaction of you, everybody else, and our regulators. 

This failed because the multiple things that should have caught 

it did not catch it. The two obvious ones, trading oversight and 

management oversight on the ground in London, failed completely. 

And second lines of defense, risk primarily and finance after that, 

also failed with the granularity of limits and the escalation and the 

pushback through risk committees. It would actually have been 

easy to catch this in many ways, and very regrettably, it did not 

happen. I believe we have taken corrective actions on all these 

counts. 

Senator MCCAIN. Do you believe that JPMorgan is too big to fail? 

Mr. BACON. I do not think it is too big to fail. I think there is 

further work that needs to be done to demonstrate and document 

that, and it is in process. I am not leading that process or deeply 

involved in it, but I think it is something that needs to be demonstrated to everybody’s satisfaction. 

Senator MCCAIN. Thank you. I thank the witnesses. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you. 

Mr. Weiland, you indicated in response to a question that it was 

your job to enforce risk limits in cooperation with senior management, I believe. Is that correct? 

Mr. WEILAND. Yes. 

Senator LEVIN. Now, the bank had five key risk limits for the 

synthetic portfolio. Those risk limits may be complicated, but the 

bottom line is that they sound alarms when it looks like an investment portfolio is putting a lot of money at risk or when it looks like 

projected losses could exceed a dollar limit that was set up ahead 

of time. 

Now, if you take a look at Exhibit No. 1d 1 in your book—and it 

is up there—this chart is also up in front of you. There are Synthetic Credit Portfolio risk limit breaches. 

Now, the VaR limit was breached starting in January, and it 

then was changed. A new model was put into place, and we have 

had a little conversation about that, and we are going to have a 

lot more later on. But the breach which occurred even before the 

VaR breach was the so-called CS01 breach, and that lasted longer. 

You can see that long red block there, the CS01 breach, and the 

CS01 stands for what? 
22 

1See Exhibit No. 39, which appears in the Appendix on page 748. 

Mr. WEILAND. Credit spread 01. It is the value of a one-basis 

point move in credit spreads. 

Senator LEVIN. All right. So credit spread of one basis point is 

CS01. 

Mr. WEILAND. Correct. 

Senator LEVIN. Now, take a look at Exhibit No. 39,1 if you would, 

Mr. Weiland. This exhibit lists the breaches from September 20, 

2011, through April 30, 2012. It is page after page after page after 

page after page of breaches—by the way, most of them not VaR 

breaches because they changed the VaR model. 

If you look just at the breaches involving the SCP, in the last 

quarter of 2011 and the first quarter of 2012, you see a huge jump, 

6 breaches in the Synthetic Credit Portfolio to over 170 breaches. 

So from the last quarter of 2011 to the first quarter of 2012, the 

number of breaches jumped from 6 to 170. 

And then in April 2012, April alone, there were 160 breaches. So 

almost as many in that 1 month of April as the three previous 

months combined, and those 3 months had 160—excuse me, 170 

breaches compared to the 6 breaches in the previous quarter. 

Now, would you agree that when you have that kind of a huge 

jump in risk limit breaches that is a worrisome pattern? Would you 

agree to that? 

Mr. WEILAND. A large jump in risk limit breaches is a worrisome 

pattern. 

Senator LEVIN. OK. 

Mr. WEILAND. But I would say that by April the action of halting 

trading had already occurred. Breaches and risk metrics can 

change. Even without making trades or changing positions, the 

markets move and the team was, at that point, as was written and 

mentioned somewhere else, in crisis mode trying to figure out what 

was the best way forward to escape from the position that we were 

in at that time. 

Senator LEVIN. Yes. And on what date had you stopped the trading? 

Mr. WEILAND. My recollection is it was after March 28. 

Senator LEVIN. After March—— 

Mr. WEILAND. It is in the report somewhere. I cannot remember 

the date. 

Senator LEVIN. Late March? 

Mr. WEILAND. Yes. 

Senator LEVIN. You stopped trading. When more than one risk 

limit is breached at a time, does that send a stronger signal that 

the portfolio is overly risky? 

Mr. WEILAND. It may. It depends. If it is different types of measures, it certainly does. Sometimes an individual position can trigger 

several limits just because the way the portfolio is organized. So it 

depends on the situation. 

Senator LEVIN. Was the Synthetic Credit Portfolio a low-risk investment portfolio? 

Mr. WEILAND. No, it was not. 

Senator LEVIN. Now, you have these multiple breaches that are 

going on in huge numbers in the first quarter. It took until the end 
23 

1See Exhibit No. 65, which appears in the Appendix on page 829. 

2See Exhibit No. 39, which appears in the Appendix on page 748. 

of March to act when those breaches were flowing in. Had you seen 

this many breaches before, by the way, in a portfolio? 

Mr. WEILAND. No. What I would say was on the—there are a 

couple different circumstances. On the CS01, as I have already 

said, we missed an opportunity there to understand some changes 

early. And given that the plan was to change the limits, it continued to breach because we were working on the changes. And so it 

was understood there were active discussions on how to deal with 

it. So continuing to have the breaches, as long as everybody understands that those are happening, I actually thought it was a good 

thing which would help keep focus on the portfolio. 

Senator LEVIN. Understanding the breaches would be a good 

thing. The breaches themselves are not a good thing, are they? 

Mr. WEILAND. Agreed. 

Senator LEVIN. All right. So now let us take a look at the CS01 

limit. It sounds alarms when the value of derivatives in the portfolio drops by that specified amount; in technical terms, when the 

credit spreads widen for specified derivatives by one basis point, 

that is the reference to the 01 point. The Synthetic Credit Portfolio 

first breached the CS01 limit on January 6, 2012. It kept on 

breaching for more than 3 months. 

Then on April 19, Mr. Weiland, after the media storm hit, the 

OCC sent you an email. If you will take a look at Exhibit No. 65.1

It asked you about that CS01 risk limit which has been ‘‘in 

excession by 1,074 percent’’ for 71 days. 

Now, when the email says ‘‘in excession by 1,074 percent,’’ it 

means the Synthetic Credit Portfolio has breached the risk limit by 

more than 1,000 percent. Is that correct? 

Mr. WEILAND. Correct. 

Senator LEVIN. So it was over 10 times the limit, and in that Exhibit No. 39,2 which we discussed earlier, which was the list of the 

breaches, it indicates that on April 19 the limit was $5 million, but 

the projected SCP losses, if the credit spreads widened one basis 

point, could be $59 million. Is that correct? 

Mr. WEILAND. Correct. 

Senator LEVIN. Do you see that? 

Mr. WEILAND. Yes. 

Senator LEVIN. Now, you responded to the OCC inquiry by saying, ‘‘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.’’ So you were ignoring the 1,000-percent breach limit for 

71 days because the CS01 limit was not ‘‘sensible.’’ So if the risk 

limit was outdated or not sensible, why did it take that long to update it when bank policy requires and the OCC requires that risk 

limits be updated every year? Why wasn’t the CS01 limit updated? 

Mr. WEILAND. Yes, I mean—— 

Senator LEVIN. As a matter of fact, they had not been updated 

since 2009, had they? 

Mr. WEILAND. The CS01 limit had been the same since 2009. 

Senator LEVIN. Even though the policy of the bank was it is supposed to be updated every year, this thing had been in breach now 
24 

1See Exhibit No. 54, which appears in the Appendix on page 797. 

for 71 days and by 1,000 percent. So there it sat for 3 years when 

you got a rule in the bank and an OCC rule saying you update it 

every year, but 71 days go by looking like that. Now, how do you 

explain that? 

Mr. WEILAND. We were in the midst of a limit re-evaluation at 

that time, at the same time—— 

Senator LEVIN. For 3 years? 

Mr. WEILAND. No, which was begun in the summer of 2011, but 

at the time, there were a lot of changes going on both in the regulatory environment and in the market. We were very focused on 

getting the regulatory capital models up to speed and working 

properly and adjusting the business to deal with those. Those 

things took priority. Again, this is another, mistake of ours, but it 

was all in good faith, and it was with, what we knew at the time 

to be the case that the change in that limit just did not take first 

priority at that time. 

Senator LEVIN. For 3 years you were supposed to have been looking at that risk limit every year. You did not revise it. Now, this 

tide hits you for 70 days, by 1,000 percent. That is 10 times the 

limit breached for 70 straight days. It was outdated anyway. It 

happened despite the OCC regulation, which you ignore year after 

year. 

Now, Ms. Drew, were you aware of the 4-month-long breach? 

Ms. DREW. Yes. 

Senator LEVIN. Why didn’t you fix it? 

Ms. DREW. My understanding was that it was in the process of 

being reviewed, and I was told by Risk that it was not a useful 

limit and that it was going to be replaced with a more useful limit 

which was being worked on in the risk group inside and outside 

CIO. 

Senator LEVIN. Now, if you look at Exhibit No. 54,1 Ms. Drew, 

here is what you said when the CIO’s chief risk officer Irvin Goldman wrote to you about this breach in an email dated February 13, 

2012. He said, ‘‘We have a global credit csbpv limit.’’ That is, as 

I understand it, the 01 limit. That is another name for the CS01 

limit. So Mr. Goldman went on as follows: ‘‘It was set up at the 

initiation of the credit book. Unfortunately we have been breaching 

for most of the year.’’ 

This is how you responded, Ms. Drew. You said, ‘‘I have no memory of this limit.’’ I think you just told us that you were aware of 

the breach of that limit, but you told him you did not have memory 

of the limit. 

Ms. DREW. That is correct. I did not know there was a global 

csbpv limit as well as a csbpv limit, and Mr. Goldman referred in 

the email to a global csbpv limit, and I probably simply misunderstood. And that is why I followed it by saying the limit needs to 

be recast with all the other limits, which was a review that I was 

assured was ongoing, had actually been started, and was making 

some progress. 

Senator LEVIN. Did you know that these limits were supposed to 

be reviewed every year? 

Ms. DREW. Yes. 
25 

1See Exhibit No. 1d, which appears in the Appendix on page 514. 

Senator LEVIN. Were you aware of the fact that it had not been 

reviewed every year? 

Ms. DREW. I do not recall. 

Senator LEVIN. Were you aware that it was 1,000 percent over 

the limit? 

Ms. DREW. No, I was not. 

Senator LEVIN. Senator McCain. 

Senator MCCAIN. I have no further questions. 

Senator LEVIN. Thank you. Very quickly, and then we are going 

to take a break and add to our panel. 

There is a second risk limit on this chart, Exhibit No. 1d.1 It is 

known as the value-at-risk, which sets a dollar limit on how much 

money is at risk for being lost over the course of a day in ordinary 

market conditions. 

A mathematical model is used to evaluate how much value an investment portfolio is putting at risk. If the value-at-risk exceeds 

the VaR limit established for the portfolio, notice then goes out to 

the risk managers. 

Now, here the Synthetic Credit Portfolio breached both the CIO 

and bank-wide VaR limits for several days starting on January 16, 

and then breached them again for 4 days starting on January 24. 

CEO Jamie Dimon personally approved a temporary increase in 

the VaR limit, as a matter of fact, until the CIO then rushed 

through approval of a new VaR model, which we referred to, which 

was effectively an end run around the risk limit. 

So now when it was activated on January 27, it resulted in an 

overnight drop. When the new VaR limit was activated, suddenly 

there was an overnight drop by 50 percent in the CIO’s VaR results. The breach ended without the SCP having to get rid of a single risky investment. Now, under the old model, the CIO’s VaR was $132 million. That 

is how much money was at risk of loss in a 1-day period. When the 

new model took effect, even though the portfolio had the same 

risky credit derivatives, its value at risk, its VaR, was suddenly cut 

in half. Now it is $66 million. And guess what? That new amount 

was way under the VaR limit. 

Now, Ms. Drew, how did you know the new VaR model was going 

to be more accurate? 

Ms. DREW. Well, Senator, the VaR model was a change and a review that had been ongoing for not 1, not 2, but 7 months by the 

independent risk modeling group, and my understanding was it 

had gone through quite a few iterations before it arrived in its final 

form as a correct measure, one that I relied on very heavily to 

manage the position. 

Senator LEVIN. Did you backtest the new model against the old 

data? 

Ms. DREW. That would have been done in Risk, sir. 

Senator LEVIN. Do you know whether it was done? 

Ms. DREW. I do not. 

Senator LEVIN. You saw the Model Review Group approved the 

new VaR model, but didn’t they also say when they approved it 

that the CIO had to automate the data entry? Isn’t that true? 
26 

1See Exhibit No. 98, which appears in the Appendix on page 963. 

Ms. DREW. If they did, that would have been an order that would 

have gone to Risk. 

Senator LEVIN. Well, so you are not aware that they said that 

you had to automate the data entry when they approved this VaR 

model, right? 

Ms. DREW. At the time I was not. I am aware of that now. 

Senator LEVIN. OK. Now, you said there was no backtesting that 

was done. Is that correct? 

Ms. DREW. I do not believe I said that. I said I do not know 

whether—— 

Senator LEVIN. You do not know. OK. Take a look at Exhibit No. 

98,1 if you would. And it is page 104. This is what the review said 

about what happened when this new VaR was put in place: ‘‘The 

Model Review Group required only limited backtesting of the new 

model. . . . That is No. 1. It was critical of that limited 

backtesting. ‘‘And it insufficiently analyzed the results that were 

submitted.’’ 

So now you have a situation where you have a new VaR that is 

dropped in there. It cuts the VaR in half, suddenly, boom, there is 

no longer a breach. And the new VaR was approved, but when it 

was approved, it was approved with the requirement that there be 

only limited backtesting of the new model, instead of backtesting 

it to see whether or not it was workable. And it insufficiently analyzed the results that were submitted. So it produced lower VaRs. 

It was full of operational errors that the bank knew about—ordered 

corrected, by the way—and did not supply the funds despite multiple requests to deal with the operational errors. 

Mr. Bacon, what do you think of a VaR model that drops the 

CIO’s VaR by 50 percent overnight? What do you think about that? 

Mr. BACON. I think it is something which would require a lot of 

inquiry and explanation. 

Senator LEVIN. Like backtesting? 

Mr. BACON. Yes. 

Senator LEVIN. It deserves backtesting? 

Mr. BACON. Yes. 

Senator LEVIN. But it did not get it here. 

Mr. BACON. I think it got insufficient—— 

Senator LEVIN. Limited. 

Mr. BACON. Correct, yes. 

Senator LEVIN. And then what it did provide, the insufficient 

data the limited backtesting did provide, was not even analyzed. Is 

that correct? 

Mr. BACON. It is absolutely not the way to do it. 

Senator LEVIN. But it was not even analyzed. Is that correct? 

Mr. BACON. I do not know if it was analyzed. 

Senator LEVIN. Well, that is what the report said. 

Mr. BACON. OK. Then I am sure that was right. 

Senator LEVIN. The VaR model, the new one, depended on analyzing a daily stream of new trading data. Instead of constructing 

an automated database that automatically would feed the daily 

trading data into a VaR model, Mr. Hagan, the model designer, a 

Ph.D., was stuck with having to manually enter the trading data 
27 

1See Exhibit No. 1d, which appears in the Appendix on page 514. 

every night using spreadsheets which had calculation and formula 

errors. 

In other words, the new key value-at-risk model for the CIO’s $350 billion portfolio, including the Synthetic Credit Portfolio, was 

being run manually using error-prone spreadsheets with operational flaws. 

Mr. Weiland, did you know that Mr. Hagan was doing nightly 

manual data entry and sometimes staying up into the wee hours 

of the night to get it done? Were you aware of that fact? 

Mr. WEILAND. I was not aware of the details of the manual work 

he was doing. I did know there were spreadsheets involved, and I 

did know that Mr. Hagan often stayed late at night. 

Senator LEVIN. Mr. Bacon, the OCC told us that the operational 

problems—the spreadsheets, the lack of an automated database, 

the calculation and formula errors which lower these VaR results— 

were shocking and absolutely unacceptable. Do you agree? 

Mr. BACON. I do. 

Senator LEVIN. Ms. Drew, why did the bank model review that 

approved the VaR knowing that there were problems and then 

allow it to operate in such a shoddy fashion? Why did the bank 

allow that to happen? 

Ms. DREW. It is very disappointing. I have no idea. The Risk 

Modeling Group is an independent group staffed by very well 

trained and educated Ph.D.s who run the models, and I am certainly very disappointed that it was not reviewed properly and that 

it was delivered to me in poor form. 

Senator LEVIN. Did Mr. Hagan work for your group? 

Ms. DREW. He did, in London. 

Senator LEVIN. What bothers me, if you will take a look at Chart 

1d1, it is not just that the multiple risk limits were breached, and 

so frequently; they were not even really limits. Nobody was told to 

stop trading because of a risk limit breach. No one investigated the 

trading because of the breaches. Mr. Bacon, should someone have 

investigated risky trading activities that triggered all these 

breaches? Isn’t that the point of breaches, that someone would investigate the breaches? 

Mr. BACON. Yes, Senator. 

Senator LEVIN. Another thing that bothers me is that the bank’s 

reaction has been to criticize the CIO’s old risk limits as inadequate and add a bunch of new ones. So there used to be five big 

risk limits. OK? Now it has gone to 230 risk limits for the Synthetic Credit Portfolio. 

It misses the point. It was not that the Synthetic Credit Portfolio 

had too few risk limits. It was that risk management personnel did 

not enforce the ones they had. I do not see how piling on another 

225 risk limits solves anything. 

Now, do you want to comment on that? 

Mr. BACON. Yes. I very much agree with you that the first failure 

is not to escalate and remediate when the risk limits you have in 

place are already telling you something. So I do agree with that. 

And one of the changes is an alteration to our policies and procedures whereby automatically, if there is a Firm-wide or line of 
28 

1The prepared statement of Mr. Cavanagh appears in the Appendix on page 117. 

business limit breach for 3 days, it goes all the way to the Firmwide Risk Committee containing Mr. Dimon, our CFO, myself, everybody. So that is now automatic. 

I think on the question of whether it is necessary to have more 

limits, although this particular egregious mistake was caught by a 

small number of limits, if you had followed up on them, there are 

other mistakes you could make that may not have been caught by 

a small set of limits, which is why we want to be safer than that. 

Senator LEVIN. Thank you. Senator McCain, do you have anything right now? 

Senator MCCAIN. No. 

Senator LEVIN. We are going to take a 5-minute break here, and 

we are going to then widen our panel. It will give us an opportunity to use the restrooms, if anybody needs to do that. It is going 

to be very brief, though. We will be back in 5 minutes. [Recess.] 

OK. We will be back in order. 

We will now add to our panel and call two additional witnesses 

to the hearing: Michael Cavanagh, the head of the JPMorgan 

Chase Management Task Force reviewing CIO losses and the CoChief Executive Officer of the Corporate and Investment Bank at 

JPMorgan Chase; and Douglas Braunstein, the current Vice Chairman and former Chief Financial Officer from 2010 to 2012 at 

JPMorgan Chase. 

I appreciate very much both of you being with us this morning. 

We look forward to your testimony. And as you may have heard, 

pursuant to the rules of this Subcommittee, all witnesses who testify before us are required to be sworn, so I would ask that each 

of you rise and raise your right hand. Do you swear that the testimony that you are about to give to this Subcommittee will be the 

truth, the whole truth, and nothing but the truth, so help you, 

God? 

Mr. CAVANAGH. I do. 

Mr. BRAUNSTEIN. I do. 

Senator LEVIN. Were you here and do you know about the timing 

system? If you have opening statements now—you do? 

Mr. CAVANAGH. There we go. May I? 

Senator LEVIN. Yes. 

TESTIMONY OF MICHAEL J. CAVANAGH,1 HEAD OF JPMORGAN 

CHASE & CO. MANAGEMENT TASK FORCE REVIEWING CIO 

LOSSES, CO-CHIEF EXECUTIVE OFFICER, CORPORATE AND 

INVESTMENT BANK, JPMORGAN CHASE & CO., NEW YORK, 

NEW YORK 

Mr. CAVANAGH. Chairman Levin, Ranking Member McCain, and 

Members of this Committee, my name is Michael Cavanagh, and 

I am the co-CEO of the Corporate and Investment Bank at 

JPMorgan. As you know, I recently led a task force that conducted 

a review of the circumstances surrounding the 2012 losses in 

JPMorgan’s Chief Investment Office. I appreciate the opportunity 

today to discuss the task force’s work, to describe what we found, 

as well as the steps JPMorgan is taking in response. 
29 

Some of what we found was, frankly, very disappointing and does 

not reflect our institution at its best. That said, we have addressed 

the issues head-on and are determined to become a better company 

because of this experience. We have fully cooperated with the Subcommittee during the course of its inquiry, and as noted in my 

written statement, we respect the key role the Subcommittee has 

played in highlighting the importance of effective risk management 

and oversight of our Nation’s financial institutions. We also appreciate the courtesies extended to us by your staff. 

As you know, earlier this year our task force issued a report 

which was the culmination of an extensive review. The work included interviews of many current and former JPMorgan employees and the examination of millions of pages of documents and tens 

of thousands of audiofiles. The work was overseen by an independent review committee of our board of directors. We have also 

been cooperating with ongoing inquiries by governmental authorities, both here and in the United Kingdom. 

Because our findings are already public and are set forth in my 

written testimony, I am not going to discuss them in detail now. 

Instead, I would like to briefly summarize our key conclusions and 

then describe the steps we have taken to address the problems we 

found. 

In short, the losses were the result of a number of acts and omissions, some involving personnel and some involving governance. 

Those responsible, in our view, include, to varying degrees: The 

traders who designed and implemented the flawed trades, the managers who failed to properly vet the strategy and ensure that it was 

sound, the risk managers who failed to serve as a robust check on 

the trading activity, and the senior management of the Firm who 

failed to ensure that CIO was subject to the same type of rigorous 

oversight as other parts of the Firm. 

In light of what we found, the Firm has taken wide-ranging remedial actions, both within CIO and throughout the Firm, to prevent incidents similar to this from occurring in the future. These 

are described in detail in the task force report, but I would like to 

briefly highlight for the Subcommittee some of the more significant 

steps we have taken. 

First, the Firm has terminated the employment or accepted the 

resignations of the responsible CIO personnel and pursued 

clawbacks of compensation. 

Second, JPMorgan has appointed a new CIO leadership team 

which has refocused CIO on its basic mandate. 

Third, the Firm has increased resources for the key risk and finance control functions within CIO. 

Fourth, CIO has implemented new or restructured limits covering a broad and granular set of risk parameters. 

And, fifth, the Firm has adopted a variety of governance measures to improve its oversight and control of CIO. 

The Firm’s remedial efforts, though, have not been limited to 

CIO. The Firm has, among other things, conducted a comprehensive self-assessment of its entire risk organization and, as a result, 

is implementing a series of improvements across the entire Firm. 

Where there is room to improve, we can and will do so. 
30 

1See Exhibit No. 71, which appears in the Appendix on page 843. 

With respect to the trading itself, we have learned many hard 

lessons, in particular, that any future portfolio hedging will be subject to appropriate monitoring requirements with documentation 

linking the hedge to the risk it is designed to offset. 

So, in conclusion, I want to assure you that this experience has 

caused substantial and healthy introspection at the senior management level of our Firm and recognition of the need for continued 

improvement. 

Thank you, and I look forward to taking your questions. 

Senator LEVIN. Thank you, Mr. Cavanagh. Mr. Braunstein. 

TESTIMONY OF DOUGLAS L. BRAUNSTEIN, CURRENT VICE 

CHAIRMAN, FORMER CHIEF FINANCIAL OFFICER (2010–2012), 

JPMORGAN CHASE & CO., NEW YORK, NEW YORK 

Mr. BRAUNSTEIN. Thank you, Chairman Levin, Ranking Member 

McCain, and Members of this Committee. My name is Doug 

Braunstein, and I serve as a Vice Chairman of JPMorgan Chase. 

From 2010 to 2012, I served as Executive Vice President and Chief 

Financial Officer of JPMorgan. Thank you for the opportunity to 

participate in today’s hearing. Mr. Cavanagh has already made a 

statement on behalf of the Firm. I look forward to answering your 

questions today. 

Senator LEVIN. Thank you very much. 

During our investigation we came across a number of examples 

of the bank giving the OCC examiners a hard time. In 2010, according to an OCC email of May 2012, when the OCC concluded 

an exam of the CIO and told you, Ms. Drew, that the CIO needed 

to do a better job documenting its risk and investment decisions, 

you sternly told the OCC that they were being overly intrusive and 

that there was little need for more documentation since Jamie 

Dimon was aware of the CIO’s investment activities. A record of 

your reaction is at Exhibit No. 71,1 and that is a May 2012 email. 

When Mr. Waterhouse, the OCC Examiner-In-Charge (EIC), recounted that 2010 incident, the first paragraph, this is what he 

wrote: ‘‘Just for your information (FYI). We did an examination of 

the CIO at the end of 2010 and have a followup planned soon. Now, 

this email is May of 2012. ‘‘We had some concerns about overall 

governance and transparency of the activities. We received a lot of 

pushback from the bank, Ina Drew in particular, regarding our 

comments. In fact, she called OCC examiner Fred Crumlish in London and sternly’ discussed our conclusion with him for 45 minutes. 

Basically, she said that investment decisions are made with the 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.’’ 

So, Ms. Drew, according to this email, you said that CIO’s investment decisions were made with the full understanding of the executive management. Is that true? 

Ms. DREW. Yes, that is true. 

Senator LEVIN. Now, according to OCC Examiner-in-Charge 

Scott Waterhouse, in January or February 2012, the bank stopped 

sending the Investment Bank’s daily profit and loss (P&L) data to 
31 

the OCC. Just plain stopped sending those documents. No notice, 

no explanation, no profit or loss data for the investment bank, one 

of the Nation’s largest. This is the investment bank we are talking 

about. 

According to Mr. Waterhouse, the OCC had to escalate the issue 

to you, Mr. Braunstein, Chief Financial Officer of the bank, to reverse the decision, which you did. During a meeting between you, 

Mr. Braunstein, Mr. Dimon, and Mr. Waterhouse, it became clear 

that it was Mr. Dimon who was responsible for directing the data 

cutoff. Is that correct, Mr. Braunstein? 

Mr. BRAUNSTEIN. Yes, sir. 

Senator LEVIN. Now, did the bank stop sending the OCC daily 

profit and loss data for the Investment Bank for a period of time? 

Was it a week, or how long was it? 

Mr. BRAUNSTEIN. I think, Senator, it was approximately 2 weeks. 

Senator LEVIN. Two weeks. Then did you restore that data to the 

OCC? 

Mr. BRAUNSTEIN. Yes, sir, I did. 

Senator LEVIN. And did Mr. Dimon say why he had ordered the 

data stopped? 

Mr. BRAUNSTEIN. Prior to stopping the data, a number of regulators had breaches in some of the information that we had shared 

with them. There had been mistaken losses of information, and so 

we wanted to ensure that prior to restarting the data that we had 

adequate controls in place to ensure that the data got to the regulators and only to the regulators. 

Senator LEVIN. And did you notify them that was your reason? 

Mr. BRAUNSTEIN. I did speak to them during the course of that 

period of time. 

Senator LEVIN. And you told them that was the reason that information was not coming to them? 

Mr. BRAUNSTEIN. During that—— 

Senator LEVIN. That January-February time, during that 2-week 

period when you were not delivering the data and you ordered it 

restored—apparently there was some heat in the conversation, allegedly. But in any event, you ordered that data restored. Did you 

during that period tell the OCC why you were stopping that data? 

That is my question. 

Mr. BRAUNSTEIN. Senator, I believe actually the time period was 

earlier, but I do recall somewhere in that period of time having a 

conversation to explain why we had turned the data off. 

Senator LEVIN. And who did you talk to? 

Mr. BRAUNSTEIN. I cannot recall if it was Mr. Waterhouse or Mr. 

Crumlish. 

Senator LEVIN. And what you gave as the explanation for suddenly cutting that data off is the same explanation you gave to 

them. Is that what you are saying? 

Mr. BRAUNSTEIN. I expressed that concern and then told them 

that I would turn the data back on. 

Senator LEVIN. Was Mr. Dimon unhappy when the data was 

turned back on? 

Mr. BRAUNSTEIN. I do not recall the specifics of his reaction, sir. 

Senator LEVIN. You do not recall that there was some very deep 

unhappiness there when it was restored, despite his order? 
32 

1See Exhibit No. 60, which appears in the Appendix on page 809. 

2See Exhibit No. 1g, which appears in the Appendix on page 517. 

Mr. BRAUNSTEIN. I do not recall the specifics of that interaction, 

sir. 

Senator LEVIN. How about the generalities of it? 

Mr. BRAUNSTEIN. As I said, I do not recollect the specifics of that 

meeting. 

Senator LEVIN. Now, sometimes the bank went further and gave 

wrong information to the OCC. We showed already today that in 

the January 30 quarterly meeting, CIO said that it was reducing 

the size of the Synthetic Credit Portfolio when, in fact, it was not. 

But here are some more examples of wrong information from 

JPMorgan, and these come after the media exposed the whale 

trades and the OCC starting asking the bank for some hard numbers. 

The Synthetic Credit Portfolio was a mark-to-market portfolio, 

which means again that the value of the portfolio was measured 

and recorded internally every day. On April 16—again, this is after 

the media storm hit—the bank met with the OCC and provided its 

first presentation on the Synthetic Credit Portfolio. 

Ms. Drew, you were present for the briefing to the OCC, and at 

that briefing the bank told the OCC that the first quarter losses 

were $580 million, and that is in Exhibit No. 60.1 But, actually, the 

losses at the end of the first quarter, on March 31, had been reported inside the bank as $719 million. And there, if you will take 

a look at Exhibit No. 1g,2 this is a list that was provided, I believe 

in May, of all of the internal profit and loss reports. And if you will 

look there, you can see that on March 30 it was $719 million, according to the bank’s internal reports, but what was reported to the 

OCC was $580 million. 

Now, not only that, but on the Friday before the Monday, April 

16 public report that I think you were involved in, Mr. Braunstein, 

the bank met with the OCC, and losses by then had more than 

doubled to $1.2 billion. 

So before the April 16 conference call, two things had happened 

here: 

One is that the report to the OCC that the first quarter losses 

were $580 million was wrong; according to the bank’s own records, 

it was $719 million. 

And then, the Friday before April 16, the losses had more than 

doubled to $1.2 billion. 

So, first, Ms. Drew, why did you tell the OCC that the first quarter losses were $580 million when the losses were $719 million? 

Ms. DREW. Senator, the number I reported was the number that 

I believed was accurate. Finance added, as it always does after the 

quarter end, reserves on top of mark-to-market losses. The aggregate of the two is the correct number that was given to the OCC. 

Senator LEVIN. I think this is separate from the reserve. I think 

the losses as reported here on this chart were $719 million—— 

Ms. DREW. The number I reported was the number that was 

given to me as calculated by central Risk and Finance, and that is 

the number I reported—— 
33 

1See Exhibit No. 1g, which appears in the Appendix on page 517. 

Senator LEVIN. So whatever number was given to you. So you do 

not know whether that number was accurate or not. You just used 

the number that was given to you. 

Ms. DREW. No. That number agreed with the total consolidated 

profit and loss statement that was given to me the day I met with 

the regulators, and it was reviewed by my chief financial officer. I 

knew that number to be the correct number. 

Senator LEVIN. OK. Then when you met with the OCC on April 

16, that was the number you gave them. Is that correct? 

Ms. DREW. I gave them whatever number was confirmed to me 

by Finance. 

Senator LEVIN. Well, I want you to look at Exhibit 1g.1

Ms. DREW. Yes, I am looking at the exhibit. 

Senator LEVIN. The first quarter was March 30, right? And do 

you see that $719 million? Is that correct? And then take a look 

at April 13. Do you see that number on April 13? 

Ms. DREW. Yes. 

Senator LEVIN. One point 2 billion dollars, do you see that? 

Ms. DREW. Yes. 

Senator LEVIN. So the number you gave to OCC on April 16 was 

$580 million, but your internal report shows $1.2 billion. So the 

Friday before you met with the OCC, your internal report showed 

a $1.2 billion loss, according to your records, but you told the OCC 

that the losses were $580 million. Why not give them the loss as 

of April 13, the Friday before you met with them? 

Ms. DREW. The OCC, to the best of my knowledge—and I asked 

this question—had profit and loss daily reports. The number I gave 

to the OCC was—— 

Senator LEVIN. Say that again? 

Ms. DREW. To the best of my knowledge, the OCC was given 

daily mark-to-market reports of the CIO’s activities. 

Senator LEVIN. So you are saying that all during this period, 

January, February, March, and April, the OCC had your daily profit and loss reports? 

Ms. DREW. That is my understanding. 

Senator LEVIN. For the Synthetic Credit Portfolio? 

Ms. DREW. For the total CIO mark-to-market activities of which 

the Synthetic Credit Portfolio was included. 

Senator LEVIN. Was that identified, by the way, separately? The 

dailies? 

Ms. DREW. I am sorry. 

Senator LEVIN. Was the SCP identified separately on those reports that—— 

Ms. DREW. That I do not know. 

Senator LEVIN. I think you are inaccurate about this, but we will 

find out from the OCC. Senator McCain. 

Senator MCCAIN. Well, thank you, Mr. Chairman—— 

Ms. DREW. This is all to the best of my knowledge. Thank you. 

Senator MCCAIN. Mr. Braunstein, let me be clear for the record. 

By regulation, regular reports are required to go to the OCC. Is 

that correct? 

Mr. BRAUNSTEIN. I believe so, sir. 
34 

Senator MCCAIN. And yet Mr. Dimon then made the decision for 

2 weeks at a very critical time not to send reports to the OCC. Is 

that correct? 

Mr. BRAUNSTEIN. That is correct, sir, based on a concern about 

the confidentiality of those reports. 

Senator MCCAIN. Well, with normal citizens, normal enterprises, 

if by regulation you are required to do something, and you do not 

want to do it, then you seek avenues to avoid it. Do we live in a 

world, Mr. Braunstein, that government regulations of our business 

and our lives, we just decide, well, we are not—because we are concerned about something, we are not going to comply with regulations? Is that how JPMorgan works? 

Mr. BRAUNSTEIN. No, sir, it does not. 

Senator MCCAIN. Did it work that way in this case? 

Mr. BRAUNSTEIN. Senator, the report in question, I am not certain, but I am not aware that was a report required to be provided 

to the regulators. We also were concerned about the loss of some 

confidential information. We wanted to ensure that we had procedures in place to avoid that going forward. 

Senator MCCAIN. Well, I guess we can find out whether those reports are required or not, although I believe they are, but I will 

have our staff check. But was there any other time where an executive decision was made, we will not send these reports to the OCC? 

Mr. BRAUNSTEIN. Not that I am aware of, sir. 

Senator MCCAIN. It seems to me it is remarkable that if you are 

required to make reports or have been, even, making reports regularly to regulators on a routine basis, the timing is very interesting 

of this, just decides not to give a report. I am not sure that there 

are many organizations, companies, and corporations in America 

that could get away with such a thing, and, frankly, it is kind of 

a testimony to the lack of action on the part of the regulators if 

they expected those reports. 

I would like to go back to this email from Scott Waterhouse to 

Mike Brosnan. It says, ‘‘We did an examination of the CIO at the 

end of 2010 and have a followup planned soon. We had some concerns about overall governance and transparency of the activities. 

We received a lot of pushback from the bank, Ina Drew in particular, regarding our comments. In fact, Ina called Crumlish when 

he was in London and ‘sternly’ discussed our conclusions with him 

for 45 minutes. Basically she said that investment decisions are 

made with the full understanding of executive management including Jamie Dimon.’’ 

Did that include you, those decisions that you were fully—had 

full understanding of the investments that were made? 

Mr. BRAUNSTEIN. Senator, I am not familiar with what specifically Ina was referring to in that statement. I was certainly 

aware—— 

Senator MCCAIN. Well, let me try and help you out. She was referring to their concerns about overall governance and transparency of the activities. 

Mr. BRAUNSTEIN. I would say, Senator, we endeavored to be fully 

transparent with the regulators, and I would certainly have supported that transparency. As to the specific investment decisions, 

I was certainly aware of the synthetic credit product. 
35 

Senator MCCAIN. You said on the April 13 call that the Firm was 

‘‘very comfortable’’ with the positions in the SCP. As Mr. Cavanagh 

pointed out, that statement was wrong, of course. 

When did you learn that your statement was false? And did you 

take any efforts to correct the record? 

Mr. BRAUNSTEIN. Senator, based on the benefit of hindsight, the 

bank and I were both misinformed and incorrect when I said that 

we were ‘‘very comfortable.’’ 

Based on the information that I had available to me at the time, 

from a whole range of sources—CIO, Risk, independent work 

done—I believed that to be true. As soon as I discovered that there 

were behavior patterns inconsistent, subsequent to April 13, in the 

portfolio’s performance, myself, Mr. Dimon, and John Hogan, began 

a much deeper inquiry. 

Senator MCCAIN. Besides the traders who mismarked the book, 

who should be held accountable or has anyone been held accountable aside from the traders for breaching JPMorgan’s own internal 

risk limits and adjusting the risk models? 

Mr. BRAUNSTEIN. Is that a question for me, Senator? 

Senator MCCAIN. Yes. Besides the traders who mismarked the 

book, who should be held accountable for breaching JPMorgan’s 

own internal risk limits and adjusting the risk models? 

Mr. BRAUNSTEIN. Senator, in the aggregate, I concur with the 

task force’s report that there were a number of mistakes made— 

in CIO, in the Risk organization, in the Finance organization, 

which I ran, and as senior management. And I deeply regret those 

mistakes. 

Senator MCCAIN. Well, when you are ‘‘held accountable,’’ what 

penalty is there that is imposed when you are held accountable at 

JPMorgan? 

Mr. BRAUNSTEIN. The Firm has taken a number of actions. They 

have terminated the employment of a number of employees. They 

have clawed back compensation—— 

Senator MCCAIN. Besides traders? 

Mr. BRAUNSTEIN. Yes, sir. They have clawed back compensation, 

and they have reduced compensation for selected individuals. 

Senator MCCAIN. So we have reduced compensation. For example, your compensation was reduced? 

Mr. BRAUNSTEIN. Yes, Senator. 

Senator MCCAIN. From what to what? 

Mr. BRAUNSTEIN. Approximately 50 percent, consistent with the 

Board’s actions for Mr. Dimon. 

Senator MCCAIN. And that translated into dollars? 

Mr. BRAUNSTEIN. I moved from $9.5 million in compensation in 

2011 to $5 million in 2012. 

Senator MCCAIN. Mr. Cavanagh, once the SCP was correctly valued, what was the final amount the CIO lost as a result of the 

whale trades? 

Mr. CAVANAGH. $5.8 billion through June 30 of last year and 

some modest losses that followed. 

Senator MCCAIN. Besides this Subcommittee’s investigation, 

what are JPMorgan’s ongoing legal and financial exposures, including penalties already paid by the Firm stemming from the whale 

trades, Mr. Cavanagh? 
36 

1See Exhibit No. 68, which appears in the Appendix on page 838. 

2See Exhibit No. 1g, which appears in the Appendix on page 517. 

Mr. CAVANAGH. I do not have a number for you, Senator. We are 

in the middle of ongoing regulatory work and examination authorities, and there will be litigation. But we do not have any estimates 

yet for exposure financially on that side. 

Senator MCCAIN. Well, I guess I do not have any other questions, 

but it is hard for me to accept that serious responsibility was assumed by the top management of JPMorgan, especially in light of 

emails that say that these decisions were, at least according to Ms. 

Drew, fully discussed and vetted by the top management of 

JPMorgan. 

No more questions, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator McCain. 

Let me pursue this issue about the figures that were given to the 

OCC. I have talked to Ms. Drew about the figure that she gave. 

What happened then is that the bank on May 4, Mr. Braunstein, 

you and Mr. Hogan called the OCC Examiner-In-Charge, Scott 

Waterhouse. And if you will look at Exhibit No. 68,1 do you see 

down where it says, about five lines down from the top, ‘‘Doug 

Braunstein and John Hogan called to provide me an update on the 

CIO position.’’ Then jump down a couple lines. It says, ‘‘Current 

losses are approximately $1.6 billion.’’ Do you see that? 

Mr. BRAUNSTEIN. Yes, Senator. 

Senator LEVIN. And that is dated May 4, correct? 

Mr. BRAUNSTEIN. Yes, Senator. 

Senator LEVIN. Now, take a look at Exhibit No. 1g.2 The day before May 4, the losses had already accumulated to $2.3 billion. Isn’t 

that correct, according to your chart? That is Exhibit No. 1g. Do 

you see that way over on the right? It goes day by day, May 1, May 

2, May 3, and May 4. Excuse me. It is our chart using our data. 

I stand corrected. But using your data, we put a chart together. 

These were internal numbers, but you supplied us your data as 

part of our investigation. We go day by day, starting January 3. 

Your data shows $2.3 billion. Do you see that? 

Mr. BRAUNSTEIN. I do, Senator. 

Senator LEVIN. OK. If that data is correct that you gave us, you 

told Scott Waterhouse, the OCC Examiner-In-Charge, that the Synthetic Credit Portfolio had lost $1.6 billion, but internally your 

books showed that the losses had already reached $2.3 billion. Is 

that correct? 

Mr. BRAUNSTEIN. Senator, the difference between these two 

charts is that the first is a year-to-date, so it would have included 

all the results from the first quarter through that date. The 1.6, 

I believe, referred to the second quarter losses, and I am certain 

that when I spoke about the losses, I would have made clear that 

they were second-quarter-to-date losses. I cannot speak to the note 

itself, but I am certain I would have drawn that distinction. 

Senator LEVIN. Well, in other words, you are saying you did not 

use the words ‘‘current losses.’’ Is that correct? 

Mr. BRAUNSTEIN. I do not recall the specifics of a conversation 

on May 4, but when relating the specific numbers, I am certain I 

would have been clear that those were quarter-to-date or second- 
37 

1See Exhibit No. 69, which appears in the Appendix on page 839. 

quarter-to-date losses, and those would have had to have been 

added to the first quarter numbers that the OCC was aware of at 

that time. I am not sure if I repeated those numbers during the 

course of that conversation. 

Senator LEVIN. The second quarter losses to the date of that 

were how much? 

Mr. BRAUNSTEIN. There were approximately $700 million in the first quarter, so subtracting that $700 million from the 2.3 from 

your chart, $1.6 billion is the second-quarter-to-date losses. 

Senator LEVIN. So when he said in his email that you said that 

the current losses are 1.6, what you are saying is you told him that 

the 1.6 was current in the second-quarter-to-date. 

Mr. BRAUNSTEIN. Yes, sir, because that is what the math would 

have suggested. 

Senator LEVIN. Well, the math may work out for you, but the 

question is whether or not that is what you said, and we will find 

out more about that. 

Ms. Drew, let me go back just for a minute to ask you again 

about these daily P&Ls. This was a letter inside the OCC, an email 

from Fred Crumlish to Scott Waterhouse. And he also says that— 

and this is in May—this is Exhibit No. 69,1 by the way. Do you see 

at the bottom of the last paragraph there, ‘‘Given CIO’s role, we 

haven’t historically gotten daily P&L from them as we do the [Investment Bank] given the nature of its operations.’’ 

Do you disagree with that? That is what you said before, that 

you did provide the daily P&L. 

Ms. DREW. I did not provide them, Senator. My understanding is 

that they were provided. 

Senator LEVIN. From whom? 

Ms. DREW. They should have been provided by Finance or Risk. 

And, in fact, I confirmed with my CFO at the regulatory meeting 

on April 16 that they were actually being sent daily for the overall 

mark-to-market position of the CIO, which included the Synthetic 

Credit Portfolio. 

Senator LEVIN. All right. So that this is wrong, this email is 

wrong. Is that correct? 

Ms. DREW. I do not know if it is wrong. My understanding was 

that profit and loss statements were sent daily. 

Senator LEVIN. And that was during January, February, March, 

right? That is historically. 

Ms. DREW. I asked that question in April, and the answer I was 

given by Finance was yes. 

Senator LEVIN. All right. Do you know who at Finance? 

Ms. DREW. My CFO at the time confirmed to me that the P&Ls 

were sent daily. 

Senator LEVIN. Who was that at the time, your CEO at the time? 

Ms. DREW. CFO. 

Senator LEVIN. CFO. Who was that? 

Ms. DREW. Mr. Wilmot. 

Senator LEVIN. OK. Now let us take a look at the issue of 

mismarking of the Synthetic Credit Portfolio book. The portfolio 

traded derivatives every day. It was a mark-to-market portfolio, 
38 

1See Exhibit No. 82, which appears in the Appendix on page 882. 

2See Exhibit No. 32a, which appears in the Appendix on page 651. 

3See Exhibit No. 28, which appears in the Appendix on page 647. 

which meant that under Generally Accepted Accounting Principles 

(GAAP), its value was measured every day. Every day the CIO had 

the report internally—that is, within the bank—a profit and loss 

figure for the Synthetic Credit Portfolio reflecting the actual value 

of the book on that day. So over the first quarter, the London traders assigned inflated values to the derivatives in the Synthetic 

Credit Book to minimize its loss. But that wrongdoing was not 

made public for months. There were red flags signaling a problem 

in the books. One red flag was on March 30, an audit by the bank’s 

own Internal Audit department, which rated the Chief Investment 

Office as ‘‘needs improvement.’’ 

Exhibit No. 82,1 if you would take a look at that. It criticized the 

CIO’s Valuation Group, which is supposed to validate the values 

assigned to derivatives for using models that had not been reviewed, not giving adequate attention to taking reserves and lacking ‘‘formally documented/consistently applied price testing thresholds.’’ So that is what Exhibit No. 82 says. 

Now, another red flag was the sudden rise of the huge disputes 

between the CIO and its counterparties over the inflated values 

that were assigned by the CIO to derivatives in the synthetic book. 

At their peak, these disputes between the CIO and its counterparties, called ‘‘collateral disputes,’’ were $690 million. 

Now, after the media reports of the whale trades, JPMorgan’s 

head accountant, the bank’s Controller, Shannon Warren, reviewed 

the Synthetic Credit Portfolio from January to April 2012. Her report was released on May 10, and it said the values that were applied to the credit derivatives—and that is the marks—were ‘‘consistent with industry practice.’’ That was the conclusion of the Controller, but the facts described in the report actually painted a picture of the derivatives valuation process that was imprecise, was 

manipulated, and produced inflated values. 

Here is the background: A trader in London was tasked with valuing the SCP derivatives each day. Under accounting rules he had 

to record a fair value for each derivative from the range of prices 

in the marketplace as indicated by trades or offers for trades that 

day. Accounting rules say that when picking a fair value, using the 

midpoint price in the daily price range is a practical expedient for 

fair value, although they do not require using it. 

Recorded telephone and instant messaging conversations show 

that the junior trader, Julien Grout, and his immediate supervisor, 

Bruno Iksil, were pressured to use favorable prices and were upset 

about doing that. On March 16, Mr. Iksil called the marks that 

they were recording ‘‘idiotic’’ and said the Synthetic Credit book 

was growing ‘‘more and more monstrous.’’ That is Exhibit No. 32a.2

At about the same time, Mr. Grout kept a spreadsheet showing 

that by using inflated prices, in just 5 days the Synthetic Credit 

book failed to report $432 million in losses that would have been 

reported using the midpoint prices. So he went through this exercise for 5 days, and this is Exhibit No. 28,3 where you can see the 

result of what he did. He went back and he analyzed what the dif-
39 

ference is between the marks that they were now using and the 

marks which they would have used had they used the mids. 

And if you look at Exhibit No. 28, that is the 5-day report, and you can see where the $432 million figure is arrived at by the folks 

in London. 

Now, the May 10 review evaluated the marks for 18 credit derivatives that were in the portfolio from January through April, 

and it looked at the values assigned to those derivatives on the last 

day of each month. 

In January—and this is now according to the May 10 review. The 

May 10 review found that in January, the CIO marks were generally close to the midpoint in the daily price ranges except in two 

instances. In February, it found that five of the marks deviated 

from the midpoint. In March, it found that all 18 not only deviated 

from the midpoint, but 16 were at the extremes of the price ranges, 

and in every case the bank was benefiting by understating the Synthetic Credit Portfolio losses. 

Mr. Braunstein, the May 10 review was prepared by the controller in your shop. It said the pricing practices were ‘‘consistent 

with industry practices.’’ Is it common for JPMorgan to change its 

pricing practices when losses start to pile up in order to minimize 

the losses? Is that common practice at JPMorgan? 

Mr. BRAUNSTEIN. Senator, the work that led to that May 10 report involved our Controller, our Chief Accounting Offices, our investment bank valuation practices, internal counsel, external counsel, and was done in consultation with PricewaterhouseCoopers 

(PwC). And the conclusions that we reached on May 10, related to 

the marks being consistent with U.S. GAAP, were based on all that 

work. 

Senator LEVIN. That is not my question. 

Mr. BRAUNSTEIN. The answer is that we believed at the time that 

the marks were done consistent with U.S. GAAP. 

Senator LEVIN. I understand that, but my question is: Here you 

have a situation where you were using a particular approach. You 

were taking the mids, basically, and in a few instances there was 

a deviation from the midpoint. In January, in two instances, there 

was a deviation from the mids. February, five deviated from the 

midpoints. In March, now all 18 not only deviated from the 

midpoints, 16 were at the extreme of the price ranges, bids and 

asks. And in every case, the bank benefited, looked better, had its 

losses look better and less than they otherwise would by understating the Synthetic Credit Portfolio’s losses. 

Now, my question is—we will find out whether doing that, making a shift in how you mark, is consistent with anything, whether 

that is consistent with good accounting practices to make the losses 

either disappear or look better, whether that practice is consistent 

with any accounting principle. That is not my question. 

Is it common inside JPMorgan to change your pricing practices 

when the losses start piling up in order to minimize the losses? 

That is my question. 

Mr. BRAUNSTEIN. No, that is not acceptable practice. 

Senator LEVIN. All right. Now, a senior executive, Mr. Webster, 

working on the May 10 review, telephoned the CIO head of credit 

trading, Javier Martin-Artajo, and confronted him about using ag-
40 

1See Exhibit No. 32d, which appears in the Appendix on page 662. 

2See Exhibit No. 34a, which appears in the Appendix on page 675. 

gressive pricing on the credit derivatives. And this is Exhibit No. 

32d,1 and it is page 2. And Mr. Webster said that in March, the 

‘‘marks had migrated . . . to the aggressive side . . . from either 

mid to somewhere close to being at the . . . bounds of the bid or 

offer.’’ 

Mr. Martin-Artajo responded that the extreme prices reflected 

the prices that the CIO was actually trading at in March. But 

when the Subcommittee checked the available trades, it found that 

the actual trades were at different prices than the booked trades, 

the booked prices, and would have resulted in bigger losses if they 

had actually been used. 

Now, an email from one person working on the May 10 review 

put it this way. This is Exhibit No. 34a.2 ‘‘At March month end the 

CIO [Front Office] marked their book at the most advantageous 

levels based on the positions they held in specific indices and 

tranches.’’ 

Different prices than the booked prices which would have resulted in bigger losses if they had actually been used. 

Is it proper, Mr. Braunstein, to change the marks and the way 

in which the marks are registered in order to reduce on the books 

the losses? Is that proper? 

Mr. BRAUNSTEIN. No, that is not proper, Senator. 

Senator LEVIN. Now, Mr. Cavanagh, given the shift in pricing 

practices that increasingly deviated from the midpoint, but the bias 

being in favor of the bank, why didn’t your Management Task 

Force report find that the CIO’s pricing practices were unacceptable on that basis? Given the deviation from the midpoint, the 

change in the procedure which was used to make these marks, why 

didn’t your task force find that an unacceptable practice? 

Mr. CAVANAGH. I understand the concern. The work that was 

done, as Mr. Braunstein said, was with full visibility of the issue 

you describe and, again, our outside-the-CIO line of business, the 

investment bank valuation team, the top people in accounting at 

the company, and our outside auditors all went through a very diligent process, looked at that issue. The marks at that time were 

shaded by the understanding of the influence that the trading in 

the marketplace was having as an effect. 

And so we looked at the work that was done in the period leading up to May 10 and all the folks were involved and felt it was 

and continue to feel the work done was very sound and reasonable 

work. 

Subsequently is when we learned the information from listening 

to the tapes during the course of the task force’s review. 

Senator LEVIN. I am not talking about what is on the tapes. I 

am talking about the shift in the way these marks are made. You 

go this way, midpoint, midpoint, midpoint, midpoint. Suddenly, 

boom, the losses are piling up, and you are now shifting the way 

those marks are made. You are no longer looking at the midpoint. 

You are shifting your process to make the losses look better. And 

you are saying that is an acceptable accounting practice. 

Mr. CAVANAGH. We looked at that—— 
41 

Senator LEVIN. Were you aware of that? 

Mr. CAVANAGH. Yes. 

Senator LEVIN. I am not talking about the tapes which show that 

your traders said that this was terrible. I am saying looking at 

what happened there, how do you possibly justify changing your 

process of making marks in order to make your losses go away or 

be less? How do you justify that? 

Mr. CAVANAGH. The process was the process of looking at the 

marketplace. The marketplace was affected by—the belief that the 

market was more volatile given all the visibility and the press articles around the—or the knowledge of the positions. So that affected 

the analysis on May 10 and got people comfortable despite the 

movement, as you described. The shift was not a change in policy. 

It was a change in the outcome of that policy. There was definitely 

a movement inside the bid/ask spread to the outer limits from more 

toward the mid, just as a result of what was going on in the marketplace. That is what the May 10 review work looked at. The Task 

Force did not do that work. We looked at the work that was done 

prior to May 10 and think it is reasonable work. 

Senator LEVIN. Did your investment bank stay at the mids? 

Mr. CAVANAGH. Typically, yes. And so—— 

Senator LEVIN. But this did not. This shifted. This had losses, 

and so it shifts to reduce the amount of those losses. Your investment bank stayed with the same approach. Is that correct, staying 

at the mids? 

Mr. CAVANAGH. The investment bank had a tighter tolerance 

band around its valuations from the midpoints in their valuation 

control practice. That is better practice, and we have subsequently—one of the remediations of the task force is to bolster and, 

I think as your report calls for, taking away that variability. But 

that is what we have done subsequently. 

Senator LEVIN. Was it a coincidence that the way in which these 

marks were made the losses look better and less as the losses were 

piling up? Was it a coincidence that you changed the practice from 

marking at the mids to marking at a broader band? Was that a coincidence? At the time. I am not talking about on May 10. Was it 

a coincidence when those marks were changed, the way in which 

those marks were made, is that a coincidence that it just happened 

to come when losses were piling up? 

Mr. CAVANAGH. I would not say it is a coincidence. It is what 

happened. It was the same factor—— 

Senator LEVIN. Was it a coincidence that it was done at that 

time? Did you inquire as to whether it was a coincidence or not? 

Mr. CAVANAGH. We inquired as to—we looked at—— 

Senator LEVIN. I am not saying whether or not it—look, you can 

argue that this is consistent with accounting practice. It is not consistent with the accounting practice that changed the way you 

marked these things in order to make your losses go away, and we 

will talk to accountants about that, by the way, if you want to 

maintain that position. I am just asking you: Was it a coincidence 

that the way in which those marks were made changed to reduce 

the losses on the books at the time those losses were piling up? 

That is all I am asking. 

Mr. CAVANAGH. Yes. I am not going to debate words with you. 
42 

Senator LEVIN. There was no relationship between the fact that 

the losses were piling up and that there was a way in which the 

marks were made to reduce the impact of those losses on the books. 

You are saying that is a coincidence. 

Mr. CAVANAGH. Yes, absolutely no intent on the part of anyone 

that we did the work to review what went on. There was no intent 

on the part of the people that were involved in the May 10 review 

that were outside CIO—— 

Senator LEVIN. I am not talking about the May 10 review. I am 

talking about the marks when they were changed. When the marks 

were changed, the way in which the marks were made. When was 

that done? What date? 

Mr. CAVANAGH. That was over the course of the first quarter. 

Senator LEVIN. Do you remember the date? Wasn’t it January? 

Mr. CAVANAGH. I am not sure. 

Senator LEVIN. When the review was made on May 10, you 

looked back as to when that change was made, right? 

Mr. CAVANAGH. Yes. I am just not recalling as we sit here. Can 

you repeat the January point? 

Senator LEVIN. Well, when did they change the way in which the 

marks were made? 

Mr. CAVANAGH. My understanding, over the course of the quarter 

the marks—— 

Senator LEVIN. But it started at some point. It started a shift 

from the mids to a broader band. When did that shift start taking—— 

Mr. CAVANAGH. I believe, right, from January as the portfolio 

was building over the course of the quarter, the marks, became 

wider relative to the calculated midpoint. 

Senator LEVIN. And because those marks became wider, the 

losses were less than they otherwise would have been if they had 

stayed at the mid, right? 

Mr. CAVANAGH. Yes. 

Senator LEVIN. And you are saying you believe, you are telling 

us that you—and you are under oath, that was—— 

Mr. CAVANAGH. I understand. 

Senator LEVIN. That that was a coincidence? 

Mr. CAVANAGH. I was answering the question about the May 10 

review—— 

Senator LEVIN. No, I am not asking—— 

Mr. CAVANAGH. So now you are asking—I understand the question you are asking. I clearly know now, having done the review, 

that the people ultimately were mismarking—were not properly 

marking their books during the course—at least during the course 

of the middle of March to the end of March, and that is what we 

came to know during the course of the review, absolutely. 

Senator LEVIN. And that those marks, the way in which the 

marks were made was changed in order to reduce the loss on the 

books? 

Mr. CAVANAGH. Yes. 

Senator LEVIN. That was the purpose? 

Mr. CAVANAGH. It seems to our review that, absolutely, the—— 

Senator LEVIN. No, I am just talking—I understand. That became your conclusion. That is the reason it was done. 
43 

1See Exhibit No. 98, which appears in the Appendix on page 963. 

2See Exhibit No. 32c, which appears in the Appendix on page 659. 

Mr. CAVANAGH. Yes. 

Senator LEVIN. OK. A minute ago you said it was a coincidence. 

Now you are saying it was not, that was the purpose. 

Mr. CAVANAGH. The purpose of the traders. 

Senator LEVIN. Yes. 

Mr. CAVANAGH. Correct. 

Senator LEVIN. OK. Now let me get to—— 

Mr. CAVANAGH. I was misunderstood. The purpose of the trader—— 

Senator LEVIN. No, I do not think you were misunderstood. I 

think I understood it accurately. I think your answer was inaccurate. 

Mr. CAVANAGH. I was answering with respect to from the perspective of the people looking at it from the outside during the May 

10 review. 

Senator LEVIN. Who is your auditor? 

Mr. CAVANAGH. Pricewaterhouse. 

Senator LEVIN. I am not talking about tapes, after reviewing the 

tapes. They accept the idea that when losses are piling up, it is OK 

at that time to shift the way in which you mark these derivatives 

to reduce the amount of the loss. 

Mr. CAVANAGH. They were involved in the review, yes. 

Senator LEVIN. And they approved this. 

Mr. CAVANAGH. They were consulted and assented to the accounting reviews on May 10. 

Senator LEVIN. OK. I think we can agree on one thing, that shifting the pricing practices to minimize losses is not acceptable. 

Mr. CAVANAGH. Correct. Absolutely. 

Senator LEVIN. Take a look, if you would, Mr. Cavanagh, at Exhibit No. 98,1 and this is that Task Force Report. This is where you 

State that you consulted with auditors and that the marks complied with U.S. Generally Accepted Accounting Principles. You 

have just told us that you agree that shifting pricing practices to 

minimize losses is not acceptable. Did you say that in your report? 

Did you say that is what happened? 

Mr. CAVANAGH. We said separate from the report—— 

Senator LEVIN. No. In the report. 

Mr. CAVANAGH. I do not believe we called that out in the report. 

It was aside from the report when we restated the financial results. 

Senator LEVIN. That is pretty significant, though, isn’t it? 

Mr. CAVANAGH. Yes. 

Senator LEVIN. But it was left out of your report. 

Mr. CAVANAGH. Yes. 

Senator LEVIN. Ms. Drew, please look at Exhibit No. 32c,2 if you 

would. This is a transcript of a telephone call between you and the 

head of the CIO’s credit trading operation, Javier Martin-Artajo, 

who sat in the London office and directly influenced the marks. It 

is undated, but it likely took place in April, and they are talking 

about what marks to show for the SCP on that day. Exhibit 32c, 

do you see that? 

Ms. DREW. Yes. 
44 

Senator LEVIN. OK. On page 1, near the bottom, Ms. Drew, this 

is what you say: ‘‘. . . I just wanted to get a really brief update 

on, what the P&L might look like.’’ 

Mr. Martin-Artajo answers: ‘‘Yes. We are going to be showing a 

slight positive today . . . I think we are going to be up like somewhere around $20 million today, ok? So this is the first, this is a 

big event for us, because we are starting to get money back.’’ 

Then a bit later on page 2 near the bottom, Mr. Martin-Artajo 

says: ‘‘So the instruction to you that we have here is probably 

around $100 million, ok? So I don’t want them to show $100 million today if they are not sure, ok? So just for you to know that, 

it’s about . . . we need to have a real, sort of 3 [basis points] move 

to . . . recognize that. I hope it happens and, if it happens between 

now and the end of the day or, or, whenever it happens, I’ll show 

you.’’ 

This is your response: ‘‘Here’s my guidance. It’s absolutely fine 

to stay conservative, but’’—and this is the big ‘‘but’’—‘‘it would be 

helpful, if appropriate, to get, to start getting a little bit of that 

mark back.’’ 

‘‘If appropriate, so you know, an extra basis point you can tweak 

at whatever it is I’m trying to show, with demonstrable data . . .’’ 

You are suggesting pretty clearly that he tweak the marks. Is 

that correct? You used the word ‘‘tweak.’’ 

Ms. DREW. I used the word ‘‘tweak.’’ The suggestion was that he 

prove—I had been told for a long period of time that the marks 

were very conservative. He says in his email that there was P&L 

upside that day of $100 to $150 million, which is possible. Markets 

move around a lot. And I was challenging him to show with data 

that if he can possibly and wants to show—and he has been telling 

me that the position is turning—that it is appropriate to mark it 

up with data. 

Senator LEVIN. And it would help if he did that. 

Ms. DREW. It would be correct if he did that with data. 

Senator LEVIN. You said ‘‘help,’’ didn’t you? You used the word 

‘‘help.’’ 

Ms. DREW. Yes. Only with demonstrable data. 

Senator LEVIN. I understand. But you told him it would be helpful, right? 

Ms. DREW. Because he had been saying that the marks were conservative and the position had been losing money, and he was not 

marking the position—— 

Senator LEVIN. Helpful to tweak, start getting a bit of that mark 

back. Tweaking is not a prediction or a hope, by the way. Tweaking 

is changing something. And I would hope that the guidance that 

you and other folks would give would be against tweaking, but 

being whatever is accurate. And there was a clear suggestion here 

that it would be helpful if he tweaked something to make things 

look a little bit better. 

Now, the rules allow derivative values to be set anywhere within 

a daily price range, and that is a range that can be influenced by 

the banks involved in this conversation. Mr. Martin-Artajo indicates the SCP derivative values could end up anywhere between 

$20 and $100 million for the day. That is the kind of conversation 

and analysis going on in our largest banks, apparently, and that 
45 

1See Exhibit No. 87, which appears in the Appendix on page 900. 

is something which you have said now, I believe, Mr. Cavanagh, 

that is going to end at your bank. Is that correct? 

Mr. CAVANAGH. We believe that the marks on all positions 

should be spot on. 

Senator LEVIN. And not tweaked. 

Mr. CAVANAGH. Correct. 

Senator LEVIN. For some purpose. 

Now, mismarks were not just an internal bank issue. The 

mismarking tainted the bank’s public SEC filings. In May 2012, 

the bank filed a 10–Q report with its first quarter financial results 

that went out to the public. One of the factors in that report was 

that the Synthetic Credit Portfolio had lost $719 million, but that 

understated the SCP losses. It was wrong, which meant that the 

SEC filing was wrong. 

In July 2012, after acknowledging the mismarking of the SCP 

book, the bank restated its first quarter financial results, hiking 

the SCP losses by $660 million. In other words, the SEC’s first 

quarter losses were not $719 million but closer to $1.4 billion. 

Mr. Cavanagh, I take it you would agree that it matters when 

a bank gets its public filings wrong. 

Mr. CAVANAGH. Yes, we take it very seriously. 

Senator LEVIN. And that a $660 million error is material. 

Mr. CAVANAGH. Yes, and as soon as we discovered it and understood the causes, we immediately restated our results. 

Senator LEVIN. OK. And, by the way, one of our recommendations in our report is that the OCC get banks to use independent 

pricing services to remove the temptation from a bank’s employees 

to tweak marks. And we also recommend that banks have to disclose when their derivative values deviate from midpoint prices and 

explain why. 

Now, I want to get to the earnings call on April 13 because we 

have disclosure problems here as well. 

Mr. Bacon, before April 13, did you or your boss, John Hogan, 

the Firm’s chief risk officer, approve positions for the Synthetic 

Credit Portfolio? 

Mr. BACON. No. 

Senator LEVIN. Two days before the earnings call—in other 

words, on April 11—the bank’s chief risk officer, John Hogan, sent 

an email, Exhibit No. 87 1 He sent it to you, Mr. Braunstein, among 

others, including Mr. Dimon. He said: ‘‘This is the governance used 

in the investment bank to control what is currently going on in the 

CIO. We obviously need to implement this in CIO as soon as possible.’’ So that is something that you received, Mr. Braunstein, on 

April 11. 

Now, you have a call, an earnings call, on April 13. That is 2 

days later. You did not tell investors that the bank’s Chief Risk Officer wanted an immediate overhaul of the CIO risk management 

during that call, did you, Mr. Braunstein? 

Mr. BRAUNSTEIN. No, sir. 

Senator LEVIN. Now, the SCP had breached all five of its key risk 

limits by then, and there had been more than 250 risk limit 
46 

1See Exhibit No. 94, which appears in the Appendix on page 927. 

2See Exhibit No. 1f, which appears in the Appendix on page 516. 

breaches since the beginning of the year. You did not tell investors 

during that call about those breaches, did you? 

Mr. BRAUNSTEIN. No, sir. I was not aware of all of that at the 

time. 

Senator LEVIN. You did volunteer a number of statements about 

the Synthetic Credit Portfolio—and I want to go through those with 

you—during that April 13 earnings call. 

First, this is Exhibit No. 94,1 and that is a transcript of the earnings call. Your statements about the Synthetic Credit Portfolio are 

on page 6 and 7. And so to make it easier to discuss them with you, 

we have listed the key statements on Exhibit No. 1f,2 which is in 

your book. 

One of the things that you said there is that all—this is now 

your public statements on April 13: ‘‘All of those positions are put 

on pursuant to the risk management at the Firm-wide level.’’ I 

think we have already heard today that Mr. Weiland did not approve individual positions, Mr. Bacon, the risk managers did not 

approve the positions. So what you said to the public is that all of 

these positions ‘‘are put on pursuant to the risk management at the 

Firm-wide level.’’ That was not really accurate, was it? 

Mr. BRAUNSTEIN. Senator, it was accurate. 

Senator LEVIN. That the positions—— 

Mr. BRAUNSTEIN. That the aggregate positions were put on pursuant to a risk management organization. There was a Chief Risk 

Officer in CIO. There were limits in CIO. At the time I was not 

aware of the breaches of a number of those limits, and I certainly 

was not aware of some of the deficiencies that we uncovered pursuant to the task force report. But, based on what I knew at the time, 

that was an accurate statement. 

Senator LEVIN. But Mr. Bacon says the risk managers did not 

approve the positions. 

Mr. BRAUNSTEIN. What that statement actually refers to is pursuant to a risk management organization, so risk—— 

Senator LEVIN. Oh, to an organization. All the positions are put 

on by an organization. 

Mr. BRAUNSTEIN. Pursuant to a risk management organization 

and its control center. 

Senator LEVIN. Boy, that is a lot different than saying that 

‘‘those positions’’—‘‘those positions,’’ this was an explosion in the 

media. You are saying, ‘‘All of those positions are put on pursuant 

to the risk management.’’ That creates an impression which is not 

true. That is not saying that our organization put all these positions on. Of course they do. As a matter of fact, Mr. Hogan said 

he learned of the trades from the paper, from the newspaper. 

Let us go to the next one, the next statement that you made during that call. You said that, ‘‘[A]ll those positions are fully transparent to the regulators. They ‘‘get information on those positions’’—we are talking about the positions the whale trades—‘‘on a 

regular and recurring basis as part of our normalized reporting.’’ 

That is the next statement that you made during that call. In fact, 

the longstanding practice of the bank is not to give individual posi-
47 

tion data to the OCC unless there is a specific request. There was 

no regular report of the SCP’s positions to OCC. Is that correct? 

There was not a regular report of that position. 

Mr. BRAUNSTEIN. I am not aware that there was a regular report. I am aware, prior to making that call, that statement, that 

on the 9th, Ms. Drew met with regulators and then on May 10 provided them with specific position reports. 

Senator LEVIN. That was on May 10 to the regulators? 

Mr. BRAUNSTEIN. Yes, Senator. 

Senator LEVIN. That is not when these trades were made? That 

is the issue. 

Mr. BRAUNSTEIN. Senator, they also received a number of other 

reports on a regular basis. 

Senator LEVIN. Are you saying that the information on these positions was provided on a regular basis to the OCC? 

Mr. BRAUNSTEIN. No, Senator. I am saying there are a number 

of other reports that they received that had components of these 

positions in them. 

Senator LEVIN. OK. So what you said is not exactly accurate on 

that day. Is that correct? 

Mr. BRAUNSTEIN. On April 13, I believed it to be accurate based 

on—— 

Senator LEVIN. I understand that you believed it to be—— 

Mr. BRAUNSTEIN [continuing]. The information that I had received from Ms. Drew, the risk organization, and from the traders, 

and from John Wilmot, CIO’s CFO. 

Senator LEVIN. OK. There are also reports here, by the way, 

which were never even received by the OCC, and you heard earlier 

about that this morning. Do you know why those reports were suddenly not sent January through April, these Executive Management Reports? Do you know why? 

Mr. BRAUNSTEIN. Yes, Senator, I do. 

Senator LEVIN. You do. 

Mr. BRAUNSTEIN. Yes. I was not aware of that at the time, 

but—— 

Senator LEVIN. You explained earlier today as to why it was. 

Mr. BRAUNSTEIN. We changed our reports, and, unfortunately, an 

error was made. The reports were only forwarded in the new format to the Fed and the FDIC, and we were not aware that the 

OCC was not getting it. They identified that as an issue, and we 

corrected that error. On April 13, I was not aware of any of that. 

Senator LEVIN. OK. So you thought you were saying something 

accurate on April 13, but it turned out not to be accurate. 

Mr. BRAUNSTEIN. I believe that we, on April 13, were being fully 

transparent with our regulators. 

Senator LEVIN. Did you believe that they got information on 

these positions on a regular basis as part of your normalized reporting? Did you believe that on April 13? 

Mr. BRAUNSTEIN. I believed that they got information related 

to—— 

Senator LEVIN. ‘‘On a regular, recurring basis’’ that they got this 

information—you know it is not true now, right? 

Mr. BRAUNSTEIN. Senator, there is information that I know 

today—— 
48 

Senator LEVIN. Not information. I am talking about information 

on these positions. That is the positions. This thing was blowing up 

in the newspaper. You have these whale trades. You lost billions 

of dollars. You are representing to the public that the regulators 

got information on those positions on a regular basis. 

Mr. BRAUNSTEIN. Senator, they did—— 

Senator LEVIN. It turned out that was not true. 

Mr. BRAUNSTEIN. Senator, they received information—— 

Senator LEVIN. On those positions on a regular basis? 

Mr. BRAUNSTEIN. On the portfolio, they received daily VaR reports. They received CIO weekly summary information. 

Senator LEVIN. I am just asking you, did they get a regular report of the SCP’s positions? I am asking you that question. 

Mr. BRAUNSTEIN. The specific positions they received, I was 

aware they had received the positions on the specifics on April 10. 

Senator LEVIN. OK. So what you said on April 13 was that the 

OCC—information on those positions was part of your ‘‘normalized 

reporting,’’ that is what you said, and that the regulators got them 

‘‘on a regular, recurring basis.’’ Now you are saying they got the 

information 3 days before your public statements. Is that right? 

Mr. BRAUNSTEIN. The statement says that they could—they 

would have access to them at any time, get the information on 

these positions—— 

Senator LEVIN. I understand. They could have accessed, we understand, if they asked for it, they got it. 

Mr. BRAUNSTEIN. And I believe based on what I knew at the 

time, including material sent to me from Ms. Drew and Mr. 

Wilmot, that they were being fully transparent and the regulators 

were aware of the positions, I believed that to be a true statement 

at that time. 

Senator LEVIN. Which is a little different from what you said, 

which is that they ‘‘get the information on those positions on a regular and recurring basis.’’ That was not accurate, and I am asking 

you, did they get—I am just saying whether it is—I am not asking 

you now what you believed. I am asking you whether or not it is 

accurate, that the OCC got ‘‘the information on those positions on 

a regular and recurring basis as part of [y]our normalized reporting.’’ I am asking you that. Is that accurate? 

Mr. BRAUNSTEIN. They got information—— 

Senator LEVIN. Not information. I am going to read this to you. 

I am going to keep reading it to you until you give me the answer. 

Did they ‘‘get the information on those positions on a regular and 

recurring basis? ’’ You know what ‘‘those positions’’ are. That is the 

positions in the whale trades. As part of a ‘‘normalized reporting,’’ 

did they? 

Mr. BRAUNSTEIN. They did not get the detailed positions regularly. 

Senator LEVIN. OK. 

Mr. BRAUNSTEIN. They got summary information—— 

Senator LEVIN. I will settle for that. I am happy to settle for 

that. They did not get information on those positions regularly. 

That is fine. 

Now, the impression is pretty clear as to what you said on that 

day, which is they ‘‘get the information on those positions on a reg-
49 

1See Exhibit No. 81, which appears in the Appendix on page 877. 

ular, recurring basis as part of our normalized reporting.’’ So what 

you say here today I think is, finally, more accurate, and that what 

you said on that day was a very inaccurate impression. 

Now, next, the third statement that you made was that ‘‘all of 

those decisions are made on a very long-term basis.’’ Now, Ms. 

Drew told us earlier that when she made a presentation in March 

2012 to the directors’ Risk Policy Committee, which is Exhibit No. 

811 again, she prepared a chart of all the CIO portfolios, and on 

that chart she showed whether the investment horizon was long 

term or short term. We are looking now at Exhibit No. 81. 

The Synthetic Credit Portfolio, which was part of the Mark-toMarket Overlay International, she identified that for us. If you will 

look at Exhibit No. 81, it is at the far right-hand corner, and it is 

part of the International reference way over to the right, as short 

as you can get on the investment horizon, as far right as you can 

get. 

Now, would you agree, Mr. Braunstein, that the Synthetic Credit 

Portfolio was traded on a daily basis and that the decisions to buy 

and sell credit derivatives were made on a short-term basis? 

Mr. BRAUNSTEIN. Senator, I would agree that these positions in 

the portfolio were traded on a daily basis. However, they were part, 

as you see at the top of this same chart, of a longer-term perspective. Some of those are shorter in duration than others. And as Ms. 

Drew said previously, the hedge position on the high yield was a 

long-term position, but we moderated it over time. 

Senator LEVIN. So when you said that ‘‘all of those decisions were 

made on a very long-term basis,’’ what you are saying now is—you 

are arguing that some were made on a long-term basis and some 

on a short-term basis? 

Mr. BRAUNSTEIN. No, Senator. All I said is trades were made 

daily. That is a tactical implementation of a longer-term decision. 

Senator LEVIN. And the tactical implication or the tactical actions, which were the day-to-day actions and which during the first 

quarter of 2012 were what we are talking about, because those are 

the whale trades which cost $6 billion, you think that when you 

told the public that ‘‘all of those decisions are made on a very longterm basis,’’ that you think that the average person listening to 

that phone call would think that you were talking about some longterm strategy and not what you are actually buying and selling 

day-to-day during those 3 months? Do you think that is the reasonable way that someone would hear the words ‘‘all of those decisions 

were made on a very long-term basis? ’’ 

Mr. BRAUNSTEIN. I think my statement that they were made on 

a long-term basis reflected my understanding of the position at the 

time as accurately as I could. 

Senator LEVIN. But you knew that these trades were being made 

day-to-day. You knew that the portfolio had dramatically increased 

from January to March so that most of them had been bought in 

the last couple months, those positions. You characterized this, ‘‘all 

the decisions were made on a very long-term basis.’’ And you think 

the average listener to that statement would think that what you 

were referring to was some strategy that was adopted, I do not 
50 

know, months before or a year before? Do you think that is a fair 

understanding of those words to someone listening to you? 

Mr. BRAUNSTEIN. Senator, I believe what I said is accurate. 

Senator LEVIN. Technically. You can find a way to make those 

accurate. That is not my question—to make them sound accurate. 

That is not my real question. I am trying to figure out what you 

are really thinking about here. You are talking to people now publicly. You have had this blowup, this huge loss, and now you are 

telling—you are trying, obviously, to reassure people. You are saying ‘‘all these positions are put on pursuant to risk management at 

the Firm-wide level.’’ Not accurate. ‘‘All those positions,’’ you said— 

the regulators know all about these positions. Not accurate. ‘‘All 

those decisions are made on a very long-term basis.’’ You think 

that the average listener, that average investor, is going to say that 

he was technically accurate, they had a long-term strategy here? 

You think the average person listening to this would not think you 

were referring to the trades that were at issue that blew up? Is 

that your statement under oath, that is what you think reasonable 

people would take from that statement here? That is what you say. 

Mr. BRAUNSTEIN. Senator, my obligation on the call and the only 

thing I was thinking about was reporting based on what I knew at 

the time, the information as accurately as I could—— 

Senator LEVIN. Did it turn out to be wrong? Were ‘‘all those decisions made on a very long-term basis’’ relative to those positions? 

Mr. BRAUNSTEIN. In hindsight, Senator, the positions and the 

portfolio did not act as a hedge. It changed dramatically. We misunderstood the risks. We misunderstood the complication in it. We 

ultimately misunderstood what the estimated performance of it 

would be. So, in hindsight, we got that wrong. The statements as 

I made them on April 13 were my very best effort, best good-faith 

effort, to accurately describe based on the information I knew available to me at the time what the portfolio was. 

Senator LEVIN. I have a lot of trouble, I’ve got to tell you, Mr. 

Braunstein, believing that those statements were anything other 

than an effort to calm the seas, because they all were exaggerations or inaccurate. You can say ‘‘in hindsight.’’ You can say ‘‘as it 

turned out.’’ But at the time there was all kinds of evidence, which 

we have shown here today, that those positions were not, as a matter of fact, ‘‘put on pursuant to risk management at the Firm-wide 

level;’’ the regulator did not receive regular reports, as you indicated they did; that the decisions—and you are referring to decisions relative to the positions—‘‘were made on a long-term basis,’’ 

when they obviously were—as you put it, tactically, done on a very 

short-term basis, and that the size of that inventory tripled during 

those 3 months. 

Now let us go to hedging. You say that it turned out not to be 

a hedge. But what you said on April 13 was that ‘‘we have put on 

positions to manage for a significant stress event in credit.’’ That 

is what you said on April 13. 

When you said that the portfolio put on positions to protect 

against ‘‘a significant stress event,’’ I take it that you meant by 

that, Mr. Braunstein, that is a new financial crisis. Is that correct? 

Mr. BRAUNSTEIN. No, sir. 
51 

1See Exhibit No. 90, which appears in the Appendix on page 905. 

Senator LEVIN. No? It was aimed at protecting against what? 

What is the significant stress event if it was not a new financial 

crisis? 

Mr. BRAUNSTEIN. As I understood the position on April 13, again, 

based on reports from the CIO traders, Ms. Drew, Mr. Wilmot, review by Mr. Hogan and the risk organization, I understood the position to be balanced, and I understood that the position still had 

jump loss default protection, i.e., bankruptcies. In the event of 

bankruptcies, the portfolio would perform as gains for the bank. 

Senator LEVIN. OK. Now, let us take a look then at Exhibit No. 

90,1 if you would. This is an email that was provided to you and 

other senior bank executives before that earnings call. It provided 

you with detailed information about the Synthetic Credit book. And 

this was prepared by two of the bank’s quantitative analysts, Mr. 

Venkatakrishnan and Mr. Vigneron. I assume you had confidence 

in those folks. Is that true? 

Mr. BRAUNSTEIN. Yes, sir. 

Senator LEVIN. So if you will turn to page 3 of Exhibit No. 90, 

this was a presentation labeled, ‘‘Synthetic Credit Summary: Risk 

and P/L Scenarios.’’ The title indicates that this describes scenarios 

for the Synthetic Credit Portfolio as to when it would earn money 

and when it would lose money. And if you look at the table on the 

left side of the page, it has three columns labeled ‘‘Spr01,’’ ‘‘Spr+10 

percent,’’ and ‘‘Up50 percent.’’ So each of those, as I understand it, 

denotes a situation in which credit gets worse. Is that accurate? 

Mr. BRAUNSTEIN. Yes, Senator, that denotes credit spreads widening. 

Senator LEVIN. And that would mean that credit is getting 

worse? 

Mr. BRAUNSTEIN. That is correct. 

Senator LEVIN. In all three now, the Synthetic Credit Portfolio 

is projected as losing money. Is that correct? 

Mr. BRAUNSTEIN. Yes, Senator. 

Senator LEVIN. That is what you call a hedge. 

Now, the first scenario, when the credit spreads widen one basis 

point, the portfolio loses $46 million. In the second, where credit 

spreads widen by 10 percent, it loses $163 million. In the third scenario, where credit spreads widen 50 percent, which is a severe 

credit crisis, it loses $918 million. In all three scenarios, the Synthetic Credit Portfolio loses money and loses more and more money 

as credit quality in the economy progressively gets worse. 

Now, those results show that the SCP is not providing any credit 

loss protection. Would you agree to that? In those three scenarios, 

that gets worse, but in all three it loses money. Would you agree 

to that? 

Mr. BRAUNSTEIN. I would agree. If that is the only thing that 

happens in those scenarios, then the portfolio would lose money. 

Credit scenarios are much more complicated than that, Senator, 

and so in addition to this, in those types of circumstances, there 

is default risk, and the portfolio would have gains in the event of 

defaults. 
52 

1See Exhibit No. 97, which appears in the Appendix on page 962. 

So, again, my understanding at the time was that the portfolio 

still provided positive gains in a jump to default scenario. 

Senator LEVIN. That would have been one 1 of 10 scenarios? Is 

that it? Take a look at page 7—do you see page 7? 

Mr. BRAUNSTEIN. Yes. 

Senator LEVIN. Where it has 10 different scenarios? 

Mr. BRAUNSTEIN. Yes. 

Senator LEVIN. The one you are talking about is the last one, 

many defaults? Is that correct? 

Mr. BRAUNSTEIN. That is a scenario, yes. 

Senator LEVIN. OK. But Jamie Dimon testified to the Senate that 

the SCP was to protect against a financial crisis—that is Scenario 

No. 4—or bad development in Europe, and that is number 2. That 

is what he said. And in both of those, the portfolio would lose 

money, correct? I am not asking you whether you agree with Mr. 

Dimon or not. I am just simply asking you whether or not in those 

two scenarios, number 2 and 4, it loses money. 

Mr. BRAUNSTEIN. Yes, it loses money. 

Senator LEVIN. And when he testified that the SCP was to protect against Scenarios 2 and 4, you go all the way over to number 

10 to try to find some scenario in which it might be helpful. But 

in Scenarios 2 and 4, it loses money. Is that correct? 

Mr. BRAUNSTEIN. Yes. 

Senator LEVIN. Now, did you disclose in that April 13 statement 

the portfolio’s current status? 

Mr. BRAUNSTEIN. Senator, I am not sure exactly what you mean 

by ‘‘current status.’’ 

Senator LEVIN. The current status of the portfolio. 

Mr. BRAUNSTEIN. I am not, again, sure exactly what you mean 

by the ‘‘current status.’’ 

Senator LEVIN. All right. Go to, if you would, Exhibit No. 97.1

This was a letter that you wrote to the Subcommittee. You said 

that when you saw this document—and we are talking here about 

that same document we have been discussing—last April, that you 

relied on the ‘‘central scenarios included on that page describing an 

80 [percent] likelihood . . .’’ Now, the central scenarios with the 

80-percent likelihood were a New Financial Crisis, Status Quo, and 

a Central Scenario, those three. That is what you told the Subcommittee, that you relied on those. You did not talk about Scenario No. 10. That is not one of those. It is not one of the four scenarios that even have a 10-percent likelihood. 

No, I am sorry. It is one of the four scenarios, with a 10-percent 

likelihood, but what you told the Committee in your letter is that 

you relied on the central scenarios, which are Scenarios 4, 5, and 

6, not Scenario No. 10. How come? How come the change? 

Mr. BRAUNSTEIN. Senator, there is no change. 

Senator LEVIN. OK. 

Mr. BRAUNSTEIN. What I was speaking about was the comment 

I made related to being ‘‘very comfortable’’ with the position. And 

as I said to your staff, ‘‘very comfortable’’ was derived from those 

80-percent likely scenarios, so a loss of $250 million to a gain of 

$350 million. 
53 

In addition, I also relied on for the ‘‘very comfortable’’ statement, 

the independent work that was done through the risk organization. 

And as I spoke to your staff, that is what I was referring to; those 

scenarios helped me to communicate the position of the bank as 

being very comfortable based on our anticipated future losses from 

the position. 

Senator LEVIN. So you were very comfortable with the position 

you were in under those three central scenarios, showing you losing 

money under a New Financial Crisis—right?—of $250 million. Is 

that correct? 

Mr. BRAUNSTEIN. Senator, while that is a big number—— 

Senator LEVIN. That helped make you comfortable. 

Mr. BRAUNSTEIN. Senator, while that is a large number for anyone, for JPMorgan, to put that in perspective, it was less than 1 

percent of the full-year profits for the company. So, yes, as a P&L 

matter, we were very comfortable. Again, based on what I know 

today, that information was inaccurate. 

Senator LEVIN. Shouldn’t investors have known during that call 

that the current status of the SCP was not great, it was losing a 

lot of money, huge positions that it had were hard to exit, it had 

been violating all five risk limits? Don’t you think you should have 

disclosed that? You said, what do I mean by the shape of the SCP. 

Well, that is what I mean by the shape. You give this very glowing 

call: These have all been approved by central, the risk managers 

have all approved this, all of our regulators know all about it. This 

is what you are telling investors on April 13 instead of telling them 

what you also knew, which is that SCP is losing money and had 

been violating risk limits. 

A pretty one-sided presentation, isn’t it? 

Mr. BRAUNSTEIN. Senator, based on what I knew at the time, I 

believe it to be the most accurate depiction of the position. All of 

those—— 

Senator LEVIN. You thought that was a balanced presentation? 

Mr. BRAUNSTEIN. All of those—— 

Senator LEVIN. You thought that was a balanced presentation of 

the SCP on April 13? 

Mr. BRAUNSTEIN. It was an accurate presentation. 

Senator LEVIN. You thought it was a balanced presentation, not 

disclosing it was losing money, not disclosing that it violated all 

five risk limits regularly, in some cases for months? You think it 

is accurate to just tell them you are comfortable, that the regulators know all about this, that your top risk people approved all 

these positions? You think that is a balanced—honestly, now, you 

think that is a balanced presentation to investors? 

Mr. BRAUNSTEIN. Senator, in hindsight, there is lots more information that we learned. 

Senator LEVIN. That you had at the time—— 

Mr. BRAUNSTEIN. Based on what I—— 

Senator LEVIN. No. Not that you learned. You had that at the 

time. 

Mr. BRAUNSTEIN. Senator, this financial analysis incorporated all 

of those factors that we had at the time, so, yes, based on all that 

information at the time, we were very comfortable based on the 

predicted outcomes. 
54 

1See Exhibit No. 46, which appears in the Appendix on page 778. 

Senator LEVIN. Well, we have already covered some of the matters involving hidden financial risks, mismarking, breaches of risk 

limits, and public disclosure problems. But there is another problem or two which I want to go into now, and that is the issue of 

and the evidence of model manipulation. 

In December 2011, the bank ordered the CIO to reduce its riskweighted assets, assets that were assigned certain weights by the 

OCC according to how risky they were. The usual way to reduce 

risk-weighted assets is to sell off some of the risky assets. But in 

December 2011, CIO personnel proposed a different solution, one 

that instead involved manipulating the mathematical models that 

were used to calculate risk-weighted assets to produce lower results. So this is the solution that was proposed by some CIO personnel in December 2011. 

So if you all would turn to Exhibit No. 46.1 This is an email 

dated December 22, 2011, which was sent to you, Ms. Drew, by the 

head of the CIO’s equity and credit trading operation, Javier Martin-Artajo. 

In this email, Mr. Martin-Artajo suggests reducing the Synthetic 

Credit Portfolio’s risk-weighted assets by $13 billion using several 

tactics. One was achieving a $2 billion book reduction through a 

trading reduction—in other words, selling off assets. But he also 

suggests achieving a much larger reduction, a $7 billion reduction, 

half of the $13 billion goal, through so-called ‘‘model reductions.’’ 

Now, here is what the estimates of the reductions would be, and 

one was CRM, which has already been acknowledged, the model reduction of the VaR, and the model reduction of the stress VaR. 

So here is the issue, though. The email identifies three mathematical models used to calculate various components of riskweighted assets. Now, that is a model, again, used to calculate the 

CRM that calculates the dollar amount of possible losses over a 

year; the VaR, which calculates the dollar value at risk of loss in 

a day under ordinary market conditions; and stress, which calculates stress VaR results, the dollar value at risk of loss in a day 

under severe economic conditions. 

Quantitative Research is the bank outfit that develops the models. And, again, I was reading from the exhibit. The reference to 

Pat is Pat Hagan, who is the CIO’s quantitative analyst who is 

working to develop the three models listed in the email. 

Mr. Hagan told our Subcommittee staff that he, in fact, provided 

the three estimates attributed to him in the email for the model 

used to produce the CRM—and, again, that is the comprehensive 

risk measure that calculates the dollar amount of possible losses 

over the year. He predicted he could achieve a $5 billion reduction 

in CRM results, a $500 million reduction in VaR results, and a $1.5 

billion reduction in stress VaR results, for a total of $7 billion. The 

plan was that all those reductions would, in turn, produce a lower 

RWA result as well as lower capital requirements. 

Now, Ms. Drew, what did you think when you got this proposal, in particular the idea of reducing the SCP’s RWA by $7 billion 

through model reductions, which is triple the $2 billion to be 

achieved through trading reductions? What was your reaction? 
55 

Ms. DREW. My reaction when I had an estimate from a front office that was dependent on QR was always that QR as an independent review section of the bank was responsible for making the 

determination, irrespective of Mr. Hagan’s or anybody else’s estimates. 

Going forward, also this was early in the process, the amount of 

RWA that had to be reduced was increased by Mr. Braunstein, and 

I delivered the message that it had to come from position reduction 

over the course of the year to the group directly. 

Senator LEVIN. You did deliver that message? 

Ms. DREW. Correct. 

Senator LEVIN. So, Mr. Cavanagh, in other words, your message 

was it has to come from reduction of sales and the—— 

Ms. DREW. Not all of it, no. Some of it. 

Senator LEVIN. Some of it. 

Ms. DREW. Whatever—— 

Senator LEVIN. How much of it? Most of it? 

Ms. DREW. My directive was that whatever the independent risk 

group, QR, approved, they could include in their reduction the 

same—models are updated all the time, and if QR confirmed that 

the reduction was appropriate, then they could use the reduction 

proportionally for whatever QR told them would be accurate. 

Senator LEVIN. All right. So let me ask you, Mr. Cavanagh: Is 

it appropriate to set goals to achieve RWA reductions by affecting 

how the models calculate the results? 

Mr. CAVANAGH. If the intention is to take on more risk and be 

deceptive about it, absolutely not. The models need to be accurate 

and properly measure under the—we are putting in new capital 

rules across the Firm, and so some of the targets were in full contemplation of the improvements that were needed to get RWA calculations correct. 

Senator LEVIN. So now my question. Is it appropriate to set goals 

to achieve RWA reductions by affecting how the models calculate 

the results? Is that appropriate? 

Mr. CAVANAGH. I think it is appropriate if there are controls 

around making sure that there is independent oversight of the 

model approvals themselves and there is visibility into what the 

sources are of actual change. 

Senator LEVIN. So where the models are changed in order to 

achieve that reduction, is that appropriate? 

Mr. CAVANAGH. Again, if the models are being—— 

Senator LEVIN. I am saying if the purpose of changing the—— 

Mr. CAVANAGH. I do not agree that the purpose—— 

Senator LEVIN. I am not saying you agree with what happened 

here. I am saying if the purpose of changing the models is to 

achieve an RWA reduction, is that appropriate? 

Mr. CAVANAGH. If we understand—it can be appropriate, yes, sir. 

Senator LEVIN. If that is the purpose? 

Mr. CAVANAGH. Yes, if there is transparency around the fact that 

there is an expectation that is going to change and the Firm 

through its risk governance processes is comfortable with the level 

of risk-weighted assets that would be used under a new model, that 

would be fine. 
56 

1See Exhibit No. 46, which appears in the Appendix on page 778. 

2See Exhibit No. 50, which appears in the Appendix on page 788. 

3See Exhibit No. 51a, which appears in the Appendix on page 790. 

4See Exhibit No. 51b, which appears in the Appendix on page 791. 

Senator LEVIN. OK. Do you see anything in this memo that I referred to about accuracy, Exhibit 46?1

Mr. CAVANAGH. No. 

Senator LEVIN. OK. So much for accuracy. 

Now, I misspoke before when I said what the CRM was, but we 

did talk about the CRM or the comprehensive risk measurement 

that the OCC requires all the national banks to calculate. It measures the amount of expected loss over the course of a year. In a 

worst-case scenario, it is used to calculate a bank’s overall riskweighted assets and in turn its capital requirements. 

Now, the RWA has other components, too, including a risk measure called the ‘‘incremental risk charge’’ (IRC)—which applies only 

to certain types of assets. And the total RWA will depend upon 

whether particular positions are categorized as CRM or IRC since 

the resulting CRM and IRC totals are going to be incorporated into 

the RWA calculation. 

So now, Mr. Weiland, if you would take a look at Exhibit No. 50.2

Mr. WEILAND. Yes. 

Senator LEVIN. That is an email dated March 21 that you received from Pat Hagan, and he is the CIO’s quantitative analyst 

in London. Here is the subject line of the email: ‘‘Optimizing regulatory capital.’’ 

In his email Mr. Hagan proposes categorizing synthetic credit positions based on what would create the lowest possible capital 

charge to the bank. And if you look at the top of page 2, he says 

the following: ‘‘. . . we should treat the regulatory capital calculation as an exercise of automatically finding the best results of an 

immensely arbitrary and complicated formula.’’ 

So a few hours later, Mr. Hagan received a call from Anil 

Bangia, who worked in the bank’s Model Risk and Development 

Group. Exhibit No. 51a3 is a transcript of an excerpt of this call 

now between Mr. Bangia and Mr. Hagan. 

‘‘Mr. Bangia: I think . . . 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.’’ 

While Mr. Bangia made it clear in his email that ‘‘optimizing regulatory capital’’ was not safe to put in writing—in other words, 

they discuss it on the phone. 

So later that day, Mr. Hagan and Mr. Bangia spoke again. This 

is now Exhibit No. 51b.4

‘‘Mr. Hagan: Um, that email that I should not have sent? ’’ 

‘‘Mr. Bangia: Um hum.’’ ‘‘Yes,’’ in other words. 

‘‘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,’’ and 

then they go on to discuss Mr. Hagan’s proposal. 
57 

1See Exhibit No. 51c, which appears in the Appendix on page 793. 

Mr. Weiland, despite the sensitivity, this email indicates that 

Mr. Hagan continued to pursue his efforts to produce the lowest 

possible RWA and to ‘‘optimize regulatory capital.’’ Right? Do you 

agree with that, what I read? Did I read that accurately? 

Mr. WEILAND. Mr. Hagan was doing calculations to estimate 

what he thought the regulatory capital should be. He was not responsible for the official calculation of the regulatory capital. 

Senator LEVIN. Yes, but the question is whether or not is there 

some reason you should not put that in an email. Why is this the 

subject of a phone call, optimizing regulatory capital? 

Mr. WEILAND. I was aware—— 

Senator LEVIN. Why hide it? 

Mr. WEILAND. Because it was not the business purpose, it was 

not what we were trying to achieve. Mr. Hagan had a misunderstanding as to what we were trying to achieve and was treating 

this regulatory capital exercise as a mathematical problem rather 

than understanding the actual rules in the process. 

Senator LEVIN. That is why you do not put it in writing? 

Mr. WEILAND. Well, we did not want anyone to misconstrue or 

misunderstand what it was we were trying to achieve, and when 

Pat sent around those emails, people were misunderstanding. 

Senator LEVIN. They thought you were doing what it said you 

were doing, which is—— 

Mr. WEILAND. What Pat was doing. 

Senator LEVIN [continuing]. Optimizing regulatory capital. 

Mr. WEILAND. That is what Pat was trying to do. 

Senator LEVIN. Yes. 

Mr. WEILAND. And what we were doing is telling him that this 

is not the objective of the exercise. 

Senator LEVIN. Therefore, do not say things like that in writing. 

Mr. WEILAND. Do not do it, and do not say it. 

Senator LEVIN. Yes, but he continued to do it in another phone 

call. 

Take a look at Exhibit No. 51c.1 That is a transcript of a phone 

conversation the next day between Mr. Hagan and you. This is 

what you say to Mr. Hagan: ‘‘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. I told this to Javier’’—in other words, Hagan’s boss—‘‘the 

other day but maybe he didn’t mention it to you—everyone is very 

sensitive about the idea—writing emails about the idea of optimizing.’’ 

Why is optimizing such a sensitive issue? 

Mr. WEILAND. Because at that point in time, we were making a 

separation in the portfolios, trying to understand and define which 

part of the portfolios should be subject, according to the new regulatory rules, to IRC calculation and which part of the portfolios 

should be subject to CRM calculation. It was not and it is not something that is meant to be recalculated on a daily basis to optimize 

it. It is meant to be done based on a business purpose of the two 

portfolios. 
58 

Mr. Hagan, in his role as a mathematician and a quantitative 

specialist, was focused too much on his own mathematical interest 

in optimizing it and not enough on what the actual rules and objectives of the exercise were. 

Senator LEVIN. He was just pursuing a mathematical interest. 

He was not operating in furtherance of the bank’s goals? 

Mr. WEILAND. In fact, we were instructing him that it was not 

the goal, that we had to do a one-time split of the portfolios according to the regulatory rules, and that we were not intending to continue optimizing the portfolio. And it was his, continued—he had 

an opinion, and he wanted people to hear it, and he continued to 

send emails about it, and, it was not consistent with what we were 

trying to achieve that we told him to stop doing it. 

Senator LEVIN. He thought he was carrying out a purpose, right? 

Mr. WEILAND. He did. 

Senator LEVIN. But it was a violation of the bank’s policy. 

Mr. WEILAND. Right. 

Senator LEVIN. Do not put it in emails. 

Mr. WEILAND. Well, primarily—— 

Senator LEVIN. You said, ‘‘Do not put it in emails.’’ You did not 

say, ‘‘Hey, you are on the wrong track.’’ 

Mr. WEILAND. I told him both things. 

Senator LEVIN. You said, ‘‘Do not put it in emails.’’ 

Mr. WEILAND. I did not want him to put it in an email because 

it was misconstruing what it was we were trying to achieve. 

Senator LEVIN. Where do you see that? 

Mr. WEILAND. I am not sure I see it in the transcript, but I had 

many conversations with Pat about this. 

Senator LEVIN. So in this transcript, saying, ‘‘Do not write emails 

about this,’’ because—— 

Mr. WEILAND. This phone call—— 

Senator LEVIN [continuing]. This is the wrong policy. 

Mr. WEILAND. This phone call was to tell him not to write these 

emails. 

Senator LEVIN. Telling him, ‘‘Do not write emails.’’ You did not 

say, ‘‘It is the wrong policy. That is not what we are trying to do 

at this bank.’’ You say, ‘‘This is a sensitive subject. Do not put it 

in emails.’’ Right? 

Mr. WEILAND. Correct. 

Senator LEVIN. Mr. Cavanagh, in your prepared statement, you 

say that, ‘‘Future synthetic credit positions in CIO will be subject 

to appropriate reporting and monitoring requirements and linked 

with appropriate documentation to a particular risk or set of risks 

that they are designed to offset.’’ 

You also said in your prepared testimony that, ‘‘We believe that 

the changes that we have made appropriately reflect the approach 

to hedging outlined in the proposed Volcker Rule and that they impose strong internal controls over hedging, including that all 

hedged transactions be properly documented and monitored.’’ 

Are you saying that the bank from now on is going to require 

contemporaneous hedging documentation for all hedges? Is that 

what you are saying? 

Mr. CAVANAGH. For all portfolio hedging, we will require contemporaneous documentation that links the risk that is to be hedged 
59 

with what the hedge is constructed to be and require ongoing monitoring from the time a hedge goes on. 

Senator LEVIN. Now, you say in your statement that the documentation is going to identify a particular risk or set of risks that 

they—I presume you mean the hedging positions—are designed to 

offset. Right? 

Mr. CAVANAGH. Yes. 

Senator LEVIN. Now, rather than identifying risks to be offset, 

are you also going to identify the assets to be offset? 

Mr. CAVANAGH. Yes. [Pause.] 

Senator LEVIN. Let me go back and just clarify one thing. Mr. 

Weiland, I think that you testified that optimizing RWA was done 

once. Is that correct? It was allowed on a one-time basis? 

Mr. WEILAND. The intention was split the book into a portfolio 

that included only index positions and no tranches and would receive an IRC charge, and a separate book which would include a 

mixture of index positions and tranches, which would be, the hedge 

ratios, and trades would be actively managed; and that going forward after that had been done, trades either needed to be assigned 

to the IRC book or the CRM book, and that there was not meant 

to be an ongoing process of optimization that would potentially blur 

the lines between the two. 

Senator LEVIN. All right. So there intention—was not an intention, you said, on an ongoing basis to optimize the book. And my 

question is this: On that one-time basis, it was going to be allowed. 

Is that correct, but on a one-time basis? 

Mr. WEILAND. Yes. The objective was within the rules to achieve 

the best RWA, of course. 

Senator LEVIN. On that one time. 

Mr. WEILAND. Yes. And then move forward assigning trades on 

a business—— 

Senator LEVIN. But not on an ongoing basis? 

Mr. WEILAND. There was not meant to be any further cross-fertilization between one of the books and the other book for the purpose of optimizing capital. 

Senator LEVIN. Now, why should it be allowed on a one-time 

basis? 

Mr. WEILAND. Well, by the rules, if you are using index positions 

and not tranches—in other words, you are not correlation trading, 

you are—— 

Senator LEVIN. Why is it that something not allowed on an ongoing basis is allowed on a one-time basis? That is what I am trying 

to understand. 

Mr. WEILAND. Well, I am not a regulatory policy expert, but my 

understanding—— 

Senator LEVIN. You think the regulators allow that optimization 

for once, but do not allow it on an ongoing basis? 

Mr. WEILAND. So I am not clear on what exactly the language 

in the rule is, but my understanding was that you are allowed to 

separate the portfolios based on instrumentation and business purpose. But what we understood to be prohibited was ongoing optimization that would include moving trades back and forth between 

the books not for a business purpose but for optimization purposes. 
60 

Senator LEVIN. You think that the regulators say it is OK to do 

it once but do not keep on doing it? 

Mr. WEILAND. That is my understanding. 

Senator LEVIN. OK. We will find out later this afternoon. 

What we have seen during this investigation is the evidence that 

JPMorgan piled on risk, broke risk limits, hid losses, manipulated 

models, dodged oversight, misinformed the public. That is not what 

a leading bank should be doing. You folks have testified here that 

you have taken some steps to clean up that act. I hope that is true. 

The public deserves it. The economy requires it. We have to have 

confidence in our banks, and particularly the major banks, which 

have such an impact should there be a major problem with those 

banks. 

And so I want to end with a thank you to you folks for being here 

without requiring subpoenas and also for your cooperation with the 

investigation. You have done that, and we are highly critical of 

these activities, and appropriately so, but at least the bank has 

been cooperative with our investigation, and for that we are grateful. You are excused. 

We are going to take a 5-minute break. [Recess.] 

OK. We will come back to order. 

I now want to call our final panel of witnesses: Tom Curry, the 

Comptroller of the Currency; Scott Waterhouse, OCC’s Examinerin-Charge at JPMorgan Chase; and, finally, Michael Sullivan, a 

Deputy Comptroller for Risk Analysis at the OCC. 

Mr. Curry, you testified before the Subcommittee last summer, 

I believe, at our HSBC hearing, and I know that you made a special effort to get here today, and we very much appreciate that. We 

welcome you back here and look forward to your testimony. And, 

Mr. Waterhouse and Mr. Sullivan, I think this is the first time that 

you have appeared before our Subcommittee. We welcome you both, 

and I appreciate your being here today. 

As you know, under our rules all witnesses who testify before the 

Subcommittee are sworn in. At this time I would ask each of you 

then to please stand and raise your right hand. Do you swear that 

the testimony you are about to give before this Subcommittee will 

be the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. CURRY. I do. 

Mr. WATERHOUSE. I do. 

Mr. SULLIVAN. I do. 

Senator LEVIN. We will use again this afternoon the same timing 

system. One minute before the red light comes on, you will see the 

light change from green to yellow, and that gives you an opportunity to conclude your remarks. The written testimony will be 

printed in the record in its entirety, so if you can, please limit your 

oral testimony to no more than 10 minutes. 

I think, Mr. Curry, you will be presenting testimony, I believe, 

for the OCC. Will that be the only testimony that we will get? 

Mr. CURRY. My colleagues will introduce themselves briefly after 

I conclude, Senator. 

Senator LEVIN. That is fine. Thank you very much. 

So let me call on you with, again, our thanks, Mr. Curry. 
61 

1The prepared statement of Mr. Curry appears in the Appendix on page 129. 

TESTIMONY OF HON. THOMAS J. CURRY,1 COMPTROLLER OF 

THE CURRENCY, U.S. DEPARTMENT OF THE TREASURY 

Mr. CURRY. Thank you, Chairman Levin, Ranking Member 

McCain, and Members of the Subcommittee. We appreciate this opportunity to discuss the OCC’s oversight of JPMorgan Chase as it 

relates to the bank’s more than $6 billion loss from credit derivatives trades in the Chief Investment Office. The OCC has supported the Subcommittee’s investigation into this incident, and we 

look forward to continuing to cooperate on this matter. 

The risk management culture and processes at the bank that allowed these significant trading losses to occur are completely unacceptable to the OCC. A strong culture of corporate governance and 

oversight was clearly lacking and, thus, internal controls failed to 

identify and manage the mounting risks in the CIO. Equally troubling was the failure of the bank to provide timely and complete 

information to the OCC as events unfolded. This is a serious 

breach in the conduct that we demand from bank management 

when dealing with our supervisory staff. 

The OCC takes these matters very seriously. In January, we 

issued a comprehensive cease-and-desist order that directed the 

bank to correct the unsafe and unsound practices and legal violations related to the CIO’s derivatives trading. 

As more fully described in our cease-and-desist order, we found 

deficiencies in a number of core functions, mainly oversight and 

governance; risk management processes and procedures; controls 

over trade valuation; development and implementation of models; 

and internal audit processes. We are closely monitoring the bank’s 

compliance with our order and evaluating what additional actions 

might be necessary. 

Had the bank’s risk management and audit processed worked as 

intended, this activity should have been highlighted to us. Nonetheless, there were red flags that we failed to notice and act upon. 

However, once we became aware of the potential scope of the problem, we quickly took actions. 

First, we directed the bank to provide us with granular information about its trading activities in the Synthetic Credit Portfolio of 

the CIO so that we could fully assess the risks being taken. 

We also launched a full-scale, comprehensive review of the activities and oversight of the CIO and Synthetic Credit Portfolio. The 

review had two components: The first was a comprehensive review 

to assess the quality of management and the risk management 

processes in the CIO function. We looked at the effectiveness of 

board oversight, including whether the Risk Committee members 

were appropriately informed and engaged, the types and reasonableness of risk metrics and limits; the model governance review 

process; the valuation control process; and the quality of work by 

the independent risk management team, as well as internal audit. 

We closely monitored the bank’s wind-down of the SCP on a daily 

basis. In addition, we assessed the adequacy of the information reported within the holding company and the bank. We wanted to 

know, first, whether they had adequate information to monitor 

their own risk; and, second, whether the information provided to 
62 

1The prepared statement of Mr. Waterhouse appears in the Appendix on page 129. 

the OCC was sufficient for us to evaluate the risks and risk controls associated with the positions undertaken by the CIO. 

The second prong was an internal review to assess the quality 

of our supervision and lessons we could learn to strengthen our supervision at the bank and across the large bank population that we 

oversee. Our goal here is to ensure that we focus our resources efficiently and effectively to identify risks, assess banks’ governance 

and risk management, and ensure that weaknesses are addressed 

promptly. 

As a result of this review, we are taking a number of steps to 

strengthen our supervision of large banks. For instance, we are 

working to ensure that we receive and act upon timely and complete information, that we regularly review models and reports 

banks use for regulatory capital purposes, and that we treat as red 

flags any sudden changes in key risk areas. Our lessons learned 

are more fully described in my written statement. 

The Subcommittee’s report contains thoughtful recommendations 

that will further enhance our supervision of derivatives activities. 

Although we are carefully studying the details in the recommendation, we fully agree with the principles they embody. Indeed, several of the recommendations reinforce requirements in our ceaseand-desist order. 

We will continue to investigate this matter and the new information provided in the Subcommittee’s report. Be assured that I will 

not hesitate to take additional actions, if warranted, in response to 

any new information we learn from the report. 

I am joined today by Scott Waterhouse and Michael Sullivan. 

Scott is the OCC’s examiner-in-charge of JPMorgan’s national 

bank, and Michael is a Ph.D. economist with a background in 

quantitative analysis and risk modeling who led the OCC’s internal 

review. 

I would like to now turn to Scott and Michael to introduce themselves to the Subcommittee, and then we will be pleased to answer 

any questions. 

Senator LEVIN. Thank you so much, Mr. Curry. Please proceed, 

Mr. Waterhouse. 

TESTIMONY OF SCOTT WATERHOUSE,1 EXAMINER-IN-CHARGE, 

OCC NATIONAL BANK EXAMINERS—JPMORGAN CHASE, OFFICE OF COMPTROLLER OF THE CURRENCY 

Mr. WATERHOUSE. Chairman Levin and Ranking Member 

McCain, my name is Scott Waterhouse, and I am the OCC’s examiner-in-charge at JPMorgan Chase’s national bank subsidiaries. I 

have been with the OCC for 30 years. 

I started as a career bank examiner out in San Francisco, where 

I spent my first 7 years examining community, mid-sized, and multinational banks on the west coast and internationally. In 1990, I 

transferred to London where I spent 7 years examining major activities of U.S. banks and then becoming the EIC for the OCC’s 

lending operation. 

I have been a team leader of capital markets and an EIC of a 

large bank. I assumed the role of EIC OF JPMC in 2008. At JPMC, 
63 

1The prepared statement of Mr. Sullivan appears in the Appendix on page 129. 

2See Exhibit No. 1a, which appears in the Appendix on page 511. 

I supervised a staff of 65 examiners who provide oversight of the 

bank’s activities. I and several members of my staff have been 

pleased to assist the Subcommittee in its investigation, and I am 

happy to answer any questions you have today. 

Senator LEVIN. Thank you so much, Mr. Waterhouse. Mr. Sullivan. 

TESTIMONY OF MICHAEL SULLIVAN,1 DEPUTY COMPTROLLER 

FOR RISK ANALYSIS, RISK ANALYSIS DEPARTMENT, OFFICE 

OF THE COMPTROLLER OF THE CURRENCY 

Mr. SULLIVAN. Chairman Levin, my name is Michael Sullivan. I 

am the Deputy Comptroller for Risk Analysis at the OCC. 

As Deputy Comptroller, I provide executive oversight for the 

three Risk Analysis Divisions that provide expertise for the agency 

on modeling of credit risk, market risk, and enterprise-wide risk. 

I also serve as a key adviser and technical expert for the OCC 

Economics Department and the OCC on practical and policy issues 

related to the use of quantitative models by banks and the oversight of banks’ model risk in supervision. 

I joined the OCC in 1999 as a financial economist and was appointed Deputy Director for Market Risk Modeling in 2004. In 

2008, I was appointed the Director of the Market Risk Analysis Division. 

In May 2012, I was asked by the Comptroller and our Executive 

Committee to do an internal report on JPMC CIO losses. In particular, the report would include a chronology of events associated 

with the bank’s trading loss in order to identify gaps in bank business and risk management. 

As important, if not more important, I was asked to provide an 

objective review of the OCC’s supervisory response to the trading 

loss in order to identify lessons we can learn from this event. I 

chronicled my findings and report to the Comptroller last October, 

and the OCC’s executive management team agreed with the findings and recommendations and has formulated plans to address 

them. 

I look forward to answering any questions you might have. 

Thank you. 

Senator LEVIN. Thank you all. 

Let me start off by kind of summarizing what happened here because one of the mysteries of this investigation is how it is possible 

that a huge and high-risk derivative trading portfolio could be operated for years at JPMorgan Chase without the OCC’s full knowledge and oversight. 

The Synthetic Credit Portfolio started out small in 2006, but in 

2011 it increased tenfold, and in early 2012 it tripled again to $157 

billion, as shown in Exhibit No. 1a,2 which is in the exhibit book 

in front of you, and there is a chart there which I think you are 

probably familiar with as well. 

In 2011 and 2012, CIO traders engaged in massive trades, sometimes involving hundreds of millions of dollars, and by March 2012, 

it compiled a high-risk mix of over 100 credit derivatives that ref-
64 

1See Exhibit No. 66, which appears in the Appendix on page 831. 

erenced both investment and non-investment grade companies, had 

multiple maturity dates, and included both short and long positions 

that offset each other in very complex ways. The bank did not tell 

the OCC all about that portfolio, and we will hear more about that 

from the OCC itself. 

Now, let me start off with you, Mr. Waterhouse. As the OCC’s 

head examiner at JPMorgan, what did you think when you saw or 

heard about the whale trades on April 6, 2012? Tell us what your 

reaction was. How much did you know about this whole SCP portfolio? 

Mr. WATERHOUSE. Well, at that point of time, I knew very little. 

We had an understanding that the SCP portfolio had been in place 

for a number of years, and it had operated as management has intended, I think, over a number of years. And having said that, we 

spent most of our time—given that, and given that it did not surface to our attention, we spent our time focusing on what we considered to be the higher-risk activities. When the London—— 

Senator LEVIN. The higher-risk activities where? 

Mr. WATERHOUSE. All across the bank. 

Senator LEVIN. OK. So you did not consider that to be a highrisk activity. 

Mr. WATERHOUSE. I did not. 

Senator LEVIN. You had no reason to believe it until April 2012? 

Mr. WATERHOUSE. And in April 2012, when the London whale article came out, I was surprised by that, and we set about from 

there a series of meetings with the bank to try to figure out what 

it all meant. So my initial response was to go to the bank and try 

to figure out what was going on. 

Senator LEVIN. Prior to that time, had you received regular information about the SCP portfolio? 

Mr. WATERHOUSE. No, we did not. 

Senator LEVIN. Now, when the OCC asked about the whale 

trades, you apparently got such reassuring answers from the bank 

that the OCC considered the matter closed on April 30. Is that correct? 

Mr. WATERHOUSE. I would not quite characterize it that way. We 

did get assurances. Management gave us information about what 

they felt the trade had been doing or the portfolio—how the portfolio was behaving. We were reassured a bit at the time, to be honest, and yet we asked for followup meetings and had a meeting the 

week after that where we got more information on that. 

So as we went through the month of April, we were following it 

up, but as we look back, we were not following up as aggressively 

as we ought to at that time. Clearly, we should have been more aggressive in looking at the portfolio. 

Senator LEVIN. In Exhibit No. 66,1 this is an email, from one 

OCC examiner to another OCC examiner. If you will look at Exhibit No. 66. 

Mr. WATERHOUSE. Yes. 

Senator LEVIN. At the bottom of the third page, it says, ‘‘The 

Whale Trade issue is considered closed—email went out to Senior 

Management yesterday.’’ So is that just one examiner telling an-
65 

other examiner something that was just not exactly accurate? Or 

what does that reference? 

Mr. WATERHOUSE. I do think—actually, I focused so much on the 

first half of that sentence; I do not know about the second half. But 

on the first half, as I discussed with my team leader, who said 

that, I think it is a poor choice of words right there. We had—and, 

in fact, just above that, ‘‘Follow-Up Items,’’ refers to Fred’s email 

of 4/17 which included a to-do list while he is out. At that point 

in time, we brought in some trading experts that we have that 

work primarily on the investment bank, and they were beginning 

to delve into the SCP portfolio. Those individuals are very aggressive, and I think Fred’s comment here was, ‘‘Hey, wait, we just had 

a meeting with the bank. The bank is going to gather some information and come back to us. Let us wait and see what their response is.’’ 

Again, it was not as aggressive as it should have been. 

Senator LEVIN. All right. The ‘‘Meeting Minutes (4/18)’’ are the 

place where those words are located. Do you see that right at the 

top of that? About one-third up the page it says, ‘‘Meeting Minutes 

(4/18).’’ 

Mr. WATERHOUSE. Yes. 

Senator LEVIN. So it is right in the minutes that it made that 

reference, but you are saying it is just an inaccurate description. 

Mr. WATERHOUSE. Down at the bottom, the London whale issue 

being closed, we did not consider it closed. 

Senator LEVIN. OK. Now, what should the bank have told the 

OCC about the SCP? For instance, when it grew tenfold in 2011 

to $51 billion, should the OCC have been informed of that? 

Mr. WATERHOUSE. I think we should have been informed, yes, 

sir. 

Senator LEVIN. And what about in the first quarter of 2012 when the portfolio tripled in 3 months to $157 billion? Should the OCC 

have been informed about that? 

Mr. WATERHOUSE. Absolutely. 

Senator LEVIN. Is it not true that when a derivatives portfolio 

gets to be that big that there is a special danger because even a 

small drop in price can result in massive losses? 

Mr. WATERHOUSE. Yes, particularly when it is as complex as this 

one was. 

Senator LEVIN. This was described, this portfolio, as being a ‘‘perilous size,’’ I think by Mr. Cavanagh, actually, in one of his emails 

or at one point. Is that an accurate description, when it gets to be 

this size it has got some real dangers? 

Mr. WATERHOUSE. I think that is one of many adjectives that 

would fit. 

Senator LEVIN. And if a portfolio consists of synthetic derivatives—maybe I will ask this of you, Mr. Curry—does it pose special 

risk because there is no tangible asset or revenue stream to stop 

losses and derivative prices are often subject to split second trading 

and price changes? 

Mr. CURRY. Yes, Senator. 

Senator LEVIN. Now, the bank has represented to the SEC that 

the portfolio served as a key tool for offsetting credit risks in their 

$350 billion portfolio and maybe for the rest of the bank as well. 
66 

1See Exhibit No. 58, which appears in the Appendix on page 807. 

Should the bank have told you about the hedging strategy along 

the way? Maybe I will ask you again, Mr. Waterhouse. 

Mr. WATERHOUSE. I think there were all aspects of the portfolio 

that we should have been informed about. 

Senator LEVIN. All right. What is the regulatory standard— 

maybe I will ask you again, either you, Mr. Curry, or anyone who 

you wish to designate. What is the regulatory standard for when 

a bank is required to alert the OCC to new derivatives information? 

Mr. CURRY. Senator, generally speaking, we do not view the disclosure requirements of institutions to be very narrow. We view 

them as being broad. A bank should flag or highlight to us any significant change in their business activities, particularly those that 

could pose additional risk. We do not base it on specific regulatory 

or other requirements. We need to have full knowledge of the 

bank’s activities. 

Mr. WATERHOUSE. Senator, if I may just jump in there? 

Senator LEVIN. Sure, please. 

Mr. WATERHOUSE. My expectation of the bank is if they are going 

to enter any new business, any new activity, we ought to be informed, and they ought to have some type of risk management control system designed ahead of time before they implement it and 

have thought through the management reporting and the limit 

structure and the whole governance process. And whether that is 

codified or not, it is certainly my expectation for safe and sound operation. 

Senator LEVIN. We had a $157 billion high-risk derivatives portfolio here that OCC hardly knew existed, and that strikes me as 

being a hidden financial risk. Is that the way the OCC views it? 

Mr. WATERHOUSE. I would view it that way, yes, sir. 

Senator LEVIN. Now, is this something that OCC has to or is expected to have to ferret out? Or is this something that the banks 

are supposed to disclose? You sort of answered that before, but 

where does the responsibility lie here? 

Mr. WATERHOUSE. The responsibility would lie first and foremost 

with management, to have the proper risk systems and controls, 

proper reporting. And then for us as the primary regulator of the 

national bank, we ought to be informed, receive the regular reports, 

and understand the risks as they transpire. 

Senator LEVIN. During our investigation we came across a number of incidents where it appeared that JPMorgan Chase was not 

being straight with the OCC, and here are a couple: 

On January 30, 2012, the CIO met with the OCC at a standard 

quarterly meeting that the OCC requires to discuss upcoming 

plans. The CIO’s chief financial officer, John Wilmot, attended that 

meeting with the OCC. So take a look, if you would, at Exhibit No. 

58.1

Exhibit No. 58 is an OCC summary of this meeting of January 

30, 2012. In interviews, both the OCC examiner, Jaymin Berg, who 

attended the meeting and who wrote this summary, and Mr. 

Wilmot, who is, again, the CIO’s Chief Financial Officer, confirmed 

to this Subcommittee that the notes were an accurate summary. 
67 

1See Exhibit No. 1g, which appears in the Appendix on page 517. 

2See Exhibit No. 68, which appears in the Appendix on page 838. 

About two-thirds down the page, the OCC States that they were 

told the following by Mr. Wilmot—and you can see this. It is near 

the bottom. ‘‘The MTM Book’’—mark-to-market book—‘‘is decreasing in size in 2012.’’ 

Now, this is a January 31 summary of a meeting, again, between 

OCC and the bank. Did the SCP decrease in size in 2012? That is 

question one. 

Mr. WATERHOUSE. Absolutely not. It mushroomed or ballooned. 

Senator LEVIN. Now, on April 16, 2012, the bank met with the 

OCC and provided its first written presentation on the Synthetic 

Credit Portfolio since the media turned the spotlight on the whale 

trades. At that April 16, 2012, meeting, the bank gave the OCC a 

presentation which stated that the SCP’s first quarter losses were 

$580 million. Internally, the CIO had reported that at the end of 

the first quarter SCP losses were $719 million. And that is laid out 

in a chart which is Exhibit No. 1g,1 but I think you can just assume that I am stating that accurately—for the moment, at least. 

By April 16, the day of the meeting, the losses had already 

climbed to $1.25 billion, and, again, that is on Exhibit No. 1g, and 

this data came to us from the bank. We put together the chart. 

So the bank gave the OCC a number on April 16, $580 million, 

that was 20 percent less than it had reported internally for the 

quarter end, which was $719 million, and it was half of what was 

on the bank’s books for the day of the meeting, or the day before 

the meeting, $1.2 billion. 

So was that an understatement of SCP losses to the OCC? 

Mr. WATERHOUSE. Absolutely. 

Senator LEVIN. Is that acceptable? And what do you do when you 

find out about that? 

Mr. WATERHOUSE. Well, in the first instance, it is not acceptable, 

and in the second instance, as we find out about this and, honestly, 

as we go through your report, there is a lot of interesting information that we have to digest still. So I think we are still in the process of determining. 

Mr. CURRY. Senator, it is wholly unacceptable for an institution, 

its officers, or employees to provide false or misleading information 

to the OCC and its examiners. 

Senator LEVIN. A couple weeks later, on May 4, the bank was 

working to finalize its first quarter financials, which it had to report publicly on its SEC filings. On that day, Mr. Waterhouse, you 

received a call from two senior bank executives, the Chief Financial 

Officer, Mr. Braunstein, and the Chief Risk Officer, Mr. Hogan. 

You summarized that call in Exhibit No. 68.2 If you turn to Exhibit 

No. 68, you summarized that call you had with Mr. Braunstein and 

Mr. Hogan. 

Halfway down the page, this is what you wrote. You wrote that 

the bank said that the Synthetic Credit Portfolio had lost approximately $1.6 billion. But internally, the bank reported as of the end 

of the previous day, the SCP loss was about $91 million for the day 

and had cumulative losses of $2.2 billion. 

So did the bank give the OCC inaccurate information on May 4? 
68 

Mr. WATERHOUSE. In respect to the $1.6 billion, I thought that 

was a cumulative number at the time. But, I heard the testimony 

earlier today that—— 

Senator LEVIN. That is OK. No, that is good. If you heard that 

testimony—I was going to ask you about that. 

Mr. WATERHOUSE. Because whether—— 

Senator LEVIN. They said it was intended to be the second quarter loss up to that point and did not include the first quarter losses. 

Did you hear that? 

Mr. WATERHOUSE. I did hear that, yes, sir. 

Senator LEVIN. And does that resonate? 

Mr. WATERHOUSE. I do not know. I thought that this was the allin number, but it could have been that way. 

Senator LEVIN. All right. Now, you also wrote in the email that 

the bank said, quote, that if you—referring to the OCC—‘‘have 

been watching the position reports and the P&Ls,’’ do you know 

what position reports and P&Ls you could have been watching? 

Mr. WATERHOUSE. We were not getting daily P&L reports on the 

SCP portfolio at that point in time. We started getting them midMay through today. 

Senator LEVIN. After the whole thing blew up. 

Mr. WATERHOUSE. After it all blew up. But we were not getting 

SCP daily reports at that time. 

Senator LEVIN. All right. So when Ms. Drew said you were, or 

she thought you were, she was wrong. You were not. 

Mr. WATERHOUSE. We were not getting specific detailed SCP reports. 

Senator LEVIN. All right. And you were not getting the position 

reports or the P&L data for the synthetic credit book. Is that right? 

Mr. WATERHOUSE. That would be correct. To the best of my 

knowledge. 

Senator LEVIN. All right. Now, on January 31, they said that the 

SCP is decreasing when it is increasing. They then kind of take a 

little jab at you by saying you guys would have—if you would have 

been following our position reports and our P&Ls, then you would 

have been able to know what was going on, when you were not 

even getting the position reports and the P&Ls. So far are you with 

me? 

Mr. WATERHOUSE. Yes. To the best of my knowledge, yes. 

Senator LEVIN. OK. Now, that kind of tone I am afraid went to 

the top. There were a number of occasions when that kind of a tone 

about the OCC coming too much into the bank’s business and so 

forth is, I am afraid, carried on with another conversation. Here is 

what happened, as far as we can tell, in late 2011 or maybe early 

2012. The bank stopped sending the investment bank’s daily profit 

and loss data to the OCC. Does anyone remember that, when that 

happened? 

Mr. WATERHOUSE. Yes, that would be me, and, in fact, it was in 

2011 that actually occurred. 

Senator LEVIN. Do you know the month? 

Mr. WATERHOUSE. August. 

Senator LEVIN. OK. So in August 2011, the bank just stopped 

sending its investment bank’s daily profit and loss data to the 

OCC. Was there an explanation given to you? 
69 

Mr. WATERHOUSE. There was—after we inquired, day two—we 

found it day one, thought it was a systems error. Day two, when 

it did not come again, we inquired with the regulatory liaison, and 

then ultimately it went up to Mr. Braunstein, and later on I had 

a conversation with Mr. Braunstein and Mr. Dimon. I am sorry. 

The second part of your question, yes, I was given an explanation 

at the time that said that there had been some leaks of information 

and lost data, and I would say none of which were attributed to 

the OCC, but that the bank was concerned about who was getting 

what and that it was rethinking its distribution of certain reports. 

Senator LEVIN. They were not accusing you then of leaking. 

Mr. WATERHOUSE. They did not accuse me. 

Senator LEVIN. No, I do not mean you. They did not accuse the 

OCC of leaking? 

Mr. WATERHOUSE. I do not think so. But I think at that point 

in time, they were unsure where they were coming from. It could 

have been internal bank, could have been a regulator, could have 

been anywhere. 

Senator LEVIN. All right. And then, as you just pointed out, you 

escalated the issue to the senior bank executives urging a reversal 

of the decision. Is that correct? 

Mr. WATERHOUSE. I did. 

Senator LEVIN. And did Mr. Braunstein agree to restore that report? 

Mr. WATERHOUSE. Yes he did. 

Senator LEVIN. Did he mention he was going to do that in front 

of Mr. Dimon? Is it true—or how did Mr. Dimon react? 

Mr. WATERHOUSE. Well, we had the discussion of why the information was turned off, which parallels what I just mentioned here. 

And when Mr. Dimon was saying why we were not going to get it, 

Mr. Braunstein basically said, ‘‘Well, I actually already started giving it to them again.’’ To which Mr. Dimon expressed his dismay 

and, said that it was his decision to be able to make that. 

Senator LEVIN. As to whether to return to—— 

Mr. WATERHOUSE. Whether to turn the reports back on to the 

OCC. 

Senator LEVIN. So apparently he had decided to stop the reports 

and—— 

Mr. WATERHOUSE. It sounded—I took it that way, yes, sir. 

Senator LEVIN. And so he would be the one to restore the flow. 

Mr. WATERHOUSE. Yes, sir. 

Senator LEVIN. And did he raise his voice? 

Mr. WATERHOUSE. He did. 

Senator LEVIN. Did he say the OCC did not need the information? Or what did he say? 

Mr. WATERHOUSE. Not in that part of the conversation. Earlier 

in the conversation, he was pressing me as to, ‘‘Why would you 

need this information? What good is it? What do you use it for? ’’ 

And he said, ‘‘I do not think you need this amount of detail. You 

can still do your supervision without it.’’ 

Senator LEVIN. OK. So that was earlier in the conversation. 

Mr. WATERHOUSE. That was earlier in the conversation. 

Senator LEVIN. And then later in the conversation, when Mr. 

Braunstein said that he had agreed to restore this report, that is 
70 

1See Exhibit No. 71, which appears in the Appendix on page 843. 

when Mr. Dimon reacted angrily and said that it is his decision, 

not Mr. Braunstein’s decision, to do that. 

Mr. WATERHOUSE. That is correct. To the best of my recollection, 

that is—— 

Senator LEVIN. All right. That is correct to the best of your—— 

Mr. WATERHOUSE. That is correct. 

Senator LEVIN. OK. Now, there is another incident, which was 

referred to, in May 2012 in an email, Exhibit No. 71,1 where, Mr. 

Waterhouse, you recounted something that had happened 2 years 

before, so it obviously had an impression on you. It was in 2010, 

the OCC was doing a direct examination of the CIO’s investment 

portfolios and said that the CIO should do a better job documenting 

the investment decisions. In this Exhibit No. 71, you were saying 

the following: ‘‘. . . we did an examination of the CIO at the end 

of 2010 and have a followup planned soon. We had some concerns 

about overall governance and transparency of the activities.’’ Now, 

that was back in 2010. Is that correct? Is that right? 

Mr. WATERHOUSE. That is correct. 

Senator LEVIN. And you were referring to the CIO investment 

portfolios, which I gather unbeknownst to you included the SCP. Is 

that correct? 

Mr. WATERHOUSE. Correct. 

Senator LEVIN. So you went on to write, ‘‘We received a lot of 

pushback from the bank, Ina Drew in particular, regarding our 

comments. In fact, Ina called [OCC Examiner Fred] Crumlish . . . 

in London and ‘sternly’ discussed our conclusions with him for 45 

minutes. Basically she said that investment decisions are made 

with the 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.’’ 

So, now, you wrote that 2 years after the event. Is that right? 

Mr. WATERHOUSE. That is correct. 

Senator LEVIN. How did it happen that the incident stayed with 

you? 

Mr. WATERHOUSE. Actually, to be clear on this, that is written— 

that is actually Mr. Crumlish’s comments that I have paraphrased. 

He and I recounted that as this thing was unfolding. So I guess it 

was ingrained on Mr. Crumlish’s mind, and he brought it back up 

to me. 

Senator LEVIN. He shared it with you and you remembered it? 

Mr. WATERHOUSE. Yes. 

Senator LEVIN. Now, the OCC issued what is called ‘‘a Matter 

Requiring Attention’’ after the 2010 exam, about documenting the 

investment decisions and positions. But it did not followup for 2 

years. 

So, Mr. Waterhouse, if the OCC had required the CIO to document its investment decisions, is it possible that OCC would have 

learned of SCP earlier? 

Mr. WATERHOUSE. Yes, it is possible. 

Senator LEVIN. Now, Mr. Curry, let me ask you, is it up to the 

bank and should it be up to the bank to decide what is appropriate 

to give a regulator and what information can be withheld? 
71 

1See Exhibit No. 64, which appears in the Appendix on page 828. 

2See Exhibit No. 61, which appears in the Appendix on page 822. 

Mr. CURRY. Absolutely not. It is not the role of the bank to determine what information or records we have access to. As Commissioner of Banks in Massachusetts, I had on the wall the charter for 

the Bank of Massachusetts, 1784, signed by John Hancock, and the 

very last provision of it says that, ‘‘Examiners appointed by the 

Commonwealth shall have full and free access to all the books and 

records of an institution.’’ That is the fundamental cornerstone of 

our system of bank supervision in this country for over 200 years, 

and that is an unacceptable premise that the bank decides what information is provided to the OCC and to our examiners. 

Senator LEVIN. So when Mr. Dimon is giving a hard time to his 

own staff and to you, Mr. Waterhouse, saying you, ‘‘Do not need 

this, why do you need this?’’ that is not up to him to decide. If you 

ask for that—even if you do not ask for that, if it has an effect on 

the bank’s books and the bank’s solidity, then you have a right to 

it and should get it even without asking. Is that correct? 

Mr. WATERHOUSE. That is correct. 

Senator LEVIN. Now, Mr. Curry, when a senior executive at a 

bank is engaging in kind of stopping the transmission of key data, 

is that a message to the rest of the bank which is not very helpful, 

to put it mildly? 

Mr. CURRY. I think the institution’s attitude or relationship with 

our examiners starts from the top. We want and expect, particularly from large institutions, an openness of communication between the supervisors and the institution. 

Senator LEVIN. Now, the bank stopped including key CIO data 

in the bank’s Executive Management Report. It failed to tell the 

OCC that the CIO had started issuing its own Executive Management Report in January 2012. It did not send copies of the new reports for months. That is Exhibit No. 64.1 And the bank also failed 

to send regular reports providing verified price data for the CIO’s 

synthetic credit derivatives for February and March. That just suddenly stopped. That is Exhibit No. 61.2

And, by the way, these are the same months that the SCP tripled 

in size and the value manipulation intensified. 

I will ask you, Mr. Waterhouse. Why didn’t the OCC examiners 

that oversaw the CIO—why didn’t you ask the bank for missing reports until mid-April, after the media storm hit on the whale 

trades? 

Mr. WATERHOUSE. Senator, this is something we should have 

been all over from day one, and we did not followup promptly, and 

I am not exactly sure what happened in these instances. I would 

say, though, that given our understanding of the nature of the risk 

in the SCP and in the CIO in general, we were looking in different 

areas, examining different parts of the bank that we perceived to 

have higher risk. So this was an area, this was one of those red 

flags that you point out in your report and that we point out in our 

report that we should have seen and we should have done better 

at. 
72 

1See Exhibit No. 39, which appears in the Appendix on page 748. 

Senator LEVIN. OK. Now, Mr. Sullivan, I think you have looked 

into the question of how the OCC missed these flags. I believe that 

was part of your investigation? 

Mr. SULLIVAN. That is correct. 

Senator LEVIN. Can you tell us what you found? 

Mr. SULLIVAN. I guess what I found was that SCP was obscure 

but not hidden—obscure to the extent that, as I went through looking, at the historical reports the OCC had received, then there 

were little pieces that might be of it, but no definitive reporting. 

I did note gaps, because I was looking through the history of 

OCC reports received, so I ran into gaps several times in terms of 

what was in the OCC’s collected files. So that was one of them. I 

was looking through the EMR through—month by month, but then 

suddenly it, just dropped off in January. So I noted that among 

several other—— 

Senator LEVIN. And those should have been picked up by the 

OCC? 

Mr. SULLIVAN. Yes, it was the standard practice, and in contrast, 

like in the investment bank, all the reports were there. So, yes, it 

was the expectation that these reports would be followed, and if 

they are not, I mean, people are supposed to followup on that. 

Senator LEVIN. So that was just a failure at the OCC. 

Mr. SULLIVAN. That was a mistake by the OCC. 

Senator LEVIN. Now, the bank is also obligated to send to the 

OCC regular reports about risk limit breaches, keep the agency informed about risk problems. The bank apparently did send those 

reports, and they reported hundreds of SCP risk limit breaches in 

the first 4 months of 2012. 

This Exhibit No. 39 1 is the list that was prepared by the bank 

in May 2012 after the media storm of all the CIO risk limit 

breaches from September 2011 through April 30, 2012. Those risk 

limit breaches jumped from 6 in the last quarter of 2011 to 170 in 

the first quarter of 2012, and then in April, 160 breaches in that 

1 month alone. 

So I take it, Mr. Waterhouse, you would agree that this is a pretty big jump, a huge jump in risk limit breaches and a worrisome 

pattern. 

Mr. WATERHOUSE. Absolutely. 

Senator LEVIN. But were they caught at the OCC? 

Mr. WATERHOUSE. We were actually more focused on the investment bank at that time where we thought there was more risk to 

the bank and to the system. So we did not pursue those as we 

should have. 

Senator LEVIN. OK. Now, Mr. Sullivan, what did you find in your 

investigation? 

Mr. SULLIVAN. Certainly in terms of those 2012 exceptions, but 

one thing as part of our report, the first thing we tried to do is provide a detailed chronology of SCP, so we went back farther in history, back to 2006 in some cases, and I think another oversight, a 

mistake by the OCC, was in the early part of 2011. That was a 

time when the SCP portfolio was creating large and sustained limit 

excesses. So that was a year before the 2012 events. 
73 

1See Exhibit No. 1d, which appears in the Appendix on page 514. 

2See Exhibit No. 65, which appears in the Appendix on page 829. 

And so it was—indications are that it was brought up in a meeting that the OCC and other regulators had with the bank. The 

bank said it is hard to keep track of excesses, we are working on 

automating the system. But certainly I think even at the time 

then, people would agree we should have followed up on those because that was a chance to get a view into the portfolio, and I think 

it could have made a difference. 

Senator LEVIN. On the EMRs, there were no reports for 4 

months, no complaint from the OCC. Risk breach reports, no one 

acted. I am just wondering. Is this because there is not enough people at the OCC to read these reports? How does it happen? 

Mr. WATERHOUSE. I think our capital markets team, which is the 

team that is responsible for this—we have 10 folks on the team, 

and I think that is a comfortable level for us. We are actually going 

to go up by one. There are a number of examinations that we were 

doing during the first quarter of 2001. There were a number of 

other activities that we were doing. But there is no excuse for not 

having somebody look at those, and I think we were focused on 

what we considered to be higher-risk activities, and that took our 

attention away from that. I think we have reinforced back-ups and 

line-ups of responsibility, and I think that would have helped even 

something as simple as that. 

Senator LEVIN. OK. Now the media blitz hits, on April 19, 2012, 

after, again, the media broke the story of the whale trades, an OCC 

examiner finally contacts the bank about the SCP’s many risk 

breaches, including CS01, if we take a look at Exhibit No. 1d.1 In 

an email dated April 19, which is Exhibit No. 65 2—this is an email 

from OCC Examiner James Hohl—an OCC examiner asked the 

CIO why it has been in excession by 1,074 percent and had been 

in excession for 71 days. That is the email, Exhibit No. 65. 

In response, Pete Weiland, senior CIO risk officer who testified 

earlier today, wrote the following: ‘‘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.’’ 

Now, this is a 1,000-percent breach for 71 days. Is that an adequate answer, to say that ‘‘we are working on a new set of limits? ’’ 

Mr. WATERHOUSE. No, sir. 

Senator LEVIN. If the risk limit—and particularly here, by the 

way, the limit had been in place for 3 years, and they did not replace it for 3 years. Shouldn’t that have been caught by the OCC? 

Shouldn’t you have noticed that they did not review these limits for 

3 years? 

Mr. WATERHOUSE. Yes, our expectation is that they ought to be 

reviewing limits on an ongoing basis. It does not necessarily have 

to be annually. 

Senator LEVIN. But it is supposed to be at least once a year, isn’t 

it? 

Mr. WATERHOUSE. According to the bank policy. But our expectation is they are reviewed and updated as and when needed. 

Senator LEVIN. So that you do not have a requirement of 1 year? 
74 

1See Exhibit No. 1e, which appears in the Appendix on page 515. 

Mr. WATERHOUSE. No, not that I know of, but our requirement 

would be they have to be appropriate throughout, any time. 

Senator LEVIN. I know that, but they do not have to be automatically reviewed every year under your policy, but it was under the 

bank policy that they would do so. 

Mr. WATERHOUSE. Not to my knowledge. 

Senator LEVIN. Not to your knowledge about OCC. 

Mr. WATERHOUSE. About OCC, correct. 

Senator LEVIN. OK. So you then were assuming that it was going 

to be updated as needed. Is that correct? 

Mr. WATERHOUSE. Yes, our expectation was that the limit process and approvals and escalation activities were happening as they 

were designed to do. 

Senator LEVIN. OK. Now, Mr. Sullivan, is this something you 

looked into as well? 

Mr. SULLIVAN. Sorry. Could you refresh my—— 

Senator LEVIN. Yes, the question of the risk limits not being reviewed, is that something that you looked at? Do you agree with 

Mr. Waterhouse that this is something where the OCC properly 

could just rely on the bank to keep updated and that did not have 

to check the box that it would be reviewed every year or so, the 

limits? 

Mr. SULLIVAN. Yes, I would agree with Scott that our expectation 

is that risk limits are adjusted as necessary. I think it is helpful 

that many banks do have an annual cycle, just to make sure that 

happens. But they should be adequate at all times. 

Senator LEVIN. Now, the second risk limit on this chart is known 

as the value at risk which estimates how much money can be lost 

over the course of a day in ordinary market conditions. A mathematical model is used to evaluate how much value an investment 

portfolio is putting at risk, and if that amount exceeds the VaR, or 

the VaR limit established for the portfolio, a notice goes out to risk 

managers who are supposed to act. 

In this case, the Synthetic Credit Portfolio breached both the 

CIO and bank-wide VaR limits for several days starting on January 16, breached them again for 4 days starting January 24, and 

the breach ended when the CIO rushed through approval of a new 

VaR model. 

When the new CIO 10–Q VaR model was activated on January 

27, it resulted in an overnight 50-percent drop in the CIO’s VaR 

results, and we have a chart up here Exhibit 1e1 showing that 

drop. 

Under the old model, the VaR was $132 million. Again, that is 

how much money was at risk of loss in a 1-day period. Under the 

new model, even though the portfolio had the same risky synthetic 

credit derivatives, its VaR dropped to $66 million, not coincidentally way under the VaR limit. 

So, in fact, it was so far under that the traders in London were 

immediately able to increase their risky activities without breaching the limit. 
75 

In January, the bank notified the OCC that it was planning to 

change the CIO’s VaR model, and the new model would immediately lower the CIO’s VaR by 44 percent. 

Mr. Waterhouse, did any OCC examiner take note in January of 

the planned change in the VaR model? 

Mr. WATERHOUSE. We understood that the bank was implementing a new VaR model with the intention to bring the VaR into 

compliance with the percentage Basel 2.5 regulations. So we know 

that it was coming in. 

Senator LEVIN. OK. Now, shouldn’t the model—and I will ask 

maybe Mr. Sullivan this question—that produces a 44-percent drop 

in VaR overnight raise a red flag, cause the OCC to investigate 

how that is possible? 

Mr. SULLIVAN. Yes, and so it is certainly, a gap on the part of 

the OCC and, I agree that it is not just the drop, but it is also the 

fact that it comes at a time when you are breaching limits. 

I would say that we have and sometimes do evaluate VaR model 

changes even within CIO. For example, the mortgage servicing 

rights VaR model, it was changed, had a big change, and the OCC 

put people on it, both an examiner and then a financial economist 

from the OCC. So it is frustrating to see the gap here. That was 

a good chance for the OCC to get some view of the portfolio. 

Senator LEVIN. OK. Now, when you mentioned Basel, that was 

supposed to require tougher risk controls, was it not? 

Mr. SULLIVAN. Basel 2.5, which was not yet finalized, has additional components for risk-weighted assets for market risk and also 

heightened expectations for model validation or, more generally, 

model risk management. It also has specific direction in terms of 

what positions are trading positions and so should properly go 

through that model. 

Senator LEVIN. But its general direction, its general theme is to 

lead to tougher risk controls, is it not? 

Mr. SULLIVAN. Yes. Higher capital and more stringent and direct 

direction to the banks in terms of their risk management, including 

model risk management. 

Senator LEVIN. All right. But here we have a case where the VaR 

was dropped by half. I mean, that is not only a red flag; that is 

a pretty bright red flag, is it not? 

Mr. SULLIVAN. I would say so, so it is something you would want 

to followup on. 

Senator LEVIN. Well, it would seem to me, given Basel, or Basel 

2.5, it would be even stranger to see a 44-percent VaR drop, and 

if it were not for the coming of Basel II. 

Mr. SULLIVAN. Basel 2.5 was not yet in effect. 

Senator LEVIN. Right. 

Mr. SULLIVAN. The bank was kind of getting ready for it. We had 

planned—and actually later executed—a review of all models associated with Basel 2.5. We did that in the summertime. That had 

been planned already. I think you would need to investigate the 

source. And so sometimes when you see these large changes, that 

can be changes in input data, changes in the model calculations, 

etc. So, definitely we need to take a look, and I think that practices 

have changed at JPMC, and I think we hope that this will go 

across the system. So that now all significant, material VaR model 
76 

changes are reported by the bank to the OCC in regular meetings, 

and that gives us the opportunity to pay attention to them. 

Senator LEVIN. Well, that is looking forward, but, again, analyzing what happened here, I will go back to you, Mr. Waterhouse. 

The 44-percent drop in the VaR cannot be explained by the fact 

that they were getting ready for Basel 2.5. That does not explain 

a drop in the VaR. If anything, you would expect no drop in the 

VaR at all as a general matter. Why would that take you off the 

hunt? 

Mr. WATERHOUSE. Well, in this instance, the drop in VaR, we 

saw it, but as Michael said, the intent was we were going to be 

looking at all the VaR models at a regularly scheduled review that 

we had planned for later on in the summer. So we did not act immediately. 

And the other thing, as to your earlier point, the bank did not 

calibrate its VaR limit alongside the drop in that, so that clearly 

does not go along with our expectation. 

Senator LEVIN. OK. Now, we also learned that the VaR model 

was developed by CIO’s Pat Hagan to lower the VaR. 

Mr. SULLIVAN. If I may, Chairman Levin, one reason they had 

to change the model is because it was missing a key source of risk: 

correlation risk. And the VaR model that was in operation in the 

IB captured that risk because the OCC directed the bank to do 

that. We did not realize that the bank would not also apply it to 

CIO. 

So the change was for Basel 2.5 purposes, but it would not explain, the big drop. 

Senator LEVIN. And did you know that this was developed by Mr. 

Hagan at the CIO in order to lower the VaR? Were you aware of 

that? 

Mr. SULLIVAN. I knew it was developed by him—— 

Senator LEVIN. No, with the purpose of lowering the VaR. 

Mr. SULLIVAN. For the purpose of lowering it, no, I have not seen 

that as the stated purpose of it. 

Senator LEVIN. If you had known that, or if you had known that, 

Mr. Waterhouse, would that have affected you? 

Mr. WATERHOUSE. Well, I think, at this point we agree that we 

should have looked at the VaR model and what—we are implementing changes to make sure that we look at any models that do 

result in a change in the VaR or the risk-weighted assets by a certain degree. We will be more forthright on that. But this is definitely something that we ought to have looked at. 

Senator LEVIN. Now, when the bank reviewed the new model for 

approval, at that time it said that implementation issues, certain 

issues, had to be worked out before the model was activated, and 

that included a couple things: Developing a database which would 

automatically input trading data into the model. The bank did not 

fix those problems before the model was activated, and the consequences we have seen or talked about, was that they had manual 

data entry into spreadsheets every trading day, input errors, formula and calculation errors, and erroneous VaR results. 

So we have a situation where they used a flawed VaR model for a $350 billion portfolio, forced the CIO’s quantitative expert to do 

manual data entry into the wee hours of the night, used spread-
77 

1See Exhibit No. 1e, which appears in the Appendix on page 515. 

2See Exhibit No. 46, which appears in the Appendix on page 778. 

sheets because the bank could not be bothered to fund development 

of an automated database. 

Did the OCC know any about that, what I have just described? 

Mr. Waterhouse, were you aware of any of that, what I just described, that they were told by the risk folks, OK, you can change 

your VaR, but you got to have automated data, and that, in fact, 

they did go to automated data? Were you aware of that? 

Mr. WATERHOUSE. No, that there were conditions for the approval of the VaR model, no, I did not, which is all the more disappointing there because we have been working with the bank for 

a number of years on upgrading its model governance processes, 

and we had been working on it. But this was clearly a failure on 

that, which is why we wound up putting this in our Consent Order. 

Senator LEVIN. Now, the new VaR model was activated on January 27, 2012. It produced VaR totals for the CIO that were substantially lower than would have been produced by the prior model, 

and I think you may have heard earlier today, as Exhibit No. 1e 1

shows, there is a chart that shows the difference in the VaR totals 

produced by the two models. 

Mr. Waterhouse, did any OCC examiner know about that difference in the model results at that time? 

Mr. WATERHOUSE. No, not at that time. I do not think. 

Senator LEVIN. As far as you know. 

Mr. WATERHOUSE. As far as I know, yes. 

Senator LEVIN. Did the OCC test the accuracy of the new model? 

Mr. WATERHOUSE. No, we did not test the accuracy at that time. 

Senator LEVIN. Now, in May 2012, after the media disclosure of 

the whale trades, the bank determined the new VaR model was not 

portraying the SCP’s risk accurately. They discarded it, and they 

reinstated the old model, which immediately produced higher VaR 

results for the CIO. 

The story does not end there, though. Four months later, in September 2012, the bank switched VaR models a third time. The new 

model, once it was put in place, again substantially lowered the 

CIO’s VaR results, this time not by 40 or 50 percent, but by about 

20 percent. 

So, Mr. Sullivan, maybe you can explain this to us. How is the 

same trading activity suddenly determined to be 20 percent less 

risky than the day before? 

Mr. SULLIVAN. In that particular circumstance, there was a 

change in the way in which they represented risk, and so what 

they had moved to in that summer period was to represent the risk 

at the index level as opposed to breaking it down into single-name 

exposures. They felt that the data at the index level was a better 

quality than they had at the single-name level. 

We took a look at that model and noted that it would lead to a 

difference in the treatment of the same instruments within the IB 

where SCP was located at that time. So we decided not to allow 

them to use that for the purposes of regulatory capital. 

Senator LEVIN. If you would, turn please to Exhibit No. 46,2 and, 

Mr. Sullivan, this is an email dated 12/22/11. It was sent to Ina 
78 

Drew by the head of the CIO’s equity and credit trading operation, 

Mr. Martin-Artajo. 

In this email, Mr. Martin-Artajo suggests reducing the Synthetic 

Credit Portfolio’s risk-weighted assets, by $13 billion using different tactics. One was achieving a $2 billion book reduction 

through a trading reduction, which is selling off assets. But he also 

suggests something else: A $7 billion reduction, half of the $13 billion goal, through so-called model reductions. And my question is 

whether or not under bank capital rules, bank models such as what 

we have talked about before, CRM and VaR and stress VaR, are 

used to calculate the RWA. And the OCC has a role in making sure 

that RWA calculations are accurate because they in turn determine 

how much of a capital buffer banks have to maintain. 

Now, without getting into the OCC’s evaluation of JPMorgan’s 

models, without doing that, what is your reaction when you see a 

bank trying to reduce its RWA, not by selling off risky assets but 

by designing models to produce lower numbers? 

Mr. SULLIVAN. Anytime we see—well, banks would propose 

changes in models for us, and so we would evaluate the quality of 

the model, try to get a sense of how it relates to the risks and the 

business, etc. So we would have to look at the specifics of the situation. 

Senator LEVIN. Well, in general, let me ask you, Mr. Curry, what 

is your reaction to that activity, reducing the RWA not by selling 

risky assets but by designing models in order to produce lower 

numbers? 

Mr. CURRY. I think we would have some—or I would have some 

hesitation if it was—the purpose was to subvert the risk-weighting 

process. 

Senator LEVIN. Well, if its purpose is to do exactly what I said, 

would that trouble you? 

Mr. CURRY. Initially, yes. 

Senator LEVIN. And then you mean that you would see where the 

review led to, but your first reaction would be this is a troublesome 

idea and we better look into it? Is that fair? 

Mr. CURRY. Yes. 

Senator LEVIN. OK. Now, the portfolio traded derivatives every 

day. It was a mark-to-market portfolio so that its value had to be 

measured every day. The CIO had to report internally within the 

bank a profit or loss figure for the Synthetic Credit Portfolio reflecting the actual value of the book on that day compared to the 

day before. 

The bank now acknowledges that the books basically were 

cooked, that inflated values were assigned to the derivatives in the 

synthetic credit book to minimize its losses. But the bank did not 

catch or admit that wrongdoing for months despite many flags. 

Now, one of the flags was an increase in the so-called collateral 

disputes, counterparties saying the values were too high. At one 

point these collateral disputes hit $5690 million. 

The collateral disputes began in March 2012, and picked up 

steam in April. Mr. Waterhouse, did the CIO ever have such large 

disputes before? 

Mr. WATERHOUSE. Not that I am aware of. 
79 

1See Exhibit No. 73, which appears in the Appendix on page 845. 

2See Exhibit No. 78, which appears in the Appendix on page 853. 

3See Exhibit No. 36, which appears in the Appendix on page 687. 

Senator LEVIN. And OCC examiners had, in fact, noticed the collateral disputes in May, Exhibit No. 73,1 went to the bank executives and asked about them. Exhibit No. 78 2 is an email dated 

June 29, 2012, from an OCC examiner, Michael Kirk, describing an 

earlier call. Here is what he said, and this is Exhibit No. 78: 

‘‘On that first daily call, Mr. Hogan’’—that is the bank chief risk 

officer—‘‘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 and then paid out the near $400 million amount. 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 left puzzled over how a collateral dispute could be resolved by agreeing to the counterparties’ 

marks, without admitting your own marks were incorrect.’’ 

So as Mr. Kirk’s email explains, either the bank’s marks were 

right or the counterparties’ marks were right, and when the bank 

decided to accept the counterparties’ marks, it was clear the CIO 

marks were wrong. But the bank did not acknowledge that its 

marks were wrong until July. 

So, Mr. Sullivan, is it appropriate or a bank to hide its head in 

the sand after it pays its counterparties such a huge amount of 

money on these collateral disputes and insist against contrary evidence that it did not have a mismarking problem? 

Mr. SULLIVAN. Senator, I did not really follow the collateral dispute, but, having looked at some of the evidence here, then I would 

share the examiner’s skepticism. 

Senator LEVIN. OK. The bank was concerned enough about the 

marks that its head accountant, the bank’s Controller, conducted a 

special review of the SCP book from January through April 2012. 

The Controller released a report on May 10, finding that the SCP 

marks were ‘‘consistent with industry practice,’’ and that is Exhibit 

No. 36,3 and we had quite a conversation about that earlier today. 

So this is a report—we call it the May 10 report—where the bank 

says that what it did was consistent with industry practice. 

Now, the facts that were described in that report to me paint a 

very disturbing picture of a derivatives valuation process that was 

highly open to manipulation, resulted in some mighty hard to justify numbers that, in fact, were discredited the very next month 

when the bank acknowledged the mismarking. 

For instance, that May 10 report documented that SCP pricing 

practices changed dramatically over the course of the first quarter. 

In January 2012, prices were marked near the midpoint of the 

daily price range, which is how derivatives are usually valued. 

In January, only 2 of the 18 prices noticeably deviated from the 

midpoint. In February, 5 out of 18 prices noticeably deviated from 

the midpoint prices. And in March, 16 out of the 18 prices were not 

even near the midpoint. They were at the extreme edge of the daily 

price range. 

The Controller collected and presented that data in the appendices of the report, but she made no mention of what had hap-
80 

pened. She simply concluded that, ‘‘The CIO valuation process is 

documented and consistently followed period to period.’’ 

Now, is it not relevant that in a period where there are growing 

problems and growing losses that suddenly there is a huge change 

in the way the prices are marked from being generally at the midpoint, as was true with the investment bank, and moved all the 

way over to the extremes in order to reduce the apparent loss on 

the books? Is that not a troubling set of facts? Mr. Curry. 

Mr. CURRY. Yes, it is, Senator. 

Senator LEVIN. Now, there an industry practice on this question? 

I mean, shouldn’t you stick to your process and, if you are going 

to change it, have some rationalization for changing it? Mr. 

Waterhouse? 

Mr. WATERHOUSE. I would say our expectation is that your revaluation process has to be consistently applied day after day after 

day, and it should not be adjusted without going through a rigorous 

process to justify any changes. 

Senator LEVIN. Is it not obvious what was happening here, that 

these prices were being changed in order to reduce the loss on the 

books? 

Mr. WATERHOUSE. It appears so, yes, sir. 

Senator LEVIN. Their report noted that the SCP book had reported internally within the bank losses which, at the end of the 

first quarter, were $719 million. But if the midpoint prices had 

been used, the report noted that an additional $512 million in 

losses would have been recorded. That is Exhibit No. 36. 

If the $512 million were added to the $719 million, the reported 

losses would have totaled $1.2 billion, or 70 percent more than the 

actual—or the losses that were reported. Is it not that kind of a 

variance that leads to potential abuse, Mr. Waterhouse? 

Mr. WATERHOUSE. Yes, absolutely. And it is important for us as 

the regulator to know what the actual market is and be informed 

on a timely basis. 

Senator LEVIN. Do our largest banks generally go back and forth 

like that, do you know, Mr. Curry? 

Mr. CURRY. I would have to defer to Mr. Waterhouse on that, 

but, that type of activity is cited an unsafe and unsound activity 

in our cease-and-desist order, and it is a focus of the affirmative 

provisions of the order that require corrective action. 

Senator LEVIN. Do you have any comment on that, Mr. 

Waterhouse? 

Mr. WATERHOUSE. Without speaking to the other banks, because 

I am not close to them anymore, but, again, the expectation is that 

they have a rigorous valuation process that is independent and provides credible prices to it. And, again, as the Comptroller just mentioned, as this collateral dispute became known, that is about when 

we started our evaluation work and our supervisory activities that 

culminated in a supervisory letter with a number of MRAs and the 

consent order that requires the bank to straighten this out. 

Senator LEVIN. Here is one of the differences that I had, one of 

the many differences that I had with the bank earlier today. 

An OCC capital markets examiner told us that it was clear from 

the numbers that the CIO was marking prices at the edge of ‘‘what 
81 

they could get away with,’’ and they were booking ‘‘fictitious profits.’’ 

Now, it seems to me that the numbers tell the story, just as the 

OCC examiner told us, and that you do not have to have subjective 

statements by the person making the marks he viewed them as bizarre. I mean, that is a subjective comment, and the bank was saying, well, until they heard the record of that person and their employee saying that, they could not tell anything from the marks 

themselves. 

And so I just want it real clear. Is it not true that the marks 

themselves, when you see that kind of a shift in the way they are 

made at the time they are made, when the losses are piling up, 

that those numbers themselves tell a story about possible 

mismarking? Mr. Waterhouse. 

Mr. WATERHOUSE. I would say that is something that is very 

troubling. On the face of it, I would have to perform our own investigation into that to make sure of that. But as you have prices that 

are being delivered that vary and are not consistently applied, that 

is very troubling. 

Senator LEVIN. And do you think that this kind of practice is allowed by the GAAP? Do you have any knowledge of that? Can you 

comment on that? Is it possible that the accounting principles allow 

this kind of a deviation to happen? 

Mr. WATERHOUSE. I actually cannot speak to GAAP, but I would 

expect that their standards would be that you have to have a consistent and rigorous and independent process. 

Senator LEVIN. Would you do this for the Subcommittee, Mr. 

Curry? Would you take this set of facts up with GAAP and what 

the bank said today about this is consistent with accounting practices, what happened here? 

Mr. CURRY. Yes. 

Senator LEVIN. And what happened here is factually clear, and 

they acknowledge what happened here. But they just say it is consistent with accounting practices. I cannot believe that what happened here on the objective marks before they got to any of these 

subjective comments on record by their own people who did the 

marking, who raised questions but did not pass those problems 

along at the time, but the marks were there. 

Could you do something for this Subcommittee and raise with 

GAAP what happened here, objectively, before we had the records 

of the traders’ comments from London? Objectively on these marks 

at this time, there were major losses occurring to reduce those 

losses on the books, differences on the books as to what happened 

in terms of the losses shown according to GAAP, are these consistent, is what they did is consistent with accounting practices? 

Would you do that? 

Mr. CURRY. I would be happy to have our chief accountant look 

into it and report back to you, Mr. Chairman. 

Senator LEVIN. Thank you. 

Again, the CIO traders that were directly involved in marking 

this book called their marks ‘‘idiotic,’’ and that is surely true. But, 

you cannot wait for the person doing the marking to say that his 

marks are idiotic when the marks on their face show a real deviation from a normal practice—and, by the way, a total deviation 
82 

1See Exhibit No. 32c, which appears in the Appendix on page 659. 

from their own investment bank’s practices—and at a time when 

the losses are piling up and just simply say this is consistent with 

accounting principles. And so we appreciate that very much, Mr. 

Curry. 

Mr. CURRY. I would just add, we would view the GAAP accounting standards as a baseline. We are looking for a much higher 

standard with our institutions, particularly larger institutions. So 

merely meeting a regulatory or accounting standard is not always 

sufficient. 

Senator LEVIN. I welcome that and I am glad to hear that, but 

I say even if you take a low baseline, I cannot believe general accounting practices allow this to happen. I just have a lot of trouble—I am not an accountant. I just have a lot of trouble believing 

that you have to get a smoking gun of the guy doing the markings 

saying, hey, I cooked the books—when you have a situation that is 

this clear, with this kind of a record of marks suddenly deviating 

from a median, from the mid, at a time when losses are piling up, 

and where the purpose is clearly to reduce the amount of those 

losses, that can be accepted as a general accounting principle. So 

I am glad that you have a higher standard, but I cannot believe 

this meets even a lower standard. 

Mr. CURRY. We will be happy to look into that. 

Senator LEVIN. Thank you. 

If you take a look at Exhibit No. 32c,1 this is a transcript of a 

telephone call between Ina Drew and the head of the CIO’s credit 

trading operation, Javier Martin-Artajo. And he was in the London 

office. He directly influenced the marks. It is not dated, but it probably took place in April. 

I do not know if you heard this part of our conversation with Ms. 

Drew about this transcript, and they are talking about what marks 

to show for the SCP that day, and she says at one point—did you 

hear this earlier this morning? Did you three happen to hear this 

conversation about tweaking? 

Mr. CURRY. I did not hear it personally. 

Senator LEVIN. Did you hear this, Mr. Waterhouse? 

Mr. WATERHOUSE. No. 

Senator LEVIN. Then let me ask you: Ms. Drew is giving guidance to Mr. Martin-Artajo, and he is basically saying it would be 

helpful—telling Mr. Martin-Artajo, it ‘‘would be helpful . . . to 

start getting a little bit of that mark back.’’ 

‘‘If appropriate, so you know, an extra basis point you can tweak 

at whatever it is I’m trying to show, with demonstrable data . . .’’ 

She said before that it is all fine to be conservative, but it would 

be ‘‘helpful . . . to start getting a little bit of that mark back,’’ to 

‘‘tweak’’ the mark. 

What do you think of that, Mr. Waterhouse? 

Mr. WATERHOUSE. I think the bank needs to provide true, accurate, independent marks every day. 

Senator LEVIN. And the person doing the marks gets the hint 

from the head of the department, it would sure be ‘‘helpful’’ if you 

could ‘‘tweak’’ that mark, that is inconsistent with what the bank 

is required to do? 
83 

1See Exhibit No. 94, which appears in the Appendix on page 927. 

2See Exhibit No. 1f, which appears in the Appendix on page 516. 

Mr. WATERHOUSE. Yes, I think that is something that we would 

definitely not condone. 

Senator LEVIN. Now, the rules—I think you have already commented on this, Mr. Curry, but let me make sure. We have shown 

a derivative valuation process which is to open to manipulation. It 

tempts bankers to manipulate derivative values to increase their 

profits or at least minimize the losses. And so that is something 

which is intolerable, and I think we have shown that is what happened here. But this is our recommendation: 

We recommend that the OCC tell banks to use independent pricing services to remove the temptation from their own employees to 

tweak marks. We also recommend that banks have to disclose 

when their derivative values deviate from midpoint prices and explain why. 

What is your reaction to that recommendation? 

Mr. CURRY. As I stated in my opening remarks, we support this 

recommendation, and we are looking at how to best implement it 

at the OCC and with our other Federal banking agencies as well. 

Senator LEVIN. Thank you. Now, after these whale trades became known to regulators and the public, and the media started to 

report on April 6, JPMorgan had an earnings call. It was Mr. 

Braunstein who made a number of statements about the Synthetic 

Credit Portfolio, and I would like to ask you about two of those 

statements. This is Exhibit No. 94,1 and this is a transcript of the 

April 13 earnings call, and his statements about the Synthetic 

Credit Portfolio are on page 7, and we have made it easier to discuss them, so we have listed the key statements in Exhibit No. 1f 2

in your exhibit book, and that is what is up here, and that is what 

is up here to my right. 

Mr. Braunstein said—now, he is talking about the whale trades, 

and he is saying, ‘‘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, 

and on a regular and recurring basis as part of our normalized reporting.’’ 

Mr. Waterhouse, is that true? 

Mr. WATERHOUSE. That is not true. 

Senator LEVIN. Regulators did not ‘‘get the information’’ on those 

positions on a regular basis, did they? 

Mr. WATERHOUSE. No, we did not; not until May after they started reporting daily did we get the information. 

Senator LEVIN. All right. In fact, wasn’t it a longstanding practice for the bank not to give individual position data to the OCC 

unless there was a special request? 

Mr. WATERHOUSE. We would ask for position data only in certain 

instances. What we wanted to do is get more aggregated risk information that would be by desk and by portfolio. 

Senator LEVIN. All right. So it had to be a special request. 

Mr. WATERHOUSE. For position data, yes. 

Senator LEVIN. Right. It would not come on a routine basis. 

Mr. WATERHOUSE. No. Way too detailed. 
84 

1See Exhibit No. 1c, which appears in the Appendix on page 513. 

Senator LEVIN. Well, too detailed but you did not get it. He was 

telling the public you did get it, and you are saying you did not get 

it, it would be too detailed for you. 

Mr. WATERHOUSE. We did not get it on a—— 

Senator LEVIN. A regular, routine basis—— 

Mr. WATERHOUSE [continuing]. Regular basis. 

Senator LEVIN. Is that right? I did not mean to interrupt you. Is 

that right? 

Mr. WATERHOUSE. Yes, sir. 

Senator LEVIN. The second statement by Mr. Braunstein involves 

the issue of whether the SCP was a risk-reducing hedge. I think 

today they acknowledged it was not a hedge. Would you agree, Mr. 

Waterhouse, it was not a risk-reducing hedge? 

Mr. WATERHOUSE. I think particularly when you look at 2012, it 

was not a hedge at all. 

Senator LEVIN. And so on April 13, Mr. Braunstein said, ‘‘We 

also need to manage the stress loss associated with the portfolio, 

so we have put on positions to manage for a significant stress event 

in Credit. We have had that position for many years.’’ And would 

you agree that they sure as heck did not have it in 2012? 

Mr. WATERHOUSE. They did not have it in 2012. 

Senator LEVIN. And the bank here was making decisions about 

how to invest depositors’ funds, right? 

Mr. WATERHOUSE. Yes, sir. 

Senator LEVIN. The excess depositors’ funds. 

Mr. WATERHOUSE. Yes. 

Senator LEVIN. The words ‘‘to manage a significant stress event 

in Credit,’’ does that in effect mean that they put on positions to 

hedge? Is that what that means? 

Mr. WATERHOUSE. I would interpret that to mean to put that position on with the expectation that there may be an economic recession and the bank would take credit losses over the course of time. 

It would be supposedly designed to offset those credit losses. 

Senator LEVIN. And, therefore, would be a hedge against those 

credit losses. 

Mr. WATERHOUSE. In that construct, yes, sir. 

Senator LEVIN. And so when he said that on that day, when you 

read that, is that the way you interpret it, that he was saying that 

this was a hedge against a significant stress event? ‘‘We have put 

on positions to manage for a significant stress event in Credit.’’ Is 

that what you would understand him to be saying in common parlance? 

Mr. WATERHOUSE. In just reading the words on the board up 

there, that is the way I would interpret it. 

Senator LEVIN. That was in a public call that was made, that Mr. 

Braunstein made on April 13. That was a misstatement, misrepresentation, and flat out falsity, as far as I am concerned. But we are 

going to let others judge that. 

If you look at Exhibit No. 1c,1 this chart tracks the SCP’s cumulative profits and losses from January through April 2012 as the 

bank reported them at the time. Those profits and losses were reported internally. They were not disclosed publicly, so this is infor-
85 

1See Exhibit No. 1c, which appears in the Appendix on page 513. 

2See Exhibit No. 1a, which appears in the Appendix on page 511. 

3See Exhibit No. 78, which appears in the Appendix on page 853. 

mation known only to the bank. And I think you have already said 

that the OCC did not receive daily CIO profit and loss data. Right, 

Mr. Waterhouse, you said that? 

Mr. WATERHOUSE. Yes, specifically we did not receive daily SCP, 

detailed daily SCP information from the bank. 

Senator LEVIN. And how about CIO? Did you get the daily profit/ 

loss on CIO? 

Mr. WATERHOUSE. We did not get from the CIO daily P&L, detailed daily P&Ls. There was some risk limit reports that we got 

elsewhere in the bank that had some information on the CIO in aggregate. 

Senator LEVIN. Was that daily? 

Mr. WATERHOUSE. Yes, we did get the daily risk limit reports, 

yes, sir. 

Senator LEVIN. Did you get the profit/loss data on the CIO daily? 

Mr. WATERHOUSE. In aggregate, there was a stop-loss utilization 

limit that contained a line item that showed, I believe, the current 

utilization against that limit. 

Senator LEVIN. OK. Is that the same as profit and loss data, do 

you know? 

Mr. WATERHOUSE. That was coming off—— 

Senator LEVIN. Was that the same, what you just described, the 

same as profit/loss data? 

Mr. WATERHOUSE. It would not be the standard P&L data that 

we would be looking for such as what we got out of the IB. But 

from my understanding, it was an aggregate mark-to-market of the 

CIO, so that would be everything that was in the CIO that was 

marked to market going against the limit. 

Senator LEVIN. All right. So it was not what would be generally 

described as profit/loss data. 

Mr. WATERHOUSE. No. 

Senator LEVIN. And the OCC in any event did not get daily profit 

and loss data for the SCP. 

Mr. WATERHOUSE. That is correct. 

Senator LEVIN. Now, I kind of interrupted my own flow here. Exhibit No. 1c,1 it tracks the SCP’s cumulative profits and losses from 

January to April 2012. Those profits and losses were reported internally. They were not disclosed publicly. So this was information 

known only to the bank, and it was not disclosed to the OCC either. The downward-sloping line represents increasing losses, and 

would you agree that this shows as a matter of fact that the Synthetic Credit Portfolio was not reducing the bank’s risks but was 

increasing them? 

Mr. WATERHOUSE. It was a very rapid increase in losses. 

Senator LEVIN. OK. And Exhibit No. 1a 2 shows how the SCP tripled in size in the first quarter in 2012 from $51 billion to $157 

billion. In March, the CIO traders went on a buying spree engaging 

in several huge transactions that added $40 billion in long positions to the portfolio, which the OCC has characterized as ‘‘doubling down’’ in Exhibit 78.3 Is that correct? 
86 

1See Exhibit No. 50, which appears in the Appendix on page 788. 

Mr. WATERHOUSE. That is correct. 

Senator LEVIN. Do you know why your examiner would have said 

it was doubling down? That is a gambling term, isn’t it? 

Mr. WATERHOUSE. That is a gambling term, and as our examiner 

looked at in here, it was position data. We made a request. We got 

some position data. And as we saw what happened over that period 

of time, we did see this rapid increase in positions. And I think the 

examiner who made that comment, his thinking there was that 

based on the information that he had, that rather than try to just 

get out of the positions, the trader was trying to take advantage 

of price anomalies so that he could profit from it. 

Senator LEVIN. Would you call that a high-risk approach? 

Mr. WATERHOUSE. This is definitely a high-risk approach. 

Senator LEVIN. OK. So, Mr. Waterhouse, take a look, if you 

would, at Exhibit No. 50.1 Now, that is an email from Pat Hagan, 

the top quantitative analyst at the CIO, and it is a March 21, 2012, 

email. The subject line is ‘‘Optimizing regulatory capital,’’ and on 

the top of page 2, Mr. Hagan writes, ‘‘. . . we should treat the regulatory capital calculation as an exercise of automatically finding 

the best results of an immensely arbitrary and complicated formula.’’ ‘‘Optimizing’’ here means to produce the lowest possible 

RWA. 

Now, does the OCC intend that its regulatory capital rules be implemented by the banks that it regulates in that way? 

Mr. WATERHOUSE. No. I think the objective here is to have clear 

and consistent calculations on the RWA without optimizing, but 

having pure clear numbers that are consistent with the rule. 

Senator LEVIN. To arrange things, in other words, to produce the 

most accurate RWA. 

Mr. WATERHOUSE. Yes, absolutely. Consistent with the rule. The 

Basel rule provides the framework for calculations, and this work 

has to be consistent with that. 

Senator LEVIN. OK. Now, Mr. Hagan proposed distributing the 

CIO synthetic credit derivatives into a couple books to ‘‘optimize 

regulatory capital.’’ You have indicated that this is not appropriate. 

The bank testified that ultimately they did not agree to Hagan’s 

proposal to divide the portfolio in that way. The bank only agreed 

to let him do it once. Is that OK? Is that like a one-bite rule for 

a dog? 

Mr. WATERHOUSE. It has to be a consistent process applied consistently. 

Senator LEVIN. But if you allow them to use the optimizing approach once, that is OK with you? 

Mr. WATERHOUSE. I did not allow that. 

Senator LEVIN. No, I am not saying—well, let me ask Mr. Curry. 

Does the OCC allow optimization one time and then from there on, 

hey, quit it? 

Mr. SULLIVAN. What I would say is that Basel 2.5 rules are fairly 

clear about the distinction between the Incremental Risk Charge 

and the Comprehensive Risk Measure. And so it has strict requirements for banks to identify what are called correlation trading 

portfolios, and then the CRM should be applied consistently to 
87 

that. So in the rule, both in its actual wording and I think within 

the spirit of the rule, you look at the business purpose of that portfolio. So if it qualifies as a correlation trading portfolio, then it 

would go into CRM. It is not that you would pick what goes into 

CRM based on other purposes. The regulation is very clear about 

the requirements that need to be met, and they do not include optimization. 

Senator LEVIN. And optimization is not authorized by the OCC 

even once. 

Mr. SULLIVAN. That is not a legitimate purpose for designing a 

risk-weighted assets calculator. 

Senator LEVIN. All right. So you are not allowed to do it once and 

then quit it. You are told, ‘‘Do not do that at all.’’ 

Mr. SULLIVAN. The rule tells you—— 

Senator LEVIN. Follow the rule—— 

Mr. SULLIVAN [continuing]. Follow the rules—— 

Senator LEVIN [continuing]. The first time. 

Mr. SULLIVAN. Yes. You follow the rules. 

Senator LEVIN. You are not allowed to not follow the rule once 

and then follow the rule from the second time on. 

Mr. SULLIVAN. No. 

Senator LEVIN. You are supposed to follow the rule right at the 

beginning. 

Mr. SULLIVAN. Definitely, yes. 

Senator LEVIN. OK. Now, these regulatory capital requirements 

are one of the most important tools that we have to ensure the 

safety and soundness of our financial system. Is that not true? Mr 

Curry, would you say that regulatory capital requirements are one 

of the most important tools that we have to ensure the safety of 

our institutions? 

Mr. CURRY. Absolutely, and I think that has been more than 

borne out by our experience during the global financial crisis. 

Senator LEVIN. Now, Mr. Curry, let me go over the recommendations that we have made in our report, our so-called Levin-McCain 

recommendations, and get your reaction to the ones that you have 

not reacted to already. 

The first recommendation is to make it clear that when it comes 

to high-risk derivatives, Federal regulators need to know what the 

major banks are up to. We recommend requiring banks to identify 

all internal investment portfolios that include derivatives over a 

specified notional size, required periodic reporting on derivative 

performance, and conduct regular reviews to detect undisclosed derivatives trading. 

What is your reaction to that? 

Mr. CURRY. We would agree generally with the recommendation 

that better data is necessary to monitor compliance and potential 

risk exposure. 

Senator LEVIN. OK. The next recommendation is: In order to try 

to stop any games that might be played by banks trying to recast 

proprietary bets as hedges, we recommend that banks be required 

to create contemporaneous documentation that identifies the assets 

being hedged, how the derivatives trade reduces the risk associate 

with those assets, and how the bank tested the effectiveness of its 

hedging strategy in reducing risk. 
88 

What is your reaction to that one? 

Mr. CURRY. Again, we agree in general principle with the recommendation, and actually this is an area of focus in our interagency rulemaking with the Volcker Rule. 

Senator LEVIN. OK. Now, we have already asked you about independent pricing services and requiring banks to disclose valuation 

disputes with counterparties. I think we have already covered that 

recommendation. 

Next, when risk alarms go off, we recommend that banks and 

your agency investigate the breaches and take action to reduce 

risky activities. Would you agree with that? 

Mr. CURRY. Yes, Senator. 

Senator LEVIN. On the issue of model manipulation, we recommend that regulators require banks to disclose to you when 

their models produce substantially lower numbers than the prior 

model, investigate the new model for evidence of model manipulation, and impose heavy penalties for any misconduct. 

What is your reaction to that? 

Mr. CURRY. We believe that would be a sound supervisory response, and it would be something that we would look to incorporate in our examination procedures as well as our training for 

personnel. 

Senator LEVIN. Thank you. 

Now, 3 years ago, Congress enacted a law to shut down high-risk 

proprietary betting that uses federally insured deposits or by systemically important financial institutions. We recommend that regulators finally issue the long-delayed final rule implementing 

Merkley-levin provisions of Dodd-Frank, which are known as the 

Volcker Rule. 

Would you agree? And I am not going to ask you about what the 

final words would be, but do you agree with what I said, that it 

is time to get that done? And can you give us a prediction as to 

when the rule is going to be finalized? 

Mr. CURRY. I think it is imperative that we adopt an interagency 

rule on the Levin-Merkley provision, or the Volcker Rule. It is 

something that the OCC and I are committed to doing as quickly 

as possible, and I believe that our experience with JPMorgan’s CIO 

office has proven to be an invaluable resource to that effort. 

Senator LEVIN. Thank you. 

And, finally we recommend that regulators finalize the pending 

rules to impose stronger capital requirements for banks, especially 

in the area of derivatives trading. And when do you think that rule 

is going to be finalized on the capital requirement? 

Mr. CURRY. To the extent that it is not addressed by the higher 

capital requirements to the market risk rules, we would look to see 

that as part of the Basel III rulemaking that is pending. 

Senator LEVIN. Mr. Curry, you took office at Comptroller not 

even a year ago, just as these whale trade stories broke, and since 

then the OCC has conducted an intensive review of the whale 

trades. Were you surprised at the level of the problems uncovered? 

Mr. CURRY. I was certainly taken aback by the press stories and, 

as we delved into it, how complex and serious the situation was. 

Senator LEVIN. Have you given thought as to how to tackle the 

problem of detecting undisclosed derivative portfolios above a cer-
89 

tain size since the derivative issue is so huge, in the trillions, 

around the world? And I think in the trillions here, for that matter. 

Have you given thought as to how we are going to provide some 

control limits so that these do not create a major problem down the 

line? 

Mr. CURRY. I think this is an area where we need to do considerably more work. I think we have already learned through some of 

the work of Mr. Sullivan and the reviews conducted by Mr. 

Waterhouse that, at least from a supervisory standpoint, we need 

to be much more alert and make sure we have both the resources 

in terms of the capital market skills and a healthy skepticism that 

is exercised on a regular basis. 

Senator LEVIN. We have gone into the concerns which we have 

had about the whale trades all day long, and the OCC has a list 

of its own concerns, and you have indicated those concerns in six 

supervisory letters and a cease-and-desist order which you have 

issued with respect to JPMorgan, and I would like to ask whether 

you found safety and soundness problems in the following areas 

during your inquiries? 

First, have you found safety and soundness problem in the CIO’s 

derivative valuation controls? 

Mr. CURRY. Yes, and that is a provision of our order as well. 

Senator LEVIN. Have you found safety and soundness problems 

in the CIO risk management? 

Mr. CURRY. Yes. 

Senator LEVIN. Have you found safety and soundness concerns in 

the VaR model risk management? 

Mr. CURRY. Yes. 

Senator LEVIN. Have you found safety and soundness problems 

in the model approvals and the RWA? 

Mr. CURRY. Yes. 

Senator LEVIN. And have you found them in JPMorgan’s management? 

Mr. CURRY. Yes, we have. 

Senator LEVIN. Would you agree that the whale trades were not 

just a problem caused by rogue traders but were a problem of management weaknesses at the bank? 

Mr. CURRY. We identified serious risk management weaknesses 

throughout the entire Firm, and they became particularly evident 

in the CIO office. 

Senator LEVIN. Am I correct that the next step relative to the 

cease-and-desist order is to evaluate compliance when the time 

comes and to then make decisions as to any penalties? 

Mr. CURRY. That is an accurate statement, Senator. 

Senator LEVIN. Well, we thank our witnesses here, and we have 

seen today a very disturbing picture which raises questions not just 

about JPMorgan but about derivatives in general, how they are 

valued, disclosed, how they are disclosed or not disclosed, how they 

are managed to limit risk or not managed to limit risk. 

The OCC has already lowered JPMorgan’s management rating. 

They have issued a supervisory letter—more than one. The OCC 

has issued a cease-and-desist order, but I believe, Mr. Curry, that 

you and your colleagues have a challenge to get America’s biggest 

bank back on the straight and narrow and to keep our banks on 
90 

the straight and narrow, and that is exacerbated when we have the 

world of derivatives, particularly those derivatives which are synthetic. 

And so we thank you for your work. We again want to express 

our appreciation to you, Mr. Curry, for making the effort you did 

to get back here for this hearing. And we stand adjourned. 

[Whereupon, at 3:41 p.m., the Subcommittee was adjourned.] 
(91) 

A P P E N D I X 

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March 15,2013 

Contacts: Tara Andringa 202-228-3685 

Opening Statement of Senator Carl Levin (D-Mich.) 

U.S. Senate Permanent Subcommittee on Investigations Hearing on 

JPMorgan Chase Whale Trades: 

A Case History of Derivatives Risks and Abuses 

March 15,2013 

Good morning. Let me begin by extending a special welcome to a longtime friend, the 

new Ranking Member of the Subcommittee, Senator McCain. This is not the first time we have 

worked side-by-side. I deeply appreciate the energy and bipartisan spirit Senator McCain brings 

to our work together on the Armed Services Committee when he was Ranking Republican there 

and now here on this Subcommittee. Like the Armed Services Committee, this Subcommittee 

has a tradition of bipartisanship, and I very much look forward to continuing our partnership 

here. 

In April 20 12, Americans were confronted with a story of Wall Street excess and the 

derivatives disaster now known as the lPMorgan Chase whale trades. The largest U.S. banks 

today are deep into derivatives, complex financial instruments that derive their value from other 

assets. The derivatives behind the lPMorgan whale trades were part of a so-called "Synthetic 

Credit Portfolio" that essentially made outsized bets on whether particular financial instruments 

or entities were creditworthy or would default during specified time periods. The bets were 

made by traders in the London office of U.S. banking giant, JPMorgan Chase. Their tradesmeaning their bets -- grew so large that they roiled the $27 trillion credit derivatives market, 

singlehandedly affected global prices, and finally attracted a media storm aimed at finding out 

who was behind them. 

That's when the media unmasked lPMorgan's Chieflnvestment Office (CIO) which, 

until then, had been known for making conservative investments with bank deposits. At first, 

JPMorgan's CEO Jamie Dimon claimed the April media reports about the whale trades were "a 

tempest in a teapot.'· But a month later, the bank admitted the truth: that their credit derivative 

bets had gone south, producing not only losses that eventually exceeded $6 billion, but also 

exposing a litany of risk management problems at what had been considered one of America's 

safest banks. 
92 

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

States. It is also the largest derivatives dealer in the world and the largest single participant in 

world credit derivatives markets. It has consistently portrayed itself as a risk management expert 

with a "fortress balance sheet" that ensures taxpayers have nothing to fear from its extensive 

dealing in risky derivatives. But that reassuring portrayal of the bank was shattered when whale 

trade losses shocked the investing public, not only with the magnitude of the losses, but because 

the financial risk had been largely unknown to bank regulators. 

The Subcommittee meets today after nine months of digging into the facts behind the 

whale trades. To learn what happened, the Subcommittee collected nearly 90,000 documents, 

conducted over 50 interviews and briefings, and has issued a 300-page bipartisan report. While 

the bank and its regulators have cooperated with our investigation, four key former JPMorgan 

employees directly involved in the derivatives trading declined to cooperate and, because they 

reside overseas, they remain beyond the Subcommittee's subpoena authority. 

Our findings open a window into the hidden world of high stakes derivatives trading by 

big banks. It exposes a derivatives trading culture at JPMorgan that piled on risk, hid losses, 

disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public. 

Our investigation brought home one overarching fact: the U.S. financial system may 

have significant vulnerabilities attributable to major bank involvement with high risk derivatives 

trading. The four largest U.S. banks control 90 percent of U.S. derivatives markets, and their 

profitability is invested, in part, in their derivatives holdings, nowhere more so than at JPMorgan. 

The whale trades demonstrate how credit derivatives, when purchased in massive 

quantities with complex components, can become a runaway train barreling through every risk 

limit. The whale trades also demonstrate how derivative valuation practices are easily 

manipulated to hide losses, and how risk controls are easily manipulated to circumvent limits, 

enabling traders to load up on risk in their quest for profits. Firing a few traders and their bosses 

won't be enough to staunch Wall Street's insatiable appetite for risky derivative bets or stop the 

excesses. More control is needed. 

Among the most troubling aspects of the whale trades case history is that JPMorgan 

traders, who were required to book the value of their derivative holdings every business day, 

used internal profit-loss reports to hide more than haIfa billion dollars in losses in just three 

months. Eventually, those misreported values forced JPMorgan to restate its earnings for the 

first quarter of2012. But to this day, JPMorgan maintains that the mismarked values did not, on 

their face, violate bank policy or generally accepted accounting principles. But if derivative 

books can be cooked as blatantly as they were in this case without breaking the rules, then the 

rules need to be revamped. And given how much major U.S. bank profits remain bound up with 

the value oftheir derivatives, derivative valuations that can't be trusted are a serious threat to our 

economic stability. 

The whale trades also demonstrate how easily a Wall Street bank can manipulate and 

avoid risk controls. The financial industry assures us that it can prudently manage high risk 

activities, because they are measured, monitored, and limited. But as the Subcommittee report 

demonstrates in detail, JPMorgan executives ignored a series of alarms that went off as the 
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3 

bank's Chief Investment Office breached one risk limit after another. Rather than ratchet back 

the risk, JPMorgan personnel challenged and re-engineered the risk controls to silence the 

alarms. It is difficult to imagine how the American people can trust major Wall Street banks to 

prudently manage derivatives risk when bank personnel can readily game or ignore the risk 

controls meant to prevent financial disaster and taxpayer bailouts. 

The whale trades also provide another example of a major Wall Street bank's 

misstatements and concealment. Our investigation found that the bank failed to fully disclose 

the Synthetic Credit Portfolio to regulators for years, even when it tripled in size in the first three 

months of2012, and even when traders went on a buying spree, acquiring $40 billion of new 

credit derivatives in March, "doubling down," in the words ofthe OCC, on an already losing 

trading strategy. In fact, in January 2012, the bank told the OCC, inaccurately, that the portfolio 

was decreasing in size, when it wasn't. Most troubling of all, when the media spotlight hit, 

senior bank executives mischaraeterized to investors and the public the nature of the whale trades 

and the extent of risk management and regulatory oversight, gambling apparently that the 

portfolio's bad bets would recover before anyone took a closer look. 

Well, we took that closer look, and it isn't pretty. A massive derivatives portfolio riddled 

with risk. A runaway train of derivatives trading blowing through risk limits. Hidden losses. 

Bank executives downplaying the bad bets. Regulators who failed to act. 

Together, the facts are a reminder of what occurred in the recent financial crisis: we 

can't rely on a major bank to resist risky bets, honestly report derivative losses, or disclose bad 

news, without a strong regulator looking over its shoulder, backed by laws that require 

transparency, risk limits, capital buffers against losses, and consequences for misconduct. 

That's the big picture. Here are some of the detailed findings from the Subcommittee's 

investigation. 

I) JPMorgan's Chief Investment Office rapidly amassed a huge portfolio of synthetic 

credit derivatives, in part using federally insured depositor funds, in a series of risky, short-term 

trades, disclosing the extent of the portfolio only after intense media exposure. 

In just a few months during 2011, as shown in Chart I, the ChiefInvestment Office's 

Synthetic Credit Portfolio grew from a net notional size of$4 billion to $51 billion, and then 

tripled in the first quarter of 20 12 to $157 billion. That exponential growth in holdings and risk 

occurred with virtually no regulatory oversight. 

2) Once the whale trades were exposed, JPMorgan claimed to regulators, investors and 

the public, that the trades were designed to hedge credit risk. But internal bank documents failed 

to identify the assets being hedged, how they lowered risk, or why the supposed credit derivative 

hedges were treated differently from other hedges in the Chieflnvestment Office. If these trades 

were, as JPMorgan maintains, hedges gone astray, it remains a mystery how the bank determined 

the nature, size, or effectiveness of the so-called hedges, and how, if at all, they reduced risk. 

3) The ChiefInvestment Office internally concealed massive losses in the first several 

months of 20 12 by overstating the value of il~ synthetic credit derivatives. It got away with 
94 

4 

overstating those values within the bank, even in the face of disputes with counterparties and two 

internal bank reviews. 

As late as January 2012, the CIO had valued its credit derivatives by using the midpoint 

in the daily range of "bids" and "asks" offered in the marketplace. That's the typical way to 

value derivatives. But beginning in late January, the traders stopped using midpoint prices and 

started using prices at the extreme edges of the daily price range to hide escalating losses. In 

recorded phone conversations, one trader described these marks as "idiotic." 

At one point, traders used a spreadsheet to track just how large their deception had grown 

by recording the valuation differences between using midpoint and more favorable prices. In 

just five days in March, according to the traders' own spreadsheet, the hidden losses exceeded 

$400 million. The difference eventually exceeded $600 million. Counterparties to the derivative 

trades began disputing the ClO's booked values involving hundreds of millions of dollars in 

March and April. 

Despite the obvious value manipulation, on May 10 - the same day JPMorgan announced 

that the whale trades had lost $2 billion - the bank's controller concluded a special review and 

signed off on the CIO's derivative pricing practices as "consistent with industry practices." 

JPMorgan leadership has continued to argue that the values assigned by its traders to the 

Synthetic Credit Portfolio were defensible under accounting rules. 

Yet in July 2012, the bank reluctantly restated its first-quarter earnings. It did so only 

after an internal investigation listened to phone conversations, routinely recorded by the bank, in 

which its traders mocked their own valuation practices. 

Their mismarked values weren't wrong simply because the traders intended to understate 

losses; they were wrong because they changed their pricing practices after losses began piling 

up, stopped using the midpoint prices they had used up until January, and began using aggressive 

prices that consistently made the bank's reports look better. Until JPMorgan and others stop 

their personnel from playing those kinds of games, derivative values will remain an imprecise, 

malleable, and untrustworthy set of figures that call into question the derivative profits and losses 

reported by our largest financial institutions. 

4) When the ero's Synthetic Credit Portfolio breached five key risk limits, rather than 

reduce the risky trading activities, lPMorgan either increased the limits, changed the risk models 

that calculated risk, or turned a blind eye to the breaches. 

As early as January 2012, the rapid growth of the Synthetic Credit Portfolio breached one 

common measure of risk, called "Value-at-Risk" or VaR, causing a breach, not just at the cro, 

but for the entire bank. That four-day breach was reported to top bank officials, including CEO 

Jamie Dimon, who personally approved a temporary limit increase, and voila, the breach was 

ended. CIO employees then hurriedly pushed through approval or a new VaR model that, 

overnight, dropped the cro's purported risk by 50 percent. Regulators were told about that 

remarkable reduction in the CIO's purported risk, but raised no objection to the new model at the 

time. 
95 

5 

The credit derivatives portfolio breached other risk limits as well. In one case, it 

exceeded established limits on one measure, known as Credit Spread 01, by 1,000 percent for 

months running. When regulators asked about the breach, jPMorgan risk managers responded 

that it wasn't a "sensible" limit and allowed the breach to continue. When still another risk 

metric, called Comprehensive Risk Measure, projected that the Synthetic Credit Portfolio could 

lose $6.3 billion in a year, a senior cIa risk manager dismissed the result as "garbage." It 

wasn't garbage; that projection was 100 percent accurate, but the derivatives traders thought they 

knew better. Downplaying risk, ignoring one risk warning after another, and pushing to 

reengineer risk controls to artificially lower risk results, flatly contradict jPMorgan's claim to 

prudent risk management. 

5) At the same time the portfolio was losing money and breaching risk limits, jPMorgan 

dodged acc oversight. It omitted cIa data from its reports to the acc; failed to disclose the 

growing size, risk, and losses of the Synthetic Credit Portfolio; and delayed or tinkered with 

acc requests for information by giving the regulator inaccurate or unresponsive information. In 

fact, when the whale trades first became public, the bank offered such blanket reassurances that 

the acc initially considered the matter closed. It was only when the losses exploded that the 

acc took another look. 

6) The failure of regulators to act sooner can't be excused by the bank's behavior. The 

acc also fell down on the job. It failed to investigate multiple, sustained risk limit breaches; 

tolerated incomplete and missing reports from jPMorgan; failed to question the bank's new 

"value at risk" model that dramatically lowered the CIa's risk rating; and accepted jPMorgan's 

protests that the media reports about the portfolio were overblown. It was not until May 2012, 

after a new Comptroller of the Currency took the reins at the agency, that acc officials 

instituted their first intensive inquiry into the Synthetic Credit Portfolio. 

Again, with the lessons of the 2008 financial crisis so painfully fresh, it is deeply 

worrisome that a major bank should seek to cloak its risky trading activities from regulators, and 

doubly worrisome that it was able to succeed so easily for so long. 

And finally: 

7) When the whale trades went public, JPMorgan misinformed regulators and the public 

about the Synthetic Credit Portfolio. JPMorgan's first public response to the April news reports 

about the whale trades was when its spokesperson, using prepared talking points approved by 

senior executives, told reporters on April 10, that the whale trades were risk-reducing hedges 

known to regulators. A more detailed description came in a conference call held on April 13 

with investment analysts. During that call, Chief Financial afficer Douglas Braunstein made a 

series of inaccurate statements about the whale trades as shown in Chart 2: He said the trades 

had been put on by bank risk managers and were fully transparent to regulators; he said the 

trades were made on a very long-term basis; he said the trades were essentially a hedge; and he 

said the bank believed the trades were consistent with the Volcker Rule which prohibits high risk 

proprietary trading by banks. Those public statements on April \3 were not true. As late as May 

10, bank CEa Jamie Dimon repeatedly described the synthetic credit trades as hedges made to 

offset risk, despite information showing the portfolio was not functioning as a hedge. The bank 

also neglected to tell investors the bad news that the derivatives portfolio had broken through 
96 

6 

multiple risk limits, losses had piled up, and the head of the portfolio had put management of the 

portfolio into "crisis mode." 

It was recently reported that the eight biggest U.S. banks have hit a five-year low in the 

percentage of deposits used to make loans. Their collective average loan-to-deposit ratio has 

fallen to 84 percent in 2012, down from 87 percent a year earlier, and 101 percent in 2007. 

JPMorgan has the lowest loan-to-deposit ratio of the big banks, lending just 61 percent of its 

deposits out in loans. Apparently, it was too busy betting on derivatives to issue the loans 

needed to speed economic recovery. 

Based on its investigation into the JPMorgan whale trades, our report makes the 

following recommendations. 

I) When it comes to high-risk derivatives, federal regulators need to know 

what major banks are up to. We should require those banks to identify all internal 

investment portfolios that include derivatives over a specified size, require periodic 

reporting on derivative performance, and conduct regular reviews to detect undisclosed. 

derivatives trading. 

2) When banks claim they are trading derivatives to hedge risks, we should 

require them to identify the assets being hedged, how the derivatives trade reduces the 

risk associated with those assets, and how the bank tested the effectiveness of its hedging 

strategy in reducing risk. 

3) We need to strengthen how derivatives are valued to stop inflated values. 

Regulators should encourage banks to use independent pricing services to stop the games; 

require disclosure of valuation disputes with counterparties; and require disclosure and 

justification when, as occurred at JPMorgan, derivative values deviate from midpoint 

prices. 

4) When risk alarms go off, banks and their regulators should investigate the 

breaches and take action to reduce risky activities. 

5) Federal regulators should require disclosure of any newly implemented 

risk model or metric which, when implemented, materially lowers purported risk, and 

investigate the changes for evidence of model manipulation. 

6) Three years ago, Congress enacted the Merkley-Levin provisions ofthe 

Dodd-Frank Act, also known as the Volcker Rule, to end high risk proprietary betting 

using federally insured deposits. Financial regulators ought to finalize the long-delayed 

implementing regulations. 

7) At major banks that trade derivatives, regulators should ensure the banks 

can withstand any losses by imposing adequate capital charges for derivatives trading. It 

is way past time to finalize the rules implementing stronger capital standards. 

The derivatives trading that produced the whale trades damaged a single bank. But the 

whale trades expose problems that reach far beyond one London trading desk or one Wall Street 
97 

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office tower. The American people have already suffered one devastating economic assault 

rooted largely in Wall Street excess, and they cannot afford another. When Wall Street plays 

with fire, American families get burned. The task of federal regulators, and of this Congress, is 

to take away the matches. The whale trades demonstrate that task is far from complete. 
98 

OPENING STATEMENT BY SENATOR MCCAIN 

Ranking Minority Member 

Permanent Subcommittee on Investigations 

March 15, 2013 

Thank you, Mr. Chairman. Let me begin by saying what an honor it is to 

serve on this Subcommittee, which has a long history of bipartisanship and a 

celebrated legacy of uncovering waste, fraud, abuse, and outright corruption. 

Before I move forward, Mr. Chairman, I want to express my gratitude to you 

and the members of your stafffor your unyielding and dedicated efforts to this 

investigation. I would also like to recognize the work of my predecessor on the 

Subcommittee, Senator Coburn, for his contributions prior to my arrival. 

This investigation into the so-called "Whale Trades" at lPMorgan has 

revealed startling failures at an institution that touts itself as an expert in risk 

management and prides itself on its "fortress balance sheet." The investigation has 

also shed light on the complex and volatile world of synthetic credit derivatives. In 

a matter of months, lPMorgan was able to vastly increase its exposure to risk while 

dodging oversight by federal regulators. The trades ultimately cost the bank 

billions of dollars and its shareholders value. 

These losses came to light not because of admirable risk management 

strategies at lPMorgan or because of effective oversight by diligent regulators. 

Instead, these losses came to light because they were so damaging that they shook 

the market, and so damning that they caught the attention of the press. Following 

the revelation that these huge trades were coming from lPMorgan's London 

Office, the bank's losses continued to grow. By the end of the year, the total losses 

stood at a staggering $6.2 billion dollars. 

This case represents another shameful demonstration of a bank engaged in 

wildly risky behavior. The "London Whale" incident matters to the federal 

government because the traders at lPMorgan were making risky bets using excess 

deposits, portions of which were federally insured. These excess deposits should 

have been used to provide loans for main-street businesses. Instead, lPMorgan 

used the money to bet on catastrophic risk. 

Through an extensive bipartisan investigation, this Subcommittee has 

uncovered a wealth of new information. Internal e-mails, memos, and interviews 

1 
99 

reveal that these trades were not conducted by a group of rogue traders, but that 

their superiors were well aware of their activities. 

Traders at JPMorgan's ChiefInvestment Office, the CIO, adopted a risky 

strategy with money they were supposed to use to hedge, or counter, risk. 

However, even the head of the CIO could only provide a quote "guesstimate" as to 

what exactly the portfolio was supposed to hedge. And JPMorgan's CEO Jamie 

Dimon admitted that the portfolio had quote "morphed" into something that 

created new and potentially larger risks. In the words of JPMorgan's primary 

federal regulator, it would require quote "make-believe voodoo magic" to make the 

portfolio actually look like a hedge. 

Top officials at JPMorgan allowed these excessive losses to occur by 

permitting the CIO to continually breach all of the bank's own risk limits. When 

the risk limits threatened to impede their risky behavior, they decided to 

manipulate the models. 

Disturbingly, the bank's primary regulator, the OCC, failed to take action 

even after red flags warned that JPMorgan was breaching its risk limits. These 

regulators fell asleep at the switch and failed to use the tools at their disposal to 

effectively curb JPMorgan's appetite for risk. 

However, JPMorgan actively impeded the OCC's oversight. The CIO 

refused to release key investment data to the OCC and even claimed that the 

regulator was trying to quote "destroy" the bank's business. 

After these losses were uncovered by the press, JPMorgan chose to conceal 

its errors and, in doing so, top officials at the bank misinformed investors, 

regulators, and the public. In an April 2012 earnings call, then Chief Financial 

Officer Douglas Braunstein, falsely told investors and the public that the bank had 

been quote "fully transparent to regulators." 

The deception did not end there. During the same earnings call, Mr. Dimon 

tried to downplay the significance ofthe losses by infamously characterizing them 

as a quote "a complete tempest in a teapot." The truth of the matter is that $6 

billion dollars, some of which is federally insured, is an inexcusable amount of 

money to be gambled away on risky bets. This investigation potentially reveals 

systemic problems in our nation's financial system. The size of the potential losses 

and the accompanying deception echo the misguided and dishonest actions that the 

banks took during the financial crisis four years ago. 

2 
100 

Let me be clear. lPMorgan completely disregarded risk limits and 

stonewalled federal regulators. It is unsettling that a group of traders made 

reckless decisions with federally insured money, and that all of this was done with 

the full awareness of top officials at lPMorgan. This bank appears to have 

entertained-indeed, embraced-the idea that it was quote "too big to fail". In 

fact, with regard to how it managed the derivatives that are the subject of to day's 

hearing, it seems to have developed a business model based on that notion. 

It is our duty to the American public to remind the financial industry that 

high-stakes gambling with federally insured deposits will not be tolerated. In 

2012, the "London Whale" trades resulted in a $6 billion loss. What if it was $60 

billion? Or, $100 billion? Does lP Morgan operate under the assumption that the 

taxpayer will bail them out again? What place does taxpayers' underwriting of the 

big banks' disregard for "moral hazard" have in the proper operation of a truly free 

market? 

I look forward to hearing from our witnesses today as we examine what 

went wrong at lPMorgan. 

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101 

Testimony of Ina R. Drew 

Former Head of the Chief Investment Office, JPMorgan Chase & Co. 

Before the U.S. Senate Permanent Subcommittee on Investigations 

Washington, D.C. 

March 15,2013 

Good morning, Chairman Levin, Ranking Member McCain, and members ofthe 

Subcommittee. Thank you for the opportunity to meet and discuss with you my perspective on 

the losses incurred last year in JPMorgan Chase's synthetic credit portfolio, one of many 

portfolios managed by the Company's Chiefinvestment Office (CIO) when I was the head of 

that office. I am greatly saddened by the entire episode, which has caused financial and 

reputational harm to JPMorgan Chase and a large number of people with whom I was honored to 

work, and I deeply regret that the losses occurred on my watch. I am also saddened that the 

losses led to my departure from the Company, to which I had devoted 30 years of my life. 

Before I address the synthetic credit portfolio, I believe it would be useful for the 

Subcommittee to know about my background and career and about the range of asset-liability 

management activities of the CIO at JPMorgan Chase. 

My background and career at JPMorgan Chase 

After attending public schools, I graduated from The Johns Hopkins University, as part of 

only the fourth class that admitted women, with a degree in international studies. I went on to 

earn a master's in international affairs from Columbia University. I have been a member of the 

Board of Trustees of The Johns Hopkins University for the past twelve years. 

In March 1982, I joined Chemical Bank in New York and thus began my 3D-year career 

at what would ultimately become JPMorgan Chase. Over the course of my career at the 

Company I worked primarily in the area of asset-liability management, and I received a 

succession of promotions and increasing management responsibilities. By asset-liability 

management, I am broadly referring to transactions and portfolio positions designed for the 

purpose of managing assets and liabilities on the Company's balance sheet, earning a favorable 

rate of return on capital, and prudently hedging exposures and risks in the Company's lines of 

business. 

I helped the Company manage assets and liabilities through a series of significant 

mergers and acquisitions, including those involving Texas Commerce Bank, Manufacturers 

Hanover, Chase Manhattan, J.P. Morgan, Bank One, Bear Steams and Washington Mutual, and I 

worked closely with a series of CEOs, including Walter Shipley, William Harrison and Jamie 

Dimon. 
102 

In 1999, I became the head of Global Treasury, the unit responsible for asset-liahility 

management for the Company. In that role I oversaw the management of the Company's core 

investment securities portfolio, the foreign-exchange hedging portfolio, the mortgage servicing 

rights (MSR) hedging hook, and a series of other investment and hedging portfolios based in 

London, Hong Kong and other foreign cities. As of mid-2004 - the time of the merger with 

Bank One and the beginning of Mr. Dimon's tenure as Chief Executive Officer of JPMorgan 

Chase - I reported directly to Mr. Dimon. During 2005, the Global Treasury function was 

renamed the Chiefinvestment Office (CIO) and was moved out of the Company's investment 

banking division to become a Corporate function. 

During Mr. Dimon's tenure as CEO my responsibilities increased significantly, for two 

principal reasons. First, the CIO's purview was expanded to include several additional books, 

including the JPMorgan Chase employee retirement plan, the company-owned-life insurance 

portfolio, and the capacity for both investment and hedging activities in the credit markets. 

Second, the Company's balance sheet grew significantly as a result of the acquisitions of Bear 

Steams and Washington Mutual and thc large inflow ofretail deposits during the financial crisis. 

In 2006, I became a member of the JPMorgan Chase Operating Committee, the highestlevel management and strategy committee of the Company. During 2007 and 2008, I served on 

the industry-wide Treasury Borrowing Advisory Committee. I am proud to be one of a small 

number of women who rose to senior positions in the financial industry. 

Asset-liabilitv management activities of the CIO 

The CIO engaged in a wide range of asset-liability management activities. As of the first 

quarter of2012, the CIO managed the Company's $350 billion investment securities portfolio 

(this portfolio exceeded $500 billion during 2008 and 2009), the $17 billion foreign exchange 

hedging book, the $13 billion employee retirement plan, the $9 billion company-owned-Iife 

insurance portfolio, the strategically-important MSR hedging book, and a series of other books 

including the cash and synthetic credit portfolios. 

Our department engaged in all of these activities as part of what we viewed as prudent 

and normal-course asset-liability management for a large financial institution such as JPMorgan 

Chase. In varying combinations, each activity was designed to preserve and enhance Company 

assets and to protect, or hedge, against losses and liabilities in the Company's various business 

lines resulting from various types of risks. Those risks included interest rate risk, foreign 

exchange risk, liquidity risk, duration risk, and credit risk. 

I recognize that we are focused today on the 2012 losses in the synthetic credit book, but 

it is worth noting that the CIO's asset-liability management activities in total- including the 

strategic hedges in the synthetic credit book - contributed about $23 billion to the Company's 

earnings from 2007 through 20 II, helping to offset business losses incurred during that difficult 

period of time. My colleagues and I in CIO worked extremely hard to protect the Company, 

through the financial crisis and beyond, by investing conservatively and prudently hedging 

business risks. I am extremely proud that our investing and hedging strategies - which were 

developed over many years and were more successful than those of many other major financial 

2 
103 

institutions - played a critical role in the Company's efforts to weather the financial storms 

during this period oftime. 

My management of the CIO 

As head of the CIO, I had a team of six experienced and accomplished financial 

professionals who reported directly to me. With respect to most of the various books I oversaw, 

including the cash and synthetic credit books, I delegated responsibility to, and relied on, my 

CIO management team. Several of my direct reports - including Achilles Macris, who had 

supervisory responsibility for the cash and synthetic credit books, among other responsibilities 

were members ofthe IPMorgan Chase Executive Committee, which consisted of the top 50 or so 

executives of the Company. Mr. Macris, who was based in London, served as head of the CIO 

for Europe and Asia. My management team also included a Chief Financial Officer of the CIO 

who also reported to the Chief Financial Officer of the Company. Separately, there was a team 

of independent Risk Management personnel assigned to the CIO, all of whom reported up to the 

Chief Risk Officer of the Company. This included several CIO Risk personnel based in London 

and several who were focused on the synthetic credit book. 

I managed the CIO in a variety of ways. I had daily meetings or communications with all 

of my direct reports and with CIO Risk Management personnel. I reviewed key written reports, 

including regular Risk Management reports and regular portfolio summaries from members of 

my management team or their teams. I held weekly portfolio review meetings, which covered 

most of the major books managed by the CIO, including the cash and synthetic credit portfolios 

managed by the London office. These meetings always included London personnel via 

videoconference, and always included a review of risk management issues. I visited the London 

office several times each year, and Messrs. Macris and Martin-Artajo came to New York several 

times each year; through these visits and otherwise, I met with them in person at least several 

times each year. 

The synthetic credit book 

The synthetic credit book, which was started in late 2006, was designed principally as a 

protective macro-level hedge against stressed credit environments, and it served this purpose 

well. From 2007 through 20 I I - a period which included the financial crisis of 2008-2009 and 

the ensuing difficult and uncertain credit environment during 2010-2011 - the book had positive 

returns every year and contributed in total approximately $2 billion to the Company's earnings. 

These gains helped offset losses in various credit-sensitive business activities, including the 

Company's very large loan portfolio, which totaled approximately $700 billion during 2011 and 

2012. 

The synthetic credit book consisted of a portfolio of synthetic credit derivatives based in 

various segments of the credit markets. Generally speaking, the book was positioned to generate 

significant returns during stressed or difficult credit environments and modest returns during 

more benign credit environments. 

Mr. Macris had supervisory responsibility for the synthetic credit book, which was 

executed and managed out of London. The book was managed on a day-to-day basis by Mr. 
104 

Martin-Artajo, who reported to Mr. Macris and who supervised the activities of the book's 

traders, including the principal trader, Bruno Iksil. Messrs. Macris and Martin-Artajo enjoyed 

reputations as experienced and highly-skilled managers who had extraordinary expertise in credit 

derivatives. They also had a five-year track record of successful management of both the cash 

and synthetic credit books. I naturally relied heavily (and I thought appropriately) on their views 

and judgments concerning the synthetic credit book. I also relied on the analysis and judgment 

of the CIO Risk Management and Finance personnel assigned to review the positions in the 

synthetic credit book. I believed that such reliance was reasonable. 

2012 developments in the synthetic credit book 

In December 2011, in accordance with a Company-wide plan to reduce risk-weighted 

assets (RWA) in anticipation of the new Basel III capital requirements, and consistent with the 

widely-held view within the Company that the macro credit environment was broadly improving, 

I told Messrs. Macris and Martin-Artajo that the overall size and RWA of the synthetic credit 

book would need to be reduced over the course of2012. I also emphasized to them that they 

needed to keep the book within all applicable risk limits, including value-at-risk (VaR), and that 

the book's VaR would need to be reduced over the course of2012. 

In January 2012, they informed me that because most of the book's short positions were 

in the relatively illiquid high-yield market, the most cost-effective near-term way to manage the 

book was to put on offsetting long positions in the more liquid investment grade market, thus 

moving the book towards a neutral or balanced position, rather than a large net short. They also 

explained that this situation would necessitate a one-quarter delay in RWA reduction as 

compared with what had been originally contemplated. This delay was approved by the 

Company's senior management. 

Also in January the Company's independent Model Review Group, part of the corporate 

Risk Management organization, approved a new, and purportedly better and more accurate, 

value-at-risk (VaR) model for the synthetic credit book. The process of developing and seeking 

approval of the new VaR model had been pending since the middle of2011. Although I, as well 

as the Company's senior management, was well aware that a new VaR model was pending, I had 

no involvement in the process of developing, requesting or approving the new model and no 

basis to personally assess the merits of either the new or old model. 

In February Mcssrs. Macris and Martin-Artajo informed me on several occasions that 

they were in the process of moving the book to a more neutral position, that the book remained 

appropriately positioned and net short on a risk-adjusted basis, that the book remained within 

VaR and other relevant risk limits, and that they were continuing to work to try to reduce RWA. 

These same conclusions were reported to the Company's senior management in late February, as 

part ofthe annual CIO business review, during which Mr. Macris discussed the overall credit 

risk protection afforded by the book. 

In late March, pointed concerns regarding the investment grade long positions were 

raised to my attention. I learned from Mr. Martin-Artajo that he believed that other market 

participants had learned of the CIO's investment grade long positions and were skewing market 

valuations by taking positions against the CIO. Soon thereafter, CIO Risk Management 

4 
105 

expressed concerns to me that the book's traders had recently purchased very large amounts of 

investment grade long positions. Shortly thereafter, in a group video conference that included 

CIO Risk Management personnel, Mr. Martin-Artajo reiterated his concern about other market 

participants skewing market valuations and recommended that the traders purchase even more 

investment grade long positions in order to counteract the skewed valuations. I immediately 

instructed Messrs. Martin-Artajo and Iksil to cease all trading of investment grade long positions. 

I also instructed them, along with Mr. Macris, to do a full review of the book, and to prepare a 

written analysis and plan for reducing the book going forward. 

Over the course of the next few weeks, during which time the book experienced a few 

days of large mark-to-market losses, I and CIO Risk Management personnel received a series of 

reassuring analyses and conclusions from Messrs. Macris and Martin-Artajo. Indeed, throughout 

this period, I made successive requests of Messrs. Macris and Martin-Artajo for greater analysis 

and explanation of the book's positions. Their responses were seemingly thorough and 

consistently reassuring. On multiple occasions, both orally and in detailed writings, Messrs. 

Macris and Martin-Artajo expressed their confident belief that, notwithstanding the issues that 

had been raised and the recent mark-to-market losses, the synthetic credit book remained 

properly balanced; the investment grade long positions were strategically appropriate; the recent 

mark-to-market losses reflected temporary market dislocations due to unsustainable actions by 

other market participants; and the losses would dissipate over the near term. In addition, Messrs. 

Macris and Martin-Artajo provided several detailed written scenario analyses estimating, with 

high confidence, that the book's second quarter performance would range between a $350 

million profit and a $250 million loss. 

I have since come to learn based on the Company's public statements in July 2012 and 

Task Force Report in January of this year - that valuations for many of the book's positions were 

inflated and not calculated or reported in good faith; that the original version ofthe second 

quarter scenario analyses reflected much higher projected losses and was specifically re-done 

before it was sent to me so as to reflect lower projected losses; and that some members of the 

London team participated in or condoned such conduct and hid from me important information 

regarding the true risks in the book. I have also since come to learn - based on the same public 

statements of the Company that the new VaR model was flawed and significantly understated 

the true risks in the book. Needless to say, I had no knowledge of these things at the time. 

CIO Risk Management received all of Messrs. Macris and Martin-Artajo's written 

analyses and conclusions, including the second quarter scenario analyses. In addition, during 

this critical period I kept the Company's senior management apprised of the issues and the 

conclusions being presented by Messrs. Macris and Martin-Artajo. Over the week leading up to 

the Company's April 13 earnings call, I made sure that Messrs. Macris and Martin-Artajo's 

written analyses and conclusions, including the second quarter scenario analyses, were 

distributed to senior management and that senior management had an opportunity to raise 

questions and issues directly with them. 

5 
106 

My oversight of the synthetic credit portfolio 

I believe that my oversight of the synthetic credit portfolio, including during 2012, was 

reasonable and diligent, and it was accomplished through multiple means. I relied on Messrs. 

Macris and Martin-Artajo, each a recognized expert on credit derivatives, to vet and supervise 

trading strategy and to keep me apprised generally on the trading and the perfonnance of the 

book. They did so through regular written reports from their team and numerous video, 

telephone and in-person conferences. I relied on the Company's fonnal risk metrics - in 

particular VaR, stress performance, and CSW 10% to alert me to excessive risks, and I relied 

on CIO Risk Management to alert me to particular problems or concerns. I I relied on the 

independent Model Review Group to vet the VaR and other risk models. Further, I relied on 

CIO Finance - in particular the Valuation Control Group - to ensure that the book's positions 

were valued properly. 

When issues or concerns were brought to my attention during the first quarter of 20 12, I 

responded forcefully and thoughtfully and ensured that the key people, including Risk 

Management personnel, were analyzing the issues and critically assessing the risks. I insisted 

that Mr. Macris and Mr. Martin-Artajo, the executive and manager with the greatest expertise 

and experience in credit derivatives, focus on and analyze the issues, assess future risks, and 

report back to me. I ensured that CIO Risk Management personnel were fully engaged and 

provided their independent analysis and judgment. When pointed concerns were brought to my 

attention in late March, I made sure that key members of the company's senior management 

were fully illfomled of the issues, received the written analyses and conclusions coming from 

Mr. Macris and Mr. Martin-Artajo, and had a full opportunity to raise questions with the London 

team. 

Ultimately, it appears that my oversight ofthe synthetic credit book during 2012 was 

undermined by two critical facts of which I was not aware at the time but have come to learn 

based on the Company's Task Force Report and other public statements: (i) the new VaR model 

was flawed and significantly understated the real risks in the book; and (ii) some members of the 

London team failed to value positions properly and in good faith, minimized reported and 

projected losses, and hid from me important information regarding the true risks of the book. 

believe it goes without saying that it is extremely difficult, ifnot impossible, to oversee a 

portfolio under such circumstances. 

Also, it appears that my oversight of the book was undermined by control failures by CIO 

Risk Management and CIO Finance. In particular, it appears that ClO Risk Management failed 

to properly understand and assess the risks in the book, and that CIO Finance failed to properly 

review the position valuations recorded by the traders. 

I recognize that the Task Force Report makes certain management-related criticisms of 

me, but I respectfully disagree with many of those criticisms. For the reasons cited, I believe that 

During the first quarter of20 12, CIO Risk Management included a manager, Keith Stephan, who sat with the 

traders in London, a more senior manager, Peter Weiland, who received daily reports with details of the 

positions and the trades, and a chief risk officer, Irv Goldman, who although new to that position had spent over 

a month in London in mid-2011 getting to know the London team and developing a better understanding of the 

synthetic credit portfolio. 

6 
107 

my management of the CIO and oversight ofthe synthetic credit book was reasonable and 

diligent. It is also important to note that the Task Force Report itself lays out the critical factors 

- the flaws in the new VaR model and the deceptive conduct by members of the London team -

that undermined my management and my oversight ofthe book. 

My departure from JPMorgan Chase 

In late April of2012, following a series of additional large mark-to-market losses in the 

synthetic credit book, it became clear to me and other members of senior management that the 

reassuring analyses and conclusions provided by Messrs. Macris and Martin-Artajo, including 

the second quarter scenario analyses, had been erroneous. This realization led to detailed 

reviews by Corporate Risk Management and other members of senior management, which in 

turn led to the Company's May 10 filings and its conference call with investors and analysts 

regarding the CIO losses. 

I was, and I remain, deeply disappointed and saddened that such significant losses 

occurred in the business unit I oversaw, a unit I managed diligently and successfully for many 

years. Although asset-liability management, by its nature, involves regular ups and downs in 

both investment and hedging books, I had never before experienced a situation like this one. 

Though I did not (and do not) believe I bore personal responsibility for the losses in the synthetic 

credit book, in late April I began to consider whether, for the good of JPMorgan Chase, I should 

step down and make it easier for the Company to move beyond these issues. In the wake of the 

May 10 disclosures I approached Mr. Dimon and told him that I thought it would be best for the 

Company if I stepped down. He reluctantly agreed, and shortly thereafter I submitted my 

retirement letter. Similarly, although I did not (and do not) believe that I engaged in any 

misconduct, I offered to give up a significant amount of my recent JPMorgan Chase 

compensation, which I have done, in recognition of the size of the losses and my position as head 

ofthe business. 

Since my departure I have learned of the deceptive conduct by members of the London 

team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the 

extent to which the London team let me, and the Company, down. 

Looking back over my long career at JPMorgan Chase, I know that I - like the vast 

majority of the people with whom I worked - always did my job with integrity and care and 

always tried to act in the best interests of the Company. In the end, I left a job and a company I 

loved dearly, after 30 years of dedicated service, because of significant losses that occurred on 

my watch. 

I thank you for the opportunity to submit this statement, and I will be happy to answer 

any qucstions you may have. 

7 
108 

Ashley Bacon 

Acting Chief Risk Officer, JI>Morgan Chase & Co. 

Written Testimony for the Senate Permanent Subcommittee on Investigations 

March 15,2013 

Good morning Chairman Levin. Ranking Member McCain, and Members of the 

Committee. My name is Ashley Bacon, and I am the Acting Chief Risk Ofocer of JPMorgan. 

have been at JPMorgan for 20 years and have spent six years in the Firm's Risk Management 

function. I appreciate the opportunity to come before you today as a part of your inquiry into the 

CIa synthetic credit portfolio to tell you about what I observed after being asked in late April to 

independently assess the CIa trades. Let me first start by expressing the entire Firm's 

commitment to the importance of efTective risk management. 

Turning to the CIa portfolio at issue: at the request of senior Firm management, I was 

brought in from outside the Chieflnvestment Office in late April 2012, along with other 

individuals from the Investment Bank, to lead a team of professionals conducting a detailed 

assessment of the synthetic credit portfolio. The purpose of that review was to understand the 

persistent losses being experienced and to help chart a course forward. Our team worked long 

hours on this review and reported back to senior Firm management on at least a daily basis. 

After initial reports, we were asked to take over responsibility for the day-to-day management of 

the synthetic credit portfolio-a responsibility that we held until a new CIa management team 

took over. 

The Firm also requested that my colleague Michael Cavanagh lead a Task Foree to 

investigate these trades. Later today, I believe that Mr. Cavanagh will speak in some detail to 

that effort and to the remedial steps identified by the Task Force in response. I will simply 
109 

discuss a few ofthe key steps we have taken as a Firm to improve our risk management-both 

within the CIa and elsewhere in the Firm. 

First. the Firm appointed a new Chief Risk Officer for CIa in May 2012. Additionally, 

the Firm took steps to ensure Risk's independence and the appropriateness of staffing levels. 

The new cia Chief Risk Officer's actual reporting practices now conform to his functional 

reporting line. He re.ports to me, and his compensation and career advancement are controlled by 

Risk, with input from the business and others about his performance, as appropriate. 

Second, thc Firm has overhauled the CIa Risk Committee. The Committee now meets 

on a weekly basis and attendees include other members of senior management, from within and 

outside of CIa. It has been reconstituted as the CIa, Treasury and Corporate Risk Committee, 

to reflect its broader responsibilities and increased participation. 

Third, CIa has implemented numerous new or restructured risk limits covering a broad 

set of risk parameters. What remained of the synthetic credit portfolio was transferred to the 

Finn's Investment Bank, where it is subject to appropriate oversight and detailed analysis. 

Finally, JPMorgan has conducted a comprehensive self-assessment of the Risk 

organization and, as a result, we are implementing a series of improvements both Firm-wide and 

within our lines of business. In addition to working to improve model development, review, 

approval, and monitoring, the Firm is reaffirming and, where appropriate, is revising its market 

risk limits across all of its lines of business. We have introduced additional granular, portfoliolevel limits and wi II continue to do so as appropriate. We have strengthened our processes for 

limit excessions to provide for more rapid escalation and more effective review. We have 

established a Firm-wide Risk Committee, improved the operation of our Risk Operating and Risk 
110 

Governance Committees, and enhanced our reporting to the Board of Directors' Risk Policy 

Committee. 

A risk organization must constantly look for ways to improve. The steps I have described 

reflect our fi.mdamental belief in how the Firm's risk profile should be overseen with effective 

challenge and with the right level of information available to address risk issues effectively. 

Thank you for the opportunity to appear before you today, and I welcome any questions 

you have. 
111 

STATEMENT OF PETER WEILAND 

Written Testimony for the Senate Permanent Subcommittee on Investigations 

March 15, 2013 

Chairman Levin, Ranking Member McCain, and Members of the Subcommittee: 

My name is Peter Weiland. I was employed at J.P. Morgan as its Head of Market Risk in 

J.P. Morgan's Chief Investment Office ("ClO") from October 2008 until October 2012. I am 

here in response to the invitation I received from the Subcommittee, and I will attempt to provide 

information and answer questions to the best of my recollection and knowledge. 

I am proud of the CIO and its accomplishments. It was a hard working team that took its 

job seriously. The events of 2012 were a substantial disappointment but I am here today to help 

explain the facts surrounding those events. 

In your invitation to me, you asked for information on several different topics. I will try 

to respond to those questions as directly and as succinctly as I can. 

You asked me about the risk management structure in the CIO and my role in managing 

risks, including within the London office. The risk management structure changed over the four 

years I was there. I was hired in October, 2008, by Ina Drew to be the Head of Market Risk. 

There was no Chief Risk Officer for the CIO at that time. When I was hired, I had a direct 

reporting line to Ms. Drew with an indirect line to J.P. Morgan's Chief Risk Officer ("CRO") 

Barry Zubrow. In mid-2009, my official reporting line changed to a direct line to Mr. Zubrow 

with an indirect line to Ms. Drew. 

In September, 2011, a search was announced to bring in a Chief Risk Officer for the CIO 

to whom I would report. In January, 2012, Irv Goldman was selected to be the CRO for the CIO. 

Upon his hiring, I reported directly to Mr. Goldman. 

174237~2.DOC 
112 

The second question posed to me by the Subcommittee was to describe the risk 

management practices at the CIO, including the risk metrics and the limits that were used, who 

set the limits, and how the breaches were handled. During most of the period in question, the 

CIO's activity was divided into SAA (strategic, longer term investment activity mostly in AFS 

accounting) and TAA (tactical, shorter term activity, mostly mark-to-market accounting). The 

SAA risk framework was generally not based on delegated trading limits; the SAA Committee 

specifically approved portfolio activity. 

The TAA was treated with a traditional delegated limit framework, including limits on 

Value-at-Risk (HVaR"), stress, and non-statisticals. Synthetic credit, although intended to offset 

strategic credit exposures, was included in the TAA because accounting rules require derivatives 

to be mark-to-market. Therefore, CIO market risk limits largely applied only to TAA activity 

with some exceptions, including individual issuer limits in SAA ("single name limits"). In late 

2011 and early 2012, it was agreed to include the SAA in firm-wide stress limit in the firm-wide 

stress limit framework. This was implemented during the first quarter of 2012. 

Limit approvals were to be made at various levels; limits were agreed by the nature of the 

business and the Risk. Top (Level I) CIO limits were approved by the CEO, the CRO, and the 

CIO. Within the CIO, Level 2, limits were approved by Ms. Drew, regional CIOs, and myself. 

Some regional limits were approved by regional CIOs and myself. Breaches of the limits were 

handled according to firm-wide Market Risk policy; the designated approvers were notified 

when the breaches occurred. 

The third question that the Subcommittee posed was the CIO's efforts to develop 

alterative risk and capital models during 2011 and 2012, in particular to recalculate the Value-at2 
113 

Risk, the Comprehensive Risk Measure ("CRM"), and the Risk Weighted Assets ("RWA") 

results, and my role in those efforts, 

In early 2011, I discussed expected Basel 2.5 risk requirements with central Risk QR 

staff. Risk QR was developing a CRM model to encompass all J.P. Morgan synthetic credit 

activity. In addition, it became clear that the VaR for CIa synthetic credit would need to be 

upgraded. The target date for this upgrade was to be the end of 2011. In this regard, several 

historical factors are relevant: 

• In 2009, the CIa synthetic credit VaR was initially modeled after the Investment 

Bank ("lB") for consistency; 

• the lB upgraded its VaR with a heavy dependence on individual credit curves in 

2010. Because CIa activity is purely index based, it was clear that the lB's 

individual name approach would be inappropriate for the CIa; 

in 2011, the Market Risk Technology group developed a VaR tool that was expected 

to take data feeds from both the IB and the CIa. In August, 2011, the initial feeds 

from CIa failed and it was determined that the VaR tool did not work without lB 

transformation tools; 

• in September, 20 II, the CIa office began work on a new VaR model that was 

intended to meet all the requirements of Basel 2.5. The development of this new VaR 

model was led by Pat Hagan of the CIa, with close monitoring by the Risk QR to 

ensure fulfillments of all regulatory requirements; 

• concUlrently, the Risk QR was developing a CRM model, another contributor to 

RWA for synthetic credit (RWA = VaR + stress VaR + CRM). The CIa business 

quantitative team had questions about the details about the central CRM model 

3 
114 

development. The European CIO team requested approval to develop a CRM model 

specifically for CIO, but their request was denied; 

• the CIO business quant team developed a parallel model CRM to try to better 

understand the central CRM model; 

• ultimately, the CIO synthetic credit VaR was approved by the Risk QR and then 

implemented at the end of January, 2012. Subsequently, it was determined that 

coding errors resulted in an incorrect VaR calculation and the VaR was rolled back to 

its previous model; 

• my role throughout the process was to maintain focus to ensure that the new VaR was 

implemented so that the firm would meet regulatory deadlines as well as maintain 

communication with the Risk QR regarding CRM model development and testing. 

The fourth question that you submitted asked for information about my role in analyzing 

the risks associated with the Synthetic Credit Portfolio (SCP) and the SCP's record of risk limit 

breaches and actions taken in response to those breaches in 20II and 2012. As always, the 

answers to SCP questions are complicated. But I was responsible for all Market Risk within the 

CIO, including synthetic credit, during my tenure as the Head of Market Risk. This included a 

wide range of activities, including: 

• the AFS securities portfolio consisting of a wide variety of asset classes including 

MBS, CMBS, CLOs, student loan ABS, credit card ABS, uni-bonds and so forth. 

This was a portfolio of approximately $400 billion; 

• Mortgage Servicing Rights hedging activity, including very large interest rates, 

volatility, and prepayment risks; 

• structural Foreign Exchange (FX) hedging activity; 

4 
115 

• tactical positioning in New York, London, and Hong Kong, primarily in rates and FX 

and also including synthetic credit; 

• CIO private equity activity. 

Supporting me in London was one senior risk manager for whom the synthetic credit 

portfolio was part of his responsibilities. There were also two junior resources dedicated to the 

synthetic credit portfolio. 

The main limits on CIO synthetic credit in 2012 were VaR, stress, csbpv, and cswIO%. 

The initial breaches were csbpv breaches. The csbpv values for all synthetic credit positions 

were added to arrive at the usage. During early 2012, as investment grade ("IG") positions 

began to be used in size to offset high yield (HY) positions, the total csbpv grew because risk 

equivalent IG and HY positions had a very different csbpv value. Given this change in the 

business mix, it was determined that the csbpv was no longer a useful limit. 

VaR limit breaches also occurred during January, 2012, sometimes resulting in a 

firmwide VaR limit breach. Given that the CIO VaR was known to consistently overstate P/L 

volatility and because it was believed that an improved model was near implementation, the new 

VaR model output was an important consideration in the approval of one-off increases and gave 

management comfort that the VaR breaches would not have occurred if a new model were 

already in place. However, because of further breaches of the csw 1 0% limits and stress limits 

that were occurring at the end of March and April, 2012, there was increased attention to the 

portfolio from senior management due to the R W A, the losses, and the press. 

The fifth question you asked was an inquiry as to what actions were taken to inform 

senior bank managers about the SCP risk issues. Let me first note that the size of the synthetic 

credit portfolio was well understood among the senior management at 1.P. Morgan. The 

5 
116 

portfolio dominated CIO VaR for most of the period from 2008 to 2012, and it had a significant 

impact on stress test results as well. Because the track record for managing such a significant 

risk had been good, namely there were significant gains in 2009 and relatively stable results 

during the rest of the period, matters proceeded in the normal course. There were active 

discussions on regulatory capital usage. 

The final question you asked me related to what actions were taken to inform regulators 

about SCP issues. During the period in question, I had occasional meetings with regulators with 

regard with to the CCAR regulatory stress exercises. In addition, the CIO management team met 

with regulators in April 2012 to discuss the SCP events. I also recall that there were some 

additional meetings about synthetic credit following up on the meeting with regulators in April, 

2012. 

I hope the above answers are helpful to your inquiry. Because this subject area is so 

complicated, it is hard to give succinct answers. I am happy to answer any questions about the 

above topics. 

Thank you. 

6 
117 

Michael Cavanagh 

Co-Chief Executive Officer, Corporate and Investment Bank, 

on Behalf of JPMorgan Chase & Co. 

Written Testimony for the Senate Permanent Subcommittee on Investigations 

March 15,2013 

I. Introduction 

Good morning Chairman Levin, Ranking Member McCain, and Members of the 

Subcommittee. My name is Michael Cavanagh, and I serve as the Co-Chief Executive Of1icer of 

the Corporate and Investment Bank at JPMorgan Chase & Co. ("JPMorgan" or the "Firm"). 

also led the JPMorgan Management Task Force's review of losses incurred in 2012 by the 

Firm's Chieflnvestment Oilice ("CIO"). I appreciate the opportunity to participate in today's 

hearing on matters relating to those losses, and will answer as best I can any questions you might 

have. I 

We have worked closely with the Subcommittee's staff during the course of its inquiry 

regarding the 2012 CIO losses, and have cooperated as completely as possible to help provide a 

full picture of what happened and how it happened, as well as JPMorgan's response. We 

appreciate the courtesies the staff has extended throughout the course of this inquiry and thank 

them for their professionalism. 

You have requested that we address in this testimony a range of topics, including the 

findings of the Task Force, oversight ofCIO and the Synthetic Credit Portfolio (including 

trading strategies, risk management, hedging, valuation, and modeling), and communications 

with third parties, including investors and regulators, regarding the Synthetic Credit P0111'olio. 

address each of these topics below. Before turning to them, however, and on behalf of our entire 

My testimony today is intended to reflect the Task Force's view of the facts. Others, including regulators 

conducting their own investigations, may have a different view of the facts, or may focus on facts not described in 

the Task Force Report, and may also draw different conclusions regarding the facts and issues. The Task Force's 

mandate did not include drawing any legal conclusion, and accordingly, by my testimony today, neither I nor the 

Task Force purport to do so. 
118 

management team, I want to repeat what we have said before: that we let down our shareholders 

and failed to meet the high standard we set for ourselves. We have learned valuable lessons from 

our experience, and have taken and are continuing to take a number of significant remedial 

actions that we believe will make us an even stronger company going forward. 

II. The Task Force 

Over the past nine months, the Task Force and its advisors conducted a thorough review 

of the CIO losses. The Task Force's work which included interviews of many current and 

former JPMorgan employees, an examination ofmi1lions of documents, and review of tens of 

thousands of audio files was overseen by an independent Review Committee of the Board of 

Directors, which conducted its own investigation and with whom the Task Force also shared and 

discussed its findings. The Task Force also shared and discussed its findings with the entire 

Board, and as you know, made its findings public on January 16,2013. 

The Task Force made five key observations, which are described briefly below. These 

observations renect the Task Force's view that direct and principal responsibility lor the losses 

lies with the traders who designed and implemented the flawed trading strategy. However, they 

also renect the Task Force's view that responsibility for the naws that allowed the losses to 

occur lies primarily with CIO management but also with senior Finm management. 

The Film's views on responsibility for these losses have had direct and concrete results. 

The Firm has tenminated the employment of those most responsible and clawed back their 

compensation; it has accepted the resignations of other relevant employees; and it has reduced 

the compensation of other personnel both within CIO and elsewhere, including the Chief 

Executive Oi1icer. Beyond these employment actions, the Firm has undertaken a significant 

effort across the entire Firm, to re-examine its risk management practices, and has worked to 
119 

take all necessary steps to ensure that the Finn is employing best practices and is well-positioned 

to prevent similar incidents in the future. 

A. The Findings of the Task Force 

I. Key Observations 

The Task Force made five key observations regarding CIO and the losses, and these 

observations correlate to several of the topics you have requested this testimony address. First. 

CIO's judgment, execution and escalation of issues in the first quarter of2012 were poor, in at 

least six critical areas: (1) CIO management established competing and inconsistent priorities 

for the Synthetic Credit Portfolio without adequately exploring or understanding how the 

priorities would be simultaneously addressed; (2) the trading strategies that were designed in an 

effort to achieve the various priorities were poorly conceived and not fully understood by CIO 

management and other CIO personnel who might have been in a position to manage the risks of 

the Synthetic Credit Portfolio effectively; (3) CIO management (including CIO's Finance 

function) failed to obtain robust, detailed reporting on the activity in the Synthetic Credit 

Portfolio, and/or to otherwise appropriately monitor the traders' activity as closely as they should 

have: (4) cro personnel at all levels failed to adequately respond to and escalate (including to 

senior Finn management and the Board) concerns that were raised at various points during the 

trading; (5) celtain of the traders did not show the full extent of the Synthetic Credit Portfolio's 

losses; and (6) CIO provided to senior Finn management excessively optimistic and inadequately 

analyzed estimates of the Synthetic Credit Portfolio's future perfonnance in the days leading up 

to the April 13 earnings call. 

Second, the Finn did not ensure that the controls and oversight ofCIO evolved 

commensurately with the increased complexity and risks ofCIO's activities. As a result, 
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significant risk management weaknesses developed within CIO that allowed the traders to pursue 

their flawed and risky trading strategies. On this point, the Task Force concluded that senior 

Firm management's view of CIO had not evolved to reflect the increasingly complex and risky 

strategies CIO was pursuing in the Synthetic Credit Portfolio; instead, they continued to view 

CIO as the manager of a stable, high-quality, fixed-income portfolio. As a result, they were less 

focused on CIO relative to client-racing businesses, and did not do enough to verify that CIO 

was well managed or that the Firm was fully applying its various risk and other controls to the 

Synthetic Credit Portfolio's activities. Compounding the matter, the CIO finance function failed 

to ensure that its price-testing procedures for the Synthetic Credit Portfolio were being properly 

and rigorously implemented, and that il produced robust reporting and analytics regarding the 

portfolio's performance and characteristics. 

Third. CIO Risk Management lacked the personnel and structure necessary to manage the 

risks of the Synthetic Credit Portfolio. With respect to personnel, a new CIO Chief Risk Officer 

was appointed in early 2012, and he was learning the role at the same time the traders were 

building the ultimately problematic positions. More broadly, the CIO Risk tlmction 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 etTectively perform its intended role as a forum tor 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. 

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CIO Risk Management made a number of key missteps, including failures to (I) review 

the appropriateness of the CIO risk limits used from 2009 to 2012; (2) ensure that the change to 

the CIO Value-at-Risk ("VaW') model for the Synthetic Credit Portfolio in January 2012 was 

appropriate and being properly implemented; and (3) appreciate the significance of the changes 

in the Synthetic Credit Portfolio during early 2012. 

Fourth, the risk limits applicable to CIO were not sufficiently granular. There were no 

limits by size, asset type or risk factor specific to the Synthetic Credit Portfolio; rather, limits in 

CIO were applicd only to CIO as a whole. The absence of granular limits played a role in 

allowing the tlawed trading strategies to proceed in the first quarter, especially as the positions 

grew in sizc. 

Fijih, approval and implementation of the new CIO VaR model for the Synthetic Credit 

Portfolio in late January 2012 were t1awed, and the model as implemented understated the risks 

presented by the trades in the first quarter 01'2012. The model sutTered [rom signiticant 

operational shortcomings that received inadequate scrutiny by CIO Market Risk, the Model 

Review Group, and the model's developer in the model approval process. Moreover, although 

the model produced significantly different results from its predecessor, the personnel involved in 

reviewing and approving the new model required only limited back-testing. 

2. Remediation 

The Firm has taken comprehensive remedial steps to address deficiencies identified since 

the losses. These include the following: 

Firs!, the Firm has replaced the individuals within CIO responsible for the losses. The 

Firm has terminated the employment or accepted the resignations of the traders and managers 

who were responsible for the trades that generated the losses, and pursued the maximum 
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c!awback of their compensation. The Firm also accepted the Chief Investment Officer's 

retirement, as well as her voluntary agreement to return or waivc amounts that the Firm 

otherwise deemed subject to a clawback. The Firm has also substantially reduced (in some 

cases, to zero) the 2012 incentive compensation for a number ofcmployees and, in addition to 

reductions for specific CIa employees, has also reduced thc 2012 incentive compensation pool 

for all of CIa. 

Second, the Firm has appointed a ncw, experienced CIa leadership team. The new 

leadership team began promptly to reposition cIa to focus on its basic mandate, and the Firm 

also has increased resources for key support functions within CIa, including Finance and Risk 

Management. 

Third, the Firm has adopted a variety of governance measures to improve its oversight of 

CIa, and ensure that cIa is better integrated into the rest ofthe Firm. For example, the Firm has 

instituted ncw and robust committee structures within CIa, and has taken steps to enhance the 

Firm's intcrnal audit covcrage of CIa activities and ensure tight linkages among CIa, Corporate 

Treasury and other operations within the Firm's Corporate sector. 2 The Firm has also integrated 

the existing cro Valuation Control Group ("VCG") stafTinto the Investment Bank's Valuation 

Control Group. In addition, the Firm has established a CIa Valuation Governance Forum 

(HVGF") as part of a Firm-wide initiative to strengthen the governance of valuation activities. 

The Film has also mandated that the CIa Corporate Business Review be conducted with 

increasing frequency, and with the same rigor as similar reviews for the Firm's client-facing 

lines of business. 

, The Corporate sector (also referred to as the "Corporate/Private Equity" sector) comprises Private Equity, 

Treasury. Chief Investment Office, and Other Corporate, which includes corporate staff units (such as Audit, 

Finance, Human Resources, and others) and other centrally managed expense, 
123 

Fourth, the Firm has overhauled the Risk Committee for CIO and enhanced the 

independence of the CIO Risk function. For example, the new CIO Chief Risk Officer's 

functional reporting practices now conform to his official reporting line; there is no confusion 

about his accountability to the Firm-wide Risk function. His compensation and career 

advancement will be controlled by the Film Chief Risk Officer, with input about his performance 

!I'om others, as appropriate. CIO's Risk Committee has been renamed the CIO, Treasury and 

Corporate Risk Committee, and now has broader responsibilities, covering Treasury and 

Corporate functions as well as CIO, and significant representation beyond CIO. The committee 

now meets on a weekly basis, and attendees also now include other members of senior 

management, trom within and outside ofCIO. 

Fifth, CIO has implemented new or restructured risk limits covering a broad set of risk 

parameters. Furthermore, the Synthetic Credit Portfolio after significant de-risking was 

transferred at the end of the second quarter 0[2012 from CIO to the JPMorgan Investment Bank, 

which has an experienced team of traders and risk managers who were better positioned to close 

out the remaining positions. 

Finally, under the guidance of its Chief Risk Officer, the Firm conducted a 

comprehensive self-assessment of its entire Risk organization and, as a result, has implemented a 

series of improvements both Firm-wide and within the lines of business. In addition to working 

to improve model development, review. approval, and monitoring, the Firm is rcaftlrming and. 

where appropriate, revising its market risk limits across all of its lines of business, and has 

already introduced additional granular and portfolio-level limits. It has strengthened the Firmwide limit excession policy to provide for more rapid escalation and a more thorough review. It 

is working to further improve market-risk reporting, and has made substantial enhancements to 

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risk reports presented to the Board of Directors' Risk Policy Committee ("DRPC"). The Finn 

also has restructured its Firm-wide Risk Operating Committee in order to increase focLis on 

identifying and implementing best practices across the Firm. Finally, the Firm has enhanccd the 

structure of its Risk Governance Committee and established a Firm-wide Risk Committee. 

B. Oversight of CIO and the Synthetic Credit Portfolio 

You have asked that I address five specific oversight-related topics: (I) oversight of CIa 

and the Synthetic Credit Portfolio generally; (2) oversight of the Synthetic Credit Portfolio's 

trading strategies and risk managcment; (3) oversight of hedging activities by the Synthetic 

Credit Portfolio; (4) oversight of valuation practices; and (5) oversight of risk and capital 

models. Several ofthesc topics are addressed above in the context of specific Task Force 

observations and remedial actions; I separately discuss below oversight of hedging activities and 

valuation practices. 

With respect to oversight of the hedging activities, let me note at the oLitset that CIa no 

longer engages in the type of trading that generated the losses in the Synthetic Credit Portfolio 

and has refocused on its core mandate of traditional Asset and Liability Management. Future 

synthetic credit positions will be within applicable risk limits, linked to a particular risk or set of 

risks that they are designed to offset, and subject to specified documentation, reporting and 

monitoring requirements. 

As to valuation practices, the Firm determined in July 2012 that CIO's internal controls 

over valuation of the Synthetic Credit Portfolio suffered from a material control weakness as of 

March 31, 2012. Since this discovery, the Firm has restructured and enhanced its independent 

valuation control group in order to remedy this shortcoming. 
125 

C. Communications with Third Parties 

I. Investors 

You also asked that I address actions taken to inform investors about the Synthetic Credit 

Portfolio. The Firm made two relevant disclosures to the market relating to the Synthetic Credit 

Portfolio during the first halfof2012: on an April 13,2012 earnings call, and in a May 10,2012 

Form 10-Q and accompanying analyst call. With respect to both, the Firm subsequcntly learned 

infonnation that caused it to make a further disclosure to the market. 

As to the April 13, 2012 earnings call, as you are aware, Mr. Braunstein stated that the 

Firm was "very comfortable" with the positions in the Synthetic Credit Portfolio, and Mr. Dimon 

agreed with an analyst's characterization of the pUblicity surrounding the Synthetic Credit 

Portfolio as a "tempest in a teapot." Those statements turned out to be wrong, of course, though 

they were the product of good-faith efforts to assess the Synthetic Credit Portfolio. As described 

in the Task Force Report, in the period leading up to April 13, Mr. Dimon and Mr. Braunstein, 

among others, requested that CIO provide information and analyses about the Synthetic Credit 

Portfolio in light of recent press covcrage relating to the Synthetic Crcdit Portfolio. These 

analyses concluded. in broad telms. that the Synthetic Credit Portfolio was generally '"balanced," 

that thc market was currently dislocated, and that mark-to-market losses were temporary and 

managcable. One of the traders in particular expressed confidence that mark-to-market prices in 

thc Synthetic Credit Portfolio would "mean revert." 

The losses in the Synthetic Credit Portfolio, however, increased in the weeks after the 

April 13 earnings call. These losses prompted senior Finn management in late April to direct 

non-CIO personnel to review and, ultimately, assume control of the Synthetic Credit Portfolio. 

A team led by a senior member of firm-wide Market Risk examined the portfolio, and after 

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analyzing, among other things, correlations of the positions and sensitivities under a range of 

market scenarios, the team concluded - and informed senior Finm management that the 

Synthetic Credit Portfolio faced much greater exposure than previously reported by CIO. lbc 

team also found that the market's knowledge ofCIO's positions would make it even more 

challenging to reduce the risks presented by those positions. 

In addition to this risk-related review, in preparation for the tiling of its Form 10-Q for 

the first qumier of2012, the Firm undertook a review relating to the valuations of positions in the 

Synthetic Credit Portfolio. Based on this review, the Firm concluded that its marks at March 31 

for the Synthetic Credit Portfolio complied with U.S. Generally Accepted Accounting Principles. 

This conclusion was reached in consultation with the Firm's outside auditors, 

PricewaterhouseCoopcrs LLP ("PwC"). 

On May 1 0, the Finn disclosed that there were significant problems with the strategy for 

the Synthetic Credit Portfolio. In Mr. Dimon's words, the strategy was "t1awed, complex, poorly 

reviewed, poorly executed, and poorly monitored." The Firm disclosed that the Synthetic Credit 

Portfolio had incurred more than $2 billion in mark-to-market losses up to that point in the 

second quarter, with the possibility of additional future losses and volatility. 

Shortly after May 10, the Task Force was formed to investigate the causes of the losses. 

In the course of our ensuing work, we became aware of evidence - primarily in the form of 

electronic communications and taped conversations that raised questions about the integrity of 

the marks in the Synthetic Credit Portfolio in March 2012. After consulting with PwC, the Firm 

concluded that it was no longer confident that the March 31 marks reflected good-faith estimates 

of the fair value of all the instruments in the Synthetic Credit Portfolio. Accordingly, on July 13, 

the Firm announced that it would be restating its first-quarter net income, to lower it by $459 

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million. At the same time, the Firm also announced that it had been expeditiously reducing risk 

in the Synthetic Credit P0l1folio and that the cumulative year-to-date losses through June 30, 

2012 had grown to approximately $5.8 billion. 

2. Regulators 

Finally, you asked about actions taken to inform regulators about the Synthetic Credit 

P0l1folio. The Task Force's focus was the causes of the losses, and as a result, a detailed 

timeline ofthc Firm's communications with its regulators relating to the portiolio was beyond 

our scopc. As a general mattcr, we try to be very open and communicative with our regulators, 

and they generally have access to whatever information they seek about matters like trading 

positions. Unfortunately, as we have said before, to the extent that we were wrong about the 

riskiness of the Synthetic Credit Portfolio in mid-April, we were also wrong when we discussed 

the portfolio's losses with our regulators at that time. And thereafter, when the losses in the 

Synthetic Credit Portfolio accelerated at the end of April, we should have been proactive in 

keeping our regulators so informed. That said, as noted in the Task Force report, senior Firm 

management and the new CIO leadership team recognize the importance of an open and 

transparent culture, including in its communications with the Firm's regulators. The Firm has 

been working and will continue to work to ensure regulators consistently have full and timely 

visibility into CIO's activities, and to enhance a culture of prompt and complete disclosure in 

accordance with regulators' expectations. 

III. Policy Considerations 

JPMorgan and its regulators have a common interest in ensuring that the Firm has the 

right risk controls in place; CIO no longer engages in the types of trades that generated the losses 

in the Synthetic Credit Portfolio. Future synthetic credit positions in CIO will be subject to 

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appropriate reporting and monitoring requirements, and linked with appropriate documentation 

to a particular risk or set of risks that they are designed to ofIset. We believe that the changes we 

have made appropriately renect thc approach to hedging outlined in the proposed Volcker rule, 

in that they impose strong internal controls over hedging, including requirements that all hedge 

transactions bc properly documented and monitored. We also understand that Congress and our 

regulators will determine the appropriate regulatory and policy response to ensure that the issues 

we faced are not repeated by us 0]" other institutions, 

IV. Conclusion 

As described above, the Task Force does not believe that the CIO losses stemmed from 

anyone specific act or omission. Rather, the Task Force concluded that the losses were the 

result of a number of acts and omissions, some large and some seemingly small, some involving 

personnel and some involving structure, and a change in anyone of which might have led to a 

different result. This experience has caused substantial and healthy introspection at the Firm and 

recognition of the need for continued improvement in multiple areas. Ultimately, the Task Force 

concluded that this incident teaches a number of important lessons that the Firm is taking very 

seriously. Thank you for the opportunity to participate in this hearing and I am happy to answer 

your questions. 

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For Release Upon Delivery 

9:30 a.m. March 15,2013 

TESTIMONY OF 

THE OFFICE OF THE 

COMPTROLLER OF THE CURRENCY 

before the 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

March 15,2013 

Statement Required by 12 U.S.C. § 250: 

The views expressed herein are those of the Office of the Comptroller of the Currency 

and do not necessarily represent the views of the President. 
130 

Chainnan Levin, Ranking Member McCain, and members of the Subcommittee, 

we appreciate this opportunity to discuss the OCC's oversight of lPMorgan Chase, 

National Association (the bank), as it relates to the bank's more than $6 billion in trading 

losses last year. The Subcommittee's important work in this area will enhance our 

understanding of lessons learned from the specific events at the bank and how we may 

apply them to improve both the risk management of other large institutions and our own 

supervisory processes. The OCC has supported the Subcommittee's efforts to review the 

bank's credit derivatives trades, and we will continue to cooperate on this matter. 

The risk management culture and processes that led to the significant trading 

losses at the bank are unacceptable. The bank's risk management and internal controls 

failed to identify and appropriately manage credit derivatives trading practices conducted 

by the Chief Investment Office (CIO) on behalf of the bank. Corporate governance and 

oversight were lacking with respect to the CIO risk taking. As a result, the activity and 

the risk associated with the CIO were not transparent. Equally troubling was the failure 

of the bank to provide timely and complete infonnation to the OCC as events unfolded. 

This represents a fundamental breakdown in the open communication that we expect 

bank management to maintain with our supervisory staffs. Had the risk management and 

audit processes worked as intended, this activity should have been highlighted to bank 

management and supervisors, thereby resulting in greater scrutiny by both the bank and 

the OCC. 

Clearly, there were red flags that we should have noticed and acted upon, and as 

our testimony will describe, we have taken actions to strengthen our supervision in this 

area. However, once we beeame aware of the potential scope of the problems in the 
131 

trades conducted by the CIO on behalf of the bank, we quickly took actions to obtain 

more information from the bank, and we initiated a series of targeted examinations. 

Based on our findings, we issued a Cease and Desist (C&D) order against the bank to 

remedy the unsafe and unsound practices and legal violations related to the derivatives 

trading activities conducted by the CIO on behalf of the bank. I As more fully described 

in our C&D, we found deficiencies in the following core functions: oversight and 

governance; risk management processes and procedures; control over trade valuation; 

development and implementation of models; and internal audit processes. Throughout 

this time, we were working closely with supervisors from the Federal Reserve System, 

and, concurrent with the OCC's enforcement action, the Board of Governors of the 

Federal Reserve System (FRB) issued a C&D order against the bank's parent company, 

lPMorgan Chase & Co (the holding company). 

We also launched an internal review to assess the quality of our supervision and 

lessons learned in order to strengthen our supervision at the bank and across the large 

bank population that we supervise. Our goal is to ensure that we focus resources 

efficiently and effectively to identify risks, assess the adequacy of banks' governance and 

risk management, and ensure that weaknesses are promptly addressed. 

Our testimony addresses the key issues highlighted in the Subcommittee's 

invitation letter, including our oversight of the CIO activities affecting the bank and the 

Synthetic Credit Portfolio (SCP); the extent to which the bank provided evidence of the 

SCP risk mitigation activities; our oversight of the SCP's valuation practices and the 

bank's use of its Value at Risk (VaR) models; and the extent to which the CIO and the 

bank impeded effective oversight by the OCC. Our testimony then describes the lessons 

1 See OCC NR 20 13-7, http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-7.html. 

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we have learned from our internal review and examinations, and how we are using those 

lessons to improve our supervision of large banks. 

I. An Overview of the Bank, the CIO, and SCP 

JPMC is a $2.4 trillion bank holding company with approximately $140 billion in 

Tier I common capital as of December 31, 2012. The lead national bank has 

approximately $1.9 trillion in total consolidated assets and $112 billion in Tier 1 common 

capital. 

The activities that generated the reported $6 billion loss were conducted in the 

national bank by the CIO. CIO performs a number of tasks, principally taking positions 

to manage the holding company's (and the bank's) exposure to various risks and 

investing cash. The CIO's primary mandate is to manage structural interest rate risk and 

hedge foreign currency capital and mortgage servicing rights. It also manages companyowned and bank-owned life insurance and oversees the holding company's pension 

funds. The CIO also had small securities and derivatives positions for both trading and 

investment purposes. The CIO functions separately from the holding company's 

investment banking business, where most trading and market making take place. 

In 2006, the holding company formally approved a modest initiative of the CIO to 

trade credit indexes in North America and London to manage the holding company's 

large cyclical exposure to credit. The VaR limit for this program was initially $5 million. 

The program grew rapidly in 2007 and 2008 as the financial crisis developed, taking 

substantial short positions in High Yield (HY) credit in SCP intended to hedge potential 

credit losses in loan and other portfolios. Because they were short positions, their value 

would generally increase if credit conditions in this market segment deteriorated. 

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Premiums paid for that protection were offset by long credit positions in other HY 

maturities and indexes as well as short and long Investment Grade (IG) credit positions 

across a variety of indexes, maturities, series, regions, and tranches. As HY positions are 

generally not bank-eligible, the bank transferred the market risk of these positions into a 

subsidiary of an Edge Act corporation, which took most of the losses. SCP was actively 

managed to achieve a dual mandate: make modest returns in a benign environment and 

more substantial returns in a credit stress event. 

Throughout the financial crisis, the position appeared to perform well. By 

September 2010 the bank had reduced its SCP risk, and CIO management planned to 

further reduce the position. 20 II was a pivotal year, as markets stabilized and the 

risk/reward of the book was not as compelling as it had been. Consequently, the book 

size was reduced until June 20 II. However, this cutback in stress loss protection led to 

large and sustained excesses of the CIO stress loss limits from February through June 

2011. The limit excesses stopped in June 20 II when the HY short positions were 

increased once again as credit markets deteriorated. 

In late 2011, CIO management had a stated goal of reducing the internal riskbased capital allocated to the CIO unit through reductions in the CIO's risk-weighted 

assets (RW A). This was to be accomplished in part by changes in the credit derivatives 

positions. Despite that goal, CIO added to its HY short positions in late 2011 and early 

2012. The CIO also added to the other positions to offset premiums paid on the short 

position. Losses, both actual and potential, accumulated in January 2012 so that by the 

end of the month, traders and CIO management were struggling to come up with a viable 

strategy to either stop building positions or, conversely, to continue aggressively trading 

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with the hope that markets would tum more favorable. Ultimately, they chose the latter 

strategy and in February and March, there was a large and rapid increase in positions 

across a wide range of indexes, maturities, series, and tranches. 

The positions became so large as to be noticed by external market traders and 

reported in the press. Losses continued to mount through April leading to the holding 

company's public announcement of $2 billion dollars in losses with the potential for 

more to come. To-date, reported losses on the position have totaled some $6 billion. 

II. The OCC's Oversight of the CIO and the SCP 

The acc oversees the holding eompany's national banks and various 

subsidiaries, including a braneh in London. The FRB oversees the holding company and 

its affiliates, as well as the Edge Aet subsidiary of the national bank. The OCe's 

supervisory team includes approximately 65 onsite examiners who are responsible for 

reviewing nearly all facets of the bank's activities and operations, including commercial 

and retail credit; mortgage banking; trading and other capital markets aetivities; asset 

liability management; bank technology and other aspects of operational risk; audit, and 

internal controls; and complianee with the Bank Seereey Aet, anti-money laundering 

laws, and the Community Reinvestment Aet. These onsite examiners are supported by 

additional subject matter experts from across the OCC, and a small team of examiners in 

London. 

acc supervises the CIa aetivities affeeting the bank as part of its broader 

supervision of capital markets aetivities in the bank. The CIa activities are eonducted 

globally but managed and controlled out of the holding company's New York offiees. As 

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a result, these activities are supervised by OCC and FRB staff assigned to the firm's 

headquarters in New York. 

Examination targets for the bank's capital markets activities were determined 

based on our risk assessment system. As part of this process, our capital markets team 

made supervisory judgments in order to focus attention where we perceived the largest 

risk to be. We examined high risk and complex trading books in the bank's investment 

bank. The examination team also reviewed the bank's compliance with Basel rules, 

liquidity, and interest rate risk management. Within the CIO, our supervisory focus was 

on its investment portfolio. This $350 billion portfolio had grown quickly through 2008 

and 2009 due to mergers and growth in deposits. The objectives of the portfolio are 

twofold: 1) to serve as a warehouse of liquid assets should the bank experience deposit 

losses due to idiosyncratic or systemic stress; and 2) to provide an earnings buffer for 

deployment of excess deposits. Given its growth, we were focusing much of our 

attention there. 

We were aware of the various short term strategies being conducted in the CIO, 

and their performance and risk were mentioned briefly in Treasury, CIO, and holding 

company reports. While we knew that the CIO held a position protecting against an 

economic downturn, we now realize that the bank's reporting on SCP did not convey the 

full nature of the activities or risks. Throughout much of the financial crisis and into 

2011, the SCP book was consolidated into cro performance metrics and not reported 

separately. Because of this lack of granular information, in 2011 and until the disclosure 

of the losses, reporting about the SCP was not transparent, and information of interest to 

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examiners on emerging issues was not provided. This lack of transparency inhibited our 

ability to fully understand the nature of the risk taking and evolution of the SCP strategy. 

Following the April 2012 Wall Street Journal article about the "London Whale," 

we directed the bank to provide us with granular information about the SCP so that we 

could fully assess the risks being taken, and we began internal discussions on the scope of 

corrective actions warranted. We quickly determined that a full-scale, comprehensive 

review of the activities and oversight of the CIO and SCP was required due to increasing 

levels of losses the bank was then reporting and the bank's lack of fulsome responses to 

our requests for information. Our review was launched during the first week of May and 

had two components. The first component focused on evaluating the adequacy of the 

bank's risk controls and risk governance, informed by their application to the positions at 

issue. The second component evaluated the lessons that could be learned from this 

episode to enhance risk control and risk management processes at this and other banks, 

and to improve OCC supervisory approaches. 

The first prong of our review involved our onsite examination team focusing on 

three broad areas. First, we actively assessed the quality of management and risk 

management in the CIO function. This review looked at decision making and board 

oversight, including whether the risk committee members were appropriately informed 

and engaged; the types and reasonableness ofrisk measurement metrics and limits; the 

model governance review process; the valuation control process; and the quality of work 

by the independent risk management team, as well as internal audit. Second, we assessed 

the adequacy of the information provided within the holding company and the bank and 

made available to the OCC to evaluate the risks and risk controls associated with the 

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137 

positions undertaken by the CIO. Third, we are now reviewing the compensation process 

of the CIO and assessing the bank's determination on "claw backs" as part of that 

analysis. 

Working on a parallel track, as part of the second prong of our supervisory 

review, we compiled a detailed chronology of events to identify gaps in the bank's risk 

management and to provide lessons to be learned for the OCC. To ensure that we had a 

full and complete picture of the SCP portfolio and how it changed over time, our internal 

review initially covered activities from the start of2011, over a year before the losses 

were realized, and in some cases, extended back several years. We focused particular 

attention on the rationale for the transactions and how they fit within the framework of 

the bank's risk management processes; the quality and extent of information provided to 

the OCC; and consistency of the bank's actions with OCC supervisory guidance. In 

addition, we assessed relevant audit and examination findings and whether deficiencies 

werc addressed; the extent to which the risks associated with the strategy were 

recognized and evaluated; and whether there was an effective exchange of views among 

the business unit and control groups. 

As a result of the work of the onsite examination teams, and as previously noted, 

we issued a C&D order against the bank for unsafe and unsound practices, and legal 

violations related to derivatives trading activities conducted on behalf of the bank by the 

CIO. Those practices and violations are detailed in the C&D order, which is available on 

the OCC website. 2 The bank has committed to taking all necessary and appropriate steps 

to remedy the deficiencies, unsafe or unsound practices, and violations identified by the 

2 See http://www.occ.gov/news-issuances/news-releases/20 13/nr-occ-20 13-7a. pdf. 

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OCC, and our examiners are closely monitoring the bank's corrective actions and 

compliance with our order. 

III. The Extent to Which the Bank Provided Evidence of SCP Hedging Activities 

in 2012 

The SCP portfolio was never specifically linked to a dedicated pool of assets. In 

addition, it was characterized by the bank as a hedge of overall credit risk of the holding 

company and as a hedge of credit risk of the CIO. Not until the OCC demanded a 

meeting on April 16, 2012, did the CIO management provide a more fulsome explanation 

of SCP positions. Even then, significant information was lacking; for example, that 

trading had been stopped and that losses had increased significantly. 

IV. OCC Oversight of the Valuation Practices Applied to the SCP 

Our ongoing supervision of valuation practices is also based on our assessment of 

risk. Valuations are often tested during targeted examinations. Between examinations, 

we review internal reports, including reports of internal auditors. The OCe's supervision 

of the valuation practices at the bank focused on the investment bank, where the bulk of 

trading in complex and difficult to value instruments took place. Within the CIO, we had 

reviewed the valuation of the investment portfolio and found the processes to be 

satisfactory. As mentioned, we did not, however, perform detailed testing of the SCPo 

We became aware of problems in SCP valuation practices as a result of both the bank 

management's internal review in late April, and an internal audit report provided to us at 

about the same time. 

We have since conducted an examination of bank-wide valuation processes, 

including the CIO, and focused on the consistency of practices and controls bank-wide, 

and as reflected in our C&D, we have directed the bank to make improvements to its 

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valuation practices. We will be conducting onsite verification to determine the bank's 

compliance. 

V. OCC Oversight of the CIO's Implementation of a New Value-at-Risk Model 

in January 2012 and Revocation of that Model in May 2012 

VaR is one risk measure used by banks to monitor and control risk taking. VaR 

methodology is also used in the federal banking agencies' and Basel risk-based capital 

rules for market risk. In general, VaR models are not designed to capture extreme tail or 

stress events. 

The OCC was aware that changes were being made to the CIO VaR model 

intended to make the model comply with the new Basel 2.5 market risk capital rules, and 

that VaR could fall by as much as one-half under this new model. We had an existing 

requirement that the bank improve its model risk management in general and the 

surrounding control processes, and we expected the bank to follow the processes 

developed to address that deficiency. 

In a meeting on May 9, 2012, to brief the OCC on the large losses in the SCP, 

bank management revealed that they had found major problems with regard to 

implementation of the new VaR model and had decided to revert to the prior VaR model. 

Bank management acknowledged that the new model had not been implemented properly 

and was poorly controlled. As a result, we immediately commenced a comprehensive 

review of both the VaR model change in the CIO and the use ofVaR across the bank. 

Our review identified numerous deficiencies and found violations of qualitative 

regulatory requirements. As a result, we directed corrective action, and we are closely 

monitoring the bank's progress. 

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We should have asked for more infonuation about the change in the VaR model 

in January, given the large drop in VaR and the recent VaR limit excesses, even though 

the model was not changed for Basel I RW A. As previously noted, at the time, our 

examiners were focused on evaluating stress testing methods, and had been focused on 

ensuring the firm improved its internal review process. As we learned later, the bank's 

internal processes for model risk management were not being effectively applied to the 

CIO. As a result, we have changed our supervisory practices, and we now discuss VaR 

model changes during monthly meetings with the bank. We expect the bank to address 

the reporting and other control weaknesses specified in our supervisory letters and C&D 

order. 

VI. The Extent to Which the CIO and the Bank Impeded Effective OCC 

Oversight of the SCP and Engaged in Unsafe or Unsound Banking Practices 

Despite regular meetings with JMPC Treasury and CIO, review of corporate and 

business unit reports, and targeted examinations of the CIO, it was the Wall Street 

Journal article naming the London Whale that led the OCC to contact the CIO and ask 

detailed questions about the credit derivatives trading. At that time, we were focusing 

resources on areas perceived to be of higher risk, and managers and control groups in the 

bank were believed to be competent. We now know, however, that they were not 

forthcoming about the business and did not raise issues appropriately with the OCc. 

Holding company-wide reporting provided limited and sometimes incomplete 

infonuation about these trading activities and perfonuance. We were aware in general 

tenus of CIO stress loss protection, but not about the details of the SCP. However, the 

fact that the CIO was not transparent about the SCP and that its reports were not 

infonuative does not excuse us from asking additional questions of the bank. We have 

II 
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learned a number of lessons from this event, and as a result, are making improvements to 

our supervision. 

VII. Lessons Learned for oee Supervision 

The acc's Large Bank supervision program is structured to promote consistent 

risk-based supervision of large banks, including internationally-active, complex financial 

institutions. While we believe our supervision-by-risk program is fundamentally sound, 

our internal review of the events at the bank and our own processes have highlighted a 

number of areas where we could improve. These lessons and the actions we are taking to 

strengthen our supervision are summarized below. 

1) The Need to Obtain and Vertfy Timely, Accurate, and Complete Information 

First, we failed to recognize the extent of SCP risk and potential for losses in a 

timely manner. Regardless of the contributing factors, we must test the quality of 

information and reports provided by firms we regulate to ensure we have a complete view 

oftheir operations. That is our standard practice, but SCP showed us that we can 

improve. We continue to emphasize that it is the responsibility of bank risk management, 

finance, and audit to ensure information is complete, accurate, and meaningful. 

While we have been emphasizing the need for banks to have firm-wide risk 

measures and reporting, this event also underscores the need to evaluate desk and 

business unit level risk and performance reporting to ensure that firm-wide reporting is 

adequate and highlights trends and outliers in the data for further review and discussion. 

Since examiners receive substantial amounts of data, it is particularly important to ensure 

that the data we obtain is presented in a clear format and reviewed in a timely fashion. In 

this particular case, we realize that while the reports themselves did not have necessary 

12 
142 

details, a more thorough follow up with the bank could have given us a better view on 

SCP strategies before the rapid buildup of positions occurred. As a result, we have 

changed our daily operating processes at the bank to ensure that an examiner reviews 

excesses in a timely fashion and that there is a back-up process in place. 

2) The Need to Identify and Apply Resources with Prerequisite Skills 

The OCC has resources and expertise for supervising trading units but we did not 

adequately deploy them to the SCPo Instead, examiners with specific trading expertise, 

including those with a combination of industry and bank supervision experience, as wet! 

as experts in OCC headquarters in various areas including trading, derivatives 

accounting, and economics, were dedicated to reviewing investment bank trading. Others 

were focused on how the bank protected its corporate and counterparty credit exposure. 

Our work in the CIO focused on the $350 billion investment portfolio, rather than the 

SCPo We paid particular attention to the investment portfolio since it had grown 

dramatically since the crisis and had a composition that differed from other national 

banks in important ways that affected both credit and liquidity risk. 

Effectively developing, applying, and coordinating the varied sources of expertise 

across the agency, in this case for trading, but more generally across the many units and 

strategy ofthe bank, is a challenge we are addressing. We continue to aggressively train 

examiners and will continue to seek and hire staff with the required technical and trading 

expertise. We are also evaluating our staffing and our use of technical experts to oversee 

this bank and other large banks. Improved analysis of trade and market data is a goal of 

the OCC's data analytics groups. 

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3) Need to Apply Matters Requiring Attention Appropriately 

The acc has standards for tracking Matters Requiring Attention (MRA) that 

were not effectively followed in the case of the CIO. An MRA associated with the CIa 

investment portfolio should have come with clear deadlines, and progress should have 

been more closely tracked. As a result of identifying this weakness, we have reinforced 

these standards, and we are conducting ongoing monitoring to ensure they are being 

followed consistently across the agency. 

4) The Needfor Regular Review of Internal Risk-Weighted Asset Models and Reporting 

We noted a number of deficiencies in the regulatory reporting in regards to 

market risk RWA for the CIa. Along with evaluating the bank's policies, procedures, 

practices, and controls to ensure the integrity of regulatory reporting, we need to 

consistently track the use of internal models; review R W A reporting to ensure it is 

informative, accessible, and accurate; and review material changes in internal models 

used for RW A. While examiners from the acc and FRB met regularly with JPM to 

discuss internal models, our C&D order requires improved controls and reporting which 

should enable us to better ensure material changes are identified. Specifically, VaR 

model changes are being highlighted and reviewed in monthly meetings with the bank. 

The implementation of Basel 2.5 will provide us with the opportunity to validate 

or, in some cases, revalidate VaR models and require improved processes as conditions 

of approval. Basel 2.5 approvals are done in partnership with the FRB, but we will 

impose conditions we feel are appropriate for the national bank. aur large bank quality 

assurance unit will be undertaking a targeted review of efforts to improve our review of 

14 
144 

R W A reporting to ensure that these practices are undertaken across our large bank 

portfolio where relevant. 

5) The Need to Look Across Business Lines and Locations and Coordinate with Other 

Supervisors 

The events at the bank highlighted our need to be more cognizant of market risks 

outside the conventional trading lines of business and operational breakdowns in the 

oversight and control of these risks. SCP also exposed the dangers of trading in offices 

or "hubs" removed from close proximity to senior management, despite advances in 

information technology and communication. It also highlights that at large complex 

institutions, risks and risk management functions can span across legal entities, resulting 

in overlapping responsibilities among banking supervisors. As a result we will focus 

more attention on overseas hubs, and conduct onsite examinations as appropriate. We 

also are looking for ways to enhance our collaboration with the FRS and other 

appropriate supervisors in our supervision of large complex firms. 

6) The Need to Identify Risks Associated with Risky Siloed Business Activities 

The CIO's structure illustrates characteristics that we need to look for in other 

business units in this bank and other banks. In this case, we observed a business unit 

operating in a silo, with poorly integrated reporting and application of controls. 

Processes for calculating risk and R W A calculation at the CIO were outside technology 

control processes; risk management portfolios lacked a clear mandate and reporting was 

limited; and, large and sustained limit excesses and limits raised to accommodate new 

risk taking lacked adequate review and evaluation by the firm. Identifying these 

15 
145 

characteristics in other business units may give us additional direction on where to look 

for potential issues before they become major problems. 

7) The Need to Identify Changes in Strategic Direction 

Our supervision needs to place more emphasis on identifying key changes with a 

bank's risk management or risk culture. For example, areas that are considered to be low 

risk but have experienced significant changes in management or key staff talent, strategy, 

unusual movements in gains/losses, and position growth or changes in types of activities 

or risk/reward profiles should be a red flag for more in-depth investigation. Our efforts to 

drive banks to strengthen their independent risk management, valuation, and audit 

functions will be the most important factor in reducing surprises. We are committed to 

involving our technical experts in reviews of all capital markets examination scoping, and 

in ongoing reviews of management information systems (MIS) to ensure that their 

technical skills are utilized to identify red flags and assess risk management processes. 

8) The Need to Improve Internal DCC Information Management Systems 

An ongoing challenge for the OCC is to improve our internal information 

management systems, to reduce manual processes to verify that the correct reports are 

being collected, and to ensure we take advantage of improvements in technology. 

Detailed data on trades and markets could have provided additional value, for example, in 

the identification of concentrations. Improving the information management systems and 

taking advantage of additional market data will require additional resources, and we are 

strengthening our data analytics team. 

16 
146 

VIII. Holding Large Banks to Higher Standards 

Finally, the events at the bank underscore the need to hold the largest banks to the 

highest standards. These banks must be managed and governed more rigorously than less 

systemically important institutions. We are doing this by demanding strong capital, 

reserves, and liquidity, and raising the bar for the corporate governance under which we 

expect large banks to operate. 

Stronger Capital. Reserves, and Liquidity Standards 

Since the onset of the financial crisis, we have directed the largest institutions to 

strengthen their capital, reserves, and liquidity positions. As a result, the quality and 

level of capital at national banks and bank holding companies with total assets greater 

than $50 billion have improved significantly. The median percentage of Tier 1 common 

capital relative to total assets for bank holding companies increased from 5.1 percent in 

2008 to more than 7.4 percent today, while the comparable ratio for national banks and 

federal savings institutions rose from 6.2 percent to 8.7 percent over that same period. 

Under scrutiny of our examiners, the largest banks have increased their loan loss 

reserves as a percentage of gross loans since the end of 2007, from 1.4 percent to 2.1 

percent. Similarly, the largest banks have materially strengthened their liquidity buffers 

through increases in short-term liquid assets that can be used to meet unanticipated 

liquidity demands and through a decreased reliance on short-term, volatile funding. 

System-wide, liquid assets are up $3.4 trillion over the past four years. The 

implementation of proposed rules related to Basel III will further enhance the quality and 

quantity of capital and liquidity held for regulatory purposes, ensuring that today's 

historically high levels remain sustainable through the next cycle. 

17 
147 

Heightened Expectations {or Strong Corporate Governance and Oversight 

While stronger capita! and liquidity buffers are essential components for 

improving the resiliency of large banks, strong corporate governance is equally 

important. We have set higher expectations for corporate governance at large banks in 

five specific areas. 

1. Board willingness to provide credible challenge. A key element in corporate 

governance is a strong, knowledgeable board with independent directors who provide 

a credible challenge to bank management. Effective directors prudently question the 

propriety of strategic initiatives, talent decisions, and the balance between risk taking 

and reward. Effective information flow and risk identification within the organization 

is essential to the ability of directors to perform this role. 

2. Talent Management and Compensation. We expect large banks to have a welldefined personnel management process that ensures appropriate, quality staffing 

levels, provides for orderly succession, and maintains appropriate compensation tools 

to motivate and retain talent. Of particular importance is the need to ensure that 

incentive compensation structures balance risk and financial rewards and are 

compatible with effcctive controls and risk management. 

3. Defining and Communicating Risk Tolerance Expectations Across the 

Company. Consistent with prudent governance practices, banks must define and 

communicate acceptable risk tolerance, and results need to be visible and periodically 

compared to pre-defined limits. Examiners are directing banks to strengthen their 

existing risk tolerance structures by better articulating the bank's risk appetite, its 

measures and limits of risk to capital or earnings on a firm-wide basis, the amount of 

18 
148 

risk that may be taken in each line of business, and the amount of risk that may be 

taken in each of the key risk categories monitored by the banks. 

4. Development and Maintenance of Strong Audit and Risk Management 

Functions. The recent crisis reinforced the importance of quality audit and risk 

management functions. We have directed bank audit and risk management 

committees to perform gap analyses relative to acc's standards and industry 

practices and to take appropriate action to improve their audit and risk management 

functions. We expect members of the bank's board and its executive management 

team to ensure audit and risk management teams are visibly and substantively 

supported. 

5. Sanctity of the Charter. While holding companies of large banks are typically 

managed on a line of business basis, directors at the bank level are responsible for 

oversight of the bank's charter-the legal entity. Such responsibility requires 

separate and focused governance. We have reminded the boards of banks that their 

primary fiduciary duty is to ensure the safety and soundness of the national bank or 

federal savings association. This responsibility involves focus on the risk and control 

infrastructure. Directors must be certain that appropriate personnel, strategic 

planning, risk tolerance, operating processes, delegations of authority, controls, and 

reports are in place to effectively oversee the performance of the bank. The bank 

should not simply function as a booking entity for the holding company. It is 

incumbent upon bank directors to be mindful of this primary fiduciary duty as they 

execute their responsibilities. 

19 
149 

IX. Conclusion: Commitment of OCC Leadership 

The leadership of the OCC is committed to strong and effective supervision. As 

demonstrated by our C&O, we will not hesitate to take strong action whenever we 

discover significant problems at an institution we supervise. Our work at the bank is 

ongoing, and we will continue to assess whether additional enforcement actions or 

referrals are warranted. 

We are equally committed to continuously enhancing our supervisory programs. 

The results of our internal investigation have been carefully reviewed by the OCC's 

executive management tcam, who agreed with the findings and recommendations, and 

formulated plans to address them. Within the OCC, we have disseminated the lessons we 

have learned to our large bank EICs, as well as our capital markets team leads. We have 

held meetings with them and provided them with guidance for incorporating these lessons 

learned in supervisory plans and practices. Our large bank management teams arc 

providing semiannual status reports to ensure effective implementation of the lessons 

learned. These reviews will be supplemented by an independent evaluation of some of 

these areas by the OCC's Quality Assurance unit. 

We appreciate the Subcommittee's investigation into this incident, and we will 

carefully review its report and recommendations to consider further enhancements to our 

supervisory program. 

20 
150 

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 
151 

SENATOR CARL LEVIN 

Chairman 

SENATOR JOHN McCAIN 

Ranking Minority Member 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

4124113 

ELISE J. BEAN 

Staff Director and Chief Counsel 

ALLISON F. MURPHY 

Counsel 

ZACHARY I. SCHRAM 

Senior Counsel 

ELIZABETH V. BALTZAN 

Fonner Congressional Fellow 

ERIC S. WALKER 

Fonner 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 

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 
152 

JPMORGAN CHASE WHALE TRADES: 

A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES 

TABLE OF CONTENTS 

I. EXECUTIVE SUMMARY ............................. 3 

A. Subcommittee Investigation. . . . . . . . . . . . . . . . . . . . . . . . . . 3 

B. Overview......................................... 4 

(1) Increasing Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 

(2) Hiding Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 

(3) Disregarding Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 

(4 ) Avoiding and Conducting OCC Oversight .......... 11 

(5) Misinforming Investors, Regulators, and the Public ... 13 

C. Whale Trade Case History .......................... 18 

D. Findings of Facts. ................................. 19 

(1) Increased Risk Without Notice to Regulators ........ 19 

(2) Mischaracterized High Risk Trading as Hedging ..... 19 

(3) Hid Massive Losses ............................ 20 

(4) Disregarded Risk. . . . . . . . . . . . . . . . . . . . .. . . .. . . . .. 20 

(5) Dodged OCC Oversight.. . . . . . . . . . . . . . . . . .. . . . .. 20 

(6) Failed Regulatory Oversight. . . . . . . . . . . . . . . . . . . . .. 20 

(7) Mischaracterized the Portfolio .................... 20 

E. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 21 

(1) Require Derivatives Performance Data ............. 21 

(2) Require Contemporaneous Hedge Documentation .... 21 

(3) Strengthen Credit Derivative Valuations ............ 21 

(4) Investigate Risk Limit Breaches . . . . . . . . . . . . . . . . . . . 21 

(5) Investigate Models That Substantially Lower Risk . . .. 22 

(6) Implement Merkley-Levin Provisions .............. 22 

(7) Enhance Derivative Capital Charges ............... 22 

II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 

A. JPMorgan Chase & Company ....................... 23 

B. Chief Investment Office. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 27 

C. Office ofthe Comptroller of the Currency ............. 32 

D. Capital Requirements .............................. 33 

E. Credit Derivatives ................................. 36 

III. INCREASING RISK.................................. 43 

A. Origins of the Synthetic Credit Portfolio. . . . . . . . . . . . . . . 44 

B. Purpose of the Synthetic Credit Portfolio: Undocumented, 

Unclear, and Subject to Change. . . . . . . . . . . . . . . . . . . . . . 51 

C. SCP Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 
153 

(1) The Early Years: 2006 to 2010 . . . . . . . . . . . . . . . . . . . . 59 

(2) 2011 SCP Expansion ........................... 61 

(3) 2011 SCP Profit From Bankruptcies ............... 64 

(4) SCP Size and Revenues ......................... 67 

(5) SCP Trader Compensation ....................... 68 

(6) 2012 Opens with Order to Reduce R W A . . . . . . . . . . . . 71 

(7) Eastman Kodak Default ......................... 76 

(8) Credit Market Rally Devalues SCP ................ 77 

(9) Four Options to Reshape the SCP ................. 79 

(10) Decision to Go Long. . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 

(11) Adoption of2012 Trading Strategy ................ 86 

D. SCP's Increasing Risk and Losses .................... 89 

(1) January 2012 . . . . . . . .. . . . . . . . . . . . . . . . . . . . .. .. . . 89 

(2) February 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 

(3) March 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 

(4) Phones Down ................................. 101 

E. Unmasking JPMorgan Chase. .. . . . . . . . . . . . . . . . . . . . .. 106 

F. Dismantling the SCP ............................... 108 

G. Analysis. ......................................... 110 

IV. HIDING LOSSES ..................................... 112 

A. Background....................................... 115 

(l) Valuing Derivatives In General ................... 115 

(2) Valuing Derivatives at JPMorgan Chase. . . . . . . . .. .. 118 

B. Mismarking the CIO Credit Derivatives. . . . . . . . . . . . . .. 124 

(1) Mismarking Begins ............................. 124 

(2) Mismarking Peaks. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 128 

(3) Increasing the Reported Losses ................... 135 

(4) Trading Stopped. . .. . . . . . . . . . . . . . . . . . . . . . .. . . .. 144 

(5) Accusing the Investment Bank. . . . . . . . . . . . . . . . . . .. 146 

(6) Mismarking Continued. . . . . .. . . . . . . . . . . . . . . . . . .. 152 

C. Ending the Mismarking . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 159 

D. Reviewing the SCP Valuations . . . . . . . . . . . . . . . . . . . . . .. 163 

E. Admitting the Mismarking ........ . . . . . . . . . . . . . . . . .. 177 

F. Analysis........................................... 180 

V. DISREGARDING RISK ............................... 182 

A. Background....................................... 183 

B. Risk Management Structure at CIO .................. 187 

C. CIO Risk Management Personnel. . . . . . . . . . . . . . . . . . .. 190 

D. Disregarding CIO Risk Metrics. . . .. . . . . . . . . . . . . . . . .. 196 

(1) Disregarding the VaR Limit ..... . . . . . . . . . . . . . . . .. 197 

(a) Background ............................... 197 

(b) Developing a New VaR Model ................ 200 

ii 
154 

(c) Breaching the VaR Limit ..................... 204 

(d) Raising the VaR Limit Temporarily ............ 209 

(e) Winning Approval ofthe New VaR Model. . . . . .. 213 

(f) Using the New VaR Model to Increase Risk ...... 215 

(g) FailingtoLowertheVaRLimit ................ 216 

(h) Operating and Implementation Failures. . . . . . . . .. 219 

(2) Ignoring Comprehensive Risk Measure . . . . . . . . . . . .. 221 

(a) Background ............................... 221 

(b) Challenging the CRM Results ................. 222 

(c) Gaming the CRM Model .. . . . . . . . . . . . . . . . . . .. 227 

(3) Ignoring Repeated Breaches of Credit Spread Risk 

Limits ....................................... 234 

(a) Breaching CSOI Risk Limit ................... 234 

(b) Breaching CSWI0% Risk Limit ............... 242 

(4) Overlooking Stress Loss Limit Breaches ............ 245 

(5) Disregarding Stop Loss Advisories ................ 256 

(6) Missing Concentration Limits .................... 250 

D. Responding to the Risk Limit Failures ................ 252 

E. Analysis. ......................................... 254 

VI. AVOIDING AND CONDUCTING OCC OVERSIGHT ..... 256 

A. Overview oCOCC's Oversight Role ................... 258 

B. Pre-2012: Avoiding OCC Oversight As the SCP Develops 261 

(1) 2006-2009: Minimizing OCC Oversight As 

SCP Expands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 262 

(2) 2010: Resisting OCC Examination Results .......... 264 

(3) 2011: Missing SCP Red Flags .................... 268 

C. 2012: Dodging OCC Oversight While SCP 

Losses Mount ..................................... 270 

(1) Misinforming OCC that SCP Book to be Reduced .... 270 

(2) Failing to Provide OCC With CIO Data. . . . . . . . . . . .. 273 

(3) Failing to Investigate Risk Limit Breaches .......... 276 

(4) Miscasting Long Acquisitions As Risk Reducing ..... 278 

D. 2012: Resisting OCC Oversight Even After Whale 

Trades Became Public .............................. 281 

(1) Providing OCC with Limited or Incorrect Information. 281 

(2) Updating OCC Only When Losses About to Become 

Public ....................................... 286 

(3) Hiding Problems With the Marks. . . . . . . . . . . . . . . . .. 289 

E. OCC Aftermath ................................... 292 

F. Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 297 

iii 
155 

VII. MISINFORMING INVESTORS, REGULATORS, AND 

THE PUBLIC ....................................... 299 

A. Public Disclosure of Whale Trades and SCP ........... 303 

B. Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 312 

(1) Rule 10b-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 312 

(2) Section 17(a) ofthe Securities Act of 1933 .......... 314 

C. Disclosures and Key Omissions Raising Concerns. . . . . .. 315 

(1) Mischaracterizing the Involvement of Firm wide Risk 

Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 316 

(2) Mischaracterizing SCP as "Fully Transparent to the 

Regulators" .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 319 

(3) Mischaracterizing SCP Decisions as "Made on a Very 

Long-Term Basis" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 321 

(4) Mischaracterizing SCP Whale Trades As Hedges ..... 324 

(5) Asserting SCP Trades Were Consistent With the 

Volcker Rule .................................. 338 

(6) Omitting VaR Model Change. . . . . . . . . . . . . . . . . . . .. 341 

D. Analysis. ......................................... 354 

# # # 

iv 
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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 ChiefInvestment 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 
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2 

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? 

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/ 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, 

t 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). 

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.). 
159 

4 

2013.4 Bank representatives also read to the Subcommittee portions of 

notes taken during interviews conducted by the JPMorgan Chase Task 

Force ofCIO 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 materials 

and reports on the whale trades and on the OCC's own oversight 

efforts.s 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 of2012, JPMorgan Chase's ChiefInvestment 

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. 

4 See 1116/2013 "Report of JPMorgan Chase & Co. Management Task Force Regarding 2012 

CIO Losses," prepared by JPMorgan Chase, 

http://files.shareholder.com!downloads/ONE/228 819703 I xOx6286S6/4cbS 7 4aO-ObfS -4728-

9S82-62Se4S19bSab/Task]orce _ Report.pdf. 

5 See 10/26/2012 Confidential Supervisory Report, OCC, PSI-OCC-13-000014-126 [Sealed 

Exhibit]. 
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(1) Increasing Risk 

In 2005, JPMorgan Chase spun off as a separate unit within the 

bank its ChiefInvestment 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 ChiefInvestment 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 (RW A) 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 R W A - 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 R W A, 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 of2012, 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 oftrades 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 
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6 

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 ofthe 

"London Whale" behind the huge trades roiling the credit markets, 

eventually unmasking JPMorgan Chase's ChiefInvestment 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 ofthe 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. 

(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 
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7 

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, ajunior 

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 ofthe month .... 

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 a loss of $400 

million. That change took place on the first trading day after the whale 
163 

8 

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 ofthe 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 ofthe 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 ofthe 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 ifit 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, 
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9 

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. 

The ability ofCIO personnel to hide hundreds of millions of 

dollars of additional losses over the span ofthree 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 ofthe 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 downplay ed, 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% (CSWI0%) limit, stress loss limits, and stop loss 

advisories. During the first three months of2012, 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 
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10 

same month, the SCP repeatedly breached the CSOI 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 CSWI 0% 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 oftime. 

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 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 SCPo 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 
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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-inCharge 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 20 12, 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 ofthe Comptroller ofthe 

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 ofthe 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 ofthe portfolio prior to 2012. Both the 

OCC and JPMorgan Chase bear fault for the OCe'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 ofthe 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 20 1 I, 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 cro. The OCC learned of the $400 million gain, but 

did not inquire into the reason for it or the trading activity behind it, and 
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12 

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 SCPo Instead, over the course ofthe 

quarter, the CIO tripled the notional size ofthe 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 ofthe 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 ofthe 

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 ofCIO 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. 
168 

13 

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 oflater 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 OCe'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, 
169 

14 

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 SCPo 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 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 Vo1cker 

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 of24%. 

Given the information that bank executives possessed in advance 

of the bank's public communications on April 10, April 13, and May 10, 
170 

15 

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 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 of2012, 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 ofthe 

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 
171 

16 

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 LongTerm 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]U 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 ofa 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 Vo1cker Rule is 

intended to reduce bank risk by prohibiting high risk proprietary trading 

activities by federally insured banks, their affiliates, and subsidiaries. 

However, the Vo1cker 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 Vo1cker 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 Vo1cker is unclear," a statement 
172 

17 

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 ofVaR 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 annuall0-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 of2011 

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 ofthe 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 of2012. 
173 

18 

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 ofthe 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 of20 12. 

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 R W A results. Equally disturbing is evidence that the OCC was 

regularly informed of the risk limit breaches and was notified in advance 

ofthe cra 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 
174 

19 

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 ofthe CIO, 

Ina Drew, a member of the bank's Operating Committee, who criticized 

the OCC for being overly intrusive. 

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 riskreducing 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 offact. 

(1) Increased Risk Without Notice to Regulators. In the first 

quarter of2012, without alerting its regulators, JPMorgan 

Chase's Chieflnvestment 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 
175 

20 

size and effectiveness ofthe 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 of2012, 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 ofthe portfolio; 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 portfoliospecific 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 
176 

21 

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 offact, 

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 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 ofVaR, eSDI, eSWID%, stop loss limits, 

or other specified risk or stress limits or risk metrics. 
177 

22 

(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 ofthe Dodd-Frank Wall Street 

Reform and Consumer Protection Act, also known as the 

Vo1cker 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) ofthe 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 LIMIT A TIONS.--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." 
178 

23 

II. BACKGROUND 

This section provides background information on JPMorgan 

Chase, its ChiefInvestment 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 

7 1/9/2013 Fonn 8-K. JPMorgan Chase & Co., at I, (hereinafter "119/2013 JPMorgan Fonn 8-

K"), http://xml.IOkwizard.comifilingJaw.php?repo=tenk&ipage=8650849; see also "Financial 

Highlights," JPMorgan Chase & Co., 

http://files.shareholder.comidownloads/ONE/2156230 I 84xOx556141/09bfS025-eea2-413d-aOaf96820dd964f6/.TPMC_2011_annuaIJeport_finhighlights.pdf. 

8 "JPMorgan Chase & Co.," New York Stock Exchange, 

htlp:llwww.nyse.comlaboutllistedljpm.html. 

9 JPMorgan is the largest bank holding company by asset size. See "Top 50 Holding Companies 

(HCs) as of9/30/2012," Federal Reserve System, Nationallnfonnation Center, 

http://www.ffiee.gov/nicpubweb/nicweb/Top50Fonn.aspx; 2/2812013 Fonn IO-K (Annual 

Report), JPMorgan Chase & Co., at I, 

http://files.shareholder.comidownloads/ONE/2275559219xOxS 19617-13-221119617/filing.pdf; 

see "About Us," JPMorgan Chase & Co., http://www.jpmorganchase.comicorporate/AboutJPMC/about-us.htm; see also "Financial Highlights," JPMorgan Chase & Co., 

http://files.shareholder.comidownloads/ONE/21562301 84xOx556141/09bf5025-eea2-413d-aOafro6820dd964f61JPMC _201 1_ annualJeport _ finhighlights.pdf. 

See "The History of JPMorgan Chase & Co.," JPMorgan Chase & Co., 

htlp:llwww.jpmorganchase.comicorporate/About-JPMC/document!shorthistory.pdf. 

II See "History of Our Finn," JPMorgan Chase & Co., 

htlp:llwww.jpmorganchase.comicorporate/About-JPMC/jpmorgan-history.htm. 

12 1116/2013 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 I, 

http://files.shareholder.comldownl oads/ONE/22 7555921 9xOx628669/0de 7 6d99-815a-4a63-

b 14d-c9f41 ed930a3IJPM _News _2013 _1_16_ Current.pdf. 
179 

24 

issuance, commodities trading, and asset management. 13 It also serves 

as a primary dealer in U.S. Government securities. 14 The firm's 

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. IS The firm's principal nonbank 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 "CorporatelPrivate 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 

13 5/10/2012 JPMorgan Form 10-Q, at 4-5. 

14 "Primary Dealer List," Federal Reserve Bank of New York, 

http://www.newyorkfed.org/marketslpridealers_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/2265496134xOx556139175b4bd59-

02e7-4495-a84c-06eOb 19d6990/JPMC _20 II_annual Jeport _ 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/2156234165xOx577097Ic0734566-

d05f-4b7a-9fa4-ecl2a29fb2daJ1PM._News_2012_6_I3_Current.pdf; see also 1/13/2012 "2011 

Business Results," JPMorgan Chase & Co. press release, at 2, 

http://files.shareholder.comidownloads/ONE/2156234165xOx533390/4026b 17b-89d6-4adabeOO-9548c93ff325/4Q II_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, 

~ttp:llwww2.occ.gov/topics/capital-markets/financial-marketsltrading/derivatives/dq212.pdf. 

- Id., at 9, Graphs 3 and 4. 

23 Id., at Tables II and 12. 
180 

25 

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

Chief Executive Officer (CEO) of JPMorgan Chase & CO?4 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 lOoK and 10_Q.25 

Douglas Braunstein served as JPMorgan Chase & Co.'s Chief 

Financial Officer (CFO) from July 2010 to December 2012. He was 

also a member ofthe 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?? 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?8 

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.}! 

Stephen Cutler serves as JPMorgan Chase's general counsel.32 

Greg Baer is a managing director and deputy general counsel in charge 

24 Mr. Dimon became Chainnan of the Board on December 31, 2006, and has been Chief 

Executive Officer since December 31, 2005. See "Members of the Board," JPMorgan Chasc & 

Co., http://www.jpmorganchase.com/corporate/About-JPMClboard-of-directors.htm#dimon. 25 2/29/2012 "Fonn 10-K," JPMorgan Chase & Co., at 342, 

http://files.shareholder.com/downloads/ONE/2204603745xOxS 19617 -12-1 631l 96 I 7Ifiling.pdf; 

1118/2012, "Fonn lO-Q," JPMorgan Chase & Co., at 230, 

http://files.shareholder.comidownloads/ONE/2204603 745xOxS 19617 -12-3081l9617 lfiling.pdf. 

26 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (91l2/2012). 

27 The current Chief Financial Officer of the holding company is Marianne Lake. IIl6/20 13 

"Report of JPMorgan Chase & Co. Management Task Force Regarding 2012 CIO Losses," 

http://files.shareholder.comidownloads/ONE/2288197031 xOx628656/4cb574aO-Obf5-4 728-

9582-625e4519b5ab/Task Jorce_ 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 

12/412012 "Fonn 8-K," JPMorgan Chase & Co., at 3, 

http://files.shareholder.comidownloads/ONE/2204603745xOxS 1193125-12-

4899641l9617/filing.pdf. 

29 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

30 201 3 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. 
181 

26 

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 ofthe holding company's Model 

Risk and Development office which oversees development of risk and 

capital models and metrics. Prior to assuming that post in February 

2012, he was head ofthe Investment Bank Structuring and Pricing 

Direct office.37 

Michael Cavanagh has served as Co-CEO ofthe Corporate and 

Investment Bank since July 2012, and is a member ofthe firm's 

Executive and Operating Committees.38 Prior to that position, he served 

as CEO ofthe 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 ofthe CIO 

losses.41 Daniel Pinto is currently the other Co-CEO of the Corporate 

and Investment Bank.42 

33 "lPM Chase Hires B of A's Gregory Baer," American Banker, Rob Blackwell (9/9/2010), 

http://www.americanbanker.comiissues/l 75 _I 73/jpm-chase-hires-bofa-greg-baer-1 025302-

I.htm!. 

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/20 13-0 1-08/jpmorgan-s-staleyquits-to-join-bluemountain-hedge-fund.html. 

36 Id. 

37 2013 IPMorgan Chase Task Force Report, at 21. 

38 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12112/2012); see also 

"Michael 1. Cavanagh," Bloomberg Businessweek Executive Profile, 

http://investing.businessweek.comiresearchistocks/people/person.asp?personId=170434&ticker= 

IPM. 

39 "Michael 1. Cavanagh," Bloomberg Businessweek Executive Profile, 

http://investing.businessweek.comiresearchistocks/people/person.asp?personId=170434&ticker= 

IPM. 

40 Id.; Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12112/2012). 

41 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012); 2013 

JPMorgan Chase Task Force Report, at 1, footnote I. 

42 Subcommittee interview of Michael Cavanagh, IPMorgan Chase (12112/2012). 
182 

27 

B. Chief Investment Office 

The ChiefInvestment 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 IPMorgan 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 effectively doubling the CIO's pool of excess 

deposits.49 By 2012, the CIO was managin~ a portfolio of 

approximately $350 billion, a historic high. 0 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, IPMorgan 

Chase's proxy statement described the CIO and its Treasury office as 

43 2011 lPMorgan annual report at \07; Subcommittee briefing by lPMorgan Chase (5/22/2012) 

(Greg Baer). 

44 2013 lPMorgan Chase Task Force Report, at 21; Levin Office briefing by lPMorgan Chase, 

(5/25/2012) (Greg Baer). 45 2013 lPMorgan Chase Task Force Report, at 21; Subcommittee briefing by lPMorgan Chase 

(8/15/2012) (Greg Baer). 

46 Levin Office briefing by lPMorgan Chase (5/22/2012) (Greg Baer). 

47 Subcommittee briefing by lPMorgan Chase (8/15/2012) (Greg Baer). 

48 Subcommittee interview ofIna Drew, CIO (9/7/2012); see also 2/13/2012 letter from 

lPMorgan Chase to U.S. Department of the Treasury and others, "Comment Letter on the Notice 

of Proposed Rulemaking Implementing Section 619 ofthe Dodd-Frank Wall Street Reform and 

Consumer Protection Act," lPM-CIO-PSI-0013270, at 57 ("As the crisis unfolded, lPMorgan 

experienced an unprecedented inflow of deposits (more than $ I 00 billion) reflecting a flight to 

;l,uality."). 

4 Subcommittee interview of Ina Drew, CIO (9/7/2012). 

50 Subcommittee interview of Scott Waterhouse, OCC (9/l7/2012). 51 1d. 

52 Subcommittee briefing by lPMorgan Chase (8/l5/2012) (Harry Weiss). 53 1d. 
183 

28 

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 

lPMorgan 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 ofthe horizon, the CIO indicated that it 

maintained "North America" and "International" f,0rtfolios, whose 

assets were "mainly in mark to market accounts." 7 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-forsale."S8 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-offmode.,,60 

A final component of the CIO's longer term horizon was a portfolio of 

"Special Investments," which 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 ofthe 

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 ofthe Tactical Asset Portfolio 

545/15/2012 IPMorgan Chase 2012 Proxy Statement, "Board's Role in Risk Oversight," at 11, 

http://files.shareholder .com! downloads/ONE/2265496 I 34 xOx5 5 6146/e8b5 6256-3 65c-4 5aabbdb-3aa82fDd07eal IPMC _2012 yroxy _ statement.pdf. 

55 Mar. 2012 "Directors Risk Policy Committee - CIO 2012 Opportunities and Challenges," 

prepared by Ina Drew and Irvin Goldman, CIO, IPM-CIO-PSI 0015015. 

l6ld. 

571d. 

58 Id. 

59 Id. 

60 1d. 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 ofMr. Dimon. 

Subcommittee interview oflna Drew, CIO (91712012). 

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 oflna Drew, CIO (9/7/2012). 
184 

29 

which, in tum, 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 ChiefInvestment Officer and head 

of the CIO from February 2005, when it was first spun off as a standalone 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 He was 

replaced by Chetan Bhargiri who now serves as 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 

62 Subcommittee interview ofIna Drew, CIO (917/2012). 

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)."). 

4 Subcommittee interview ofIna Drew, CIO (91712012). 

65 1d. See also 4/2012 JPMorgan Chase & Co. internal presentation to Subcommittee entitled, 

"ChiefInvestment Office Organization," JPM·CIO·PSI 0001875. 

66 Subcommittee interview ofIna Drew, CIO (91712012). 

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/I il2012) and John Wilmot, 

CIO (9/I 112012); 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 (911512012); 2013 

JPMorgan Chase Task Force Report, at 19-20. Mr. Weiland resigned in October 2012. Id., at 

20. 

n 2013 JPMorgan Chase Task Force Report, at 15. 

73 Subcommittee interview ofpatrick Hagan, CIO (21712013). 
185 

30 

The International ChiefInvestment Officer was Achilles Macris, 

who joined the CIa in 2006, rose quickly to management, and served as 

Ms. Drew's top deputy in the CIa'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 CIa'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 CIa'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 Mr. Iksil is a 

74 Subcommittee interview ofIna Drew, CIO (91712012); 4/2012 JPMorgan Chase & Co. internal 

presentation to Subcommittee entitled, "Chiefinvestment 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.comlnews/20 12-04-13/jpmorgan-said-to-transform-treasury -to-proptrading.htm!. 

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/20 12-04-13/jpmorgan-said-to-transformtreasury-to-prop-trading.html. 

77 Subcommittee interview ofIna 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.comlnews/20 12-04-13/jpmorgan-said-to-transform-treasury-to-proptrading.htm!. 

78 Subcommittee interview ofina 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.comlnews/20 12-04-13/jpmorgan-said-to-transform-treasuryto-prop-trading.htm!. 

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. 

g, Subcommittee interview ofIna 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.comlarticle/SBI0001424052702303299604577326031119412436.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-debatewith-bets.htm!. 

82 See "Ten Questions to be Answered on 'London Whale gate,'" Financial News (5/1112012), 

http://www.efinancialncws.comlstory 12012-05 -11 II O-questions-jp-morgan-scandal-iksil; 
186 

31 

French national who lived outside of Paris and commuted to his job in 

London.s3 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.s4 He oversaw several other CIO traders including Julien 

GroUt.85 

In July 2012, JPMorgan Chase fired Messrs. Macris, MartinArtajo, 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."s7 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.8s 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 

"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. 

8} See "Who Is the London Whale? Meet JPMorgan's 'Humble' Trader Bruno Iksil- Daily 

Intel," New York Magazine, Joe Coscarelli (5111/2012), 

http://nymag.com!daily/intelligencer12012/0S/jpmorgan-london-whale-bruno-iskil-2-billionloss.htrnl. 

84 See, e.g., "'London Whale' Rattles Debt Market," Wall Street Journal, Gregory Zuckerman 

and Katy Burne (4/6/2012), 

http://online.wsj.com/artic1e/SB I 00014240S2702303299604S77326031119412436.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 7112/2012 letter from 

JPMorgan Cbase to Achilles Macris, JPM-CIO-PSI-H 0002742-743, at 742; 7/12/2012 letter 

from JPMorgan Chase to Javier Martin-Artajo, JPM-CIO-PSI-H 0002744-745, at 744; 7112/2012 

letter from JPMorgan Chase to Bruno Iksil, JPM-CIO-PSI-H 0002740-741, at 740. Mr. Grout 

subsequently resigned from the bank on December 20, 2012. 

S? 7113/2012 "CIO Task Force Update," JPMorgan Chase & Co., at 22, Exhibit 99.3 to 

JPMorgan Chase 7113/2012 Form 8-K, 

bttp:1 lfiles.sbarebolder .com! downloads/ONE/2204603 74 SxOxS 82 869/dfl f2aS a-92 7 e-4c I 0-a6aSa8ebd8dafd691CIO _Taskforce _ FINAL.pdf. 

" 1116/2013 email from JPMorgan Chase counsel to Subcommittee, "CIO c1awbacks," PSIJPMC-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!20 12/051 14Ibusiness/jpmorgan-chase-executive-to-resign-in-tradingdebac1e.html?pagewanted=a1I; "JPMorgan's Drew Forfeits 2 Years' Pay as Managers Ousted," 

Bloomberg, Dawn Kopecki (7113/2012), http://www.businessweek.com/news/2012-07-

13/dimon-says-ina-drew-offered-to-retum-2-years-of-compensation. 
187 

32 

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 

The OCC maintains 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 April2012,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 

91 "Agency Profile and History," Office of the Comptroller of the Currency, Annual Report, FY 

2011, at i, http://occ.gov/pubJications/pubJications-by-type/annualreports/201IAnnualReport.pdf; "About the OCC," Office of the Comptroller of the Currency, 

http://occ.gov/aboutiwhat-we-do/missionlindex-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). 

93 "About the OCC," Office of the Comptroller of the Currency, http://occ.gov/aboutiwhat-wedo/missionlindex-about.html. 

94 Id. See also "Finaocial Stability Oversight Council: About the FSOC," U.S. Department of 

the Treasury, http://www.treasury.gov/initiatives/fsoc/aboutiPages/default.aspx. 

95 "Biography: Thomas J. Curry, Comptroller of Currency," U.S. Department of Treasury, 

http://www.occ.gov/aboutiwho-we-are/comptroller-of-the-currencylbio-thomas-curry-print.pdf. 

96 "About the OCC," Office of the Comptroller ofthe Currency, http://occ.gov/aboutiwhat-wedo/missionlindex-about.html. 

97 Id. See also "Section Five Licensing aod Enforcement Measures," Office of the Comptroller 

ofthe Currency, Annual Report, FY 2011, http://occ.gov/publications/publications-bytype/annual-reports/201IAnnualReport.pdf. 
188 

33 

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 ChiefInvestment Office invests the banks' deposits, the OCC is the 

primary prudential regulator of JPMorgan Chase Bank and its 

subsidiaries, including the CIO. 102 The OCe's supervisory team 

includes approximately 65 on-site 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 

98 Testimony of Thomas 1. Curry, Comptroller of the Currency, before the House Committee on 

Financial Services, (June 19,2012), at 2, http://www.occ.gov/news-issuances/congressionaltestimony/20 12/pub-test-20 I 2-9 I-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/201IAnnuaiReport.pdf. 

100 Testimony of Thomas 1. Curry, Comptroller of the Currency, before the House Committee on 

Financial Services, (6119/2012), at 3, http://www.occ.gov/news-issuances/congressionaltestimonyl20 12/pub-test-20 12-91-written.pdf. 

101 "About the OCC," Office of the Comptroller of the Currency, http://oee.gov/aboutlwhat-wedolmissionlindex-about.html. 

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, 

http://www.occ.gov/news-issuances/congressional-testimony 120 12/pu b-test-2012 -9 I-written. pdf. 

103 Ill., at II. 

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. 
189 

34 

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 re~uirements issued by the 

Basel Committee on Banking Supervision. 1O 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 20 I 0, provided a broader set of reforms. 109 Basel III 

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 discIosures."IIO Among other provisions, Basel III increased the 

minimum amount of capital that had to be raised from common 

equity. I II 

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 0-20 countries. See "Basel Committee on Banking 

Supervision," Basel Committee on Banking Supervision, Bank for International Settlements, 

http://www.bis.orglbcbs/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.orglbcbslhistory.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 Intemational Settlements, http://www.bis.orglbcbs/index.htm (summarizing history of 

Basel Accords); October 2011 "Progress report on Basel III implementation," Basel Committee 

on Banking Supervision, Bank for International Settlements, 

http://www.bis.org/publlbcbs203.pdf. 

110 "International regulatory framework for banks (BasellII)," Basel Committee on Banking 

Supervision, Bank for International Settlements, http://www.bis.orglhcbslbase13.htm (providing 

general information about Basel III). See also October 20 I I "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/publlhcbs238.htm. 

III "Basel III overview table," Basel Committee on Banking Supervision, Bank for International 

Settlements, http://www.bis.orglbcbslbase131b3summarytable.pdf (table summarizing Basel III 
190 

35 

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. I 14 

Instead, individual banks are allowed, within regulatory parameters and 

subject to regulatory approval and oversight, to develop their own model 

to calculate RW A. liS The bank's aggregate RWA is then used to 

calculate its required minimum capital, with a greater ratio of equitybased capital required for banks with higher RW A. 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 riskier activities than if capital were more 

expensive. l17 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. 

reforms). Por information about what qualifies as capital and common equity, see December 

2011 "BasellII definition of capital- Basel III Prequently Asked Questions," Basel Committee 

on Banking Supervision, Bank for International Settlements, 

http://www.bis.org/publlbcbs211.htm?ql=1. U.S. regulators have yet to fully implement Ba,el 

Ill; regulations have been proposed to implement its new capital requirements and additional. 

froposed regulations are being developed to implement its new liquidity requirements. 

12 See, e.g., ace minimum capital requirements, 12 C.F.R. Part 3, Appendices A-B; "'Revisiting 

Risk-Weighted Assets," IMP Working Paper No. WP/12/90, Vanessa Le Lesl" and Sofiya 

Avramova (March 2012); June 2011 "Basel Ill: A global regulatory framework for more 

resilient banks and banking system," prepared by BCBS, http://www.bis.org/pubIlbcbsI89.pdf 

(revised version 2011). 

II] See, e.g., "Revisiting Risk-Weighted Assets," IMP Working Paper No. WP112/90, Vanessa 

Le Lesle and Sofiya Avramova (March 2012); 2013 JPMorgan Chase Task Porce Report, at 26; 

12 C.P.R. Part 3, Appendix A ("Risk-weighted assets means the sum oftotal 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.P.R. Part 3, Appendices A-B. 

115 Subcommittee briefing by OCC (3/412013); 12 C.P.R. Part 3, Appendices A-B. 

116 See, e.g" OCC's minimum capital requirements, 12 C.P.R. Part 3, Appendix A ("A bank's 

risk-ba,ed 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)."). 

117 See. e.g., "The Soviet Banking System - And Ours," Wall Street Journal (7124/2012), Judy 

Shelton, 

http://online.wsj.comiarticle/SBI 0000872396390444025204577 545522816 1 87642.htmL 
191 

36 

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. llS Credit derivatives derive their value from the 

creditworthiness of a specified financial instrument such as a corporate 

bond, 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 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. 

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 

118 Markit Credit Indices: A Primer (October 2012), Appendix 4 at 32, (hereinafter "Markit 

Credit Indices: A Primer"), http://www.markit.comlassets/enldocs/products/datalindices/creditindex-annexes/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 S~~ 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee 

request, "COO Briefing," at 9, PSI-JPM-30-00000 1. 

124 See "OCC's Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 

2012," at 8, http://www2.occ.gov/topics/capital-markets/financialmarkets/tradingl deri vati vesl dq212. pdf. 

125 See, e.g., 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee 

request, "COO Briefing," at 15-19, PSI-JPM-30-000001. 

126 See, e.g., 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee 

request, "COO Briefing," at 18, PSI-JPM-30-000001 ("The Basic Contract: A Credit Default 

Swap"); see also Markit Credit Indices: A Primer, at 4. 
192 

37 

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 short party has to pay.l3l The premium amount 

or credit spread typically increases when a default is perceived to be 

more like1~, because the insurance or credit protection becomes more 

valuable. 1 2 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. 

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.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.13 

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 

127 Markit Credit Indices: A Primer, at 4. 

128 See 2/6/2009 presentation prepared by IPMorgan Chase in response to a Subcommittee 

request, "COO Briefing," at 16, PSI-IPM-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. 

I3l ld.,at6. 

1321d. 

133 See 2/6/2009 presentation prepared by IPMorgan Chase in response to a Subcommittee 

request, "COO Briefing," at 17, PSI-JPM-30-000001; see also Markit Credit Indices: A Primer, 

at4, 

134 See 2/6/2009 presentation prepared by IPMorgan Chase in response to a Subcommittee 

request, "COO 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, 
193 

38 

other types of credit instruments. 137 The value of the index is typically 

determined by calculating the value of each constituent credit instrument 

and using a mathematical formula to combine them into a single dollar 

value for the entire basket. 138 Parties then enter into swaps that 

reference the index.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 ofthe instrument. 145 On the other hand, if a credit event takes 

place during the covered time period, it trigf,ers a typically substantial 

payout by the long party to the short party.1 6 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 ofa 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 ofthe bet. The index's changing value typically 

reflects the initial index price or premium amount, which is also called 

the credit spread. 149 If a party trades or unwinds a swap prior to its 

expiration, that party typically makes a final payment reflecting the 

value of the index at that time. 150 

IG9, HY, and iTraxx Indices. The CIO traded a variety of credit 

indices. CIO profit-loss reports indicate that, by March 2012, the CIO 

137 Markit Credit Indices: Fact Sheet, at 1, http://www.markit.eomlassets/enldocs/factsheels/MKT _ Credit_ 

Indices _ factsheet. pdf 

us Markit Credit Indices: A Primer, at 12-13. 

139 Id at 11 

140 Id:: App~ndix 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 II. 

146 Id., at 13. 

147 Id., at 14. 

148 Id., at 11. 149 1d. 

15o ld. 
194 

39 

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. I52 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. I53 

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 ~roup of indices 

referencing corporations in Europe and Asia. I5 One key index traded 

by the CI0 is the CDX.NA.lG.9. 155 "CDX" refers to credit index. 

"NA" refers to North America. I56 "10" refers to "investment grade," 

because the index tracks credit default swaps (CDS) for 125 investment 

grade companies in North America. I5? Each year, Markit issues two 

series ofthis index, updatin/f it every six months with a revised reference 

list of 125 constituent CDS. 58 The number "9" in "IG9" denotes the 

relevant series ofthe 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. 

"109 lOyear" 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 ofthe referenced companies during the 

151 See. e.g., 4110/2012 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 

munerous credit derivative positions). 

152 See Markit Credit Indices: A Primer, Appendix I, at 19-21; see also 4/10/2012 email from 

Julien Grout to "CIO Credit Positions" email group, "CIO CORE Credit Positions: IO-Apr-12," 

JPM-CIO-PSI002306I. 

153 Markit Credit Indices: A Primer, at 7. The prices are freely accessible to the public at 

www.markit.com.ld .• atI2. 

IS< See 2013 JPMorgan Chase Task Force Report, at 24. 

155 See, e.g., 4110/2012 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., 3116/2007 "CDS IndexCo and Markit Announce Official Name Change for New 

Series of CDX Indices," Markit, http://www.markit.comlenlmedia-centre/pressreleasesldetail. page ?dcr=/markitiPressRelease/datal2007/03/2007 -03-16. 

157 See 2/6/2009 presentation prepared by IPMorgan 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 trom the index. Id., at 14. 

159 See 2013 JPMorgan Chase Task Force Report, at 24. 
195 

40 

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 1 00 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. l64 The iTraxx gro~ of indices also had a high yield index 

known as the "XO" index. 1 5 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 ofthe 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 

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., 4110/2012 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 LendingAppendix B, at 63, http://www.occ.gov/publications/publications-by-typc/comptrollershandbook! 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. 

165 See 2013 JPMorgan Chase Task Force Report, at 24. 

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. 

16& 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," OCC-SPI-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, II. 
196 

41 

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. I72 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, for 

example, four tranches with different degrees of vulnerability to 

default. I7) 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 

sometimes did not require any premiums. 178 These instruments also 

typically required the parties to make a final payment when the swap 

expired or the trade otherwise cIosed.179 CIO documents show that the 

CIO traded credit tranches as well as credit indices and credit default 

swaps. ISO 

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 

171 See 4110/2012 email from Julien Grout to "CIO Credit Positions" email group, "CIO CORE 

Credit Positions: 1O-Apr-12," JPM-CIO-PSI 0023061. 

172 Markit Credit Indices: A Primer, Appendix 1, at 18-21. 

17J Id at 15 

174 Id:: at 15: Appendix 4, at 37. 

175Id. 

176 Id. 

177 Id. 

178 Id., at28. 

179 Id., at IS. 

180 See 4/10/2012 email from Julien Grout, CIO, to "CIO Credit Positions" email group, "CIO 

CORE Credit Positions: 1O-Apr-12," JPM-CIO-PSI 0023061. 

181 See "Markit COX Contributing Banks," Markit website, 

http://www.markit.comlenlproducts/datalindices/credit-and-Ioan-indices/cdxlcontributingbanks. page; "Markit iTraxx Contributing Banks," Markit website, 

htlp:llwviW.markit.comleniproducts/dataiindices/credit-and-loan-indices/itraxx/contributingbanks.page? 
197 

42 

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 tradin~ and 

holdings, with JPMorgan Chase as the largest participant by far. I 2 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 

182 See Gee Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012, 

at I, Graph I and 4, Tables 11 and 12, http://www2.occ.gov/topics/capital-markets/financialmarkets/trading/derivatives/dq212.pdf. 

183 Gee Quarterly Report on Bank Trading and Derivatives Activity Second Quarter 2012, at 1-

2, h1tp:llwww2.occ.gov/topics/capital-markets/financial-marketsItrading/derivatives/dq212.pdf. 

Holding companies tracked by the Gee 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. 
198 

43 

III. INCREASING RISK 

In 2005, JPMorgan Chase spun off as a separate unit within the 

bank its Chieflnvestment 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 Chieflnvestment 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 20 II, 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 

RW A 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 of2012, 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 0[$100 million in January, another $69 million in February, and 

another $550 million in March, totaling at quarter-end nearly $719 
199 

44 

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 ChiefInvestment 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. 

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 ofthe 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 de~osits in 

very safe instruments, an approach typical among large banks. 84 Those 

instruments included, for example, U.S. treasury bonds, municipal 

bonds, corporate securities, high grade corporate bonds, and high grade 

mortgage-backed securities. 18S At a Senate hearing, Mr. Dimon stated: 

184 Subcommittee interview of Mike Sullivan, OCC (8/30/2012). 

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 govenmlent and agency 

securities," with the remainder primarily in mortgage backed securities). 
200 

45 

"the bulk ofCIO'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 While 

banks 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 

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-980e-00ab870fdOd9. -

187 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 188 1d. 

189 Subcommittee interview of David Olson, CIO (9114/2012). 

190 Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 

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 "ChiefInvestment Office New Business Initiative Approval," prepared by CIO, on 

"Credit and Equity Capability," OCC-SPI-0008163I , at I; Subcommittee interview of Mike 

Sullivan, OCC (8/30/2012). 

19' 5110/2006 "ChiefInvestment Office New Business Initiative Approval," prepared by CIO, on 

"Credit and Equity Capability," OCC-SPI-00081631, at I. 
201 

46 

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-atRisk" (VaR) limit of $5 million,197 which meant that ifthe 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 T ABX 

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.,,20o Neither had a track record, making their risk 

profiles unknown. 

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 Service.,,20I The 

audit report stated: "ChiefInvestment 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 oflowering 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 

195 Subcommittee interview of Michael Sullivan. OCC (8/30/2012); 512212008 "ChiefInvestment 

Office New Business Initiative Approval," prepared by CIO, on "Credit and Equity Capability," 

OCC-SPI-0008163 I, at 8. 

196 5/10/2006 "Chief Investment Office New Business Initiative Approval," prepared by CIO, on 

"Credit and Equity Capability," OCC-SPI-0008163I, 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 OOOllOI. 

200 2/6/2009 presentation prepared by JPMorgan Chase in response to a Subcommittee request, 

"CDO Briefing," at 21, PSI-JPM-30-000001. 

201 1112912007 "cro Global Credit Trading," JPMorgan Chase & Co. Audit Department Report, 

JPM-CIO-PSI-H 0006022-023. 202 Id. 
202 

47 

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 si~naled by carrying a junk bond rather than 

investment grade bond rating. 04 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 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 

203 4112/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"Synthetic Credit Materials," JPM-CIO-PSI 0001101. 

20' See "Junk Bond," OCC February 2008 Comptroller's Handbook: Leveraged LendingAppendix B, at 63, http://www.occ.gov/publications/publications-by-type/comptrollershandbook/jldf/leveragedlending.pdf. 

205 For more information on the HY credit index, see Chapter 2. 

206 See 5/22/200S "Chieflnvestment Otlice New Business Initiative Approval," prepared by 

CIO, on "Credit and Equity Capability," OCC-SPI-000SI63 I, at II. 

207 Subcommittee interview of Ina Drew, CIO (91712012); see also 4/1212012 email from Ina 

Drew, CIO, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and 

others, "Synthetic Credit Materials," JPM-CIO-PSI 000 II 00-1 06, at 104 ("The Chief Investment 

Otlice 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). 
203 

48 

derivative products, such as credit index tranches,209 and engaging in 

larger volumes oftrades?lO 

The aee has since determined that, in 2008, the bank violated 

aee notification requirements by adding credit index tranche positions 

to the sep without notifying the agency of that "new product" which 

represented "a substantial change in business strategy.,,211 The aee 

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 aee, in contravention of its notice obligations.212 

According to the aee, the first time the sep was even mentioned in a 

written communication to the aee was on January 27, 2012, in a 

routine VaR report,213 and the first time the aee became aware of the 

portfolio's size and high risk nature was after it attracted media attention 

in April 2012.214 

JPMorgan ehase has acknowledged to the Subcommittee that, 

despite more than five years of operation, the eIa never detailed the 

purpose or workings of the sep 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 aee 

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 

209 For more information on credit tranches, see Chapter II. 

210 Subconnnittee interview of Mike Sullivan, OCC (8/30/2012); 512212008 "Chiefinvestment 

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 1d. 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). 

21S 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."). 
204 

49 

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" (T AA) 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 T AA 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 of2012: 

217 Subcommittee interviews of Mike Sullivan, OCC (8/30/2012), Jaymin Berg, OCC 

(8/3112012); and David Olson, CIO (9114/2012). Ms. Drew told the Subcommittee that the tenns 

TAA and Discretionary Trading Book were used interchangeably and that the SCP was part of 

the TAA. Subcommittee interview ofIna Drew, CIO (9/7/2012). 

218 Subcommittee interview ofIna Drew, CIO (9/7/2012). 

219 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Bhargiri, CIO). 

220 For example, Bruno Iksi!'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 ofthc "Core Credit Book." (JPM-CIO-PSI 0001249). 

221 Subcommittee interview ofIna Drew, CIO (91712012). 

122 Id.; 3/2012 "Directors Risk Policy Committee- CIO 2012 Opportunities and Challenges," 

frepared by Ina Drew and Irvin Goldman, ChiefInvestment Office, JPM-CIO-PSI 0015016. 

23 Subcommittee interview oflna Drew, CIO (9/7/2012). 
205 

50 

Chief Inyestment Office Portfolios 

(Not to Scale) 

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 CIa 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 

CIa's "Global Credit Trading" portfolio as involving "proprietary 

position strategies.,,225 In 2013, the JPMorgan Chase Task Force wrote: 

"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 keepin~ with profitmaking investments than risk 

management.22 The SCP was also housed in the CIa's Tactical Asset 

Allocation portfolio, formerly known as the Discretionary Trading 

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-CIOPSI 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-201O-80, OCC-SPI-00011201(Matter Requiring Attention) [Sealed Exhibit]. For more 

information about the OCC review, see Chapter VI. 

225 11/29/2007 "CIO Global Credit Trading," JPMorgan Chase & Co. Audit Department Report, 

JPM-CIO-PSI-H 0006022-023. 

226 2013 JPMorgan Chase Task Force Report, at 24, footnote 23. 
206 

51 

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 clientfacing customers229 or client-facing activity.230 Instead, all of the SCP 

trades were made by the bank's own traders for the bank's own 

purposes, and the resulting profits and losses affected the bank's own 

bottom line, rather than the bottom line of any client. 

B. Purpose of the Synthetic Credit Portfolio: 

Undocumented, Unclear, and Subject to Change 

JPMorgan Chase told the Subcommittee that the SCP was 

originally established to function as insurance or a "hedge" against 

certain credit risks confronting the bank. In its 2013 report, the 

JPMorgan 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 While 

some evidence supports that view ofthe SCP, there is a dearth of 

contemporaneous SCP documentation establishing what exact credit 

risks, potential losses, or tail risks were supposedly being hedged by the 

SCP; how its hedges were sized, targeted, and tested for effectiveness; 

and why SCP "hedges" were treated so differently from other types of 

hedges within the CIO. 

As noted above, the 2006 New Business Initiative (NBI) that 

formally authorized the CIO to engage in credit trading said the purpose 

was to address the bank's "cyclical exposure to credit.,,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."m Tail events are 

227 Subcommittee interview of Bill Winters, JPMorgan Chase (9/1 112012). 

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 (8/3112012) and Michael Cavanagh, 

JPMorgan Chase (12/1 112012). 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 "Chieflnvestment Office New Business Initiative Approval," prepared by CIO, on 

"Credit and Equity Capability," OCC-SPI-00081631, at I; Subcommittee interview of Mike 

Sullivan, OCC (8/30/2012). 

233 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/1 9/2012) and Michael 

Cavanagh, IPMorgan Chase (12112/2012); Subcommittee briefing by IPMorgan Chase 

(8/15/2012) (Greg Baer). 
207 

52 

develogments viewed as highly unlikely, but very costly ifthey do 

occur. 34 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 10sses?36 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?40 

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 

234 Subcommittee briefing by JPMorgan Chase (811512012) (Harry Weiss); Subcommittee 

interview of Jamie Dimon, JPMorgan Chase (911912012). 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"). 

m Subcommittee briefing by JPMorgan Chase (811512012) (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 ofIna Drew, CIO (91712012), relying on 312012 "Directors Risk 

Policy Committee - CIO 2012 Opportunities and Challenges," prepared by Ina Drew and Irv 

Goldman, Chief Investment Office, JPM-CIO-PSI 0015016. 

238 512212008 "Chief Investment Office New Business Initiative Approval," prepared by CIO, on 

"Credit and Equity Capability," OCC-SPI-0008163! at I. 

239 Subcommittee interview of John Wilmot, CIO (911112012). 

240 Subcommittee briefing by JPMorgan Chase (811512012) (Harry Weiss). 
208 

53 

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 hed~e the CIO's own $350 

billion Available-For-Sale (AFS) book of assets. 43 The head ofCIO'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 lPMorgan 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 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. 

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.251 In fact, he 

241 Subcommittee interviews ofIna Drew, CIO (917/2012); John Hogan, JPMorgan Chase 

(9/4/2012); Irvin Goldman, CIO (9115/2012). 

242 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Barghiri; Jay Balacek). 

243 Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9112/2012); John Wilmot, 

CIO (911112012); Irvin Goldman, CIO (9115/2012) (Goldman explained that the SCP had 

different hedge targets over time); David Olson, CIO (9/l 4/20 12). 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). 

244 212012 "CIO February 2012 Business Review," JPM-CIO-PSI 0001940-984, at 950 ("The 

credit derivatives portfolio seeks to efticiently provide mark-to-market stress offset to the CIO 

Int'l credit investments activity."). 

245 Subcommittee interview ofIna Drew, CIO (91712012). 

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 ofIna Drew, CIO (9/712012). 

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 (21712013). 
209 

54 

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 "soundin~ 

boards" if she later wanted to deviate from what had been agreed to.2 6 

According to the acc, on April 16, 2012, JPMorgan Chase told the 

acc that the SCP was expected to gain $1 biIIion to $1.5 billion in 

value to offset $5 to $8 billion in firm wide 10sses.257 

The acc capital markets examiner with responsibility for 

JPMorgan Chase told the Subcommittee that a distinction should be 

made among hedges, protection, and stress loss protection?58 He 

explained that a dedicated hedge meant that "x" hedges "y" and is 

reported accordingly. An example is buying the short side ofa credit 

default swap that names a specific company and using that short position 

to hedge a bank loan to that same company.259 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. 

The acc 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.260 In his view, JPMorgan Chase did not 

need a "top ofthe 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 ofbusiness.261 For example, the 

252 Id. 

253 Subcommittee briefing by IPMorgan Chase (8/15/2012) (Harry Weiss). 254 [d. 

255 Subcommittee interview ofIna Drew, CIO (9/7/2012). 256 Id. 

257 See 4/1 7/2012 email from Fred Crumlish, OCC, to Mike Brosnan, OCC, and others, "lPM 

CIOIIG9 'whale' trade," OCC-SPI-00010490. 

258 Subcommittee interview of Fred Crumlish, OCC (8/2812012). 259 Id. 

260 Id. 

261 Id. 
210 

55 

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/63 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?65 They also described it as hedging 

against a U.S. financial crisis.266 In his Senate testimony, Mr. Dimon 

pointed to both risks, saying the Synthetic Credit Portfolio's "original 

intent was to protect or hedge the 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%?68 

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 ifhe 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 

262 Subcommittee interview of John Wilmot. CIO (9111/2012). 

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 (8115/2012) (Chetan Barghiri; Han), Weiss; 

Gregg Gunselman). 

266 Subcommittee briefing by JPMorgan Chase (811512012) (Gregg Gunselman). 

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). 

268 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/1912012). 

269 See 411112012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"updated," JPM-CIO-PSI 0001077 ("[w]e are working on Jamie's request for [c]orre1ation of the 

credit book against the portfolio"). 

270 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 

271 Subcommittee interview ofIna Drew, CIO (1211112012). 
211 

56 

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 lPMorgan 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 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 bank in those 

scenarios.275 That April 11, 2012 analysis flatly contradicted the SCP's 

status as a hedge. 

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 ofthe primary tasks 

undertaken by the CIO was to hedge risks associated with the bank's 

mortgage servicing rights and interest rates.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 ran~e to the CIO, and the CIO constructed an 

MSR hedge accordingly.2 7 The MSR hedges appear to have been 

272 4110/2012 email from John Hogan, JPMorgan Chase, to John Wilmot, CIO, and others, 

"Materials for FED/OCC Questions," JPM-CIO-PSI 0001021. 

27J Subcommittee interview of Scott Waterhouse, OCC (911 712012). See also Subcommittee 

interview of Michael Kirk, OCC (S/2211 012); 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."); 4110/2012 email from Fred 

Crumlish, OCC, to Scott Waterhouse, OCC, and others, "JPM CIO trades," OCC-000040S7 

("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 ofthe SCP, see Chapter VI. 

274 4111/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"synthetic credit information," JPM-CIO-PSI 0001701-709 ("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."). 

2J5 See id., at JPM-CIO 000115S. For a more detailed discussion of this presentation, see 

Chapter VII. 

276 Subcommittee briefing by JPMorgan Chase (S/J5/2012) (Harry Weiss). 

277 Subcommittee interview of Michael Sullivan, OCC (8/30/2012); Levin Office briefing by 

JPMorgan Chase (S/15/2012) (Greg Baer). 
212 

57 

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 cia managers and the bank's 

Chief Financial Officer Douglas Braunstein on a weekly basis.28o 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 cia 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,z82 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 cia 

had no standardized method or documentation in place for identifying 

what was being hedged, recordin,r a notional amount or maturity date, or 

testing the hedge effectiveness?8 Ms. Drew told the Subcommittee that 

SCP performance was evaluated in relation to the underlying asset that it 

was trying to hedge,285 however, neither she nor the bank identified or 

produced any documentation supporting that assertion. 

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. IPMorgan 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 

27S 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-SPI00033169, See also, e.g., 1/20/2012 "CIO Weekly Performance Summary," JPM-C10-PSI-H 

0001577. 

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, 

281 Levin Office briefing by JPMorgan Chase (6/15/2012) (Greg Baer), 

282 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Chetan Bhargiri), 

2SJ Subcommittee briefing by JPMorgan Chase (8/15/2012) (Gregg Gunselman). 

284 Subcommittee interview of Michael Kirk, OCC (8/22/2012), 

285 Subcommittee intcrview of Ina Drew, CIO (91712012), 
213 

58 

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 dollar-value 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 ofthe 

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 eamings.,,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, IPMorgan Chase has not identified any CIO documentation 

indicating that credit derivatives in the SCP were subjected to any ofthe 

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, IPMorgan 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?88 The bank also contended that regulators should not require a 

macro or portfolio hedge to have even a "reasonable correlation" with 

286 JPMorgan Chase 2011 Annual Report, at 202-203. 

287 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer, Chetan Bhargiri); 

Subcommittee interview of Jamie Dimon, lPMorgan Chase (9119/2012) (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 ofIna Drew, CIO (91712012) 

(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 (9111/2012); 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 2113/2012 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 ofproposed Rulemaking Implementing Section 619 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act," at 56-57. 
214 

59 

the risks associated with the portfolio of assets being hedged?89 The 

counter to this argument is that the investment being described would 

not function as a hedge at all, since all hedges, by their nature, must 

offset a specified risk associated with a specified position?90 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 acc was unable to identify any other bank engaging in this 

type of general, unanchored "hedge" suggests that this approach is 

neither commonplace nor useful. 

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 acc examiners expressed 

skepticism that the SCP functioned as a hedge at all, given the lack of 

specificity over what was being offset,29I 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 acc 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 of2012, 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. 

289 1d at 25 

290 S~~, 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/l7/2012). The OCC Examiner-inCharge told the Subcommittee that the SCP hedge was at best "conceptual," and that a 

"conceptual hedge that is undocumented is not good. ,. 

292 5118/2012 email from Elwyn Wong, OCC, to Michael Kirk, OCC, "CIO Call with Mike 

Brosnan," OCC-SPI 00021602. 
215 

60 

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 

vehic1es.293 In addition, during the financial crisis, after the bank 

purchased Bear Steams 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 

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 of2009, 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 ofthe 

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;30o 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.30 ! The head ofthe 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 

293 Subcommittee interview ofina Drew, CIO (91712012). 

294 1d. See also JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 

2956/2112012 "CIO Compensation - Revenue to Compensation Historical Lookback," JPM-CIOPSI-H 0002749. 

296 JPMorgan Chase Task Force interview of Bmno 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. I:I2-CV-03852-GBD (US DC 

SONY), Consolidated Amended Class Action Complaint (11120/2012), at ~~ 67-72. 

2986/2112012 "CIO Compensation - Revenue to Compensation Historical Lookback," JPM-CIOPSI-II 0002749. 

299 JPMorgan Chase Task Force interview of Bmno 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 Foree interview of Bmno 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). 
216 

61 

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% ofthe 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 20 11, 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/07 and the 

financial markets were bearish.308 According to Mr. Macris, Ms. Drew 

thought there would be more defaults.309 Together, these signs 

suggested that more rather than less credit protection was needed. 

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,,,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 oflong 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.31l 

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 

303 Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 

304 IPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 

305 6/2lf2012 "CIO Compensation - Revenue to Compensation Historical Lookback," JPM-CIOPSI-H 0002749. 

306 IPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 9/6/2012). 

307 Subcommittee briefing by IPMorgan Chasc (9/4/2012) (Jeanette Boot). 

308 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 9/6/2012). 

309 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 8/28/2012). 

310 lPMorgan 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 lPMorgan Chase (5/22/2012) (Greg Baer), Levin briefing by 

lPMorgan Chase (6/27/2012) (Greg Baer and Harry Weiss). 
217 

62 

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 of2011, 

the SCP's notional size was $4 billion; by the end of 20 11, it was $51 

billion, a more than tenfold increase.316 Most of this growth occurred in 

the first half of2011. Notionals more than tripled in the first quarter, 

then tripled again in the second quarter to reach $42 billion.317 

Towards the end of2011, 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 equitybased capital required for banks with higher R W A. 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 

R W A. 321 He wrote: "We can reduce [R W A] by simp ly selling 

3J3 Levin Office briefing by JPMorgan Chase (5/22/2012) (Greg Baer). See also 2013 JPMorgan 

Chase Task Force Report, at 30. 

3144112/2012 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 1 been using Investment Grade strategies that gave us some 

carry or huying optionaJity ... to offset the directionaJity of the High Yield Book"). 

315 Subcommittee interviews of Douglas Braunstein, JPMorgan Chase (9112/2012) and Irvin 

Goldman, CIO (9115/2012); 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. 

317 See "Summary of Positions by Type," prepared by JPMorgan Chase in response to a 

Subcommittee request, JPM-CIO-PSI 0037609. 

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 R WA, see Chapter II. 

320 1d. See also 2013 JPMorgan Chase Task Foree Report, at 26-27. 

321 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partiaJ readout to the 

Subcommittee on 8/27/2012); 12/22/2011 email from Bruno Iksil to Achilles Macris and Javier 

Martin-Artajo, CIO, "urgcnt -----: Rwa," JPM-CIO-PSI 0001227. See also FDIC presentation, 
218 

63 

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 lim it. 323 Instead, Mr. Martin-Artajo 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 longterm 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 The CIO traders adopted that trading strategy. 

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 of2011 was $70 billion/26 

while other materials reported that, by the beginning of2012, the CIO's 

RWA was around $40 billion.327 When asked by the Subcommittee for 

more complete R W A records, the bank responded that such records were 

not prepared and were not available, although a former CIO employee 

who worked on RW A models recalled that monthly R W A 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 

"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 

~etting into a neutral position by going long 4-5 times the high yield short positions."). 

22 12/22/2011 email from Bruno Iksil to Achilles Macris and Javier Martin-Artajo, CIO, "urgent 

-----: Rwa," JPM-CIO-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 1d. 

325 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeannette Boot). 

326 See 1/3112012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, "CIO Quarterly 

Meeting," OCC-SPI-00004695 (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 1118/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "Meeting materials for 

I I am meeting," conveying presentation entitled, "Core Credit Book Highlights," prepared by 

Mr. Iksil, at JPM-CIO-PSI 0000100 (indicating CIO's RWA was then $40.3 billion); JPMorgan 

Chase Task Force Report, at 28, footnote 30 (indicating CIO RWA at start of2012 was about 

$43 billion); 1119/2012 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 of2012 was $43 billion). 

328 Subcommittee interview of Patrick Hagan, CIO (2/7/2013). The Subcommittee also located 

some R WA data in the monthly Executive Management Reports prepared by the bank. See, e.g., 

December 2011 "Chieflnvestment Office - Executive Management Report," OCC-SPI00033116, at 8, 10; April 2012 "Chief Investment Office - Executive Management Report," 

OCC-SPI-00033 162, at 4. 
219 

64 

investigation that, as a result of the trading strategy to reduce the RW A, 

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.33o 

(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 of20ll, 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 payoff 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. 

Over the next few months, the value of the HYll 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 

329 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 812812012). 33o Id. 

331 Subcommittee interview of Doug McLau~hlin, OCC (813012012); 2011 CA Quarterly 

Summary: Global ChiefInvestment Office 4 Quarter CA summary," OCC-SPI-00002483. See 

also JPMorgan Corporate Sector Executive Management Report (Full Year 2011 Actuals), JPMCIO-PSI 0018046, at 071. 

332 For more information on credit index tranches, see Chapter II. 

333 See OCC data analysis derived from DTCC data for JPMorgan Chase, described in "JPMCCIO timeline of Significant Events and OCC Discovery," prepared by the OCC, OCC-SPI00038895, at 6 [Sealed Exhibit]; 1012612012 OCC Confidential Supervisory Report, Appendix 

I I at PSI-OCC-13-0000l I3 [Sealed Exhibit]; "From 'Caveman' to 'Whale,'" Wall Street 

Journal, Gregory Zuckerman (511712012), 
220 

65 

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 ofthe 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/36 triggering a massive payout to the CIO 

and others holding the short side of the position. 

Ina Drew told Jamie Dimon that the gains were about $400 

million.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,,,34o while 

a JPMorgan Chase internal report characterized them as a "windfaI1.,,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 ofthe 2011 

trades involving the SCP at the time.344 

The OCC told the Subcommittee that, while its examiners noticed 

the CIO's $400 million gain at the end of2011, they did not look into its 

http://online.wsj.comiarticle/SB 1 0001424052702303879604577408621 039204432.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 II (11/29/2011), 

http://www.amrcaseinfo.comimaincase.php?start_ dt= 11 /29/20 11 &end _ dt=&start _ no=&end _ no= 

~?esc=&prev _ desc=.&sort=F&event_ SEARCH=Y ~rru:ge _start=&range _ stop=. 

. See 4/5/2012 emrul 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), JPMCIO-PSI 0018046 at 071. 

342 20 II CA Quarterly Summary: Global Chief Investment Office 41h 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, IPMorgan Chase (9/4/2012). 
221 

66 

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 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 ofthe SCP's high risk trading activity in 

2011. 

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.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 cro,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 ofthe SCP's 

complex trading strategy that involved combining investment grade and 

3'5 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 (8/3012012). 

348 Subcommittee interview of Fred Crumlish, OCC (8/30/2012). 

349 Subcommittee interview oflna Drew, CIO (91712012). 

350 Subcommittee interview oflna Drew, CIO (121712012). 

351 lPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 8/28/2012). 

352 lPMorgan Chase Task Force interview of Bruno lksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 

353 ld. 

354 Subcommittee briefing by lPMorgan Chase (8/15/2012) (Jeanette Boot); Subcommittee 

interview oflna Drew, ClO (91712012). 
222 

67 

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 

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/57 would not have 

sustained losses from any individual corporate bankruptcy, and so was 

not using the SCP's 20 II trading strategy as a hedge. 

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.,,358 

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. 

(4) SCP Size and Revenues 

From its inception in 2006, until 2011, the Synthetic Credit 

Portfolio generated uneven, but sometimes substantial revenues for the 

bank. 359 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. 

355 Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 

356 Subcommittee interview ofIna Drew, CIO (12/11/2012). 

357 Subcommittee interview ofirvin Goldman, CIO (9115/2012). 

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 ofIna 

Drew, CIO (91712012). 
223 

68 

CIO Synthetic Credit Portfolio Revenues 

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 presentatlOn entllied. "CIO CompensatlOn;' 

chart entitled, "Synthetic Credit Book Comparison: Revenue and 

SCB Troder Incentive (2008-201 I)," 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 

(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 20 II, to three key CIa 

employees involved with SCP trading, Achilles Macris, Javier MartinArtajo, and Bruno Iksil. The bank prepared a summary chart which is 

reprinted below: 

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-PSI 0001940-963 ("This is a tail risk 

book that ... from 2007-2011 has generated US$2.4bln total return."); Subcommittee interview 

of Michael Sullivan, OCC (111712012). 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). 

36! 2012 JPMorgan Chase Task Force Report, at 91. 
224 

69 

~ ! " ~ ~ j I ! '2 g> ij, 

% j ~ !I '-' 

"li f ?, b ~ .. ~ -C ~ & ~j j ~ !1 " ~ ~ 

~ ;;J d 3' m 3' 

~ ~ ~ :::: 

fJ ~ ttl m ~ " J. :::. 

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, ~!1 ~* .; ll jj 

g ~~ .r! 

~ r ~~~ ~; ~m 

" ~ :...~ r;:u. ~ , 1 " , , :Jl "':1'-; ~ ,,~N !! 

~ d ~ !! *~ H ~ ~J !!! go g ~- i !!!- I~ ;lI" 

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<Il 

C 

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Source: 612112012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 754. 

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, 

.., 
225 

70 

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 Mana~ement Development Committee of 

JPMorgan's Board of Directors. 67 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 ofInvestment 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 20 I 1 and was at the top 

362 See 6/2112012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 754. See also 

"CIO Compensation - Revenue to Compensation Historical Lookback," JPM-CIO-PSI-H 

0002749. 

363 6/21/2012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 757-760; 766-770; 

772-781. 

::: 2013 JPMorgan Chase Task Force Report, at 92. 

Id.,at 92. 

3663/23/2012 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. 

3696/21/2012 CIO Compensation Presentation, JPM-CIO-PSI-H 0002746, at 750. 
226 

71 

end of the range in 2010; and Mr. Iksil was at the top end of the range 

for 2011 (the only year available).370 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. 

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 20 11, senior JPMorgan Chase management, 

370 Id .• at 754. 

371 7113/2012 "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 

ifin the CIO review there was any 

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 

bl, CIO"). 

3 3 Id., at 93. 
227 

72 

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 As Mr. Braunstein explained to the Subcommittee, there was 

also less of a need for the CIO to protect its $350 billion Available-forSale 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 R W A. 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 R W A 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 R W A 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 

374 Subcommittee interview of Douglas BraWlstein, JPMorgan Chase (9112/2012). 

375 Id. 

376 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 916/2012). See also 1218/2012 European Central Bank Press Release, 

http://www.ecb.intipresslpr/date/20 I Ilhtml/prl I 1208 _I.en.html. 

377 Subcommittee interview of Douglas BraWlstein, JPMorgan Chase (9112/2012). 

378 CIO management even told regulators, at a January 2012 meeting, that they intended to 

reduce the size ofthe SCI'. See 113112012 email from Jaymin Berg, OCC, to Fred Crumlish, 

OCC, "CIO Quarterly Meeting," OCC-SPI-00004695 (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 R W A will decrease from $70B [billion 1 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 (9119/2012), Ina Drew, CIO 

(91712012) and Douglas Braunstein, JPMorgan Chase (9112/2012). At the time, JPMorgan Chase 

had recently engaged in stock buy backs 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 R W A to minimize its 

mandatory capital requirements. 

381 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9112/2012). 3821d. 
228 

73 

earning more money, and the SCP's synthetic assets would re~uire the 

use of a lot of capital under the upcoming Basel III standards.3 3 

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 RW A 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 which made its credit loss protection characteristics irrelevant 

to the decision to reduce its RWA. 

Mr. Iksillater told the JPMorgan Chase Task Force investigation 

that then-CFO John Wilmot told the traders in December 20 11, that 

notwithstanding the $37 billion reduction in R W A during the earlier part 

of 20 II, he wanted an additional reduction in R W A of $25 billion.38 

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 RW A outcome.388 According to the traders, 

reducing the portfolio still more, and faster, would be more expensive389 

because of execution costS.390 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. 

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 RW A reduction, Mr. Iksil estimated a 

cost of $400 million. 391 Mr. Martin Artajo later told the JPMorgan 

Chase Task Force investigation that the CIO had not been given any 

383 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9119/2012). See also 2013 

JPMorgan Chase Task Force Report, at 26-27. 

384 Subcommittee interview ofIrvin Goldman, CIO (9/15/2012). 

385 Subcommittee interview of John Wilmot, CIO (911112012). 

386 Subcommittee interview ofIrvin Goldman, CIO (9115/2012). 

387 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 

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 ofIna Drew, CIO (9/7/2012) and Michael Cavanagh, JPMorgan 

Chase (12112/2012). 

391 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 
229 

74 

budget to cover that cost to reduce the SCP.J92 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.J93 Ms. 

Drew told the Subcommittee that she then asked the traders to see if it 

was possible to reduce RW A 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 

RW A 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 RW A 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 R W A. 396 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 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."J98 Thus, as he 

described it, he was told to maintain the SCP's default protection in 

order to f.0sition the CIO to profit from future American Airlines-type 

defaults. 99 Ms. Drew confirmed to the Subcommittee that she gave 

guidance to the traders to position the book for another gain like in late 

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, "lOB RWA Target 

Reduction.ppt," JPM-CIO-PSI 0000039; JPMorgan Chase Task Force interview of Bruno Iksil, 

CIO (partial readout to the Subcommittee on 8/27/2012). See also 2013 IPMorgan Chase Task 

Force Report. at 28 ("a 35% proportional unwind ofthe [SCP] would result in a $10 billion 

RWA reduction, but could cost slightly more than $500 million"). 

394 Subcommittee interview ofIna Drew, CIO (91712012). 

395 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9119/2012). 

396 Subcommittee interview of Douglas Braunstein, IPMorgan Chase (9/12/2012). 

391 Subcommittee interview ofIrvin Goldman, CIO (9115/2012). 

398 IPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 399 Id. 
230 

75 

2011.400 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. 

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 SCPo The cover email stated: "[P]lease find 

attached a grid for the Core credit Book R W A reduction scenarios .... 

Currently any major reduction will lead to a very high cost through 

proportional reducing.,,401 That presentation estimated the execution 

cost for achieving a $10 billion reduction in R W A 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 ofCIO 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 1 

[profit/loss). We may have a tad more room on rwa." Her comments 

followed information the day before, that the SCP's RWA total might be 

better - that is, lower - than anticipated.404 Her comments also 

underscored her reluctance to incur the costs associated with unwinding 

the SCPo 

400 Subcommittee interview ofina Drew, CIO (12111/2012). 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"); 119/2012 email from Ina Drew, 

CIO, to John Wilmot, CIO, "CRM results for Q4," JPM-CIO-PSI 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). 

401 114/2012 email fromJulienGrout.CIO.tolna Drew, John Wilmot, and Javier Martin-Artajo, 

CIO, "RWA reduction for Core Credit- scenario analysis summary," JPM-CIO-PSI 0001259. 

402 [d., at 260. 403 1d. 

404 1110/2012 email fromlnaDrew.CIO.toJavierMatin-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 ofIna Drew, CIO (91712012). 
231 

76 

According to the bank, it ultimately decided to require the CIa to 

meet its original R W A reduction target by the end of 20 12, and no 

more.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 CIa's decision to 

increase rather than decrease the size of the SCPo 

The Eastman Kodak loss had its roots in a December 2011 

decision to reduce the CIa'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 RW A and to maintain less 

protection due to the improving economic environment, the CIa 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 gositions in Dec' 11 ... the HY short risk 

position [was] increased." 08 

While the CIa traders ac~uired the new short credit instruments in 

December and early January,40 they did not replace all of the expiring 

shorts due to the instruction to lower the SCP's RW A and reduce its size 

405 2013 JPMorgan Chase Task Force Report, at 28. It is unclear, however, what the ultimate 

R W A 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); 111 9/2012 email fromAchillesMacris.CIO.tolna 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 R W A 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., 1120/2012 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). 
232 

77 

due to the improving macroeconomic climate. By January 10,2012, Mr. 

Iksil reported internally that the SCP was less "short" than it had been at 

the end of December 2011,410 which meant that it was providing less 

credit protection. 

On January 19,2012, Eastman Kodak filed for bankruptcy,4lI 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 ofiong 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, 

410 1110/2012 email from Bruno Iksil, CIO, to Keith Stephan, CIO, "CRM results for Q4," JPMCIO-PSI0000083. 

411 See In re Eastman Kodak Company, Case No. 12-10202 (ALG) (Baukr. SDNY), Voluntary 

petition for relief under Chapter I I (1/1912012), http://www.kccllc.netlkodak. See also 

"Eastman Kodak Files for Bankruptcy," New York Times (lII9/2012), 

http://dealbook.nytimes.coml2012/01/19/eastman-kodak-liles-for-bankruptcy/; Subcommittee 

briefing by JPMorgan Chase (9/4/2012) (Jeanette Boot); Subcommittee interview ofIrvin 

Goldman, CIO (9/15/2012). 

412 2013 JPMorgan Chase Task Force Report, at 30. 

4\3 Subcommittee interview ofIrvin 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." rd. 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" (312012) at JPM-CIO-PSI 0001247-

258, at 258. 

415 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8127/2012); 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., 1120/2012 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 lirmwide VaR breach); 1/2012012 email from MRM Reporting, 

JPMorgan Chase, to Jamie Dimon and others, JPMorgan Chase, "JPMC 95% 10Q VaR - Limit 

Excession Notification (COB 1/1912012). 
233 

78 

meaning that the value oflong credit positions increased and the value 

of short credit positions fell. 417 Since the value of short credit protection 

generally declined, the SCP book also lost value.418 As the OCC 

explained it to the Subcommittee, ~eneral market movements went 

against the CIO in January 2012.41 

The result was that the SCP eXEerienced nine straight days of 

losses in the second half of January. 20 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 ifno 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 ofthe 

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 

417 Subcommittee interview of Peter Weiland, CIO (S/29/2012). 

418 Subcommittee briefing by JPMorgan Chase (S/15/2012) (Jeanette Boot); Subcommittee 

interview of Michael Sullivan, OCC (S/30/2012). See also 2013 JPMorgan Chase Task Force 

Report, at 26 (stating that in the fourth quarter of 20 II, the SCP held an overall net short 

r:isition). 19 Subcommittee interview of Michael Sullivan, OCC (111712012). 

420 See Synthetic Credit Profit and Loss, OCC-SPI-0000029S, and chart tracking the SCP's daily 

frofit and loss reports in Chapter IV. 

21 Subcommittee interview of Michael Kirk, OCC (S/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/manuallsection3-

3Jdf. 

4 112612012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "credit book last 

version,"conveying "Core Credit Book Highlights," JPM-CIO-PSI 0000159-173, 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 ofirvin 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"). 
234 

79 

SCP book as a hedge.425 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 SCPo 

The evidence indicates that CIO management gave only cursory 

attention to the option ofleaving 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.426 According to Mr. 

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.43! 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 oflosses in the SCP, Ms. Drew convened a 

meeting to discuss the SCP and, in particular, how to reduce its R W A. 433 

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 

r:roduce gains rather than reflect the costs of maintaining credit loss protection. 

27 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."). 

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 1/412012 email tromJulienGrout, CIO, to Ina Drew, John Wilmot, and Javier Martin-Artajo, 

CIO, "RWA rcduction for Core Credit- scenario analysis summary," JPM-CIO-PSI 0001259-

260, at 260. The $516 million was the projccted cost for unwinding just 35% of the SCPo 

431 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 9/6/2012). 

432 See 1110/2012 email from Ina Drew, CIO, to Javier Martin-Artajo, CIO, "International Credit 

Consolidated P&L 09-Jan-2012," JPM-CIO-PSI 0000075. 

433 See 1118/2012 email from Bnmo Iksil, CIO, to Julien Grout, CIO, "Meeting materials for 

Ilam meeting," JPM-CIO-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, 
235 

80 

In preparation for the meeting, Mr. Iksil provided Ms. Drew a 

written presentation with key information about the SCP.434 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 $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 RW A 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 Mr. Iksil's presentation indicated that as of midJanuary, implementing the CIO's shadow RWA model would have had 

the effect of reducing the SCP's apparent RW A by almost 50%. 

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: 

Credit Index IG9 - $278 billion in gross notional value; 

Credit Index HYI0 and 11 $115 billion in gross notional value; 

and 

Main iTraxx S9 - $90 billion in gross notional value.438 

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 1118/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "Meeting materials for Ilam 

meeting," JPM-CIO-PSI 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). 

4351118/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "Meeting materials for llam 

meeting," JPM-CIO-PSI 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 

R WA, see Chapter II; for more infoffilation about the CIO's efforts to produce an alternative 

RWA model, see Chapter V. 

438 1118/2012 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-PSIOOOOI01. The IG9 tracked 125 investment grade companies in the United States; 

the HY I 0 and 1 I each tracked 100 companies at higher risk of default; the Main ITraxx S9 
236 

81 

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 ofthese positions on top oftheir huge size all boosted 

the SCP's RWA. 

The next day, January 19,2012, to follow up on the prior day's 

meeting, Mr. Martin-Artajo 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 of20.5 Bin 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 following the current QR model 

guidelines .... 

The third scenario is possible if we get the new [CIa] model 

The fourth scenario is our Target scenario and the one we are 

hoping to implement ... by midyear.,,44o 

Each ofthe four scenarios turned on whether the CIa would be 

required to use the bank's official "QR" model or its own shadow model 

to calculate RW A; and whether the CIa traders would be permitted to 

tracked 125 investment companies in Europe. For more infonnation on credit indices, see 

Chapter II. 

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 tenn 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 (21712013). 

440 1/19/2012 email from JavierMartin-Artajo,CIO,to Ina Drew, CIO, and others, "Credit book 

Decision Table Scenario Clarification," at JPM-CIO-PSI 0000105-106. 
237 

82 

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 

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 1119/2012 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 R WA 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 (21712013). 
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USD 400·S00mm 

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USD ·150mm to USD ·SOmm 

USD JOOmm 

Possible if approved by QR 

elo Model no diversification 

Data availa ble 

RWA reduced from USD 21 Btn to 

USD 15 Bin USD 15 Bin 

USD15 Bin 

Active risk reduction of the 

critical legs with regards to RWA 

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Buying protection on IG9 10yr, 

MAIN 59, HY10 7yr 

USD 100mm 

USD 200mm 

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USD 150mm 
239 

84 

Of the four scenarios laid out in the Decision Table, the fourth, or 

"Target Scenario," had the lowest "draw down" or expected loss.444 

Under the first two scenarios, if the QR model prevailed, produced a 

higher RWA, and required the CIa 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 CIa model prevailed and the traders reduced risk actively, the 

Decision Table estimated losses at $150 million. Under the final 

scenario, if the CIa 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 

proposinr a trading strategy for the CIa on "the trades that make 

sense.,,44 Mr. Iksillater told the JPMorgan Chase Task Force 

investigation that the last scenario in the table was the one that the CIa 

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 Subcommittee has been unable to identify 

any documentation establishing Ms. Drew's approval of the R W A 

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, ifhe had not intended 

to inform her of the strategy and obtain her approval before proceeding. 

444 1119/2012 email fromJavierMartin-Artajo.CIO.toInaDrew.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 (111712012). 

445 III 9/2012 email fromJavierMartin-Artajo.CIO.tolnaDrew.CIO. and others, "Credit book 

Decision Table - Scenario Clarification," JPM-CIO-PSI 0000106. 446 Td. 

447 See 1/26/2012 email from Bruno Iksil,CIO,toAndrewPerryman,CIO, "credit book last 

version," conveying "Core Credit Book Highlights," (January 2012), prepared by Mr. Iksil, at 

JPM-CIO-PSIOOOOI61. 

448 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 

449 Subcommittee interview ofIna 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, CTO,to 

Andrew Perryman, CIO, "credit book last version," conveying "Core Credit Book Highlights" 

prepared by Mr. Iksil, at JPM-CIO-PSI 0000161. 
240 

85 

The analysis undertaken in the January 18 presentation was 

designed to reduce the SCP's RWA so that the RWA for the CIa 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 R W A and 

avoiding losses were in "constant tension.,,45o By the end of January, 

these problems converged, and the traders came up with a solution that 

they believed would address both problems. 

(10) Decision to Go Long 

In the second half of January 2012, the cra 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 had 

also received permission to reduce the SCP's RWA opportunistically, 

rather than immediately. 

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.452 In addition, removing short positions would have made it 

impossible to prevent Eastman Kodak-style losses or obtain American 

Airlines-style gains. The CIa traders decided instead to advocate 

buying more credit positions that were "long" on risk, that is, where the 

cra was essentially selling insurance against future credit defaults. 

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 

ofthe SCP's credit assets would produce gains only when a referenced 

entity declared bankruptcy or defaulted on its debts. Since the original 

function ofthe 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. 

The CIa traders apparently reasoned, however, that, just as buying 

protection required CIa to pay a premium, selling protection would 

450 Levin Office briefing of JPMorgan Chase (6/26/2012) (Harry Weiss). 

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. 

m See 111912012 email from Javier Martin-Artajo, CIO, to Ina Drew, CIO, and others, "Credit 

book Decision Table - Scenario Clarification," at JPM-CIO-PSI 0000106. 
241 

86 

allow the CIO to collect premiums, which they often referred to as 

"carry.,,45J 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 Still another 

benefit was that the value ofthe long credit protection would increase 

during a market rally so, according to CIO's market risk officer at the 

time, adding longs would help balance the portfolio's losses ifthe 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 

ofthe CIO's problems at once: to offset losses by producing carry, 

reduce RW A, 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 

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 (9112/2012). CIO's fonner CFO, John Wilmot, agreed: the traders "earned" 

carryon 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, C1O, 

"urgent -----: Rwa," JPM-CIO-PSI 0001227 (stating Mr. lksil had reduced RWA in the past by 

selling protection). The CIO's fonner 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 

(911112012). C.S. Venkatakrishnan, a risk expert at the bank, concurred, telling the 

Subcommittee that RWA could "typically" be reduced by offsetting instrwnents 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 

419/2012 email from John Wilmot, CIO, to Ina Drew, CIO, and others, "Deliverables for meeting 

tomorrow," JPM-C1O-PSI 0001645 (referring to conversation with CFO Douglas Braunstein, 

who explained that selling protection might not have been as economic, from an R W A 

rerspective, as reducing the existing protection); JPMorgan briefing (7/5/2012) (Greg Baer). 

56 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 

457 See, e.g., 5/3/2012 email from Irvin Goldman, C1O, to Douglas Braunstein, JPMorgan Chase, 

and others, "CSW 10%," conveying "CIO Synthetic Credit" presentation (5/2012), JPM-CIOPSI-H 0000549 (presentation indicating that the SCP sought to retain the upside on potential 

del,mlts and thus sold protection on investment grade indices). 
242 

87 

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 $1 00 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 It also stated 

that the SCP already included some long credit instruments which were 

providing "offsetting gains to the 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 Specifically, it proposed: 

"The trades that make sense: 

• 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 

tum 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 

458 1126/2012 email fromBrunoIksil.CIO.toAndrewPerryman.CIO. "credit book last 

version," JPM-CIO-PSI 0000159-173, conveying "Core Credit Book Highlights," (1/2012), 

£repared by Mr. Iksil; Subcommittee interview of Peter Weiland, CIO (8/29/2012). 

59 JPMorgan Chase Task Force interview of Javier Martin-Artajo, CIO (partial readout to the 

Subcommittee on 9/6/2012). 

460 Subcommittee interview ofIna Drew, CIO (9/7/2012). 

46\ 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 1126/2012 email from Bruno Iksil, CIO,toAndrewPerryman,CIO, "credit book last 

version," conveying "Core Credit Book Highlights," (I120l2), prepared by Mr. Iksil, JPM-CIOPSI 0000161. 463 Id. 

464 Id. 

465 Id. 

466 Id. 
243 

88 

not understand. Because the traders themselves declined the 

Subcommittee's request for interviews and were outside ofthe 

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 No CIO official offered a more detailed explanation of the 

specific trading strategies set forth in the January proposal. 

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.470 The OCC provided the Subcommittee with its 

understanding of the proposed trading strategies as follows. 

Selling the forward spread: The presentation proposed buying 

credit protection in the short term and selling credit protection in 

the long term. 471 

Buy protection on the tightening move: The presentation proposed 

essentially buying credit protection when it was less expensive.472 

As noted above, when credit markets are improving, credit 

insurance becomes less costly. 

Turn the position over to monetize volatility: The presentation 

proposed selling SCP positions to take advantage of changing 

prices and locking in any profits.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 The presentation appears to 

propose buying the long side of those credit instruments. 

467 See, e.g., Subcommittee interview oflna Drew, CIa (91712012), 

468 Subcommittee interviewofirvin Goldman, CIa (9115/2012), 

469 Subcommittee interview of Peter Weiland, CIa (8/29/2012), 

470 Subcommittee interview of Michael Sullivan, acc (8/30/2012), 

471 Id. 

472 Id. 

473 Id. 

474 Id, 

475 For more information on these credit index tranches, see Chapter II. 
244 

89 

Use indices and add to existing position: The presentation noted 

that the SCP already had some long credit index positions on the 

books,476 and proposed expanding those holdings. 

In addition to advocating those particular trading strategies, the 

presentation contained a warning about possible losses. In a section 

entitled, "Adverse scenarios and possible drawdowns," the proposal 

stated that if unanticipated defaults occurred, they could impose costs of 

$200 million "upfiont," and if prices failed to behave as expected, 

additional losses of$300 million were possible.477 In other words, the 

proposal warned from the beginning that its trading strategies could 

result in losses totaling $500 million. 

The Subcommittee has not identified any formal approval 

document, but the ISMG apparently approved the proposed trading 

strategies, since the CIO traders immediately began implementing them 

in late January, in particular by buying substantial amounts of the IG9 

credit derivative index on the long side. 478 This trading strategy would 

prove, however, in the words ofMr. 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 

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 ofthe 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 ofthe year. 

(1) January 2012 

As noted above, in June 2011, the CIO began to increase the size 

ofthe Synthetic Credit Portfolio in anticipation of deteriorating credit 

476 Subcommittee interview of Michael Sullivan, OCC (8/3012012). 

477 1126/2012 email from Bruno Iksil, CIO, to Andrew Perryman, CIO, "credit book last 

version." conveying "Core Credit Book Highlights," (January 2012), prepared by Mr. !ksil, at 

JPM-CIO-PSIOOOOI65. 

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). 
245 

90 

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 One trader explained the losses as the result of a 

combination offactors: the high-yield short positions losing more value 

than expected and the investment-grade long positions gaining less value 

than expected.486 When the Subcommittee 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 

480 IPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 9/6/2012). 

481 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Jeanette Boot). JPMorgan Chase 

told the Subcommittee that the SCP used the IG9 index on both sides of its forward trades, with 

the "short leg" (buying credit protection) maturing in December 2012, and the "long leg" (selling 

credit protection) maturing in 2017. Id. The trade meant the CIO was both liable for and 

protected against defaults in investment grade companies through December 2012, but thereafter 

was liable for only defaults in investment grade companies through December 2017. See, e.g., 

411112012 email from John Wilmot,CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"synthetic credit information," conveying presentation, at 5, JPM-CIO-PSI-OOO 1706 (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 1126/2012 email fromBrunoIksil.CIO.toAndrewPerryman.CIO. "credit book last 

version," conveying "Core Credit Book Highlights," (112012), prepared by Mr. Iksil, at JPMCIO-PSIOOOOI61. 

483 Subcommittee interview of John Wilmot, CIO (9111112). 

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 fromBrunoIksil.CIO.toAndrewPerryman.CIO. "credit book last 

version," conveying "Core Credit Book Highlights," (1/2012), prepared by Mr. Iksil, at IPMCIO-PSI 0000162 (explaining "credit book has a YTD P&L of -100M," unanticipated defaults 

could impose costs of $200 million "up front," and if prices failed to behave as expected, 

additional losses of$300 million were possible). 

486 See 2013 JPMorgan Chase Task Force Report, at 33. 
246 

91 

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" ofthe 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. 

487 Subcommittee interview of Mike Sullivan, OCC (8/30/2012). 

488 Subcommittee interview of Doug McLaughlin, OCC (8/30/2012). 

4891/30/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo, CIO, "update on core credit 

book." JPM-CIO-PSI 0001223. 
247 

92 

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 

larger and larger drawdown pressure versus the risk due to 

notional increase. Please let me know the course of action I 

should take here.,,49o 

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 

20 II, and applied it to the bull market in the early part of 20 12, 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 That meant that 

the mark-to-market profits the CIO was able to post on the investment 

grade credit protection it sold was insufficient to offset the mark-tomarket losses it had to post on the high yield protection they purchased. 

Mr. Iksillater 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 "CSO I" - prevented him from doing so. He later wrote in an email: 

"[T]he need to reduce V AR - RWA and stay within the CSO I limit 

49° ld. 

491 1/3112012 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., 1131/2012 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). 

49J JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 9/6/2012). 
248 

93 

prevented the book from being long risk enough.,,494 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. 

(2) February 2012 

Despite the concerns expressed by Mr. Iksil and Mr. Macris about 

the SCP trading strategy, the CIa traders continued to pursue it 

throughout February, acquiring even more credit 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 CIa 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 CIa 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 an February 9, 2012, the SCP 

book breached a risk limit called "CSOl.,,500 The book at that point had 

reported losses exceeding $128 million since the beginning of the 

494 3129/2012 email fromBrunolksil.CIO.toJavierMartin-Artajo.CIO. "First draft of the 

presentation," conveying "CIO Synthetic Credit Update" (312012) 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 CSOllimit which the SCP ultimately breached in February. For more infonnation on 

these limits, see Chapter V. 

495 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 812712012). 

496 See 4/912012 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 0002204-213, at 212; Subcommittee briefing by 

JPMorgan Chase (8/1512012) (Jeanette Boot). 497 2/22/2012 email by Bruno Iksil,CIO,toJavierMartin-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 (10/412012) (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-CIO-PSI 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 02/0912012," 

JPM-CIO-PSIOOOI825. For more information on how the CIO responded to the SCP's 

breaching that risk limit, see Chapter V. 
249 

94 

year. SOl Despite the breach - and the losses CIO managers allowed the 

traders to continue to implement their trading strategy. 

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).so2 Mr. Iksil explained 

that this news affected the prices ofthe indices in which the SCP was 

trading to such an extent that the SCP had to post mark-to-market losses 

on both the protection it had bought and the protection it had sold.s03 

The reasons for this double loss were unclear, yet the traders continued 

to acquire still more credit derivatives. 

Mr. Iksillater indicated in an internal document that, by midFebruary, 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."so4 

According to Mr. Iksil, he and Mr. Martin-Artajo discussed the 

trading strategy in February. Mr. Iksillater 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,sOS that is, increase the overall 

size ofthe positions. In Mr. Iksil's view, the losses would only be 

multiplied by volume.so6 He indicated that Mr. Martin-Artajo responded 

that the book had to be "hedged on high yield defaults."so7 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. SOB So he continued to purchase long credit 

instruments and collect the carry. 

SOl 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, CIa, 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. SONY), Voluntary 

petition for relief under Chapter II (5/1412012), 

http://www.kccllc.netldocuments/8822 900/8822900120514000000000001. pdf. 

503 See undated internal document authored by Bruno Iksil, CIa, with his personal notes and 

comments on SCP trading activities from January to March 2012, JPM-CIO-PSI 0021890. 

504 Undated internal document authored by Bruno Iksil, CIa, with his personal notes and 

comments on SCP trading activities from January to March 2012, JPM-CIO-PSI 0021891. 

505 JPMorgan Chase Task Force interview of Bruno Iksil, CIa (partial readout to the 

Subcommittee on 812712012). 506 I

d. 

507 Id. 

508 Id. 
250 

95 

On February 28, Mr. Iksil wrote that there was "more bleeding," 

and he had added approximately "[$]6-7 bin [billion] ig9 1 Oyr" to the 

SCP book.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.5ID 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 

They also did not disclose that the SCP had incurred two straight months 

of losses. 

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. Iksillater 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 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. 

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. 

5102/29/2012 email from Bruno Iksil,CIO, to Javier Martin-Artajo, CIO, "Core credit book 

uRdate", JPM-CIO 0003443. 

5 I JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 8/28/2012). See also 4/912012 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 0002204-213; 

31712012 email fromC.S. Venkatakrishnan, JPMorgan Chase, to Ina Drew, CIO, and others, 

"CIO CRM Results," JPM-CIO-PS1 0001815 (stating SCP increased in January and February by 

$33 billion); Subcommittee briefing by JPMorgan Chase (8115/2012) (Jeanette Boot). 

512 2/28/2012 email fromJohnWilmot.CIO. to Jamie Dimon, JPMorgan Chase, and others, 

"C10 Business Review Materials," JPM-CIO-PS1 0001940, at 942. 

513 See 2013 JPMorgan Chase Task Force Report, at 37-38. 

514 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 515 3/29/2012 email from Bruno Iksi1,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). 
251 

96 

When asked about the February trading activity, the OCC told the 

Subcommittee that the CIa 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.517 

(3) March 2012 

In March, the CIa 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 ofthe month, exceeded 

half a billion dollars. 

On March I, 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 RW A 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."s19 

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 ofthe long positions in an apparent 

attempt to staunch the losses. 

By mid-March, according to Mr. Macris, there were meetings 

every other day to discuss the book.520 According to Mr. Martin-Artajo, 

the protection the traders bought continued to lose 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."s22 Yet, on March 19, 2012, Mr. Iksil wrote 

that perhaps they should increase the book's long positions even more: 

517 Subcommittee interview of Scott Waterhouse. OCC (911712012). See also 2013 JPMorgan 

Chase Task Force Report, at 39. 

518 3/112012 email from Achilles Macris, CIO,to Javier Martin-Artajo, CIO, "priorities," lPMCIO-PSIOOOI219. 

519 JPMorgan Chase Task Force interview of Achilles Macris, CIO (partial readout to the 

Subcommittee on 8128/2012). 

52o Id. 

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 3/1512012 email from Bruno Iksil,CIO, to Javier Martin-Artajo, CIO, "Update on Core," 

JPM-CIO-PSI0000386. 
252 

97 

"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.,,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 IG 17.525 The 

second involved an even newer IG index series, the IGI8, 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 Altogether, in a few weeks, these trades increased the 

notional size of the SCP by $40 billion. 

Mr. Iksillater 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 ofthe market.528 He explained 

that he had sold so much protection in the IG9 index that he believed the 

523 3119/2012 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," OCC·SPI·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 (9117/2012), Michael Sullivan and Douglas McLaughlin, 

OCC (8/30/2012); OCC Presentation to the Subcommittee, page entitled, "IQ2012," (noting that 

"CSOI 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 quarterend public filings). 

525 See 2013 JPMorgan Chase Task Force Report, at 42; Subcommittee briefing by JPMorgan 

Chase (8/15/2012) (Jeanette Boot). See also 3122/2012 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 3122/2012 email from PeterWeiland,CIO,to Irvin 

Goldman, CIO, "I would like to understand the increase in positions in credit," JPM·CIO·PSI 

0000410-411. 

521 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 0000410-41 I (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-CIOE 00014689-691, at 691 (reporting an additional purchase ofiTraxx long positions totaling $5.65 

billion). 

528 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 
253 

98 

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 Later, 

Mr. Iksil wrote to a colleague: 

"[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.,,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 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. 

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 R W A. 535 According to 

Ms. Drew, she was not informed at that meeting about the SCP's recent 

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-CIOPSI 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 lG9 was "underperform[ingJ" 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 $[00 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 oflna Drew, CIO (12111/2012). 

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-ClO 0003492. For more about this meeting, see Chapter IV. 
254 

99 

acquisition of additional long positions, the $600 million to $800 million 

lag described in the prior day's email, or the traders' use of more 

favorable derivative prices to minimize reported SCP 10sses.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 109, and in tranches (Weaker CDX.HY 

equity and mezzanine tranches, steeper 109 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 dal' expressed "confusion" over the SCP's increased 

positions.53 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 ClO'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.54l When asked for more detail, 

JPMorgan Chase told the Subcommittee that, at the end of March, the 

SCP included $62 billion in 10 index holdings, $71 billion in iTraxx 

index holdings, $22 billion in High Yield index holdings, and a variety 

536 Subcommittee interview ofIna Drew, CIO (121! 112012). For more information on the 

traders' pricing practices, see Chapter IV. 

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 lased position noted today after yesterday's exhaustive meeting," 

JPM-ClO 0003492; see also Subcommittee interview ofIna Drew, ClO (l21! 112012). 

539 Subcommittee interview ofIna Drew, CIO (121! 112012); 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, ClO, "I would really like to 

understand the increase in positions in credit," JPM-ClO-PSI 0000410. 

541 "Summary of Positions by Type and Series," prepared by JPMorgan Chase in response to a 

Subcommittee request, JPM-CIO-PSI 0037609. 
255 

100 

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 109 index alone,s43 which comprised over 

half the market 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.s45 

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 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. 

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."s47 According to the CIO's longtime 

CFO, Joseph Bonocore, the SCP book had always held a net short 

542 Id. 

5434110/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, "Net 

positions vs. average trading volumes," JPM-CIO-PSI 0001026. See also 1118/2012 email from 

Bruno Iksil, CIO, to Julien Grout, CIO, "Meeting materials for II am meeting," conveying 

presentation entitled, "Core Credit Book Highlights," prepared by Mr. Iksil, at JPM-CIO-PSI 

0000101 (reciting even larger SCP positions in January, including a $278 billion notional 

position in the IG9 index, $115 billion notional position in the HYIO and I I 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). 

544 See DTCC presentation to Subcommittee (9/27/2012), at 2, PSI-DTCC-OI-OOOOOI (showing 

total COX IG9 untranched trading to total approximately $150 billion). 

545 Subcommittee interview ofina Drew, CIO (12111/2012). 

546 See 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"CIO," JPM-CIO-PSI 0000546; 4116/2012 email fromJosephSabatini.JPMorganChase.to 

Anna Iacucci, Federal Reserve, "materials for Fed/OCC/FDIC call at noon today," OCC-SPI00009712; Subcommittee briefing by JPMorgan Chase (8115/2012) (Jeanette Boot and Harry 

Weiss); Subcommittee interviews ofina Drew, CIO (91712012), 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[.] fll am done."), at 45 (indicating SCP had "assumed an overall net-long 

credit risk orientation"). 

547 Subcommittee interview ofina Drew, CIO (91712012). 
256 

101 

position when he was there, and he observed that a net long position 

could not serve as an effective hedge.548 Mr. Martin-Artajo 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 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 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 "CSWlO.,,558 Two other risk limits, 

VaR and CSOI, had been breached earlier in the year, but Ms. Drew told 

548 Subcommittee interview of Joseph Bonocore, cra (9/1112012). 

549 JPMorgan Chase Task Force interview of Javier Martin-Artajo, cra (partial readout to the 

Subcommittee on 9/6/2012). 

550 Subcommittee interviews ofIna Drew, cra (9/7/2012) and Irvin Goldman, CIa (9/15/2012); 

JPMorgan Cha~e Counsel interview of Bruno Iksil, CIa (partial readout to the Subcommittee on 

8/27/2012); 2013 JPMorgan Chase Task Force Report, at 45. 

551 Subcommittee interviews ofIna Drew, cIa (9/7/2012) and (12/11/2012). 552 I

d. 

553 Subcommittee interview ofIna Drew, CIa (1211112012). See also 6/29/2012 email from 

Elwyn Wong, acc, to Scott Waterhouse, acc, and others, "2nd Wilmer Hale Call," acc-sPI00071386 (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 ofIna Drew, CIa (91712012). 

555 JPMorgan Chase Task Force interview of Bruno Iksil, CIa (partial readout to the 

Subcommittee on 8/27/2012). 

556 3/26/2012 email from Irvin Goldman, CIa, to Achilles Macris, Javier Martin-Artajo, and 

John Wilmot, CIa, "Tranche Plan," JPM-CIa-PSI 0001267. [Emphasis in original.] 557 5/9/2012 email from Michael Kirk, acc, to Jan1es Hohl, acc, "Document I," aCC-SPI00021996, at 997. 558Id. 
257 

102 

the Subcommittee that she considered the CSWIO 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."s6o Mr. Macris reported: 

"Just spoke to Ashley [Bacon] regarding the issue and he has 

agreed to dedicate Olivier to help us with R W A 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.,,56! 

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."s62 The OCC also 

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.s66 Since JPMorgan Chase transferred many SCP index 

559 Subcommittee interview ofIna 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. 

56! 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 0001220-222, at 221. See 

also 2013 JPMorgan Chase Task Force Report, at 45-46. 

562 Subcommittee interview of Scott Waterhouse, OCC (911 7/2012). See also 11/6/2012 OCC 

Supervisory Letter JPM-2012-52, "ChiefInvestment Office Risk Management Review," PSIOCC-17 -0000 IS [Sealed Exhibit] ("Board and senior management did not ensure effective 

oversight ofCIO 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. "). 

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 
258 

103 

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. 56? 

One key area of inquiry with respect to the SCP losses has focused 

on the CIO's massive long position in the 109 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 109 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 

, .. 

'" 

('" 

1'00 

I " 

~ " 

.. 

Credit Spreads on 169 Index 

Confidential Treatment Requested by J p, Morgan Chase & Co JPM-C10·PS)·D002062 

At first, the general downward trajectory of the 109 prices over the 

first quarter of 20 12 allowed the CIO to post mark-to-market gains on its 

109 holdings. The FDIC chart below explains how based on a series of 

theoretical spreads. If the ClO entered into a contract to sell a certain 

Chase's restatement in July 2012. See also JPMorgan Chase & Co. Form 1O-Q (tor period 

ending 9/3012012), filed with the SEC (11108/2012), 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 1O-Q (for period ending 9130/2012), filed 

with the SEC (11/08/2012), at 8 ("Principal transactions in CIO included $449 million oflosses 

on the index credit derivative positions that had been retained by it following the transfer of the 

synthetic credit portfolio to lB on July 2, 2012, reflecting credit spread tightening during the 

quarter."). 

568 Undated chart entitled, "Credit Spreads on IG9 Index," prepared by JPMorgan Chase, JPMCIO-PSI-0002062. 
259 

104 

amount ofI09 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 of20 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 109 

market price, which caused the CIO's earlier acquisitions to continue to 

gain in value and post even more mark-to-market gains. 

What Happened to JP Morgan in the Markets? (A Simple Example) CFIMonitoring(,ronp 

CDX IG Series 9, 5 Year 

JPl\Io,·gru. (eIO) 

Theor&tic .. 1 Spread 

(Cost of Buying 

Protection on Underlying 

Credits) 

Hedge Funds 

Sel $1MMPI<lt CO)(16 

Se'ies.g~2QO 

MTMResult 

Nonoe-•• lss:umirl!)llIttl.lI 

trOldll"TlM.)Iket 

The Simple Example Synopsis 

20QBp'S No Skew 

200Bps-{-10Skew) 

200 Bps. \_20 Skew} 

204H~II$ 120 Skew) 

JP Morgan begin s sellm 9 protection on the CDXIG Series 9 at or near th aoretlcal valu €I ofth e underlym 9 credits and 

continues to se!1 at lowerspreads, which beginS to drive the Index below th e th eoreticai valu e, creating 8 Negative Skew 

Hedge Funds see an arbitrage opportun Ity an d begin bUYing protection, waitin gfor spreads to return to theoretical 

JP Morgan cantrn u es seiling protection, drivm g the spread down fu rtheran d creatin g MTM losses for h edge fun ds 

Hedge Fun ds circu late rumors of large position s held by JPM. an d begin to realize that JPM needs to exit these positIOn s 

Hedge Funds getthe last leu gh. as th e spreads fin ally do converge to th eoretlcal an d JPM is flndln g It very expen s!ve to 

Buy back their protection 

Source: 07/16/2012 FDIC presentation, "What Happened in IP Morgan's CIO? A 

Primer," at 4, FDICPROD-0036009. 

FOICPROO-D036009 

But posting gains in its 10 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 109 gains themselves 

were under pressure. One journalist described the CIO's 109 trading 

strategy as playing a game of "chicken" with its counterparties, most of 
260 

105 

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 ofthe 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 he kept digging himself deeper into his 

position, he got backed into a comer and couldn't cover his 

losses."s69 

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 ofIG9 

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."s72 An 

OCC examiner also told the Subcommittee that the traders, by increasing 

volume at the end of the month, were artificially driving the prices 

10wer. 573 Once the IG9 premiums began to rise, the value ofthe 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. 

569 "JPMorgan's Loss: The Explainer," Marketplace, Heidi N. Moore, (5/1112012), 

http://www.marketplace.org/topics/business/easy-streetljp-morgans-Ioss-explainer. 

570 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 

571 Undated chart entitled, "Credit Spreads on IG9Index," prepared by JPMorgan Chase, JPMCIO-PSI-0002062. 

572 Levin Office briefing by JPMorgan Chase (6/26/2012) (Greg Baer). 

573 Subcommittee interview of James Hohl, OCC (9/6/2012). 
261 

106 

E. Unmasking JPMorgan Chase 

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."S75 The JPMorgan Chase official charged with conducting 

the internal investigation of the SCP described the book as having grown 

to a "perilous size."s76 As Mr. Iksil had warned in January, the "scary" 

notionals produced price "volatility" which, in tum, produced hundreds 

of millions of dollars in losses. 

An additional consequence of the size ofthe positions was that the 

CIO's positions became visible to the rest ofthe market. Mr. Iksil had 

expressed for some time a concern that the traders on the opposite side 

were moving against him.577 In January, he had predicted a fight 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 Yet 

even there, the SCP's massive buys attracted market attention. 

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.s80 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 

574 3/29/2012 email from Bruno Iksil, CIO, to Javier Martin·Artajo, CIO, "First draft ofthe 

presentation," conveying "CIO Synthetic Credit Update," JPM-CIO-PSI 0001249. 

75 Recorded telephone conversation between Bruno Iksil, CIO, and Julien Grout, CIO 

(31l612012), JPM-CIO-PSI-H 0003820-822. 

576 Michael Cavanagh, quoted in "JPMorgan's 'Whale' Loss Swells to $5.8 billion," Financial 

Times, Tom Braithwaite, (7/1312012). 

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."); 1/3012012 

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."). 

578 1/3112012 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 (81l512012) (Jeanette Boot); JPMorgan Chase 

Task Force interview of Bruno Iksil, CIO (partial readout to the Subcommittee on 812712012). 

580 4/4/2012 email fromPeterWeiland.CIO.tolrvin Goldman, CIO, "Call," JPM-CIO-PSI-H 

0002093. 

581 4/5/2012 email from Joseph Evangelisti,JPMorganChase, to Ina Drew, CIO, Douglas 

Braunstein, JPMorgan Chase, and others, "WSJ/Bloomberg CIO stories," JPM-CIO-PSI 

0000543-545, at 544. 
262 

107 

On April 6, 2012, both Bloomberg and the Wall Street Journal ran 

articles on Mr. Iksil's trading. The Bloomberg stoty, 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."s82 

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.s86 The article stated: 

"[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.' 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 

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-to-distort-credit-indexes.html. 

5831d. 

584Id. 

585Id. 

586 "London Whale Rattles Debt Market," Wall Street Journal, Gregory Zuckerman and Katy 

Burne, (4/6/2012), 

http://online.wsj.com/artic1e/SB 1 0001424052702303299604577326031119412436.html. 5s71d. 
263 

108 

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 CIa 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 CIa's Synthetic Credit Portfolio. 591 At a later Senate 

hearing, Mr. Dimon explained what they found as follows: 

588 1d. 

589 Id. 

"In December 2011, as part of a firm wide effort and in 

anticipation of new Basel Cap[ital] requirements, we 

instructed CIa to reduce risk weighted assets and associated 

risk. To achieve this in the Synthetic Credit Portfolio, the 

CIa 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 risks .... CIa'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 

590 4/10/2012 email from Douglas Braunstein, JPMorgan Chase, to John Hogan, JPMorgan 

Chase, "Credit," JPM-CIO-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 SCPo 

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 

(8115/2012) (I-larry Weiss); 2013 JPMorgan Chase Task Force Report, at 71. 

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). 
264 

109 

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 ofthe 

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 II, 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. 

593 Statement by Jamie Dimon. quoted by Chainnan 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. Fonn IO-Q (for period ending 9/30/2012), filed with the SEC 

(11I0S/2012), at 10. 

595 Id., at 220. 596 Id. 

597 See 12112/2012 OCC Supervisory Letter, JPM-20I2-66, PSI-OCC-IS-OOOOOI [Sealed 

Exhibit]. 

598 See, e.g., "Mortgage Lending Helps JPMorgan Profit Rise 34%," New York Times 

(10/12/2012), http://dealbook.nytimes.com/2012/1 011 2/jpmorgan-quarterly-profit-rises34l?ref=global. 
265 

110 

CIO Synthetic Credit Portfolio Reported Mark-To-Market Losses 

January - December 2012 

Month or Quarter End Monthly or Quarterly Cumulative Losses 

Losses YTD 

January $ 100 million $ 100 million'w 

February $ 69 million $ 169 million 

March $ 550 million $ 719 million 

April $ 1.413 billi on $ 2.132 billion 

As of May 15 $ 1.563 billion $ 3.695 billion 

June Not available $4.4 biliionO"" 

July restatement of first $ 660 million"U' $ 5.8 billion"UL 

quarter losses 

September $ 449 million"u, $ 6.2 billion 

December Not available $ 6.2 billion"U4 

Source: JPMorgan Chase & Co. 2012 SEC filmgs; 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 

599 For losses from January through May 15,2012, see OCC spreadsheet, OCC-SPI-00000298. 

600 JPMorgan Chase & Co. Form IO-Q for quarterly period ending 6/30/2012, at 6, 11. 

601 JPMorgan Chase & Co. Form 8-K, (7113/2012), 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 IO-Q for quarterly period ending 9/30/2012, at 10, 12. 

60412112/2012 OCC Supervisory Letter, JPM-20I2-66, PSI-OCC-I8-000001 [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. 
266 

111 

records detailing the risk reduction strategy or the assets being hedged, 

no analysis showing how the size and nature ofthe hedge were 

determined, and no tests gauging the hedge's effectiveness. Hedging 

claims require those types of contemporaneous records in 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. 
267 

112 

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) offereci ill 

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, ajunic,c 

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-Artaj 0] 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 

605 3115/2012 instant messaging session among Bruno Iksil, CIO, Julien Grout, CIO, and Luis 

Buraya, CIO, JPM-CIO-PSI-H 0003798-819, at 805. 

606 3/16/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Julien 

Grout, CIO, JPM-CIO-PSI-H 0003820-822, at 821. 
268 

113 

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 

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 ofthe 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 ofthe 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 
269 

114 

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 ofthe 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 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 
270 

115 

"that is most representative of fair value in the circumstances" as 

required by bank policy and generally accepted accounting principles. 

The ability of CIa 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 cra 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 

CIa personnel involved in marking the SCP book and preparing the 

CIa'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 ofthe CIa's International 

Office. Mr. Martin-Artajo was the head of the CIa's equity and credit 

trading operation. Mr. Iksil was a senior CIa trader who oversaw the 

Synthetic Credit Portfolio. Mr. Grout was a more junior cra trader 

specializing in credit derivatives and charged with preparing the SCP's 

daily marks. 

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." 

607 Accounting Standards Codification Topic 820-10-30, Fair Value Measurements and 

Disclosures (ASC 820). 608 Jd. 
271 

116 

GAAP specifies a hierarchy ofthree categories of infonnation that 

should be used when calculating the fair value of a derivative, placing a 

priority on observed market prices.609 Levell consists of "quoted prices 

in active markets for identical assets or liabilities.,,61o Level 2 consists 

of "inputs other than quoted prices included within Levell 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 By "mid-market 

pricing," it means the price in the middle ofthe 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 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 

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 820-1O-35-36C, Fair Value Measurements and 

Disclosures (ASC 820). 

614 Accounting Standards Codification Topic 820-1O-35-36D, Fair Value Measurements and 

Disclosures (ASC 820). 

6" 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 www.markit.com. Markit Credit Indices: A Primer (October 

2012), at 7, 12; see also http://www.markit.comJenJproducts/datalindices/credit-and-loanindices!cdxlcdx-prices-iframe.page. 
272 

117 

spread and midpoint rrices of specified derivatives for use in their 

financial reporting.6

! 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 endof-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-tomarket 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 Parties with derivative portfolios 

616 JPMorgan Chase's Investment Bank, for example, took this approach. 

617 Accounting Standards Codification Topic 820-1O-35-24B, Fair Value Measurements and 

Disclosures (ASC 820). 

m See Accounting Standards Codification Topic 820-10-35-540, 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 ofthe transactions or quoted 

prices is needed."). 

19 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 ifit attempted to sell its entire (large) position at once."). See also 

511012012 JPMorgan Chase Controllers special assessment ofCIO'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."). 
273 

118 

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 which it holds a 

concentrated block of assets, and the uncertainties associated with its 

pricing methodology.62o 

(2) Valuing Derivatives at JPMorgan Chase 

Because lPMorgan 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, lPMorgan 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 

620 Subcommittee briefing by Public Company Accounting Oversight Board (9/14/2012). 
274 

119 

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 

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 

621 5110/2012 JPMorgan Chase Controllers special assessment ofCIO's marks, January through 

April 2012, at 4, JPM-CIO 0003637-654, at 640. See also 1118/2007 Controllers Corporate 

Accounting Policies, "Fair Value Measurements," prepared by JPMorgan Chase, OCC-SPI00056794, 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)."). 

622 2013 JPMorgan Chase Task Force Report, at 48-49. 

623 1118/2007 Controllers Corporate Accounting Policies, "Fair Value Measurements," prepared 

by JPMorgan Chase, OCC-SPI-00056794, at II. See also 5/10/2012 Controllers Corporate 

Accounting Policies, "Fair Value Measurements," prepared by JPMorgan Chase, .lPM-CiO 

0003424-442. 

624 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Olivier Vigneron). 
275 

120 

information on a number of derivatives for trading book valuations.625 

This service typically provided the bank with the midpoints ofthe bidask 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 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 ofCIO 

asset valuations stated that "[i]ndependent and reliable direct price feeds 

are the preferred method for assessing valuation. In general, third Earty 

priceslbroker quotes are considered the next best pricing source.,,6 7 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. 

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!l0/2012 JPMorgan Chase Controllers special assessment of 

CIO's marks, January through April 2012, at 6, JPM-CIO 0003637-654, at 642. 

626 CIO Executive Summary, "Chief Investment Office New Business Initiative Approval" on 

"Credit and Equity Capability," (undated, but in 2006), at II, OCC-SPI-00081631. 

6275/21/2010 CIO-VCG Procedure: Valuation Process, OCC-SPI-00052685, at I. 

628 Id., at 3. 
276 

121 

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 bidoffer 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.,,63o 

By March 2012, when the SCP routinely encompassed over 100 

different types of credit derivatives, this daily pricing effort required 

sustained effort. 63 ! 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 

629 See 2013 IPMorgan Chase Task Force Report, at 46. 

630 5/10/2012 IPMorgan Chase Controllers special assessment ofCIO's marks, January to April 

2012, at 5, JPM-CIO 0003637-654, at 641. See also 2013 JPMorgan Chase Task Force Report, 

at 46-47. 

631 See, e.g., 4110/2012 email from Julien Grout, CIO, to "CIO Credit Positions" email group, 

"CIO CORE Credit Positions: 1O-Aprl2," IPM-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. 
277 

122 

explanation in the P&L Predict as we11.634 At the end ofthe business 

day in London, Mr. Grout sent an email with the P&L Predict to a 

designated list ofCIO personnel in both London and New York.635 

In New York, a CIO colleague, lsi 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 YCG 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 his judgment and 

estimate the value ofthe 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 

6J'ld. 

6J5 See, e.g., 3/20/2012 email fromJulienGrout.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. 

6J6 See, e.g., 3/20/2012 email fromlsiOaikhiena.CIO.to "EOD Credit estimate" mail list, copy 

to "CIO P&L Team" mail list, "Intemational Credit Consolidated P&L 20-Mar-2012," JPMCIO-PSIOOI9484. 

637 12/12/2012 distribution list document, "Distribution List Membership Around March 2012," 

p,rovided to Subcommittee by JPMorgan Chase legal counsel, JPM-CIO-PSI-H 0002815. 

38 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 firm wide P&L reports). 

640 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 
278 

123 

values reported intemally.64! 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 tum 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 VCO 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 VCO 

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 

641 See l/29/2013 email fromOCC legal counsel to the Subcommittee, PSI-OCC-23-000001. 

642 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9112/2012). See also 2013 

JPMorgan Chase Task Force Report, at 53. 

643 See 5/2l/20lO CIO-VCO Procedure: Valuation Process, OCC-SPI-00052685. 

644 See 5110/2012 JPMorgan Chase Controllers special assessment ofCIO's marks, January to 

April 2012, at 5, JPM-CIO 0003637-654, at 642. 

64 See 2013 JPMorgan Chase Task Force Report, at 53. 

646 See, e.g., 5/2l/2010 CIO-VCO 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 VCO mid prices for 18 credit derivative positions). See also 2013 

JPMorgan Chase Task Force Report, at 54. 

648 See 5/2l/2010 CIO-VCO Procedure: Valuation Process, OCC-SPI-00052685, at 6 ("In 

assessing the reasonableness of fair value measurements that are subject to testing, VCO will 

consider whether such measurements appropriately reflect liquidity risk, particularly in the case 

ofinstrurnents for which CIO maintains either a significant/concentrated position and/or if the 

market for given instrument can be observed to be less liquid. In this regard, VCO is responsible 
279 

124 

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 ofthe 

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 lO-year, near the midrsoint price and 

had substituted instead noticeably more favorable prices. 50 

This change in the CIO's pricing practice coincided with a change 

in the SCP's profit-loss 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 

for calculating / monitoring these reserves and consulting with the business on such estimates 

.... "); Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 

649 1/3112012 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 ofCIO'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 IO-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 [d. 
280 

125 

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 ofthe month.654 March continued the pattern, 

losing money on 16 of22 business days, including a string oflosses - 15 

of the last 16 business days at the end of the month.655 April and May 

were more ofthe same.656 

The following chart, which was prepared by the Subcommittee 

using daily SCP P&L data supplied by the acc, sets out the daily 

profit-loss figures reported internally b~ the CIO to bank management 

from January through mid-May 2012.67 

653 1d. 

654 Id. 

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. 
Synthetic Credit Portfolio - Internal Reports of Daily and Year-To-Date Profit and Loss 

January 1,2012 through May 15,2012 

Date Dally P&L YTDP&L Date Daily P&L YTDP&L Date DailyP&L YTDP&L Date 

($2,331,403) ($2,331,403) I-Feb $11,899,066 ($88,468,701) $15,808,609 ($153,233,146) 2-Apr 

4-Jan ($9,405,151) ($11,736,554) 2-Feb ($2,476,245) ($90,944,946) 2-Mar ($878,902) ($154,112,048) 

5-Jan $ll,489,O45 ($247,509) 3-Feb $800,677 ($90,144,269) 5-Mar $1,171,999 ($152,940,049) 4-Apr 

6-Jan ($6,II8,207) ($6,365,716) 6-Feb ($3,633,327) ($93,777,596) 6-Mar $3,161,395 ($149,778,654) 5-Apr 

($8,161,497) (S14,527,213) 7-Feb ($749,985) ($94,527,581) 7·Mar $1,264,716 ($148,513,938) 

lO-Jan ($1,147,064) (115,674,277) 8-Feb ($23,773,934) ($118,301,515) 8-Mar $U54,204 (SI47,359,734) II-Apr 

II-Jan $223,462 (S15,450,815) 9-Feb ($4,114,971) ($122,416,486) {S4,565,697} (S151,925,431) I2-Apr 

12-Jan ($3,552,588) (119,003,403) lO-Feb SI,044,270 ($121,372,216) 12-Mar ($838,406) (1152,763,837) 13·Apr 13-Jan (SI,328,679) ($20,332,082) I3-Feh ($5,029,&18) (S126,402,034) ($55,325) ($152,819,162) 16-Apr 

J6-Jan (SI,474,654) ($21,806,736) 14-Feb ($1,756,535) ($128,158,569) 14-Mar ($3,654,838) (S156,474,000) l7-Apr 

17-Jan $538,245 ($21,268,491) IS-Feb ($3,310,361) ($131,468,930) IS-Mar ($730,1&1) (S157,204,181) I8-Apr 

I8-Jan Sl,531,279 ($19,737,212) 16-Feb S2,787,722 (SI28,681,208) 16-Mar ($3,864,759) (SI61,068,940) 19-Apr 

19-Jan ($2,497,903) ($22,235,115) 17-Feb $}51,612 (SI28,529,596) 19-Mar ($3,368,891) ($164,437,831) 20-Apr 

lO-Jan ($5,824,024) ($28,059,139) 20-Feb S1,402 ($128,528,194) 20-Mar ($43,553.294) (S207,991,125) 23-Apr 23-Jan ($14,937,654) (S42,996,793) 21-Feb ($3,647,248) (S132,175,442) 21-Mar $701,825 ($207,289,300) 24-Apr 24-Jan ($18,663,381) (S61,660,174) 22-Feb ($5,258,735) ($137,434,177) 22-Mar ($1,786,282) (S209,075,582) 25-Apr 2S-Jan ($5,349,602) (S67,009,776) 23-Feb (5},144,086) ($138,578,263) 23-Mar ($12,555,383) ($221,630,965) 26-Apr 

($1,609,067) (S68,618,843) 24-Feb ($5,248,999) ($143,827,262) 26-Mar ($32,426,419) ($254,057,384) 27-Apr 

27-Jan ($3,637,880) (S72,256,723) 27-Feb ($7,575,866) ($151,403,128) 27-Mar ($44,740,604) ($298,797,988) 30-Apr 

30·Jan ($22,790,129) ($95,046,852) 2S-Feb ($2,894,309) ($154,297,437) l8-Mar ($50,685,464) ($349,483,452) 

31-Jan (55,320,915) ($lOO,367.767) 29-Feb ($14,744,318) (S169,041,755) 29-Mar ($49,996,238) ($399,479,690) 

30-Mar ($319,192,503) ($718,672,193) 

DailyP&L YTDP&L Date Daily P&L 

$11,615,112 ($707,057,081) }¥May ($794,944) 

($10,407,844) ($717,464,925) 2¥May ($52,404,248) 

($11,100,155) ($728,565,080) ($91,590,554) 

($9,517,665) ($738,082,745) ($103,250,854) 

($415,342,049) ($1,153,424,794) 7-May ($58,065,892) 

($6,301,198) (SI,159,725,992) 8-May ($195,248,051) 

($4,809,755) ($1,164,535,747) 9-May ($108,126,095) 

($50,629,714) (SI,215,165,461) lO-May ($36,461,805) ($37,415,502) ($1,252,580,963) II-May (S570,159,849) 

$9,948,665 ($1,242,632,298) 14-May ($227,592,775) 

($28,338,553) ($1,270,970,851) I5-May ($119,236,467) 

($29,239,630) ($1,300,210,4&1) ($32,236,022) ($1,332,446,503) 

($161,148,061) ($1,493,594,564) 

($81,602,918) ($1,575,197,482) 

($187,629,766) ($1,762,827,248) 

($162,235,258) ($1,925,062,506) 

$15,364,325 ($1,909,698,181) 

($222,070,242) (S2,131,768,423) 

Source: acc spreadsheet, aCC-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, 

((((

((

((

(((
282 

127 

The SCP had never before experienced those types of sustained 

losses. According to CIO personnel, at the beginning of2012, $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.,,66o 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 midmarket price.,,66! 

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 ofthe 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 ofthe 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 

658 Javier Martin-Artajo. head ofClO equity and credit trading. reported: "lfwe ever had a loss 

over $5 million, Ina calls me at night." JPMorgan Chase Task Force interview of Javier MartinArtajo, CIO (partial readout to the Subcommittee on 9/6/2012). See also 2013 JPMorgan Chase 

Task Force Report, at 50, footnote 64. 659 2129/2012 email from Bruno lksil, 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 valucs, five or nearly one third had used 

more favorable prices than the midpoint prices. See chart on February valuations, 5/1 0/2012 

JPMorgan Chase Controller's special assessment ofCIO's marks, January to April 2012, JPMCIO 0003637-654, at 653. 

660 2/29/2012 email from Bruno Iksil,CIO,to Javier Martin-Artajo, CIO, "Core credit book 

ur.date", JPM-CIO 0003443. 

6 1 2013 JPMorgan Chase Task Force Report, at 47. The JPMorgan Chase Task Force defined 

the "unadjusted mid-market 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 thc Synthetic Credit Portfolio was undcrpcrforming 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'rc 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 J 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 Jig 

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."). 
283 

128 

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 ofthe book.664 Month-end 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 quarterend, 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 ofthe 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 bid-ask spread.667 

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[edJ" or lessened through the receipt of the cash 

p,remiums or "carry" from the short counterparties. 

65 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, 5110/2012 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 rd., the charts examining 18 SCP marks as ofJanuary 31 and as of February 29, 2012, 

reprinted in part below. 
284 

129 

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 

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.67o For five days, he tracked the divergence for three of 

the largest credit derivative holdings in the SCP book, the "CDX.lG" 

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 ofthe five days. The next six 

6687/10/2012 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 month-end prices, the marks for March 30 were not generally at or near the mid.") and 

89 ("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."). 

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-CIOPSI-H 0002812. 
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U.S. Dollars 

Date Distance ITrmoc: 

12-Mar-12 (2025B647) (59.050.049 

13-Mar-12 (206.639.426 ) (61372,979 

14-Mar-12 (268,984,074) (82,396,799 

15-Mar-12 1292,470549) (83.045.952) 

16-Mar-12 (498.717.231\ (100525.860\ 16-Mar-12 (432348435) (130.119.511) 

Grout Spreadsheet 

Basis Points 

CDX.lG CDX.HY ITraXx.Maio S910y CDX.lG910y CDX.HY 

(90.077977' 1:53,415.6211 3.0 2.0 0.17 

(89,698.506'1 (54.687.653\ 3.5 2.0 0.18 

(136.202780 (58279.879) 4.0 3.0 0.18 (181.254945 (37635.855\ 4.0 4.0 0.12 

(158.706.386\ (107,356,237) 5.0 3.0 0.34 

(1U345 094) (107.356.237) 5.0 3.0 0.34 i Source: Spreadsheet prepared by Julien Grout, CIO, JPM-CIO-PSI-H 0002812. Losses are indicated by figures in parentheses. 

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286 

131 

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,,67 

Mr. Grout: "itraxx 83 (4bp) ig180 (4bp) hy 37) 0.12,,674 

Mr. Iksil: "... So julien, basically [yo]u say the worsening is 1 bp 

in ig9 ... ,,675 

Mr. Grout: "correct bruno" 

[Later that same day] 

Mr. Iksil: "We have 6 bps in ig9 after a1l676 ... 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 lOy" 

Mr. lksil: "I am confused. I mean, [I']m trying to keep a 

relatively realistic picture here - ig9 lOy put aside Because 7 bps 

in ig9 10yr makes up for 7x50 gives 350 ... ,,678 

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 3115/2012 email andspreadsheetfromJulienGrout.CIO.toJavierMartin-Artajo.CIO. with 

copy to Mr. Iksil, CIO, JPM-CIO 0003457-459. That version of the spreadsheet contained data 

for only [our days, March 12 through March IS. A later version of the spreadsheet added data 

for March 16, which is the version reprinted above. 

674 Mr. Grout was directing Mr. lksil'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.lG 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 ClO'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 JasonHughes,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.lG of the three indices; it exceeded $136 million on 

March 14 and $181 million on March IS, the day of the conversation. 
287 

132 

Mr. Grout: "that's what [I] am saying. [I] am not marking at 

mids as per a previous conversation .. ," 

Mr. Iksil: " ... Send to me andjavier 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 showed that the unreported 

losses - the "Difference" - had reached at least $432 million. Ifthat 

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.68o 

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 ofthe divergence per blocks. The 

ig9 10yrs lags another bp [basis point] today.,,681 

Mr. Iksil's observation, that the IG9 10 year credit index "Iag[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 lOy" 

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. MartinArtajo that the problem was growing and already, in less than a day, 

involved $300 million in hidden losses: "[T]he divergence has increased 

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 3115/2012 instant messaging session between Bruno Iksil, CIO, Julien Grout, CIO, and 

Luis Buraya, JPMorgan Chase, JPM-CIO-PSI-H 0003798-819, at 801-806. 

680 See 3fl5/2012 email andspreadsheetfromJulienGrout.CIO.toJavierMartin-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 ofthe 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,toJavierMartin-Artajo,CIO, "Update on core," 

JPM-CIO-PSI0000386. 
288 

133 

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 dal that, by the end of March, the total divergence 

might reach $1 billion.68 

In another email onMarchI6.2012.Mr. Iksil told Mr. MartinArtajo, 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 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. 

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. Martin-Artajo's] expecting is 

a remarking at the end of the month, you can't do it unless it's 

682 3116/2012 email from Bruno Iksil. CIO,to JavierMartin-Artajo,CIO, "update on Core PNL," 

JPM-CI00003475. 

683 Jd. 

684 3116/2012 transcript of an instant messaging session between Bruno Iksil, CIO, Julien Grout, 

CIO, and Eric de Sangues, JPMorgan Chase, JPM-CIO-PSI-H 0003815, at 818 (Mr. Iksil: "sent 

an Email to Javier an[nJouncing 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 3116/2012 email fromBrunoIksil.CIO.toJavierMartin-Artajo.CIO.JulienGrout.CIO. 

and Patrick Hagan, JPMorgan Chase, "trade idcas on core," JPM·CIO-PSI0000387. 

686 3/16/2012 transcript of a recorded telephone conversation between Julien Grout, CIO, and 

Bruno Iksil, CIO, JPM-CIO-PSI-H 003820-822. 
289 

134 

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. ... [TJhe book continues to grow, more and more 

monstrous." 7 

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 ofits 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 ofthe 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 

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 problems 

with the CIO's marks.69 ! 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 mid687Id. 

688 lPMorgan Chase's legal counsel to the Subcommittee (11116/2012) (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 (12/1112012). 

691 Subcommittee interview ofIna Drew, CIO (12/2112012). 

692 Id. 
290 

135 

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 [$]IOOm[illion] to [$]300m[illion]-

main reason is the CDX 109 lag (2-3 bps or 1 00-150m)-

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 I bp in the 

rally. The hit here is 80-100m. - the estimated bid-ask on 

the book grossly amounts to SOOm all-in (200m for 10, 

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 haIfa 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 

693 3/19/2012 email from Bruno Iksil,CIO,toJavierMartin-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 20 I 3 report, the JPMorgan 

Chase Task Force stated that, by March 19, the CIO had reported only a small SCP daily loss for 

each ofthe 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. 
291 

136 

reflect the 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 SCPo 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 SCPo 

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 ofCIO management, including Ina Drew.698 

695 See 3/20/2012 email fromJulienGrout.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. 

696 3/20/2012 email from InaDrew,CIO,to AchillesMacris,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."). 
292 

137 

In addition, in the P&L email's commentary explaining the CIO's 

loss, Mr. Iksil699 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 had a $100 million "loss" plus another "lag" of $1 00 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 IOyr 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 13 bps, 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 ofCDX.HYIO-CDX.HYll series versus on-the-runs 

that is also $1 00-200M, 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 em ailed 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 MartinArtajo, Irvin Goldman, Peter Weiland, Keith Stephan, Patrick Hagan, 

and Jason Hughes.703 

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: "[Blut that's why 1 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."). 

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 lsi 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," 
293 

138 

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.70s Mr. Martin-Artajo also acknowledged 

that Mr. Iksil had been placed in a difficult position. 

Mr.lksil: "Yea[h] so, yea[h] we sent an estimate down [$]40 

million today .... " 

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.lksil: "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 up front, precisely before we discuss, you know, what it's 

going to look like[.] [T]hat you know if we expect potentially to 

lPM-CIO-PSI 0019484-487, at 486; 12/12/2012 distribution list document, "Distribution List 

Membership Around March 2012," provided to Subcommittee by lPMorgan Chase legal 

counsel, lPM-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, urn, I didn't, I 

didn't want to show the P&L and Achilles told me yesterday not to do it."). 
294 

139 

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. 

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.lksil: "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." 

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: "Y ea[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 
295 

140 

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.lksil: " ... [Y]ou know it's just that, 1 have to, I don't know I 

thought, 1 thought that was, that was not realistic know what we 

were doing, and ... 1 said probably I was wrong you know, 1 

thought that it was this estimate before tomorrow, you know, was 

the way to, because 1 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 ifI don't --" 

Mr. Martin-Artajo: "No, no, no, man, no man." 

Mr.lksil: "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 1 think was worse.,,707 

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 

706 rd .• at 394-395. 

707 rd., at 396-397. 
296 

141 

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.lksil: "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! 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.lksil: "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 ifthe 

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. 

7093/20/2012 transcript of recorded telephone conversation between Bruno Iksil, CIO, and Javier 

Martin-Artajo, CIO , JPM-CIO-PSI-H 006392, at 397. 
297 

142 

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 ofthe meeting to take place later 

that day was to discuss issues related to the Synthetic Credit Portfolio's 

"underperformance" and Risk Weighted Assets (R W A). 711 The meeting 

on March 21 took place, as confirmed in an email the next day from Ms. 

Drew to Mr. Martin-Arta~o and Mr. Macris in which she described the 

meeting as "exhaustive." 12 

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 emaiCI4 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 

710 Id., at 398-399. 

711 See 3/2112012 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: I. 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 oflna Drew, CIO (1211 112012). 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). 
298 

143 

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 ofthe 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 

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 SCPo The purpose of 

the email's commentary was to explain a $40 million loss, which was 

the largest ofthe year and followed two straight months oflosses. 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 ofthe $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 

715 Subcommittee interview of Michael Cavanagh, lPMorgan Chase (12/12/2012). Counsel for 

Ms. Drew told the Subcommittee that she was not aware of the explanation ofMr. Cutler and 

Mr. Cavanagh. 

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. 

m 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 Martin-Artajo, 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. 
299 

144 

"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 

(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 of300M USING THE BEST BID ASKS 

and approximately 600m from the mids."m 

Using instant messaging, Mr. Iksil asked Mr. Grout to find out 

from Mr. Martin-Artajo what level oflosses 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 

719 Subcommittee interview ofIna Drew, CIO (91712012). 

720 See OCC spreadsheet, OCC-SPI-0000029S. 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 bidask spread. 

722 Subcommittee interview ofIna Drew, CIO (91712012). 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 

~resented the book."). 

23 See 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Javier Martin-Artajo, 

CIO, JPM-CIO 0003507-50S, at 50S. Sec also 2013 JPMorgan Chase Task Force Report, at 51. 
300 

145 

[$]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]fthere is 

some." 

Mr.lksil: "[N]othing for now ... [1]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]skjavier 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] 

Mr.lksil: ''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.lksil: "[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 

724 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Julien Grout, CIO, JPMCIO 0003515-541, at 528-541. 725 3/23/2012 instant messaging session between Bruno Iksil, CIO, and Ade Adetayo, CIO, JPMCIO 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 
301 

146 

(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 (ifit 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 

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. 

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 "Chieflnvestment Office New Business Initiative Approval," prepared by CIO, on 

"Credit and Equity Capability" (undated, but in 2006), at II, OCC-SPI-000SI63 I. 

728 See, e.g., 3/23/2012 email fromJavierMartin-Artajo.CIO.tolnaDrew.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). 

729 See. e.g., 3/23/2012 email fromAchillesMacris.CIO.tolnaDrew.CIO. "This is not 

'normal' .... ," JPM-CIO-PSI 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 RW As 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 
302 

147 

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 Jillion 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 [R W A]. I just didn't want the investment bank 

to roll over us, okay? This732 has increased the book by 25 or 26 

billion ofRWA 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 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." 

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 

12oldman] and call [CRO John] hogan an~ explain. I can give him a heads up."). . 

. At the hme, Mr. Pmto was co-head of fixed mcome 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 MartinArtajo, CIO, JPM-CIO-PSI-A 0000060. See also, partial transcript of this conversation at JPMCIO 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. 
303 

148 

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, ifhe'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-PS\· 

A 0000140. 
304 

149 

Mr. Pinto: "From what I understand, how we got here, honestly, 1 

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, T, yeah, I don't know. These are very 

aggressive comments. '" T 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. 

734 Id. 

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 oflike 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 ... ?" 
305 

150 

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 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. 

735 [d. 

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. 

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?" 
306 

151 

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 to take a look of the marks and see ifthere is anything 

that is being done inappropriate. What I was 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 

736 Jean Francois Bessin was the director and global head of valuation for the Investment Bank. 

JJJ 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. 

JJ8 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 
307 

152 

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-todate loss by then totaled $399 million.740 JPMorgan Chase 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 ofthe year. The marks at quarterend 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 inde~endent 

internal review team, the Valuation Control Group (VCG). 42 

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 

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. 

741 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12112/2012). 

742 5/10/2012 JPMorgan Chase Controllers special assessment of ClO'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, ClO, and Javier Martin-Artajo, CIO, JPM-CiO 0003555 
308 

153 

trading, the cra traders had engaged in a series of enonnous trades, 

involving $40 billion in credit derivatives, which dramatically increased 

the size ofthe portfolio and which the OCC later characterized as 

"doubling down" on the book's trading strategy. Due to the portfolio's 

enonnous size by the end ofMarch/44 even small price variances in the 

positions could produce large losses.745 

On March 30, 2012, the cra 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. 

Even that large number, however, hid the true extent ofthe 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 bid-ask. It's better you see since you don't have 

a reserve, you see?" 

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 ifit's minus 50 or minus ISO?" 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. Martin-Artajo: "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 0001220-222, at 221 (Mr. Macris: "Just spoke to Ashley [Bacon] 

regarding the issue and he has agreed to dedicate Olivier to help us with R W A targeting for Q2 . 

... the objective is to determine what is the best course of action to insure that the book is and 

remmns balanced in risk and P+L terms .... c1early, 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 lksil, CIO, to Javier Martin-Artajo, CIO, "first draft of the 

presentation," JPM-CIO 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 5/1 0/2012 JPMorgan Chase Controllers special assessment of ClO'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-SPI00071386 ("Real market marks were trued by end of Mar and the large loss on 3/31/2012 was 

due to that one reason. "). 
309 

154 

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! 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.lksil: "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 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 

747 3/30/2012 transcript of recorded telephone conversation between Bruno Iksil, CIa, and Julien 

Grout, CIa, JPM-CIO 0003562-563. 

748 See 3/30/2012 email from Julien Grout, CIa, to the cro Estimated P&L mailing list, "cro 

Core Credit P&L Predict [30 Mar]: -$138,I35k (dly) -$583,296k (ytd)," JPM-CIO 003567-569, 

at 569. 

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. 
310 

155 

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" ofthe 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 

"draw down" in the SCP book would be at the end ofthe second quarter, 

since it would be "highly depend[e]nt on the marks.,,75} 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 ofQ2 with the current book as 

it is." 54 

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 At the close of business in London, the CIO traders sent out 

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 (41612012); "JPMorgan Trader Iksil's Heft Is Said to Distort Credit Market," Bloomberg 

News, Stephanie Ruhle, Bradley Keoun and Mary Childs (41612012), 

http://www.bloomberg.comlnews/2012-04-05/jpmorgan-trader-iksil-s-heft-is-said-to-distortcredit-indexes.html. 

752 See 41612012 email fromlnaDrew.CIO.toAchillesMacris.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 41612012 email fromlnaDrew.CIO.toAchillesMacris.CIO. "Credit," JPM-CIO-PSI 

0000571 at 572; 41612012 email fromAchillesMacris.CIO.toInaDrew.CIO. and Javier 

Martin-Artajo, CIO, JPM-CIO-PSI 0001582-583, at 583 (Mr. Macris: "Any further drawdown, 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' drawdown for Q2 which is highly depend[e]nt on marks."). See also 41912012 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, 

sf reads (current) and normalized."). 

74 41612012 email exchange among Javier Martin-Artajo, CIO,lna 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. 
311 

156 

an SCP P&L Predict projecting a daily loss 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 lOY" and the "iTraxx.Main S09 lOY." 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 Iksillater told the JPMorgan Chase Task 

Force investigation that the first number was simply an "accident.,,76o 

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 

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/l0/2012 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. 

759Id. 

760 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12/12/2012) (Harry Weiss). 

76J See 2013 JPMorgan Chase Task Force Report, at 64-65. 
312 

157 

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 

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 s~oke with Javier and Achilles. They 

decided to show the losses." 64 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 

762 JPMorgan Chase Task Force interview ofC.S. Venkatakrishnan, JPMorgan Chase (partial 

readout to the Subcommittee on 1118/2013). 

163 JPMorgan Chase Task Force interviews of Julien Grout, CIO, and Bruno Iksil, CIO (partial 

readout to the Subcommittee on 1118/2013). 

764 JPMorgan Chase Task Force interview of Bruno Iksil, CIO (partial readout to the 

Subcommittee on 8/27/2012). 

7654/10/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"Credit," JPM-CIO-PSI-H 0002276. 

766 Subcommittee interview ofIna Drew, CIO (1217/2012) (noting that the news article itself was 

"a cause ofa 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 1118/2013) (stating he expected a 

"bloodbath" oflosses 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. 
313 

158 

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. Martin-Artajo: "[S]tart getting a little bit of that mark 

back... so, you know, an extra basis point you 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.,,77o 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."m 

768 Due to the media attention and escalating losses in the synthetic credit book, Ina Drew, CIa, 

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 411 0/2012 email from InaDrew,CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"8:30am Calls Set up for Wednesday and Thursday," JPM-CIO-PSI 0001719. 

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 ofIna 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 
314 

159 

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 ofthe mark. Mr. Buraya 

commented in part: "I can imagine the next headline' IP Morgan is 

hoarding cash. They are not marking the stuff in the right place.' 1 can 

see it happening." Mr. Iksil replied in part: " ... and if they want us to 

line 500 [millionJ lower, so be it. So be it. Right? There's nothing 

wrong with it.,,77 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 ofthe SCP appears to have finally ended in 

May 2012, as part of a concerted effort by IPMorgan 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 

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 

1 0 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.lksil: "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.lksil: " ... 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.comlarticle/2 012/07 /l3/us-j pmorgan -loss-restatementidUSBRE86COFR20120713. 

773 Id. 

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 0000141-146, at 142 {"This is a 

weekly report that we in lB 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. Ifllook at the total 

mtm differences across the CIO book facing the G-15 - the mlm 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 wasforwardedtolnaDrew.CIO. and Irvin Goldman, 

CIa, on 4123/2012. See also 4/23/2012 email from Ina Drew, CIO,to Irvin Goldman, CIa, 

"Largest aTC Collateral Call Dispute Report plus Update on Collateral Disputes Reported to 

Supervisors," JPM-CIO-PSI-H 0000141-146, at 141. 
315 

160 

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 On April 20, 2012, Daniel 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.,,78o 

The largest single dispute involved Morgan Stanley which 

contested credit derivative valuations that it contended were overstated 

by more than $90 million.78J Morgan Stanley told the Subcommittee 

J75 Subcommittee interview ofIna Drew, CIO (12111/2012). 

77b 511412012 email from James Hohl, OCC, to Fred Crumlish, OCC, and others, "May 14 

minutes," OCC-SPI-00025835 ("At one time widest collateral disputes were $690MM. Morgan 

Stanley difference was once in excess of$120MM. The largest difference was around mid 

Afril."). 

77 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 0000141-146, at 142. 

J79 See 4/20/2012 email from Daniel Vaz, JPMorgan Chase, "URGENT ::: Huge Difference for 

iTraxx and CDX trades," JPM-CIO 0003586-587. 

780 4/20/2012 email from John Hogan, JPMorgan Chase, to Douglas Braunstein, JPMorgan 

Chase, "Collateral Disputes," JPM-CIO-PSI-H 0000108. 

781 See 5114/2012 email from James Hohl, OCC, to Fred Crumlish, OCC, and others, "May 14 

minutes," OCC-SPI-00025835; Morgan Stanley response to Subcommittee questions 
316 

161 

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 CIa 

desk vs the JPM dealer desk. We [Morgan Stanley] have 

significant MTM [mark to market] breaks on positions facing 

the CIa trades whereas trades facing you[r] dealer desk are 

very much in_line.,,783 

According to Ina Drew, the large collateral disputes generated a 

series of questions internally about the CIa's valuation process. She 

told the Subcommittee that Jamie Dimon "felt that one way to find out 

[about the validity ofthe 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 ofthe disputes. Then we would find 

out if the disputes were real or not.,,784 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 reemphasis on the CIa marks at the request of the bank's CEO. 

(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 4/2012012 email from Morgan Stanley to JPMorgan Chase, JPM-CIO 0003603-605. 

784 Subcommittee interview ofIna Drew, CIO (I2/10/2012). 
317 

162 

Ch' Ie fI nves ment Offi Ice C o a II t era I D' ISPU es- A .pn 'I 20 -M ay 23 , 2012 

Date TotalofCIO Largest Counterparty Counterparty of 

Collateral Disputes Difference Largest Dispute 

4/20/2012""' $ 520 million $ 115 million Morgan Stanley 

05/02/2012'00 $ 182 million $ 55 million Morgan Stanley 

05/03/20127

" $ 194 million $ 57 million Morgan Stanley 

05/04/2012'00 $ 203 million $ 61 million Morgan Stanley 

05/07/2012 '°' $ 212 million $ 61 million Morgan Stanley 

05/08/20 12'"u $ 144 million $ 54 million Morgan Stanley 

05/09/2012 $ 120 million $ 58 million Morgan Stanley 

0511012012'"" $ 66 million $ 46 million Morgan Stanley 

05/1112012 1Y• $ 69 million $ 27 million Morgan Stanley 

05/14/20127Y4 $ 156 million $ 46 million Morgan Stanley 

05/15/20127Y5 $ 152 million $ 11 0 million DBKAG 

0511712012"0 $ 42 million $ 27 million Morgan Stanley 

05/2112012 $ 25 million $ 32 million Morgan Stanley 

05/23/2012/Y· ($ 29) million $ 17 million Morgan Stanley 

"0572412012 ($ 29) million $ 17 million Morgan Stanley 

05/25/2012"UU $ 25 million $ 39 million Morgan Stanley 

Source: JPMorgan Chase and OCC documents ciled 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 lO 

j,ear 22-100 tranche. 

86 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 Jed," JPM-CIO,PSI 0014195. 7S7 1d. 

788 See 517/2012 email from Paul Bates, JPMorgan Chase, to Phil Lewis, CIO, and others, "CIO 

Credit Collateral differences as of COB Friday 4'h," 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-CIO-PSI 0014779. 

790 See 519/2012 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 [Tueslday 8th including 2 day differences against Morgan Stanley," JPMCIO-PSI-H 0002712-717. 

791 See 5110/2012 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 9'h May," JPM-CIO-PSI 0014797. 

792 See 5111/2012 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 10'h May," JPM-CIO-PSI 0017989. 

793 See 5114/2012 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 11'h May," JPM-CIO-PSI 0032235. 

794 See 5/1512012 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 14'h May," JPM-CIO-PSI 0018281. 

795 See 5116/2012 Synthetic Credit Daily Risk Report, OCC-SPI-00l14068, 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. 
318 

163 

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 ofthe CIO's books. 

On April 27, 2012, lPMorgan 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. sal 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 ofMay.so2 

D. Reviewing the SCP Valuations 

The Valuation Control Oroup (VCO) of the ChiefInvestment 

Office was charged with reviewing the accuracy ofthe CIO's marks at 

both month-end and quarter-end. In April 2012, the CIO VCO 

conducted its regular review of the SCP book as of the last day in 

March.so3 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 VCO'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."so4 The effort was 

headed by the bank's Controller, Shannon Warren.sos 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 

801 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

8021d. 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 

Eroblematic."). 

OJ See 2013 JPMorgan Chase Task Force Report, at 54. 

804 Id., at 73. 

805 Ms. Warren issued the memorandum summarizing the assessment. See 51l0/2012 JPMorgan 

Chase Controllers special a~sessment ofCIO's marks, January to April 2012, JPM-CIO 

0003637-654. 
319 

164 

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 VCO conducted its regular 

review of the SCP prices and the Controller's office conducted its 

special assessment, the CIO VCO itself was under criticism. On March 

30,2012, JPMorgan Chase's internal audit group released a report 

criticizing the VCO, noting among other problems that it was using 

umeviewed risk models, unsupported and undocumented pricing 

thresholds, inadequate procedures for evaluating pricing sources, and 

inadequate procedures for requiring reserves. S06 For example, the 

internal audit report rated the following as "Needs Improvement"S07: 

"CIO VCO practices where a number of risk & valuation 

models have not been reviewed by Model Review Oroup 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 offormallrc 

documented/consistently applied price testing thresholds." os 

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 VCO thresholds had been applied 

"without sufficient transparency or evidence." It also found that the 

"root cause" of the problems with the CIO VCO's price testing practices 

was an "insufficient assessment/formalization of certain price testing 

methodologies and poorly documented CIO VCO practices."so9 

The audit report should have encouraged the VCO to conduct a 

more careful review ofthe 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 

VCO 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. 

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, OCCSPI-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 hal d] not been appropriately documented and or catalogued." Id. 

809 Id. See also 2013 JPMorgan Chase Task Force Report, at 55-56. 
320 

165 

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. 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 

810 4/20/2012 email from Jason Hughes, CIO, to Rory O'Neill, JPMorgan Chase, and others, 

"URGENT ::: Huge Difference for iTraxx & COX 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. 

Bl2 See 5110/2012 JPMorgan Chase Controller's special assessment ofCIO'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. 
321 

166 

months ofJanuary, 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 (bidask 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 SCPo 
CIO Marks of 18 Positions as of January 31, 2012 

Credit Default Swap Indices and Tranches CIOMark Broker Bid Broker Mid Price Broker Offer 

CDX.NA.HY 10-15% S08 05Y 70.000 69.625 70.313 71.000 

CDX.NA.HY 10-15% SIO 07Y 20.750 19.700 20.538 21.375 

CDX.NA.HY 15-25% S 1 0 05Y 93.375 92.875 93.313 93.750 

CDX.NA.HY 15-25% Sil 05Y 86.250 85.438 86.063 86.688 

CDX.NA.HY 35-100% S I 0 05Y 106.:l13 106.170 106.315 106.460 

CDX.NA.HY IDX S II 07Y 101.000 100.688 101.000 101.313 

CDX.NA.HY IDX S14 05Y 100.625 100.375 100.625 100.875 

CDX.NA.HY IDX S 15 05Y 100.125 99.938 100.125 100.313 

CDX.NA.IG 0-3% S09 05Y 26.813 26.460 26.680 26.900 

CDX.NA.IG 0-3% S09 lOY 60.750 60.563 60.813 61.063 

CDX.NA.IG IDX S09 07Y 102.000 101.500 103.500 105.500 

CDX.NA.IG IDX S09 lOY 119.500 119.000 120.750 122.500 

iTraxx.Main 0-3% S09 lOY 66.563 66.290 66.620 66.950 

iTraxx.Main 22-100% S09 07Y 19.750 18.160 19.495 20.830 

iTraxx.Main 22-100% S09 lOY 40.000 39.400 40.600 41.800 

iTraxx.Main IDX S09 07Y 148.500 146.750 148.750 150.750 

iTraxx.Main IDX S09 lOY 158.000 156.500 158.500 160.500 

iTraxx.Main lOX S16 05Y 143.000 142.500 143.000 143.500 __ 

Source: 5110/2012 JPMorgan Chase Controller's special assessment ofCIO's marks, January to April 2012, JPM-CIO 0003637-654, at 653. 

Benefit 

lower price 

higher price higher price higher price 

higher 

higher price 

lower price 

lower price lower price 

higher price 

lower spread 

lower spread 

higher price 

lower spread 

lower spread 

lower spread lower spread 
CIO Marks of18 Positions as of February 29, 2012 

Credit Default Swap Indices and Tranches CIOMark Broker Bid Broker Mid Price Broker Offer 

CDX.NA.HY 10-15% S08 05Y 89.750 89.500 90.000 90.500 

CDX.NA.HY 10-15% SIO 07Y 17.000 15.160 16.245 17.330 

CDX.NA.HY 15-25% S 1 0 05Y 95.375 94.660 95.120 95.580 

CDX.NA.HY 15-25% S 11 05Y 86.250 85.660 86.330 87.000 

CDX.NA.HY 35-100% S10 05Y 106.188 106.000 106.145 106.290 

CDX.NA.HY IDX S 11 07Y 102.000 101.063 101.563 102.063 

CDX.NA.HY IDX S 14 05Y 101.375 101.250 101.500 101.750 

CDX.NA.HY IDX S 15 05Y 100.563 100.313 100.500 100.688 CDX.NA.IG 0-3% S09 05Y 24.188 23.830 24.060 24.290 

CDX.NA.IG 0-3% S09 lOY 59.875 59.625 59.853 60.080 

CDX.NA.lG IDX S09 07Y 92.000 89.613 91.813 93.813 

CDX.NA.IG IDX S09 lOY 112.500 111.063 113.313 115.563 

iTraxx.Main 0-3% S09 lOY 66.125 65.875 66.138 66.400 

iTraxx.Main 22-100% S09 07Y 15.500 15.250 16.125 17.000 

iTraxx.Main 22-100% S09 lOY 34.500 34.400 35.115 35.830 

iTraxx.Main IDX S09 07Y 131.750 130.750 132.750 134.750 

iTraxx.Main IDX S09 lOY 146.750 144.250 146.250 148.250 

iTraxx.Main IDX S16 05Y 128.250 126.000 128.250 128.500 

Source: 5/10/2012 JPMorgan Chase Controller's special assessment ofCIO's marks, January to April 2012, JPM-CIO 0003637-654, at 653. 

Benefit 

lower price 

higher price hig!'ter 12rice 

higher price higher price 

higher price 

lower price lower price 

higher price 

lower price lower spread lower spread lower price lower spread lower spread lower spread lower spread lower spread 
CIO Marks of 18 positions as of March 31, 2012 

Credit Default Swap Indices and CIO Mark Broker Bid Broker Mid Broker Benefit Month-End CIO Trad

Tranches Price Offer (date and price)813 

CDX.NA.HY 10-15% S08 OSY 91.500 91.500 92.000 92.500 lower price Info not available. 

CDX.NA.HY 10-15% S 10 07Y 13.125 10.625 11.875 13.l25 higher price Info not available. 

CDX.NA.HY 15-25% SIO 05Y 93.375 92.875 93.125 93.375 higher price Info not available. 

CDX.NA.HY 15-25% SII OSY 83.750 82.875 83.313 83.750 higher price Info not available. 

CDX.NA.HY 35-100% SIO 05Y 106.000 105.625 105.813 106.000 higher price Info not available. 

CDX.NA.HY IDX S 11 07Y 102.000 101.250 101.625 102.000 higher price Info not available. 

CDX.NA.HY IDX S 14 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.lG 0-3% S09 lOY 62;756 62.750 63.125 63.500 lower price 3/30 (a) 63.250 

CDX.NA.IG IDX S09 07Y 88.000 88.000 89.500 91.000 lower spread 3/30 @ 90.000 

CDX.NA.lG IDX S09 lOY 110.750 110.750 112.250 113.750 lower spread 3/30 @J 113.000 

iTraxx.Main 0-3% S09 lOY 65.875 65.750 66.250 66.625 lower price 3/30@ 66.375 

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 lOY 33.000 33.000 34.700 36.750 lower spread 3/30 @J 33.625 

iTraxx.Main IDX S09 07Y '.;;;(119:1SftJ·'; 123.250 127.250 131.250 lower spread 3/30 @J 129.000 

iTraxx.Main IDX S09 lOY 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; 5110/2012 JPMorgan Chase Controller's special assessment ofCIO's marks, January to April 2012, JPM-CIO 0003637-654, at 653. 

i1J Trades executed by CIO at or near month-end (Friday, March 30, 2012). See JPM-CIO-PSI 0037501. 
325 

170 

The data in the Controller office's charts showed that, over the 

course ofthe first three months of2012, 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 ofthe 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 ofthe 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 ofthose 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 VCO. 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 proofthat 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 ofthe 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 

VCO mid market estimates was $512 million before 

adjustment to the boundary ofthe VCO valuation range ... 

and $495 million after adjustment."sI4 

In other words, after fmding a $512 million difference between what the 

CIO reported and what would have been reported if the CIO had used 

814 511 0/2012 JPMorgan Chase Controllers special assessment of ClO's marks, January to April 

2012, at 9, JPM-CIO 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.). 
326 

171 

the midpoint prices, the Controller then shaved off$17 million from that 

difference by disallowing certain reported marks that were so extreme 

they fell outside the YCO's range of permitted deviations from the 

midpoint prices.8ls After changing those marks to reflect the extreme 

edge of the YCO'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 ofthe 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 in 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." 

815 For a number of credit derivatives, the VCO 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 tbat the 

accepted deviation for the iTraxx Main Series 9 7-year index was a six-basis-point deviation 

from tbe midpoint of the relevant bid-ask spread). 

816 See 5110/2012 JPMorgan Chase Controller's special assessment ofCIO's marks, January to 

April 2012, at 8, JPM-CIO 0003637-654, at 644 ("If the front office mark is outside the VCO 

valuation range, the position mark is adjusted to the outer boundary of the range."). 

817 The bank also detennined that the VCO used formulas in its spreadsheets that had not been 

properly vetted, "introduced two calculation errors," and resulted in the VCO's understating the 

difference between the VCO mid-prices and the SCP marks. See 2013 JPMorgan Chase Task 

Force Report, at 56. The Controller later increased tbe amount of unreported losses to $677 

million in July, then reduced that total due to certain price adjustments and the application ofa 

li~uidity reserve. See 2013 JPMorgan Chase Task Force Report, at 55, footnote 68. 

81 See 5/8/2012 recorded telephone conversation between Alistair Webster, JPMorgan Chase, 

and Javier Martin-Artajo, CIO, JPM-CIO-PSI-A 0000164; 5/8/2012 transcript oftbe same 

recorded telephone conversation, JPM-CIO 0003631-636, at 631-634. 
327 

172 

Mr. Webster: "But they were, none of them were actually at the 

boundaries ofthe bid or offer." 

Mr. Martin-Artajo: "Right." 

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."SI9 

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."s2o 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 

8\9 5/8/2012 transcript of recorded telephone conversation between Alistair Webster, JPMorgan 

Chase, and Javier Martin-Artajo, CIa, JPM-CIO 0003631-636 (Mr. Martin-Artajo: "I mean 

are you saying, are you saying that we had a trend at the end ofthe month to mark a little bit 

towards more, more one side ofthe 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 

fositions' value, and one of them explicitly denied any bias."). 

20 5110/2012 JPMorgan Chase Controller's special assessment of CIa's marks, January to April 

2012, at 11, JPM-CIO 0003637-654, at 647. 
328 

173 

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 

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, ChiefInvestment 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 

821 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. 

822 Id., at 647. See also 2013 JPMorgan Chase Task Force Report, at 6, 74. 

823 See 5/10/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, "Braunstein I 

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 6/2912012 

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. 1 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," JPM-CIO 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). 
329 

174 

garbage.,,826 The OCC said that the VCO 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 ofthe SCP positions at the very edge 

of "what they could get away with" and were booking "fictitious 

profits. ,,829 Yet neither the VCO 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 $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 

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. 

830 JPMorgan Chase later restated its financial results to attribute $660 million in additional 

losses to the SCP by the end of March. See 7113/2012 "Fonn 8-K," JPMorgan Chase & Co., at 

2, http://files.shareholder.comidownloads/ONEl22617 41819xOxS 1193125-12-

3013911l96171filing.pdf 

831 3/16/2012 transcript ofa recorded telephone conversation between Julien Grout, CIO, and 

Bruno Iksil, CIO, JPM-CIO-PSI-A 0000162. 

832 3123/2012 instant messaging session between Bruno Iksil, CIO, and Julien Grout, CIO, JPMCIO 0003515-541, at 541. 

833 See 511 0/20 12 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"). 
330 

175 

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 

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 

834 5/10/2012 JPMorgan Chase Controllers special assessment ofClO's marks, January to April 

2012, at JPM-CIO-0003646. See also 2013 JPMorgan Chase Task Force Report, at 55, 74. 

835 [n its 2013 report, the JPMorgan Chase Task Force did not criticize either the ClO 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 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. [d., at 96-97. See also id., at 55-56. The Task 

Force report also announced formation ofa 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. [d., 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-SP[-00000298, printed as a Subcommittee chart earlier in this 

chapter. Numbers do not reflect restated P&L figures. 
331 

176 

negative market developments following the bank's public filing, it is 

also possible the cra 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 goinj to make 

calls every time the number moves around, by $0.5 billion," 37 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 cra'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 oldercredit indices. As the cra 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 ofthese 6 Series-9 

tranche positions; this reflects the market's reduced 

liquidity.,,839 

When asked about the reserve, CIa 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 

837 5110/2012 "Business Update Call," JPMorgan Chase transcript, at 8, 

r3~p:/ /i.mktw .net! _ newsimages/pdf/jpm-conference-call. pdf. 

See 5110/2012 JPMorgan Chase Controller's special assessment ofCIO's marks, January to 

April 2012, JPM-CIO 0003637-654, at 645-646; 4113/2012 cra Valuation Summary Memo, 

March 2012 Month-End Results, OCC-SPI-00021381-388, at 386 ("For March month end the 

level of the Liquidity Reserve, which represents the illiquidity of oft~the run positions, was 

$~186.4)mm."). 

83 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. 

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). 
332 

177 

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 Iiquid.,,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 ofthe 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. 

841 5/2112010 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). 
333 

178 

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 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 ofthe 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 ChiefInvestment 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 

846 Subcommittee interview of Michael Cavanagh, lPMorgan Chase (l21l2/2012). See also 2013 

lPMorgan Chase Task Force Report, at 75,89. 

847 Subcommittee interview of Michael Cavanagh, lPMorgan Chase (l21l2/2012). 

848 20 13 lPMorgan Chase Task Force Report, at 89. 

849 71l3/2012 "Form 8-K," lPMorgan Chase & Co., at 2, 

http://files.shareho1der.comidown10ads/ONE/2261741819xOxS 1193125-12-

301391119617/filing.pdf. 

850 lPMorgan Chase & CO. 10-Q filing with the SEC for the second quarter of2012, at 4, 

http://www.sec.gov/Archives/edgar/data/196171000001961712000264Ijpm-2012063010q.htm. 

851 Subcommittee interview of Michael Cavanagh, lPMorgan Chase (121l2/2012). 
334 

179 

CIa did not, on their face, violate bank policy or GAAP, because the 

CIa 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 

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. MartinArtajo'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 longterm 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 

852 Id. See also 5110/2012 JPMorgan Chase Controller's special assessment ofCIO'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. 

854 7/12/2012 letter from JPMorgan Chase to Javier Martin-Artajo, CIO, JPM-CIO-PSI-H 

0002744-745, at 744. 
335 

180 

standard policies and procedures in the Book's stated 

value."s5 

The bank told the Subcommittee that it did not terminate Julien Grout at 

the time, because it wanted to consider whether, as ajunior trader, he 

had been coerced into marking the SCP book improperly.s56 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 ofthe 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. 

Detecting the mismarking of derivatives does not require analysis 

of a person's subjective opinions; it requires analysis ofthe 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. 

855 7112/2012 letter from lPMorgan Chase to Bruno Iksil, CIO, lPM-CIO-PSI-H 0002740-741, at 

740. See also 7/12/2012 letter from lPMorgan Chase to Achilles Macris, CIO, lPM-CIO-PSI-H 

0002742-743, at 742. 

856 Subcommittee interview of Michael Cavanagh, lPMorgan Chase (12112/2012) (Harry Weiss). 
336 

181 

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. 
337 

182 

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% (CSWI0%) limit, stress loss limits, and stop loss 

advisories. During the first three months of2012, 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 (CSOl) 

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% (CSWI0%) 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 ofthe 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 
338 

183 

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. 

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-inCharge 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 20 12, 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 
339 

184 

who demands regular and exhaustive reviews of every comer 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 Steams as those institutions failed. 858 

While JPMorgan Chase accepted $25 billion in bailout funds durin~ the 

crisis, it was among the first of the banks to fully repay the loans.85 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: 

"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. 

857 "House of Dimon Marred by CEO Complacency Over Unit's Risk," Bloomberg, Erik 

Schatzker et al. (6/12/2012), http://www.bloomberg.comlnews/2012-06-12lhouse-of-dimonmarred-by-ceo-complacency-over-unit-s-riskhtml. 

858 See, e.g., "JPMorgan Chase & Company," New York Times, (Updated 11116/2012), 

http://topics.nytimes.comltop/news/business/ companies/morgan j-'p _chase_and _company lindex. 

html. 

859 ld.; "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-exitscontinue/. 

860 See 6/2112012 "CIO Compensation - Revenue to Compensation Historical Lookback," JPMCIO-PSl-H 0002746. at 749. 

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), 

hltp:llwww.cq.comldoc/congressionaltranscripts-4105471. 
340 

185 

The CIa 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 

peogle focus on it, think about it, and decide what to do about 

it." 62 

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 CIa and bankwide risk limits during the first 

three months of 20 12. 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 CIa losses, the warning signs were clear, but they were disregarded 

or rationalized. Even Mr. Dimon acknowledges that it was not until 

March that the CIa instructed the traders to stop taking on additional 

positions. 

The ChiefInvestment Office, which managed a $350 billion 

investment portfolio consisting, in part, of federally insured deposits, 

had an inadequate risk management function. The CIa 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 CIa's risk profile, ChiefInvestment 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. 

The bank's reliance on Ms. Drew to police risk within the CIa was 

so excessive that some senior risk personnel first became aware of the 

CIa'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 ofthe CIa's 

risk problems before JPMorgan Chase's Chief Risk Officer. 

862 Id. 

863 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9119/2012) and Michael 

Cavanagh, JPMorgan Chase (12112/2012). See also 2013 JPMorgan Chase Task Force Report, at 

22. 

864 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 865 rd. 
341 

186 

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 ofa 

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 payoff, 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, ifnot 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 cro requires an analysis of its risk management 

866 See 4113/2012 "Edited Transcript JPM - QI JPMorgan Chase & Co. Earnings Conference 

Call:' at 10, JPM-CIO-PSI 0001151. 867 Id at 7 

868 S~; 511012012 "Business Update Call," JPMorgan Chase transcript, at 2, 

http://i.mktw.netl_newsimages/pdf/jpm-conference-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."). 
342 

187 

structure, risk personnel, and why specific risk metrics in place at the 

time ofthe trades were disregarded. 

B. Risk Management Structure at eIO 

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 technolo~y 

infrastructure used to monitor and manage risk."S 9 

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,s70 and were regularly discussed 

with the Risk Policy Committee ofthe Board ofDirectors.871 The 

business unit risk limits were developed by each unit's head and risk 

management personnel,s72 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 

869 See 3/3012012. "'2011 Annual Report," JPMorgan Chase publication, at 125, 

http://files.shareholder.com/downloads/ONE/183 97480 86xOx5 5613 9/75b4 bd59-02e7 -449 5-

a84c-06eOb 19d6990/JPMC _2011_ annuatreport _ complete.pdf. 

870 3/2012 presentation prepared by JPMorgan Chase entitled "Market Risk Limits," at 12, OCCSPI-OO 117682. 

871 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/412012). See 

also 312012012 Directors Risk Policy Committee meeting minutes for JPMorgan Chase, JPMCIO-PSI-0013563. 

872 3/2012 presentation prepared by JPMorgan Chase entitled "Market Risk Limits," at 12, OCCSPI-00117682. 

873 Subcommittee interview of Peter Weiland, CIO (8/2912012). 
343 

188 

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 

For both the bank and its business units, risk limits were 

categorized as either Levell or Level 2 limits. Breaches of Level I 

limits were viewed as more serious. According to a March 2012 

JPMorgan Chase presentation on market risk limits, the "[CIO] Risk 

Committee reviews Levelland Level 2 limits for each business on a 

monthly basis.,,877 When Levell firm limits were breached, the firm 

Operating Committee was notified by email. Changes in or waivers of 

bankwide Levell limits required the approval of the CEO and CRO. 

Changes in or waivers of a business unit's Levell 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 

I 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 Levelland Level 2 

limits: "Business unit must take immediate steps toward reducing the 

874 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (121l2/2012). 

875 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 876 2/2012 presentation prepared by JPMorgan Chase entitled "cro February 2012 Business 

review," at 1, JPM-CIO-PSI 0001940, at 942. 

877 3/2012 presentation prepared by JPMorgan Chase entitled, "Market Risk Limits," at 1, OCCSPI-001l7682. 

878 Id., at 13. 

879 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9119/2012). 

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 nonstatistical 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 I, 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 Levell limits, while the CIO CSBPV and CSW 10% limits were Level 2 limits. Any 

excessions of Level I 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. Undcr Firm policy, all cxccssion notifications should include 

(I) 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 cxceeded) and the percentage by which the limit has been 

exceeded, and (4) the number of consecutive days the limit has been exceeded. "). 
344 

189 

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 

automatic freeze or unwinding ofpositions.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 Martin-Artajo, head 

ofthe 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 . 887 view. 

With hindsight, the JPMorgan Chase Task Force provided this 

negative assessment of the CIO's risk management structure: 

881 See, e.g., 3/2012 presentation prepared by JPMorgan Chase entitled, "Market Risk Limits," at 

13,OCC·SPI-00117682. 

882 3/30/2012, "2011 Annual Report," JPMorgan Chase publication, at 162, 

http://files.shareholder.com/downloads/ONE/18 3 97 48086xOx5 5613917 5b4 bd5 9-02e7 -44 9 5-

a84c-06eOb 19d6990/JPMC _ 2011_ annualJeport _ 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 ovm 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 originallimit."). 

883 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 

884 Subcommittee interview ofIna Drew, CIO (12111/2012). 

885 See, e.g., 3/8/2012 email fromJavierMartin-Artajo.CIO.tolna Drew, CIO, and others, "CIO 

CRM Results," JPM-CIO-PSI 0008773-775, and discussion below. 

886 Subcommittee interview of Ina Drew, CIO (917/2012); 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. 
345 

190 

"For a significant period of time prior to the first quarter of 

2012, CIO was subjected to less rigorous scrutiny than clientfacing 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 ofCIO Chief Risk Officer was 

vacant through 20 11.890 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 

When he was infonned of limit breaches, bank documents indicate that 

his reaction was to challenge the metrics, not the CIO traders.892 The 

same was true ofthe 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 b~ Ms. Drew, in 

2008, to serve as the CIO's Chief Market Risk Officer.8 4 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 ofthe 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. 

888 2013 IPMorgan Chase Task Force Report, at 94. 

889 Subcommittee interview of Michael Cavanagh, IPMorgan Chase (12112/2012). See also 

testimony of Jamie Dimon, Chairman & CEO, IPMorgan 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 ofIrvin Goldman, CIO (9/15/2012). 

891 Subeommittee interview of Peter Weiland, CIO (8/29/2012). 

892 See Chapter V, Section D, "Disregarding CIO Risk Metrics," below. 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. 
346 

191 

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 

cro 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 cro had long-tenured 

Risk personnel in less senior positions ... they appear not to 

have been expected, encouraged or supported sufficiently by 

cro management or by the Firm-wide Risk organization to 

stand up forcefully to the cro front office and to vigorously 

question and challenge investment strategies within the cro. 

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 ChiefInvestment 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 Many senior bank managers were not even aware 

that the position ofCrO Chief Risk Officer was vacant. One telling 

indication of the lack of a robust risk management culture at JPMorgan 

Chase's cro 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 cro,898 many 

in the CIO were under the impression that Mr. Weiland was, in fact, the 

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). 

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 
347 

192 

CIO's Chief Risk Officer prior to the hiring ofIrvin 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.,,90o 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.90s Mr. I-logan 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 

Chase in response to a Subcommittee request, "C[O Risk Management Team," JPM-C[O-PS[-H 

0002813; I130/20 [2 email from Irvin Go[dman. C[O, to Ashley Bacon, JPMorgan Chase, "C[O 

VaR heads up and update," JPM-C[O-PS[ 0020168 ("Pete as head of market risk .... "). 

899 Subcommittee interview of Joseph Bonocore, JPMorgan Chase (9/1 [12012). 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 20 [[ for 

~ersona[ reasons. [d. 

00 Subcommittee interview of Joseph Bonocore, JPMorgan Chase (91l [120[2). 

901 Subcommittee interview of David Olson, C[O (9/[4/20[2). 902 [d. 

903 Subcommittee interview of Patrick Hagan, C[O (217120[3). 

904 [/10/20[[ email from Ina Drew, C[O, to Peter Weiland, C[O, "Confidentia[ - 2010 

Performance Evaluation" JPM-C[O-PSI-H 0002801. 

905 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 906 [d. 

907 Id. 
348 

193 

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: 

"[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 20 12, and it performed 

ineffectively as the portfolio ~rew in size, complexity and 

riskiness during that period." 08 

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.91 0 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 CSOI 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 

908 2013 JPMorgan Chase Task Force Report, at 8. 

909 Id., at 98, footnote 109. ("In late 20l0learly 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 ofIrvin Goldman, CIO (9/15/2012). 

911 See 412612012 email from Gina Serpico, CIO, to Manish Jain, JPMorgan Chase, "Org Chart," 

conveying presentation entitled "CHIEF INVESTMENT OFFICE - ORGANIZATION," JPMCIO-PSIOOOI885. 

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.") 

9\3 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 201h meeting of the DPRC, "CIO management did not disclose 

the increasing mark-to-market losses, the recent breaches in certain ofCIO's risk limits, the 
349 

194 

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 

In addition, unlike other JPMorgan Chase lines of 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 of2012.,,916 

Even ifthe role ofCIO 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.9!7 

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 

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 

AfPointment, "CIO RISK COMMITTEE (Attachment Below)," JPM-CIO-PSI-H 0006401-437. 

91 2013 JPMorgan Chase Task Force Report, at 100. 

917 Subcommittee interview oflna 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' 20 I I 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). 
350 

195 

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 Mr. Hogan stated that until the stories broke, his first priority 

had been to understand the bank's consumer 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: 

920Id. 

"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 

921 See Section D "Disregarding CIO Risk Metrics," below. 

922 Subcommittee interview of Jobn Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

923 Id. 
351 

196 

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 

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' 

924 2013 JPMorgan Chase Task Force Report, at 12-13. 

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 (21712013). 

921 See, e.g., 12 C.F.R. Part 3, Appendix B. The OCC, Federal Reserve, and FDIC have also 
352 

197 

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 of2012, the CIO's risk 

limits were repeatedly breached by the Synthetic Credit Portfolio, even 

triggering a breach ofa 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 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 

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-I 6759.pdf. 

928 See acc definition ofVaR, 12 C.ER. 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.ER. Part 3, Appendix B, Sections 4 and 5; Subcommittee briefing by acc 
353 

198 

oversees to obtain its approval ofVaR models used to calculate 

regulatory capital. 930 Banks also use VaR models for internal risk 

management. While the acc has broad authority to oversee the risk 

management and model development process, banks are not required to 

submit internal risk management VaR models for acc 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 ofVaR 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 maj ority 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 caiculations.,,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 "IOQ" VaR. The "95%" refers to the 

confidence level in the computation, and the "1 OQ" indicates it is the 

VaR that JPMorgan Chase reports in its I O-Q quarterly filings with the 

SEC. According to JPMorgan Chase's 2011 Annual Report: 

"The Firm calculates VaR to estimate possible economic 

outcomes for its current positions using historical simulation, 

(31412012). 

930 12 C.F.R. Part 3, Appendix B. Section 3(c)(I) ("(c) Requirements for internal models. (I) 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, aod operation, or the validation process must 

be subjected to an independent review of its adequacy and effectiveness."). 

932 313012012, "2011 Annual Report," JPMorgao Chase publication, at 311, 

http://files.shareholder .coml downloadslONE/183 974808 6xOx5 5 613 917 5 b4bd5 9-02e 7 -449 5-

a84c-06eOb 19d6990/JPMC _ 2011_ annualJeport _ complete. pdf. 

933 Id atl58 

934 JPMorgan' Chase & Co. Form 10-Q (for period ending 913012012), filed with the SEC 

(1110812012), at 96, http://files.shareholder.comldownloads/ONE/2252595197xOxS 19617 -12-

308119617 lfiling. pdf. 

935 Subcommittee interview of Jamie Dimon, JPMorgao Chase (9/1912012). 
354 

199 

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 CUITent 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 acC's Examiner-in-Charge at lPMorgan 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 lPMorgan Chase, risk models, including VaR models, were 

normally developed or overseen by the Model Risk and Development 

(MRAD) group, also refeITed 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 

conculTently with an existing model for several months to evaluate how 

the new model performs and examine any diverging results between the 

twO.940 

936 313012012, "2011 Annual Report," JPMorgan Chase publication, at 158, 

http://files.shareholder.com/downloads/ONE/183 9748086xOx5 56139175b4bd59-02e7 -4495-

a84c-06eOb 19d6990/ JPMC _ 2011_ annuaUeport _ complete.pdf. 

937 Subcommittee interview of Scot! Waterhouse, OCC (9/17/2012); see also Subcommittee 

briefing by JPMorgan Chase (8/15/2012). 

938 Subcommittee interview ofC.S. Venkatakrishnan, JPMorgan Chase (10/25/2012). 939Id. 

940 Id. 
355 

200 

(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 The CIO 10-Q VaR model then in effect had been 

designed by Keith Stephan, a member ofthe CIO's risk 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 mode1.944 

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" 

V aR 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 of2011, wrote algorithms 

for them, and worked to refine the models over the next few months. 

941 Subcommittee briefing by JPMorgan Chase (8I1S/2012) (Greg Baer). 

942 Subcommittee interviews of Elwyn Wong, OCC (8/20/2012); Michael Kirk, OCC 

(8/2212012); and C.S. Venkatakrishnan, JPMorgan Chase (10/2S/2012). 

943 Subcommittee interview of Patrick Hagan, CIO (21712013); Levin Office briefing by 

JPMorgan Chase (7/S/2012). 

944 Subcommittee interview of Patrick Hagan, CIO (21712013); 2013 JPMorgan Chase Task Force 

Report, at 104. 

945 Levin Office briefing by JPMorgan Chase (7/S/2012); Subcommittee briefing by JPMorgan 

Chase (8/1S/2012). 

946 Levin Office briefing by JPMorgan Chase (7/5/2012). 

947 See 10110/2011 memorandum by Patrick Hagan and Keith Stephan, CIO, "VAR 

METHODOLOGY," JPM-CIO-PSI 0000041-47. 

948 Subcommittee interview of Patrick Hagan, CIO (21712013). 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-9S model "overstated the risk." Id. 
356 

201 

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 CIa. 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 ?et the new VaR-95 model completed and implemented 

quickly.95 

According to JPMorgan Chase, the impetus for the new VaR 

models was to render the CIa's VaR models compliant with Basel III 

requirements. 952 Basel III refers to a set ofintemational 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 CIa 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 CIa'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, CIa 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 

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 Novembcr 2011). 

951 Subcommittee interview of Patrick Hagan, CIO (217/2013). 

952 Levin Office briefing by JPMorgan Chase (7/5/2012). For more information on BasellIl, see 

Chaptcr II. 

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), 

http://www.nytimes.coml20 13/0 1/07lbusiness/globall07iht-banks07 .html?src=twrhp. For more 

information about the Basel Accords generally, see Chapter n. 954 Subcommittee briefing by JPMorgan Chase (8115/2012). 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 oflna Drew, CIO (91712012). 

956 2013 JPMorgan Chase Task Force Report, at 122. 
357 

202 

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. 96o Under those rules, a higher RWA required 

greater capital to protect against the higher 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 RW A 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 

ofthe 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 ofthe first quarter of 

957 Subcommittee interviews of John Hogan and Ashley Bacon. JPMorgan Chase (9/4/2012) and 

Patrick Hagan, CIO (21712013). 

958 Sec "VaR Methodology," prcpared by Patrick Hagan and Keith Stephan, JPM-CIO-PSI 

0000041, at 045 ("All the above problems with Oll!' methodology gcnerally lead to highcr 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 (217/2013). 

959 Subcommittee interview of Patrick Hagan, CIO (217/2013). 

960 RWA is a dollar measure ofa bank's assets, adjusted according to the assets' risk. For more 

information, sce Chapters II and Ill. 
358 

203 

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 Ql 2012,,961 

The email indicates that Mr. Martin-Artajo estimated that $7 

billion, or more than 50% ofthe total $13 billion RWA reduction, could 

be achieved by modifYing risk related models. 962 While changing the 

VaR model was only one ofthe proposed changes and was estimated to 

have the smallest effect, it was nevertheless characterized as capable of 

producing half of a billion dollars in RW A reduction. That the MartinArtajo 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 RW A calculation, shows that the CIO 

viewed Mr. Hagan's work, at least in part, as a way of ~roducing lower -

as opposed to simply more accurate SCP risk results. 63 

961 1212212011 email ii'om Javier Martin-Artajo, CIO,to Ina Drew and John Wilmot, ClO, "RWA 

- Tranche Book," JPM-ClO-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 ofRWA 

reduction that could be achievcd by each of the listed "model reduction[ s]" by the end of the first 

quarter of 20 I 2). 

962 The email cstimated 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 arc 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 modi tying the QR model used to calculate its "Stress" VaR, another key 

contributor to the RWA model. Mr. I lagan confirmed to the Subcommittcc that hc had provided 

all three o[these estimates. Subcommittee interview of Patrick IIagan, CIO (21712013). Thc 

recommended model changes, projected to reduce the ClO'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 "ClO Synthetic Credit: Risk background 

infonnation 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). 

963 Sec, e.g., 3/8/2012 email fromJavierMartin-Artajo.CIO.tolnaDrew.CIO. and others, "CIO 

CRM Results," JPM-ClO-PSI 0000373 (indicating that the ClO 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 challcngc the current methodology and havc the model changed."). 
359 

204 

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 mode1.964 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 stafe65 Mr. 

Hagan told the Subcommittee that he had not developed a fully working 

RW A 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 mode1.966 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. MartinArtajo 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 mode1.969 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. 

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 $I25mm limit, an increase of$5mm 

9641118/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "Meeting materials for Ilam 

meeting," JPM-CIO-PSI 0000098-104, conveying presentation entitled, "Core Credit Book 

Highlights." 

965 Subcommittee interview of Patrick Hagan, CIO (21712013). 

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 1118/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "Meeting materials for 11am 

meeting," JPM-CIO-PSI 0000098-104, conveying presentation entitled, "Core Credit Book 

Highlights." Mr. Hagan told the Subcommittee lhat 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 (21712013). 

968 1119/2012 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. 
360 

205 

from the prior day's revised VaR.,,97J 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 

ofm[ar]k[e]t data in the last week of20[1]1 with rally in 

OTR [on-the-run] HY [High Yield] indicies. '" The big 

drivers, are increases in notional ofHY 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. 

971 1110/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, "JPMC Finnwide VaR - Daily Updated - COB 

1/09/2012," JPM-CIO-PSI 0000095. 

972 Id. 

973 1110/2012 email from Peter Weiland, CIO,toIna Drew, CIO, and others, "JPMC Finnwide 

VaR - Daily Updated - COB 1/09/2012," JPM-CIO-PSI 0000094. The email mentions RWA, 

because a version ofthe VaR is used, in part, to caleulate RWA scores. Therefore, risks that 

increase the VaR also increase the RWA, and could potentially trigger increased capital reserve 

requirements. 

9741/10/2012 email from Keith Stephan, ClO, to Bruno Iksil, ClO, and others, "Core Credit Var 

Summary 06 January," JPM-CIO-PSI 0000093, [emphasis in original]. 
361 

206 

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 Mr. Martin-Artajo 

replied: "No, in terms ofVAR." Mr. Martin-Artajo continued: 

"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 chan~es. Hopefully we get this [model] approved 

as we speak.,,9 6 

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.98o While 

several JPMorgan Chase officials minimized the relevance ofVaR 

975 1112/2012 email from Peter Weiland. CIO, to Javier Martin-Artajo, CIO, "JPMC Finnwide 

VaR Daily Updated COB 1/09/2012," JPM-CIO-PSJ 0000093. 

976 1112/2012 email from Javier Marlin-Artajo, CIO, to Peter Weiland, CIO, and others, "JPMC 

Firmwide VaR - Daily Updated - COB 1109/2012," JPM-CIO-PSI 0000093. 

977 Id. 

978 Id. 

979 Subcommittee interviews of Jamie Dimon, JPMorgan Chase (9/19/2012), Douglas 

Braunstein, JPMorgan Chase (9112/2012), and Ina Drew, CIO (91712012). For more infonnation, 

sec Chapter III. 

980 lI20/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, "JPMC 95% I OQ - VaR - Limit Excession Notification 

(COB 1/19112)," JPM-CIO-PSI 0001890; 1116/2012, JPMorgan Chase spreadsheet "Position 

Limit and Loss Advisory Summary Report," JPM-CIO-PSI 0037534 (showing exeession of the 

$95 million MTM 10Q VaR limit for close of business January 16,2012). 

980 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/20 I 2). 
362 

207 

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 "Levell" 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 These VaR breaches caused real concern within the CIO. 

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 ofthe 

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: 

981 Id. 

"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 ifpossible.,,985 

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 1119/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, "JPMC 95% VaR - Limit Excession Notification (COBs 

1116112 and 1117/12)," JPM-CIO-PSI 0005264; 1123/2012 email from Market Risk Management 

Reporting, JPMorgan Chase, to Jamie Dimon, lPMorgan 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 IrvinGoldman,CIO, and others, "Breach of firm var," JPMCIO-PSIOOOOI41. 

984 1/20/2012 email from IrvinGoldman,CIO,to Keith Stephan, CIO, and others, "Breach of 

firm var," JPM-CIO-PSI 0000149. 

985 1120/2012 email from Keith Stephan, CIO,to Irvin Goldman, CIO, "Breach of firm var," 
363 

208 

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 cm VaR reduction in the 

tranche book by 44% to [$157mm [million], with cm being 

well under its overalilimits.,,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. 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 fi'iends 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 

JPM-CIO-PSIOOOOI47. 

986 1120/2012 email from Irvin Goldman, CIO, to John Hogan, JPMorgan Chase, "CIO VaR," 

JPM-CIO-PSI 0000151. [Emphasis in original.] Mr. Goldman's prediction ofa $57 million VaR 

for the SCP was even lower than the $70 million VaR that had been predicted by Mr. MartinArtajo and Mr. Stephan. See 1112/2012 email from Peter Weiland, CIO, to Javier Martin-Artajo, 

CIO, "JPMC Fimlwide VaR - Daily Updated - COB 1109/2012," JPM-CIO-PSJ-000093; 

lI20/2012 email fromKeithStephan.CIO.toIrvin Goldman, CIO, "Breach oftinn var," JPMCIO-PSIOOOOI47. 

987 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

988 112312012 email from Javier Martin-Artajo, CIO, to Patrick Hagan, "CIO VaR," JPM-CIOPSI 0000151. "QR" refers to Quantitative Research, a part of the bank's risk division that 

worked on model development. Subcommittee interview ofC.S. Venkatakrishnan, JPMorgan 

Chase (I 0/25/20 12). 

989 2013 JPMorgan Chase Task Force Report, at 125. 
364 

209 

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 +$I.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 ofCIO 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. 

(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 

990 1/20/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, "JPMC 95% I OQ - VaR - Limit Excession Notification 

(COB 1119112)," JPM-CIO-PSI 0001890. 

991 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 
365 

210 

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 firm wide 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 31 S\ 

2012. There is a pending approval for a new model for the 

CIO Inti Credit Tranche book. If the new model is approved 

and implemented prior to January 31 st, 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 ofCIO 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 oflowering 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 re~uest by a business 

segment to exceed an existing bankwide VaR limit. 93 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 

992 1/23/2012 email from Market Risk Management Reporting, JPMorgan Chase, to Jamie 

Dimon, .lPMorgan 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 (9119/2012). 

994 1123/2012 email from Jamie Dimon, .lPMorgan Chase, to John Hogan, JPMorgan Chase, and 

others, "APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval," JPM-CIO-PSI 
366 

211 

The temporary limit increase in the bankwide VaR limit provided 

immediate reIiefto 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-tomarket 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 oflong 

positions1ooo were threatening yet another breach of the bankwide VaR 

0001337, See also 1/25/2012 email from Ina Drew, CIO, to MRM Reporting and others, 

"ACTION NEEDED: CIO International-One-offLimits Approval, JPM-CIO-PSI 0000157-158 

(containing Ms, Drew's approval ofthe temporary increase in the ClO's VaR limit); 2013 

JPMorgan Chase Task Foree Report, at 79 ("Messrs, Dimon and Hogan approved the temporary 

increase in the Finn-wide VaR limit, and Ms, Drew approved a temporary increase in ClO's 10-

Q VaR limit"), 

995 For more infonnation 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-SPI00000299, Numbers do not reflect restated P&L figures after JPMorgan Chase's 

restatement in July 2012, See also JPMorgan Chase & Co, Fonn 10-Q (for period ending 

9/30/2012), filed with the SEC (11108/2012), at 10,220, 

http://files,shareholder,comidownloads/ONE/2252595 I 97xOxS 19617-12-308119617/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, JPM-CIO-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 

[or COB 27 Jan," JPM-CIO-PSI 0000177, 
367 

212 

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: 

"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 lOY index long 

risk1001 .... This is consistent wi the VaR increases of the last 

several days ... wherein the VaR increases approx Imm per 

billion of notional in IG9 lOy .... 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 ofbusiness].* 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,lo04 breaching the CIO's temporary VaR limit of$105 million1oo5 

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 

1001 "CDX IG S9 lOY" and "IG9 I Oy" refer to credit derivative indices acquired by the SCPo For 

more information about these indices. see Chapter n. 1002 1127/2012 email fromKeithStephan.CIO.toIrvin Goldman, CIO, and others. "Update on 

'old/current methodology VaR' increase for con 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 ShOlis 

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 oflowering it. Therefore, it is difficult to see how 

IPMorgan 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 ofVaR levels in the Synthetic Credit Portfolio, 

FDlCPROD-0024286. 

1005 1/23/2012 email from Ina Drew, CIO, to MRM Reporting, and others, "ACTION NEEDED: 

CIO Global 1 OQ VaR Limit One-alI Limit Approval," JPM-CIO-PSI-H 0002880. 
368 

213 

Goldman and the bank Chief Risk Officer John Hogan asking: "Why is 

the CIO V AR so elevated?" but took no further action to evaluate the 

CIO trading strategy causing the VaR increase. lO06 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. loos 

( e) Winning Approval of the New VaR Model 

On January 30, 2012, the CIO won bank approval of its new VaR 

model. I009 The impact ofthe 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. IOII However, the evidence is clear that the January 

2012 pressure to expedite approval ofthe 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 ofthe 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."I013 

JPMorgan Chase has acknowledged to the Subcommittee that the 

internal approval process for the new CIO VaR model was "hurried.,,1014 

All ofthe bank's VaR models were supposed to be reviewed and 

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-PSIH 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 oflna Drew, CIO (917/2012). 

1009 See 1/30/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, "draft ofthe 

MRG review of the HVAR methodology for the CIO core credit books," JPM-CIO-PSI 0000187. 

1010 See undated spreadsheet ofCIO 10Q VaR from 12/1/2011 to 5110/2012, JPMC·Senate/Levin 

000155. 

1011 Levin Office briefing by JPMorgan Chase (6/26/2012). 

1012 Subcommittee interview of Michael Sullivan, OCC (1117/2012). 

lOll 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.eomJdoc/congressionaltranseripts-4105471. 

101 Subcommittee briefing by JPMorgan Chase (8/15/2012) (Greg Baer). 
369 

214 

approved by its internal Model Review Group, which was part of its risk 

division. lOIS 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 identirying 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 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.I021 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 

lOll Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase (10/25/2012). 

1016 See, e.g., 112512012 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 CIOPSI 0000189. 

1018 Subcommittee briefing by JPMorgan Chase (8115/2012); 2013 JPMorgan Chase Task Force 

Rer0rt, at 127. 

101 Subcommittee interview of Michael Sullivan, OCC (8/20/2012); 12112/2012 OCC 

Supervisory Letter to JPMorgan Chase, "CIO Oversight and Governance Examination," PSIOCC-18-000001 [Sealed Exhibit]. 

1020 Subcommittee interview ofC.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 "perfornled only limited backtesting of the model," because the CIO "lacked the data necessary for more extensive backtesting"). 

1022 Subcommittee interview of Patrick Hagan. CIO (21712013). 

1023 1/27/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, and others, 
370 

215 

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 V AR 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."lo26 

(1) 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 

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 

"draft ofthe MRG review of the HVAR methodology for the CIO core credit books," JPM-CIOPSI 0000187. 

I024l130/2012 email from Ashish Dev, JPMorgan Chase, to Peter Weiland, CIO, "draft of the 

MRG review of the IIVAR 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 "[f1ormal 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-17-0000 19 [Sealed Exhibit]. 1026 I

d. 

1027 See undated spreadsheet of CIO 1 OQ VaR from 1211/2011 to 511 0/2012, JPMC-Senate/Levin 

000155. This 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 (21712013). 

10291d. 
371 

216 

prior model 1030 - 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 

Value-at-Risk for the Chief Investment Office (CIO 

GloballOQ VaR) 

250,000,000 

200,000,000 

'" 

~ 150,000,000 

~ ~ 

~ 100,000,000 

50,000,000 

n "' '" N "' i u n 

~ n i W ~ C 0 rn 0 0 

'" ~ N ! N N 

.c ~ ~ 

w ~ "'" ~ 

Date 

~ 

:5. 

"'" 

'1 

~ 

_Reported VaR Mode! 

__ Old VaR Model 

--VaRlimit 

Source: Subcommittee chart created from data provided by JPMorgan Chase, 

JPMC-Senate/Levin 000155-6. 

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 

10JO Subcommittee chart created from data provided by JPMorgan Chase, JPMC-Senate/Levin 

000155-6; Levin Office briefing by JPMorgan Chase (7/5/2012) (Greg naer). 

1031 See 5110/2012 "Business Update Call," JPMorgan Chasc transcript, at 2, 

http://i.mktw.net/_ newsimages/pdf/jpm-conference-call.pdf (Mr. Dimon: "In the first quarter, wc 

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 

lB VaR Bandbreak Summary Report - ClB 4/30/2012," JPM-CIO-PSI 0007884. 

10J2 This chart was prepared by the Subcommittee using data provided by JPMorgan Chase, 

JPMC-SenatciLevin 000155-6. 
372 

217 

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. !O33 When asked why not, Ms. Drew explained that 

"everything can't happen at once," and "models get changed all the 

time."I034 

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 ofthe 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. I035 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. I036 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. I03? Mr. Dimon told 

the Subcommittee that a discussion as to whether the VaR limit should 

have been lowered at the 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 

103J Subcommittee briefing by JPMorgan Chase (8/15/2012); 318/2012 email from Ashley Bacon, 

JPMorgan Chase, to John Hogan, JPMorgan Chase, Peter Weiland, CIO, and others, "Finnwide 

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.)"). 

1034 Subcommittee interview ofIna Drew, CIO (91712012). 

1035 Subcommittee briefing by JPMorgan Chase (8115/2012). 

1036 Subcommittee interview ofIrvin Goldman, CIO (911512012). 

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. 

1038 Subcommittee interview of Jamie Dimon, JPMorgan Chase (911912012). 
373 

218 

"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 RW A ... 

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. MartinArtajo: "[W]e set the book for long risk carry. . .. I hope I did right. 

Let me know your thoughts."t041 

At the end of 20 11, 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 ofthe 

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 V AR 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] $IOm[iIIion] .... 

The unfortunate part is the firm is runnin§ close to its limit 

(CIO is within it[s] limit as it stands).,,104 

1039 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 

10403/29/2012 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-CIO-PSI 0001247. 

1041 1/31/2012 email from Bruno Iksil,CIO,to JavierMartin-Artajo,CIO, "hello, quick update in 

core credit," JPM-CIO-PSI 0001229. 

1042 3/29/2012 email from Bruno IksiI,CIO,toJavierMartin-Artajo, CIO, "First draft of the 

presentation," with attachment entitled "CIO Synthetic Credit Update," at slide entitled "Core 

Credit Book: summary," at 1, JPM-CIO-PSI 00001247 ("the book is huge"). 1043 4/18/2012 email from Keith Stephan, CIO,toAchillesMacris, CIO, and others, "CIO VaR," 

JPM-CIO-PSIOOOI205. 
374 

219 

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 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 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 ofthe 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 20 I 3 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. . .. 

1044 Subcommittee interview of Michael Sullivan, OCC (8/30/2012). 

1045 Subcommittee interview of Patrick Hagan, CIO (21712013). 1046 I

d. 
375 

220 

CIO's implementation ofthe 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. Spreadsheetbased 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 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 IE 

[Investment Bank] VaR of $26 million, average CIO VaR of $17 million, 

and average Total VaR of $36 million" for the third quarter of20 12.1052 

Bank officials told the Subcommittee that the new VaR model had the 

1047 2013 IPMorgan Chase Task Force Report, at 105. 

I048 1d at 125 128 

1049 Id:: at 12S'(expiaining that this error "likely had the effect of muting volatility by a factor of 

two and oflowering the VaR"). 

1050 Subcommittee briefing by OCC (3/4/2013) (Fred Crumlish). 

1051 See IPMorgan Chase & Co. Form IO-Q for period ending 9/30/2012, filed with the SEC 

(11108/2012), at 22, http://files.shareholdeLcom/downloadsiONE/2252595197xOxS 19617-12-

308/19617/filing.pdf. 

1052 Id., at 98. 
376 

221 

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 lPMorgan 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 SCPo 

(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. IOS5 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: 

1053 Subcommittee briefing by JPMorgan Chase (1/28113) (Ncila Radin). 

1054 Subcommittee interview ofC. S. Venkatakrishnan, JPMorgan Chase (10/25/2012). Anew 

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/pkgIFR-20 12-08-30/pdf/20 12-16759. pdf. 

105 Subcommittee brie±lng by JPMorgan Chase (8115/2012). 

1056 5114/2012 "Basel 2.5 Increases The Squeeze On Investtnent Banking Returns." Standard & 
377 

222 

• "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 

At the CIO, CRM was used to measure risk and capital 

requirements related to credit tranche positions and their associated 

hedges.I061 While CRM is a component ofRWA 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 ofthe 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 

Poors publication, https:llwww.standardandpoors.comlratings/articles/enius/?articleType= 

HTML&assetID= 1245334380388. 1057Id. 

1058 See 2/20 II "Revisions to the Basel II Market Risk Framework," Basel Committee on 

Banking Supervision, http://www.bis.org/publ/bcbsI93.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, tolna 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 (21712013). 

1061 Subcommittee interview ofC.S. Venkatakrishnan, JPMorgan Chase (l0/25/2012). 

10621d. 

1063 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 

1064 See 119/2012 email from Keith Enfield, CIO, to Achilles Macris, CIO, and others, "CRM 

Results for Q4," JPM-CIO-PSI 0000085. See also 1/9-10/2012 email exchanges among CIO 

personnel, "CRM results for Q4," JPM-CIO-PSI 0000083-84. 
378 

223 

$1.966 billion. 1065 On January 11, it was $2.344 billion. 1 066 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 R W A. 1 06 The largest single 

reduction he advocated was a change in the model for calculating CRM, 

which is a key component ofRWA. His email stated that changing the 

CRM model could reduce the CIa's overall RWA by as much as $5 

billion. I 069 

Patrick Hagan, the CIa's lead quantitative expert, told the 

Subcommittee that, at the direction ofMr. Martin-Artajo, his supervisor, 

he had begun work on developing a new CRM model for the CIO during 

the summer of 20 11. 1070 He confirmed to the Subcommittee that he 

provided the estimate that the new CRM model he was developing could 

lower the CIa's RWA by $5 billion. 1071 

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 CIa RWA of $40.3 billion, an 

RWA model a "shadow model" in Mr. Weiland's words 1072 -

developed by the CIa 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 CIa model 

prevailed, reduction ofthe portfolio could cost as little as $100 

million. 1074 These projections show that the CIa had a strong incentive 

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 I

d. 

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. 

Venkatakrishuan, JPMorgan Chase, to Bruce Broder, JPMorgan Chase, "Privileged and 

Confidential," JPM-CIO-PSI 0036179-181, at 180-181. 

1068 See 12/22/2011 email fromJavierMartin-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, (0 Bruno Iksil, Patriek 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, a( 033 ("Model reduction QR CRM 

(ackno[w]ledged already) 5 (Pat [Hagan] estimate)."). 

1070 Subcommittee interview of Patrick Hagan, CIO (21712013). 

1071 Id. 

1072 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 

1073 See 1118/2012 email tromBrunolksiltoJulienGrout.CIO. "Meeting materials for Ilam 

meeting," conveying a presentation entitled, "Core Credit Book Highlights," prepared by Mr. 

Iksil, JPM-CIO-PSI 0000098-104. 1074 1d. 
379 

224 

to see its shadow RWA model approved, including its revised method for 

calculating CRM. 

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. 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, re,f?resenting an increase of more 

than 300% in less than seven weeks. lo 

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."lo78 His statement expressed the concern, examined in 

Chapter IIl, that credit derivative prices were not following historical 

norms; that the C10 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 ofthe model used to 

calculate RWA for the Synthetic Credit Portfolio."loso Given the key 

role ofCRM 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 the CRM results for January and 

February.IOSI Mr. Weiland expressed surprise at the huge CRM figure 

and questioned the results: 

1075 See 5/3/2012 email trom Irvin Goldman,CIO, to Douglas Braunstein, JPMorgan Chase, and 

others, "CSW 1 0%." 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,andJavierMartin-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 fromlnaDrew.CIO.toJavierMartin-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," lPMCIO-PSIOOOI219. 

1079 Id. 

1080 2013 JPMorgan Chase Task Force Report, at 39. 

1081 3/2/2012 email fromKevinKrug.JPMorganChase.toPeterWeiland.CIO. and others, "CIO 

CRM Results." JPM-CIO-PSI 0000338. 
380 

225 

"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 

$3.1 bn to $6.3bn. The second is that your group believes that 

the absolute level ofCRM 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 

10823/2/2012 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," JPM-CIO-PSI-0000338. 

1084 Subcommittee interview of Peter Weiland, CIO (8/29/2012). 
381 

226 

$150mm[million] (a decrease) in lO%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. 

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." 108S 

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 wogress until 

we can understand how to improve the number 088 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 ofthe 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 

1085 31712012 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," .TPM-CIO-PSI-0001815. 

1087 3/8/2012 email from Achilles Macris, CIO, to Javier Martin-Artajo, CIO, "CIO CRM 

Results," JPM-CIO-PSI-00018 15. 

\088 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 12/22/201 I email from Javier Martin-Artajo, CIO,toIna Drew, CIO, and others, "RWATranche Book," JPM-CIO-PSI 0000032. 
382 

227 

position before trying to do what we have done with the 

reduction ofRWA 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 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 ofthe new, bankwide CRM risk model. 

"Hoping that the model is somehow valid for extrapolating down to the 

1089 3/8/2012 email from Javier Martin-Artajo, CIO,to Ina Drew, CIO, and others, "CIO CRM 

Results," JPM-CIO-PSI 0000371. 

1090 See, e.g., 12 C.ER. 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). 
383 

228 

0.001 level risks is madness," Mr. Ha&an wrote, "the only conceivable 

excuse for it is institutional inertia."lo 2 

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 ca1culation. 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. 

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 

1092 31712012 email from Patrick Hagan, CIO, to Javier Martin-Artajo, CIO, and others, "New 

CRM numbers," JPM-CIO-PSI 0036342-344. 

1093 See 31712012 emails among QR personnel, "New CRM numbers," JPM-CIO-PSI 0036342-

344. 

1094 Subcommittee interview orc.s. Venkatakrishnan, JPMorgan Chase (10/25/2012). 
384 

229 

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 postdiversification 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 ofMr. Venkatakrishnan, called Mr. Hagan in London and 

warned him about sending the type of email he did: 1096 

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 ... " 

1095 3/21/2012 email from Patrick Hagan CIa, to Irvin Goldman, CIO, and others, "Optimizing 

regulatory capital," JPM-CIO-PSI 00 II 025-026. 

1096 The call was at 10:42 Eastern Daylight Savings Time, because UK daylight savings time 

didn't start until March 25, 201 2. It was 2:42 Greenwich Mean Time, only four hours ahead, in 

London. 
385 

230 

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 CRMlIRC split, he nonetheless 

discussed pursuing the issue with Mr. Hagan: 

Mr. Hagan: "Hi Anil, this is Pat." 

Mr. Bangia: "Hi Pat." 

Mr. Hagan: "Urn, you know that email that I should not 

have sent?" 

Mr. Bangia: "Urn 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." 

Mr. Bangia: "Yeah. Yeah. I think we should also make 

sure we don't oversell this in the sense that the stability of 

1()97 3/2112012 recorded telephone conversation between Anil Bangia. JPMorgan Chase, and 

Patrick Hagan, CIO, JPM-CIO-PSI-A 0000089. 
386 

231 

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 halfthat 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. 

understand -" 

10983/2112012 recorded telephone conversation between Patrick Hagan, CIO, and Anil Bangia, 

JPMorgan Chase, IPM-CIO-PSI-A 0000090. 
387 

232 

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." 

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 annoyin~. Ok, I understand the 

sensitivity. Tell Irv I'm sorry." 099 

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 R W A, but existing 

trades could not be re-categorized. 11ol 

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 RW A projections of our 

1099 3/21/2012 recorded telephone conversation between Peter Weiland, CIO, and Patrick Hagan, 

CIO, JPM-CIO-PSI-A 0000091. 

1100 Subcommittee interview of Patrick Hagan, CIO (21712013). See also, 2/4/2012 email 

exchanges among QR personnel, CIO personnel, and Mr. Hagan, CIO, "Final splitT' 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."). 

101 Subcommittee interview of Patrick Hagan, CIO (21712013). 
388 

233 

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 R W A 

(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 R W A totals, "Confidence in reported RW As is 

ebbing.,,1105 It discussed a wide range of factors contributing to RW A 

variances, mentioning near the end ofthe 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 RW As, which inevitably 

brings complexity and opacity. Pillar 3 individual reports often 

refer to 'model changes,' 'data cleansing,' 'R W A 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 RW A 

results to artificially lower the bank's capital requirements were both 

discussed and pursued by the bank's quantitative experts. 

11024/3/2012 email from Achilles Macris, CIO,to Ina Drew, CIO, no subject line, JPM-CIO-PSI 

0000497-498. 

ll03 4/3/2012 email from John Wilmot, CIO,to Ina Drew, CIO, no subject line, JPM-CIO-PSI 

0000497. 

II04Id. 

1105 3/2012 "Revisiting Risk-Weighted Assets," IMF Working PaperNo. WP112/90, Vanessa Le 

Lesle and Sofiya Avramova, at 4, http://www.imf.org/extemal/pubs/ft/wp/2012/wpI290.pdf. 

1106 Id., at 26. See also January 2013 "Regulatory consistency assessment programme (RCAP) -

Analysis of risk-weighted assets for market risk," Basel Committee on Banking Supervision 

(documenting wide RWA variances across banks and countries); "Banks' Risk Mcasurements 

Rarely Off By Much More Than A Factor Of Tcn," Dealbreaker.com, Matt Levine (1/31/2013), 

http://dealbreaker.com!2 01310 I Ibanks-risk -measurements-rarel y-off-by-much-morc-than-afactor-of-ten!, (discussing evidcnce 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"). 
389 

234 

(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 SprO 1; and second, the 

"Credit Spread Widening 10%" (CSWIO%). 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 CSOI and CSWIO% risk limits for 

the CIO. 1107 

(a) Breaching CSOI Risk Limit 

The Synthetic Credit Portfolio first breached the CSOI risk limit in 

January 2012. 1108 To understand how the CSOI works, it helps to 

understand how positions on a credit index are priced. Most credit 

positions operate somewhat like insurance. I 109 The "short" party makes 

periodic premium payments to the "long" party over a specified period 

oftime 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 shOli party. 

The amount of the premium payments paid by the short party is 

typically expressed in basis points. A basis point is equal to onehundredth 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. 

1107 Subcommittee interviews ofina Drew, CIO (9/7/2012, 12/11 /20 12). 

1108 See 1120/2012 email fromKeithStephan.CIO.toIrvinGoldman.CIO. and others, "Breach 

affirm var," JPM-CIO-PSI 0000141. 

1109 For more information about credit products, see Chapter II. 
390 

235 

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. Ifthe 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, CSO 1 measured the expected profit or loss to 

a portfolio if the credit spread on a credit position widened by I basis 

point over the course of a day.IIIO The CIO used two CSO 1 measures, 

one for their global credit portfolio, and one more specific to their markto-market (MTM) portfolio. According to JPMorgan Chase, "[t]he 

Global CIO MTM CS BPV (CS01) limit was $5,000,000 from midAugust 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." I III This limit meant that if the CIO 

held credit positions in its mark-to-market book and the credit spread 

widened by I basis point, a loss of more than $5 million would trigger a 

discussion as to whether the positions had to be unwound. I I 12 

A presentation later prepared by JPMorgan Chase shows that the 

CIO breached the $5 million MTM CSOI limit in early January and 

quickly incurred more and more risk. II I3 

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 1120/2012 email from Keith Stephan, CIO,toIrvin Goldman, CIO, and others, "Breach of 

firm var," JPM-CIO-PSI 0000141. See also 2013 JPMorgan Chase Task Force Report, at 80 

(HWith 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."). 

1113 51712012 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-

8 11, at 811. Sec also 2013 JPMorgan Chase Task Force Report, at 80 (indicating CSBPV limit 

was first breached on January 6, 2012). 
391 

236 

CIO MTM CSOI Limit Breaches, Sept. 20ll-May 2012 

10;000;000 ------.-

fl0,OOO,OOOj 

\2Q.OOO,OOOj 

(30,!KJO,OOO} 

,~.ooo.ooor 

tso~OOO.O<lOI 

(60.oop;OOO), 

O'o;ooo;ooo! 

-

~";, ~ ..... 

,(b<i ciJ! 

-.;7" .,: 

-. .. --,-------

~ 

---"'" ""-

"' , 

.~ 

_. 

Source: JPMorgan Chase presentation entitled "cro Global Credit CSBPV Limits," 

JPM-CIO-PSI-H 0000811. 

The Synthetic Credit Portfolio first breached the $5 million MTM CSO 1 

limit on January 6, 2012, a breach that continued for months, until the 

limit was replaced in May.u 14 Over the same period oftime, the CIO's 

Global CSOllimit was $12 million. The SCP first breached the CIO 

Global CSOllimit on January 18,2012, breached it again on January 25, 

and stayed in breach until May when that risk limit, too, was 

replaced. Il15 

In response to the January breaches, the CIO traders requested an 

increase in the CSOI risk limits to end the breaches. On January 27, 

2012, CIO trader Bruno Iksil, apparently confused over the level ofthe 

limit, emai1ed Mr. Martin-Artajo with the request: 

"I will need an increase in the CSOI 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 

[$] 1 OM [ill ion ] CSO 1 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 

1114 5/4/2012 email fromIrvinGoldman.CIO.toPeterWeiland.CIO. and others, "Information 

Needed," JPM-CIO-PSI-H 0000627, at 636. 1115 I

d. 

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. 
392 

237 

increase in the mark-to-market (MTM) CSBPV limit, from $5 million to 

$20 million, $25 million or $30 million." 1117 These Global CSO 1 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 CSO 1 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 oflosses 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 CSO 1 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 CSOI 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.,,112o 

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-SPI-00117682, 

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 2113/2012 email from Syed Hassan, CIO,to Keith Stephan, CIO, and others, "CIO Global 

Credit spread BPV limit breach- COB 02109/2012," JPM-CIO-PSI 0001825, 

1121 See, e,g" 2/2012 chart ofCIO limit breaches prepared by Subcommittee using data provided 

by JPMorgan Chase, JPM-CIO-PSI 0001832 (reformatted for clarity), Note: because ofa 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 3/3113 email from JPMorgan Chase outside counsel to the Subcommittee, "Crossing 

the t's," PSI-JPMC-37-000001, 
393 

238 

Excerpt From JPMorgan Chase Chart 

Tracking CIO MTM and Global CSOI Breaches 

January - February 2012 

[Date ;;-i~;~~~__ Limit Type __ -_---___ t Cur;entLimitl Li~itUtili~atio;-

01118/2012 CIO Global Credit CSBPV i 12,000,000 12,476,463.89 

01125/2012 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 i CIO Global Credit CSBPV 

[Date of B~~;~hl_ n Li';;i~--~~ent Limitl Limit Utilization 

01/06/2012 CIO Global Credit CSBPV - 5,000,000 5,767,816.27 

MTM 

01118/2012 • CIO Global Credit CSBPV - 5,000,000 10,501,915.86 

MTM 

01/25/2012 CIO Global Credit CSBPV - 5,000,000 10,974,965.09 

MTM 

i 02/02/20121<::10 Global CreditCSBPV --r 5,000,000 12,096,601.27 

I : MTM I 

102/_09_/2_-o_i~t_CI_0_GI~_ba_~_C;~it CSBPv-1 5,~00,=00_C_0-L-I_8_,6_59---,0--1_9--._3_6_1 Source: Subcommittee chart created from data provided by JPMorgan 

JPM-CIO-PSIOOOI832_ 

Ms. Drew was informed ofthe CIO Global Spread CSBPV limit 

breaches in an email fromMr.GoldmanonFebruary13.2012. 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 CSOI 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 CSOI 

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. 

1122 2113/2012 email fromIrvinGoldman.CIO.tolnaDrew.CIO. "Csbpv limit- please read," 

JPM-CIO-PSI-H 0002936. 

1123Id. 

1124 Id. 
394 

239 

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 

ofthe portfolio in material market moves. Until the new 

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 ofthe risk of the portfolio.,,1125 

At the time ofthis 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 CSOI 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 CSOI 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.,,1I28 The following day, February 17, Mr. Stephan sent the email 

chain regarding the CSOI 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 

1125 2/15/2012 email from Peter Weiland, CIO, to Keith Stephan, CIO, and others, "CIO Global 

Credit spread BPV limit breach - COB 02/0912012," JPM·CIO·PSI 0001824. 

1126 Subcommittee interview of Irvin Goldman, CIO (9/15/2012). 

1127 Id. 

11282/16/2012 email from Keith Stephan, CIO, to Peter Weiland, CIO, and others, "CIO Global 

Credit spread I3PV limit breach- COB 02/09/2012," JPM·CIO·PSI 0001823. 
395 

240 

draft and let me know if you agree Iw the points - think we need to get 

Javier on board wi this before we send out formal limit request." 1 129 

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 cro 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 

By March 30, 2012, the cro had been in breach of the CSOllimit 

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 Bohl, a bank examiner with the OCC, 

emailed cro 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?"I133 

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 CSO 1 will be replaced by something more 

sensible and granular." 1134 

1129 2117/2012 email from Keith Stephan, CIa, to Bruno Iksil, CIa, and others, "CIa Global 

Credit spread BPV limit breach - CaB 02/09/2012," JPM-Cla-PSI 0001823. 

1130 2013 JPMorgan Chase Task Force Report, at 81. 

1131 6/8/2012 email from Elwyn Wong, aCC,to.lairam Kamath, acc, and others, "Weekly 

Capital and RWA Schedule," aCC-SPI-00085027. 

113 4119/2012 email from Jairam Kamath, acc, to Fred Crumlish, acc, and others, "CIa and 

firm VaR excessions CaB 41712," aCC-SPI-00004177. 

1133 4/19/2012 email from James Hohl, acc, to Peter Weiland, CIa, "Info on VaR, CSBPV, and 

stress status and limits," aCC-SPI-00022341. 

11344/19/2012 email from Peter Weiland, CIa, to James Hohl, acc, "Info on VaR, CSBPV, and 
396 

241 

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 CSOI 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 CSOllimit, 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 oftheir major risk limits. J 136 In 

May 2011, the policy was changed to require the reviews to be 

conducted semi-annually. 1 137 Contrary to both policies, however, the 

CIa 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 

of2012, Mr. Weiland was still developing a proposal to review and 

revise the CIa risk limits. J 139 

Ultimately the plan to review the limits in 2012 was overtaken by 

events, and the CSO 1 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 CSBPV 

value had "increased dramatically as IG [Investment Grade credit index] 

positions were added."1I4o 

The Subcommittee was told that Mr. Weiland and others within the 

CIO criticized the CSOI 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 CSOI in use by CIa assumed 

all ofthe positions moved by one basis point. 

stress status and limits," OCC-SPJ-00022340. 

illS Subcommittee interview of Peter Weiland, CIO (8/29/2012). 

1136 2013 JPMorgan Chase Task Force Report, at 101, footnote 112. 

1137 Id. 

IUS Id. 

1139 Id., at 10 l. 

1140 51712012 email fromPeterWeiland.CIO.tolna Drew, CIO, and others, "CSBPV History," 

attached presentation entitled "CIO Global Credit CSBPV Limits," JPM-CIO-PSI-H 0000810-

811, at 811. 

1141 Mr. Weiland considered the non-beta-adjusted CSO 1 version unsophisticated, so he ignored 

it. Subcommittee interview of Elwyn Wong, OCC (8/20/2012); Subcommittee interview of Peter 

Weiland, CIO (8/29/2012). 
397 

242 

This criticism doesn't explain why the CIO didn't use a version of 

the CSO I that took correlations into account. That metric, known as the 

"beta-adjusted" CSOI, was already in use at JPMorgan Chase's 

Investment Bank.1142 In fact, the CIO managed to report a beta-adjusted 

CSO I 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 CSOI 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 CSOI 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 CSWIO% Risk Limit 

The second credit spread risk limit that was breached and then 

disregarded by the CIO was the CSWIO%. Whereas CSOI 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, CSWIO% 

measured the expected daily profit or loss to a portfolio if the credit 

spread widened by 10%.1145 According to Mr. Weiland and Mr. Stephan, 

credit spread widening measures like CSWIO% and CSW50% "better 

reflect[ed] the risk of the portfolio in material market moves.,,1146 Ms. 

Drew told the Subcommittee that she considered the CSWIO% to be an 

"overriding" risk limit of key importance. 1 147 

1142 Subcommittee interview ofreter Weiland, CIO (8/29/2012). 

1143 See 4111/2012 email from Jolm Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"slnthetic credit information," JPM-CIO-PSI 0001701. 

II 4 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 

0000810-8 II, at 81 I. 

1145 2013 JPMorgan Chase Task Force Report, at3, 82. 

11462116/2012 email from Keith Stephan, CIO, to Peter Weiland, CIO, "CIO Global Credit 

sfread BPV limit breach - COB 02/09/2012," JPM-CIO-PS[ 0001826-31. 

I 47 Subcommittee interview onna Drew, CIO (9/7/2012). 
398 

243 

On March 22, 2012, the SCP breached the CIO's mark-to-market 

CSW10% limit. I 148 Ms. Drew expressed immediate concern. I 149 The 

next day, Ms. Drew halted all trading in the SCP, but the SCP remained 

in breach of the CSWI 0% limit for over a month, through April30. lIso 

Unlike the CSOI 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 CSWI 0% limit for 

another month - a breach which was on top of its CSOI 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 CSWI 0% risk metric is also another example of a risk metric 

whose validity was challenged by CIa 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 CIa differed from the Quantitative Research 

team in how it calculated the CSWI 0% metric. And as with VaR and 

CRM, the CIa's CSWI 0% model produced a lower risk profile for the 

SCP than the bank's standard approach. llSI 

On March 30, 2012, eight days into the CIO's CSWI 0% limit 

breach, the head of the QR group, Mr. Venkatakrishnan, emailed Chief 

Risk Officer John Hogan, questioning the divergent results ofthe 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 

I O%CSW is for their book. But I spoke to Ashley and we 

1148 See 5110/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, "Braunstein I 

Cutler call on CIO," OCC-SPI-OOOOOO 18 ("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 oflna Drew, CIO (12111/2012). 

1150 See 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, 

"Information Needed," JPM-CIO-PSI-H 0000627, at 636. See also 2013 JPMorgan Chase Task 

Foree Report, at 82. 

1151 JPMorgan Chase did not have a standard CSWIO% model that it applied bankwide, in the 

same sense as its VaR model. Instead, the QR team had developed a CSWIO% calculation as 

part of another model. Subcommittee interview of C.S. Venkatakrishnan, JPMorgan Chase 

(10/2512012). 
399 

244 

agree that 1 O%CSW has been trending up for CIO, by either 

their model or ourS.,,1152 

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." I 153 

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 CSWI 0% 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 ofthe CSW10% metric wa~ 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 yaxis. 1155 

11523/30/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to Oliver Vigneron, 

JPMorgan Chase, "CIO 1 0% CSW," OCC-SPI-00070715. 

1153 4/2/2012 email from C.S. Venkatakrishnan, JPMorgan Chase, to John Hogan, JPMorgan 

Chase, and others, "CIO DAY I," OCC-SPI-00070715. 

1154 Subcommittee interview of Michael Sullivan, OCC (111712012). 

11555/3/2012 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. 
400 

245 

CIO Mark-to-Market CSWIO% Breaches 

January 2011-April2012 

. (5{)O) .,-----_~.,..".m-n."""n:_-------­

IV Vilflliifitydrift 

;i (,,00) (rtlark~t activity) 

!:i (3Qbl +-------

i200) .+------:----r------.....,,....n;;;.. 

.. .'-;;;;"""' ..... ~ ...... .£--""t._-c:-:f_~:::_------t"I~OdI_":::--t_ CIO activity (l@)·"(London Whale) 

:lW 

~OO 

'M .., H ... ::1 .... S ~ ..-{ 

.. ~ B .... :~. '" '" ~ 

... ~ '" !.! .'" .i!\ .... ~ ,., % ~ .~ ~ ~ 

" ., <-

.... .., ~ ~ ..... '" N N N ..-{ ci ..., . 

~ 1:1 ri ",: :g o. o. ,b 8 '" N N ~ N .'" rr -. -- -- -.. .~ ;;;; ~ ~ .~ '" .$ .. f! !'l. 

-- ~. ...... '" .... '" '" . ,.-j ... ...:.4: 

--~O"'CScW MINt --.IO$QSW.Linilt 

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. 

The pattern of increasing risk is unmistakable beginning in January 

2012, even as the CIO traders and risk managers were citing CSWI0% 

as a more reliable risk indicator than the CSO 1. 

(4) Overlooking Stress Loss Limit Breaches 

On March 29, 2012, one week after the CSWI 0% 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 CIa 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, CIa exceeded its aggregate stress loss limit 

threshold, with the 'oil crisis' stress test resulting in the 

1156 See 5/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, 

"Information Needed," JPM-CIO-PSI-H 0000627, at 636. 
401 

246 

'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 ofthe Synthetic Credit Portfolio grew over time during 

the months preceding March 29. The increase in notional 

value in tum 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.,,11S7 

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 Levelland 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.11S8 But the risk metrics tell a different 

story. The VaR and CSOI alarms sounded in January; the CRM sounded 

in early March; the CSWI 0% sounded three weeks later, and the stress 

loss limits sounded a week after that. An internal bank document listing 

the many breaches ofthe CIO's risk limits is nine pages long.1l59 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 

1157 2013 JPMorgan Chase Task Force Report, at 82-83. 

1158 Sec. 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. 

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

http://www.eq.com/doc/eongressionaltranseripts-4105471. ("CIO had its own limits around 

credit risk and exposure. At one point, in March, some of those limits were triggered."). 

1159 05/04/2012 email from Irvin Goldman, CIO, to Peter Weiland, ClO, and others, "Information 

needed," JPM-CIO-PSI-H 0000627-636. 
402 

247 

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 twentyday 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. I 160 

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 CSWIO% 

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. 116J 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. 

After the CIa's losses became public, OCC examiners reviewing 

JPMorgan Chase's stop-loss 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: 

1160 12/01/2011 JPMorgan Chase spreadsheet "Position Limit and Loss Advisory Summary 

Report," OCC-SPI-00134805; 12/9/2011 JPMorgan Chase spreadsheet "Position Limit and Loss 

Advisory Summary Report," OCC-SPI-00134832. 

1161 "Position Limit and Loss Advisory Summary Report," OCC-SPI-00134902; "Position Limit 

and Loss Advisory Summary Report," OCC-SPI-00024212. 
403 

248 

"I know this should be fairly obvious but we'd like to know 

how MRM [Market Risk Management] defines I-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 

I-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 I day and five day loss advisory. 

Rather, this type ofloss 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 ofloss-limits: "while some LOBs [lines of business] continue to 

show the loss advisories as thresholds, Market Risk Management overall 

favors the Drawdown measure ofP&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 IO-day stop losses. Perhaps if they had reported 

cumulative losses in the 5-day and 20-day lines, management 

would have been apprised ofthe gravity of the situation 

much earlier.,,1164 

Mr. Kamath also observed: "Incidentally, CIO does not have drawdown 

limits.,,1165 In other words, JPMorgan Chase admitted calculating losses 

for the purpose of its stop loss adv isories in a way that minimized the 

losses and therefore the number of notifications to management. By way 

ofjustitying that decision, Ms. Surtani referred instead to a limit that did 

not even exist for the portfolio in question. Mr. Kamath told the 

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] 1163Id. 

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 ofa position. 
404 

249 

Subcommittee that JPMorgan Chase had deliberately structured the stop 

loss algorithm in this way, and that it was not merely an error in 

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. I 167 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. I 168 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 ifthe 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 ofthe 

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. ll72 

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 I through April 30, 2012, CIO risk limits 

and advisories were breached more than 330 times. I 173 A list of those 

breaches also shows that, in the fourth quarter of20 II, the Synthetic 

Credit Portfolio caused the CIO to breach its risk limits only six times; 

in the first quarter of2012, 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 

1166 Subcommittee interview of Jairam Kamath, OCC (8/24/2012). 

11675/4/2012 email from Irvin Goldman, CIO, to Peter Weiland, CIO, and others, "Information 

Needed," JPM-CIO-PSI-II 0000627, at 636. 

1168 "Position Limit and Loss Advisory Summary Report," OCC-SPI-00134902. 

1169 6/2012 FDIC presentation, "JPMC & COMPANY CIO Synthetie Credit Portfolio," 

FDlCPROD-0001783, at 33. 

1170 Id. (Breach of the SCP's stop loss limit "was not escalated as this limit was only 'advisory' 

(e.f

. not a hard limit which would require hedging or cutting of the positions)."). 

117 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," JPM-CIO-PSI-H 0000627-636 (providing a list ofCIO breaches). 
405 

250 

number of risk limit breaches was disregarded by both the bank and its 

regulator. 

(6) Missing Concentration Limits 

Like beta-adjusted CSOl, lPMorgan 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 

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. lPMorgan 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, ifused 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 10urnal 

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, 

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 [d. 

11 JJ Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

1178 '''London Whale' Rattles Debt Market," WaH Street Journal, Gregory Zuckerman and Katy 

Burne (4/6/2012). 
406 

251 

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. I ISO 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."llsl 

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 si¥nificant adverse movements in the price of the 

instruments. I IS 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 

1l79 1d. 

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 411 1/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

;'f~nthetic credit information," JPM-CIO-PSI 0001701. 

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). 
407 

252 

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 ofthat 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. 

D. Responding to the Risk Limit Failures 

In the aftermath ofthe 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 ofCIO 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 ofthe 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. 

ll84 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-CJO-PSI 0001753. 
408 

253 

Processes were inadequate for the nature ofthe 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. 1l88 

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 of260 limits," including "67 

redesigned VaR, stress and non-statistical limits," and new asset class, 

single name, and country concentration limits. ]]90 In addition, "29 new 

limits specific to the Synthetic Credit Book have been implemented to 

create consistency with JPMC's IB [Investment Bank] approach."] 191 

All of these new SCP limits focused on the risks inherent in 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. ll92 

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. 

1186 1116/2012 OCC Supervisory Letter to JPMorgan Chase, "Examination ofVaR Model Risk 

Management," PSI-OCC-17-0000IS [Sealed Exhibit]. 

1187 See 8114/2012 OCC Supervisory Letter, JPM-2012-37, PSI-OCC-17-000001 [Sealed 

Exhibit]; 8/31/2012 OCC Supervisory Letter, JPM-2012-40, PSI-OCC-17-00000S [Sealed 

Exhibit]; 11/6/2012 OCC Supervisory Letter, JPM-2012-S2, PSI-OCC-I 7-00001 5 [Sealed 

Exhibit]; 1lI6/2012 OCC Supervisory Letter, JPM-2012-S3, PSI-OCC-17-000019 [Sealed 

Exhibit]; 11/27/2012 OCC Supervisory Letter, JPM-2012-S9, PSI-OCC-17-00002S [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," PSI-OCC-17-000029. 

1189 See 6/2012 FDIC presentation, "JPMC & COMPANY CIO Synthetic Credit Portfolio," at 

34, FDICPROD-0001783. 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 Sec 6/2012 FDIC presentation, "JPMC & COMPANY CIO Synthetic Credit Portfolio," at 

34, FDICPROD-000I783. 

1192 Id., at 26. 
409 

254 

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, co-COO 

and Deputy CROIHead 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. 

E. Analysis 

Despite lPMorgan 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 

1193 2013 JPMorgan Chase Task Force Report, at 115. 

1194 Id., at 116. 

1195 Id., at li3. 

1196 Id., at 116, li8-119. 
410 

255 

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 modem 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. acc 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 proofthat 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. 
411 

256 

VI. AVOIDING AND CONDUCTING OCC OVERSIGHT 

Prior to media reports of the whale trades in April 2012, IPMorgan 

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 IPMorgan 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 ofthe 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 of2011, 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 miliion 

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 ofthe 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 
412 

257 

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 ofCIO 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 

oflater evidence indicating that CIO personnel had acted in bad faith 

and deliberately understated the SCP losses. 
413 

258 

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 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 ofthe 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. 1 

197 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 

ChiefInvestment Office (CIO) sits within the national bank, however, 

the OCC is the regulator with primary responsibility for supervising the 

CIO's activities. 1 198 

1197 See "About the aee," aee website, http://www.occ.gov/about/what-we-do/missionlindexabout.htmL 

1198 Subcommittee interview of Scott Waterhouse, aee (9/17/2012); see also Subcommittee 

interview of Julie Williams, aee (9/13/2012). 
414 

259 

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 gersonnel to 

JPMorgan Chase; all are physically located at the bank. 200 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 

oflaw 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-in-Charge, and includes on-site examination staff, risk 

analysis division staff, and economic experts. 1202 During the period in 

question, the OCC Examiner-in-Charge at JPMorgan Chase was Scott 

Waterhouse. The most senior member ofthe 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 

1199 Subcommittee briefing by OCC (7/30/2012). 

1200 See 7/3012012 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 Wan 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-06-00000 11. 

1202 Testimony of Thomas J. Curry, Comptroller of the Currency, "Implementing Wan 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. 

1203 See 2012 OCC Organizational Chart, JPMC Resident Staff, OCC-00004227. 
415 

260 

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 staffto conduct examinations ofthe 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 ofOCC 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 

ofthe 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 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 

concluded, in particular, that the so-called "whale trades" had been 

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-13-00004S-046 [Scaled 

Exhibit]. 

1206 See John G. Walsh, Office of the Comptroller of the Currency, 

httf:llwww.occ.gov/aboutlwho-we-are/comptroller-of-the-currencylbio-john-walsh.html. 

120 See Thomas J. Curry, Office of the Comptroller of the Currency, http://occ.gov/aboutlwhowe-are/comptroller-of-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/2012-04-0S/jpmorgan-trader-iksil-s-heft-is-said-to-distortcredit-indexes.html. 

1209 Testimony of Thomas J. Curry, Comptroller of the Currency, "Implementing Wall Street 

Refonn: 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 Sec "About the OCC;· OCC website, http://www.occ.gov/about/what-we-do/missionlindexabout.html. 
416 

261 

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 ofthe 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 ofthe SCP as a CIO portfolio was when it was mentioned in a 

routine bankwide Value-at-Risk (VaR) report on January 27, 2012. 1216 

1212 Subcommittee interviews of Scott Waterhouse, OCC (9117/2012), 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 

IPMorgan Chase, described below. 

1213 10/26/2012 Confidential Supervisory Report, OCC at PSI-OCC-13-000014 [Sealed Exhibit]. 

1214 Testimony of Thomas I. Curry, Comptroller of the Currency, "Implementing Wall Street 

Refonn: 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 12/3112010 OCC Report of Exarnination, 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]. 
417 

262 

That report identified the SCP for the first time as a distinct portfolio 

accounting for over 90% of the CIO's VaR. I217 The lack of bank 

disclosures essentially made it more difficult for OCC to effectively 

oversee this high risk portfolio in its early years. 

(1) 2006-2009: Minimizing acc 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 ofthe 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 

1211 Id.; Subcommittee interview of Doug McLaughlin and Michael Sullivan, OCC (8/30/2012) 

(Mr. McLaughlin). 

1218 See 7117/2006 New Business Initiative Approval Chief Investment Omce, JPM-CIO-PSI-H 

0001142; see also ChiefInvestment Omce New Business Initiative Approval Executive 

Summary, IPM-CIO-PSI-H 0001354. 

1219 Subcommittee briefing by thc OCC (11129/2012) (Fred Crumlish). See also, e.g., 5/16/2012 

email from Fred Crumlish, OCC, to Elwyn Wong, OCC, "here is redline and new final," OCC00003507 at 508 (describing the OCC's general awareness ofa "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 (11129/2012) (Scott Waterhousc). 

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, IPMorgan 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 IPMorgan Chase (Greg Baer) (8115/2012). 

1224 Subcommittee briefing by IPMorgan Chase (8/15/2012). 
418 

263 

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 g0rtfolio, a broader investment 

portfolio which included the SCP.l 26 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.l227 In addition, the CIO 

and OCC told the Subcommittee that a few years earlier, the TAA 

portfolio had been called the "Discretionary Trading" portfolio.l228 

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 ofthat 

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. 

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-SPI-00135422, 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 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. 

1228 See Subcommittee interviews ofJaymin Berg, OCC (8/3112012) and Ina Drew, CIO 

(9/7/2012); but see 1/2011 Executive Management Report, OCC-SPl-00000250 (still reporting 

the T AA portfolio as "Discretionary" even after the name had changed.). 

1229 Subcommittee interview oflna Drew, CIO (91712012). 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 7116/2011 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 7'", 2011," JPM-CIO-PSI-H-BEP 0006896-897. 

1233 11118111 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 lOth, 2011," JPM-CIO-PSI-H-BEP 0006898-899. 
419 

264 

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 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 Synthetic Credit Portfolio until media reports 

on April 6, 2012 described the book's outsized credit derivative 

holdings. 1237 

(2) 2010: Resisting oee Examination Results 

In 2010, as part of its routine examination process, the OCC 

conducted a detailed review of the ero'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 

1234 Subcommittee interview of Fred Crumlish OCC (8/28/2012); testimony of Thomas 1. 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 ofthe Comptroller ofthe Currency, "Comment Letter on 

the Notice of Proposed Rulemaking Implementing Section 619 of the Dodd-Frank Wan Street 

Reform and Consumer Protection Act," at 56-57, http://www.sec.gov/comments/s7-41-

Il/s74111-267.pdf. 

1236 For more information On the bank's description of the SCP as a hedge, see Chapter III. 

1237 Subcommittee interview of Doug McLaughlin and Michael Sullivan, OCC (8/30/2012). 

1238 See 12/812010 Supervisory Letter JPM-201O-80, OCC-SPI-OOOlI201 [Sealed Exhibit]. 1239 Id. 
420 

265 

Board of Directors committee. 124o The Supervisory Letter made no 

explicit mention of the Synthetic Credit Portfolio, but because the SCP 

was part of the T AA 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 

Moreover, according to the Examiner-In-Charge's email.Ms. Drew 

informed the OCC "that investment decisions are made with the full 

understanding of executive management including Jamie Dimon. She 

said that everyone knows what is ~oing on and there is little need for 

more limits, controls, or reports.,,1 44 

The OCC's head capital markets examiner told the Subcommittee 

that he was "surprised" at the time by her reaction, because that level of 

"push back" 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 

124°ld. 

1241 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 

1242 5111/2012 email from Scott Waterhouse, OCC, to Mike Brosnan, OCC, and Sally Belshaw, 

OCC, "lP. 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). 

1244 5/l 112012 email from Scott Waterhouse, OCC, to Mike Brosnan, OCC, and Sally Belshaw, 

OCC, "J.P. Morgan Chase," OCC-0000I746; 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 (9/612012). 

1245 Subcommittee interview ofFred Crumlish, OCC (8/28/2012). 

1246 Subcommittee interview of Scott Waterhouse, OCC (9/l7/2012). 

1247 Subcommittee interview oflna Drew, CIO (9/7/2012). 
421 

266 

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 ofthe 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 ofthe 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 of2012. 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 staffthat she 

believed the MRA had been closed out,1254 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 ofa CIO examination in the fall of2012, 

an examination that was overcome by events, it still viewed its 

mishandling of the 2010 MRA as a "fail from OCC."1255 

When asked ifthe 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 

1248 11712011 letter from Ina Drew. CIO, to Scott Waterhouse, OCC, OCC-SPI-00011198 at 199. 

1249 Subcommittee interview ofIna Drew, CIO (917/2012). 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 (8115/2012) (Greg Bacr, 

Chetan Bhargiri). 

1250 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 

1251 Subcommittee interview of Scott Waterhouse, OCC (9117/2012). 

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 ofIna Drew, CIO (91712012). 

1255 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 

1256 Subcommittee interview of Scott Waterhouse, OCC (911712012). 1257 Id. 
422 

267 

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 According to the OCC, 

when it requested resumption ofthe 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. 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. 

1258 Subcommittee interview of laymin Berg, oee (8/31/2012). The examination was regarding 

the Firm Wide Stress Initiative, which concluded with an oee Supervisory Letter. See 3/9/2012 

oee Supervisory Letter lPM-2012-09 to lPMorgan Chase, "Examination of FSI Stress Testing 

Framework" [Sealed Exhibit]. 

1259 Subeommittee interview of laymin Berg, oee (8/31/2012). 1260 Id. 

1261 Id 

1262Id: 

1263 See 3/9/2012 oee Supervisory Letter lPM-2012-09 to lPMorgan Chase, "Examination of 

FSI Stress Testing Framework" [Sealed Exhibit]; Subcommittee interview of laymin Berg, oee 

(8/31/2012). 

1264 Subcommittee interview of Scott Waterhouse, oee (9/17/2012). 1265 Id. 
423 

268 

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 The bank estimated that the OCC was without the 

reports for about two weeks altogether. 

(3) 2011: Missing SCP Red Flags 

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 20 II, the SCP expanded tenfold in size, from about $4 billion in 

notional gositions at the beginning of the year to $51 billion at the end of 

the year. 268 As explained earlier, it acquired a complex mix oflong 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 of2011, 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. l272 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, 

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 abnonnal 

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 infonnation, 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 ofCIO limit 

exceptions Jan. - June 2011), PSI-OCC-13-000067 [Sealed Exhibit]. 

1271 See 10126/2012 OCC Confidential Supervisory Report, Appendix 4 (summary of CIO limit 

exceptions Jan. - June 20 II) at PSI-OCC-13-000067 [Sealed Exhibit]. 

1272 Id. 

1273 Id. 
424 

269 

2011, the eIO continued to breach the limit for seven weeks in a row, 

peaking at 50% over the limit. 1274 

The CIO's stress limit breaches were dramatic and sustained 

during the first half of2011, yet when the oee inquired into the reason 

for the breaches, the bank "failed to offer any details about the source," 

and the oee did not pursue additional information. 1275 In hindsight, the 

oee 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 oee missed a 

key opportunity to examine and perhaps curb the excesses of the sep 

prior to its incurring losses in 2012. The oee also told the 

Subcommittee that the multiple breaches of the 2011 stress limit 

provided evidence that the sep 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 sep 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 eIO in late 

November. 1278 One ofthe eIO 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 Despite the enormous size of those 

transactions and the hundreds of millions of dollars they generated, the 

bank did not alert the oee to the trading activity and the oee did not 

inquire into the source of the gain. 

Tn hindsight, the oee characterized the trading profits as 

"outsized,,1280 and due to an "idiosyncratic" trade that the eIO 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 

1274 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012); 

10/26/2012 OCC Confidential Supervisory Report, Appendix 4 (summary ofClO limit 

exceptions Jan. -June 2011), PSI-OCC-13-000067 [Scaled Exhibit]. 

127ISee 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-13-000042 [Sealed 

Exhibit]. 

1276 Suhcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/3012012) 

(Doug McLaughlin). 

1277 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/30/2012). 

1278 See 415/2012 email from Ina Drew, ClO, 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-ClO 

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 II 

at PSI-OCC-13-000113 [Sealed Exhibit]. 

1280 5/3112012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, "QA," OCC-SPI00026410. 

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 
425 

270 

the bank admitted that the "CDX[.]HY positions were set up to take 

advantage of [a] key bankruptcy credit related event[],,,1282 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. 

C. 2012: Dodging OCC Oversight While SCP 

Losses Mount 

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 ofthe year, the CIO tripled the 

size ofthe SCP, buying tens of billions of dollars of a high-risk mix 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 operatin~ outside of 

control limits in 2011 to operating out of control in 2012." 283 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 rsrior quarter and get an update on the CIO's plans for the 

new quarter.! 84 One ofthe 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 markto-market basis and consisted mostly ofthe SCP.!286 He said that the 

CIO's "MTM" book was "decreasing in size in 2012. It's expected that 

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, OCCSPI-0003247, at 248. 

1283 10/26/2012 OCC Confidential Supervisory Report, PSI-OCC-13-000020 [Sealed Exhibit]. 

1284 See l/24/3012 email from James Hohl, OCC, to Jaymin Berg, OCC, "CIO meeting," OCC00004746; Subcommittee interview of Jaymin Berg, OCC (8/3l/2012). 

1285 See 1/3l/2012 email from Jaymin Berg, OCC, to Fred Crumlish, OCC, "CIO Quarterly 

Meeting," OCC-SPI-00004695. 

1286 Subcommittee interview of John Wilmot, CIO (9/1 I12012) (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) .. 
426 

271 

RW A [Risk Weighted Assets] will decrease from $70B [billion] to 

$40B.,,1287 

The OCC told the Subcommittee that, as a result ofthis meeting, it 

understood that the MTM book would be "de minimus" within a year or 

twO. 1288 Another OCC examiner who 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 RW A 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."J290 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 20 II that they were 

going to 'take the book down, reduce the risk.' That meant getting 

1287 See 1/3112012 email from Jaymin Berg, OCC, to Fred Crumlish. OCC, "CIO Quarterly 

Meeting," OCC-SPI-00004695. 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 Chiefinvestment 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 of2011. 

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 (8/3112012). During the meeting, the bank 

did not disclose, as it should have, just how cnorroous 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 HYlO and 11 credit indices; and a $90 billion notional 

position in the Main ITraxx S9 index. See 1118/2012 email from Bruno Iksil, CIO to Julien 

Grout, CIO, "Meeting materials for II am 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 tbe CIO's RW A by just $10 billion would 

cost $516 million. 114/2012 email from Julien Grout, CIO, to Ina Drew, John Wilmot, and Javier 

Martin-Artajo, CIO, "R W A reduction for Core Credit- scenario analysis summary," JPM-CIOPSI 0001259, at 260. The notes ofthe quarterly meeting do not contain any reference to that 

ex~ense. 

128 Subcommittee interview of James Hoh!, OCC (9/6/2012). 

129" Subcommittee interview of Jaymin Berg, OCC (8/31/2012). 

1291 4113/2012 email from Jamie Dimon, JPMorgan Chase, to John Hogan, JPMorgan Chase, 

"CIO," JPM-CIO-PSI 0001753. 
427 

272 

R W A 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 ofRWA, 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 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, lPMorgan Chase should 

have told the OCC about its plans at the time. 

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. 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 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 losses for the book would have 

"moved around.,,1298 It was the first of many SCP losses that the bank 

did not disclose to the OCC, but should have. 

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 

1292 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 

1293 Subcommittee interview of John Wilmot, CIO (9/1112012). 

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 

(8/3112012). 

1296 1126/2012 email from Bruno Iksil, CIO, to Julien Grout, CIO, "credit book last version," 

conveying "Core Credit Book Highlights," (112012), prepared by Mr. Iksil, JPM-CIO-PSI0000159. 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). 

1298 Subcommittee interview of John Wilmot, CIO (9/1112012). 
428 

273 

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. 

(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 ofCIO 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-to-date information 

about the CIO's trading activities, including with respect to the SCPo 

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.1 301 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 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). 

llOO Id. 

1301Id. 

13024119/2012 email from John Wilmot, cro, to James Hoh], OCC, "CIO EMR?," OCC00004723. 

130J 4/19/2012 email from James Hohl, OCC, to Geralynn Batista, OCC, "CIO portfolio," OCCSPI-00021700. The bank (old the Subcommittee that i( provided the new cro EMR to the FDIC 

and Federal Reserve, and it was simply an oversight that it was not also sent to the OCC. 

llO' 4113/2012 email from Thomas Fursa, OCC, to James Hohl, OCC, "cro Deck," OCC00004720. 

llOS Subcommittee interview of Fred Crumlish, OCC (8/28/2012). 
429 

274 

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 ofthe cro investment portfolios. But in 2012, 

the OCC told the Subcommittee that the CIO VCG reports for February 

and March failed to arrive. I306 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. 13 0

7 On April 13,2012, after the London 

whale trades appeared in the press, the OCC requested copies ofthe 

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 ofthe 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. 13lo 

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 

1306 4/13/2012 email from John BeHando, JPMorgan Chase, to James I-Iohl, acc, "CIa January 

2012 valuation memo and metri[c]s," aCC-00004735; Subcommittee interview of James Hohl, 

acc (9/5/2012). 

1307 For more infonnation about the mismarking that took place during these months, see Chapter 

4. 

<308 4/13/2012 email from John BeHando, JPMorgan Chase, to James Hohl, acc, "CIa January 

2012 valuation memo and metri[cls," aCC-00004735. 

1309 Subeommittee interview of James Hohl, acc (9/5/2012); 511712012 email from George 

Banks, acc, to Fred Crumlish, acc, "cia Valuation Summary Memo - March 2012 Months 

End Results REVISED," aCC-SPI-00021894-895 ("Just received a revised CIa March 2012 

Valuation Summary .... Appears that they are revising 1Q12 results?"). 

1310 Subcommittee interview of Scott Waterhouse, acc (9/17/2013). 
430 

275 

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-Ievel profit 

and loss data to monitor SCP performance going forward. 1312 At the 

time, the OCC head capital markets examiner told his colleagues, "[the] 

Bank will likely object to this.,,1313 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. 

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. 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. 13 IS 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.13J6 

Late, missing, and misleading CIO information in the EMR, YCO, 

and P&L reports sent to the OCC meant that the OCC was supervising 

1311 5/4/2012 email ti-om Scott Waterhouse, acc, (0 Fred Crumlish, acc, cIa Synthetic 

Position, aCC-SPI-00021853 ("Doug Braunstein and John Hogan called to provide an update on 

the CIa 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 acc spreadsheet, aCC-SPI-00000298, printed in a chart prepared by the 

Subcommittee in Chapter IV. 

1312 See 5/16/2012 email from Elwyn Wong, acc, to Scott Waterhouse, acc and others, 

"CSOl," aCC-SPI-00023929; 5114/2012 email [Tom James Hohl, acc, to John Wilmot, CIa, 

"cIa P&L Reporting," aCC-00004759 (stating that an acc request for SCP P&L for prior five 

weeks was made on May 7, 2012 and repeated on May 14,2012); 5117/2012 email from James 

Hohl, acc, to Frcd Crumlish, acc, "Not Getting CIa Daily P&L after only one day," acc00004540 (Mf. Hohl: "I got one cra daily P&L distribution and then didn't yesterday. I 

in~uired about it this morning, but haven't heard back."). 

131 5/7/2012 email from Fred Crumlish, acc, to Scott Waterhouse and others, acc, "cra 

information for Wednesday," aCC-SPI-00013737, ("[W]e haven't historically gotten P&L from 

them [Cra] as we do the IB [Investment Bank] .... Howcvcr, I askcd Jamcs [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, acc (8/24/2012). 

1315 See Subcommittee interview of Scott Waterhouse, acc (9117/2012). For more information 

about this mismarking, see Chapter IV. 

1316 Subcommittee interview of Michael Sullivan and Doug McLaughlin, acc (8/30/2012). 
431 

276 

the CIO using incomplete and inaccurate information. 1317 The lack of 

accurate data also impeded effective OCC oversight ofthe 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 ofthe CIO, information requirements which 

Ina Drew railed against as unnecessary and intrusive. 

(3) Failing to Investigate Risk Limit Breaches 

During the first quarter of2012, while lPMorgan 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 

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 ofthe 

ongoing breaches. 

In its October 2012 internal report summarizing oversight failures 

and lessons learned from the lPMorgan 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. lJl8 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 em ails 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 of2012: VaR, CSOl, CSWI0%, 

stress loss, and the stop loss advisories. 1321 

1317 Sec 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 Senale Banking Committee," OCCSPI-00074914, at II. 

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., 4113/2012 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); 415/2012 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 PSJ-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 V AR Reports -

Regulators (COB 4/3/2012)," at OCC-SPI-00132363 (see tab: CIO_Global_Credit, listing VaR 
432 

277 

The bank began reporting the eIO breaches in January and 

continued to report multiple breaches for months. While the oee 

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 oee made use ofthe risk limit reports in its routine 

regulatory oversight efforts. For example, the Subcommittee found no 

evidence that oee examiners analyzed the data to identifY the most 

serious breaches or attempted to investigate why the breaches were 

occurring. Had the oee reviewed it, the data would have disclosed 

over 330 risk limit breaches from January to April 2012, including a 

jump from the fourth quarter of2011 to the first quarter of2012 of6 to 

170 risk limit breaches. 1322 Given that the oee did not appear to notice 

when other regular eIO reports stopped arriving until press articles on 

April 6 drew attention to the eIO, as detailed above, it is possible that 

the oee examiners were not even reviewing the regular MaRRS and 

MRM reports during the first quarter of20l2. 

The oee also failed to inquire into the CIO's implementation in 

January 2012, ofa new VaR model that, overnight, lowered the eIO's 

VaR by 50%. The bank's regular MRM report emails, which oee 

received contemporaneously, provided the oee with timely notice of 

three significant facts: that the eIO had breached the bankwide VaR 

limit for four days running in January; that the eIO was poised to 

implement a new VaR model on January 27; and that the new model 

would significantly reduce the CIO's VaR results. 1323 The 

Subcommittee found no evidence, however, that the oee 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 oee notes, the 

bank held a meeting with the oee and mentioned the January eIO VaR 

model change, but the oee's notes contain no reference to the earlier 

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 morc 

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, "Infonnation 

Needed," JPM-CIO-PSI-H 0000627-636. 

1323 See 10/26/2012 OCC Confidential Supervisory Report, at PSI-OCC-I3-000042 [Sealed 

Exhibit J ("The change in the VaR model and its large reduction in measured risk was noted in 

reports received by the OCC."); 5/2112012 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 I127112. Note the 

reduction ofCIO VaR by 44% to $57mm."), citing to MRM Reporting emails from JPMorgan 

Chase, e.g., 1125/2012 email from MRM Reporting, JPMorgan Chase, to Peter Weiland, CIO, 

and others, "ACTION NEEDED: CIO Intemational-One-OffLimits Approval," JPM-CIO-PSI 

0000157. 
433 

278 

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 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. 

Timely information on when a bank's risk limits are breached 

provides a valuable, cost-effective 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 SCPo The OCC appears not to have 

reviewed this data, because it viewed the CIO as low risk. 1327 While 

OCC has internally concluded that the bank's risk reports were "poor 

and non-transparent,,,1328 it needs to rectify its own approach to be more 

responsive to red flags where they do exist. 

(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 

1324 See 311/2012 Memo from Jaymin Berg, OCC, to OCC File, "Market Risk Reporting," OCCSPI-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 27'h,,); 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 (9117/2012). 

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."). 

1318Id. 
434 

279 

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 

1329 See, e.g., 4117/2012 email from Fred Crumlish, OCC, to Mike Brosnan, OCC, and others, 

"JPMlCIO I IG9 'whale trade,'" OCC-00012S21 ("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 COSs; going long IG9 credit risk (selling COSs) would neutralize some of the short 

high yield credit risk position (long COSs)."); 5/11/2012 email from Elwyn Wong, OCC, to 

Scott Waterhouse, OCC, "COX IG Series 18 vs. COX HY vs. COX IG 9," OCC SPI 00081266 

("Based on my understanding, CIO was trying to pare dO"TI 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 HYprotection and short IG protection as a proxy."); 5116/2012 email 

from Fred Crumlish, OCC, to Elwyn Wong, OCC, "here is red line and new final," OCC00003507, at 508 (attaching talking points, signed off by Mike Brosnan, head ofOCC 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 oflong 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 high-yield short positions .... "); 1126/2012 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 MartinArtajo, CIO (partial readoU! 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); 3116/2012 email from Bruno Iksil, CIO, to Javier Martin-Artajo and Julien 

Grout, CIO, "strategy for core," JPM-CIO-PSI-H 0006017 ("IG trades will improve the 

carry[.]"). 
435 

280 

The OCC told the Subcommittee that its examination team was not 

aware that the CIO was purchasing 10 longs, in part, to produce carry 

that could be used to ~urchase additional high yield shorts and offset 

SCP reported losses.! 32 The OCC told the Subcommittee that its 

examiners had believed the bank's assertion that the 10 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 10 longs was 

to offset the risks ofthe 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 10 trades initially 

appear to have been designed to hed§e market risks arising in connection 

with and related to the HY trades.,,13 5 When questioned by the 

Subcommittee, she was not aware ofthe CIO's other motives for 

purchasing the 10 longs and was surprised by evidence that CIO traders 

purchased the 10 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 10 longs 

as a financing mechanism for other positions would not qualify as the 

type of "risk mitigating" hedge envisioned by the Volcker Rule. 1338 

1332 Subcommittee interview of Mike Sullivan, acc (J 1/7/2012). 

1333 Subcommittee interview of Scott Waterhouse, acc (9/17/2012). 

1334 Subcommittee interview of Julie Williams, acc (9/l7/2012). 1335 6/29/2012 email and attached undated memorandum from Julie Williams, acc, to Thomas 

Curry, acc, "JPMC Trades and the Voleker Rule Proposal," aCC-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 acc. Subcommittee interview of 

Julie Williams, acc (9/l7/20l2). She said that the memorandum was prepared at the request of 

Comptroller Curry, but was not finalized because of other ongoing acc reviews. Id. 

1336 Subcommittee interview of Julie Williams, acc (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 of2010, P.L. 111-203 

1338 Subcommittee interview of Julie Williams, acc (9/l3/2012). The Voleker 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. 
436 

281 

D. 2012: Resisting OCC Oversight Even After Whale 

Trades Became Public 

On Apri16, 2012, the first major stories about JPMorgan Chase's 

whale trades appeared in the media. 1339 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 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 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. 

(1) Providing OCC with Limited or Incorrect 

Information 

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 

1339 See "JPMorgan Trader's Positions Said to Distort Credit Indexes," Bloomberg (4/6/2012), 

http://www.bloomberg.comlnews/20l2-04-05/jpmorgan-trader-iksil-s-heft-is-said-to-distortcrcdit-indexes.html; "London Whale Rattles Debt Market," Wall Street Journal, Gregory 

Zuckerman and Katy Burne, (4/6/2012). 

1340 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012). 

1341 See, e.g., 411012012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, "JPM CIO 

trades --- JPMorgan's Iksil May Spur Regulators to Dissect Trading -l3loomberg News4/9/12," OCC-00001827 ("As you know we had a call with the Chieflnvestment 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."). 
437 

282 

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 On its face, however, calling the SCP 

book a "dedicated 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 N early 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 

1342 See 4/10/2012 email from Joe Sabatini, JPMorgan Chase, to Anna lacucci, Fedcral Reserve, 

and others, "Background and Supp0l1ing Data for CIO Discussion of April 9, 2012," OCC·SPI· 

00004312. 

1343 5118/2012 email from Michael Kirk, OCC, to Elwyn Wong, OCC, "CIO Call With Mike 

Brosnan," OCC·SPI·00021628 at 630 (quoting 05/17/2012 email from Fred Crumlish stating: "I 

told Mikc B [Brosnan] that the Joe Sabatini cmails with selected position infonnation 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 intcrview of Fred Crumlish, OCC (8/29/2012). 1345 4110/2012 email from Joe Sabatini, JPMorgan Chase, to Anna Iacucci, Fcderal Reserve, and 

others, "Background and Supporting Data for CIO Discussion of April 9, 2012," OCC·SPI· 

00004312. Sce also 4110/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, 

"JPM CIO Trades-JPMorgan's Iksil May Spur Regulators to Dissect Trading - Bloomberg 

News· 4/91l2," OCC·00004087 ("As you know we had a call with Chief Investment Officer Ina 

Drew and others in JPM ycsterday .... JPMC's credit stress hedge is again where they want 

it. ... W c 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 

somctime today. "). 

1346 See 4110/2012 email from Joe Sabatini, .lPMorgan Chase, to Anna Iacucci, Federal Rcserve, 

and others, "Background and Supporting Data for CIO Discussion of April 9, 2012." OCC·SPI00004312 (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 thc overall net 

fosition remained long.). 347 4116/2012 cmail 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-SPI-000238 I 5 ("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: 4116/2012 email 

from Joseph Sabatini, .lPMorgan Chase, to Anna lacucci. 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, acc (8/22/2012); 4110/2012 email 

exchange among Michael Kirk, acc, Fred Crumlish, OCC, and others, "CIO info on elephant 

trade," aCC-00004730 (Mf. Crumlish: "In my response on .lPM email .... I also said it would be 

useful if they provided analyiics or a summary that recapped the hedge strategy, such as the 
438 

283 

not provide the requested data.I35O 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 April13, 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 

though it did not describe the particular credit exposures being offset or 

the risks or vulnerabilities involved in the whale trades themselves. 1354 

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. 

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. 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 was unable to 

expected impact of the hedge on the projected stress loss identified. I asked for this on the call as 

well.·'); 4110/2012 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 

nartieular strategy."). 

350 Subcommittee interviews of Michael Kirk, OCC (8/22/2012) and Scott Waterhouse, OCC 

(911712012) (describing how OCC made multiple requests for documentation about what the 

SCP was hedging but never received the requested infonnation). 

1351 Subcommittee interview of Scott Waterhouse, OCC (9117/2012). For morc infonnation 

about the bank's representation of the SCP as a hedge, see Chapter Ill. 

1352 Sec 4113/2012 "Edited Transcript JPM - Q 1 JPMorgan Chase & Co. Earnings Conference 

Call," at 7, JPM-CIO-PSI 0001151. 

13534116/2012 email from Joseph Sabatini, JPMorgan Chase, to Anna lacucci, Federal Reserve, 

"materials for Fed/OCC/FDlC call at noon today," OCC-SPI-00009712, at 714. 

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). 
439 

284 

explain why it did not, at that point, confront the bank with its analysis 

that the SCP was not, in fact, a hedge. 

The OCC also told the Subcommittee that it later determined that 

the CIO's April 16 presentation contained "material 

misrepresentations,,,1357 including a misre~resentation that the 2012 first 

quarter SCP losses totaled $580 million,13 8 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. 136o 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 Eresentation as providing 

additional information "in good faith."l 62 

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 20 12, 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 ofthe bank's primary risk 

limits: 

"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 CSOI 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. 

1357 Subcommittee interview of Michael Kirk, OCC (9/22/2012). 

13" 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. 

t359 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). 
440 

285 

CIO aggregate stress is over 23% of its $15B [billion] limit. 

Also MtM [mark-to-market] 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 10sses.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 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. 

Lastly, in response to the CSBPV breach of 1074% over 71 days, 

Mr. Weiland told the OCC: "We are working on a new set oflimits for 

synthetic credit and the current CSO 1 will be replaced by something 

more sensible and granular.,,1J67 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 but acknowledged that, at the time, the OCC reacted by 

tolerating that and the other ongoing breaches, accepting the bank's 

13634119/2012 email from James Hohl, OCC, to Peter Weiland, CIO, "Info on VaR, CSilPV, and 

stress status and limits," OCC-SPI-00022340. 

1364 Mr. Weiland explained that the increase in firm VaR "was not due to any new trades, but 

rather to market data." 4/l9/2012 email from Peter Weiland, CIO, to James Hohl, OCC, "Info 

on VaR, CSilPV, and stress status and limits," OCC-SPI-00022340. 1365Id. 

1366 Subcommittee interview of James Hohl, OCC (9/6/2012). 

\367 4/l9/2012 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). 

\368 Subcommittee interview of Jairam Kamath, OCC (8/24/2012). 

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.). 
441 

286 

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-thancomplete 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 Ultimately, OCC's excessive trust 

in the bank allowed the bank to avoid scrutiny about the status ofthe 

SCP, and was a central reason for the OCe's failure to challenge the 

unsafe and unsound derivatives trading activity by the CIO. 

(2) Updating oee On]y When Losses About to 

Become Public 

At the same time it was reassuring its regulators, JPMorgan Chase 

ramped up its internal efforts to address the rapidly escalating losses in 

the SCPo As shown in the below chart tracking the SCP's daily profitloss 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."I372 

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 7/3112012 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). 
442 

287 

5200,000,000 ~---------------------.• --

$100,000,000 +------------------------

$0 

·$100,000,000 +-----------... --

·$lOO,OOO,OOO +-----------11--

·$300,000.000 +-------------· .. ··--+-il·----i!--!i 

·$400,000.000 f--------·----+----IHI--------·-

·$500,000,000 +-----------------il-----------

-5600,000,000 +-.----.---------------------------

'S700,000,000 ..L.... ____________________ . __ _ 

MTM Stop LQSS Advisory 

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, l373 

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 IPMorgan 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 In addition, the bank did not update the 

OCC, as it should have, on then-$500 million in CIO collateral disputes 

indicating that the CIO may have been overvaluing SCP assets and 

understating its losses.1375 According to the OCC, for nearly three 

1313 Subcommittee interview of Scott Waterhouse, OCC (9/17/2012), 

1314 See 3/30/2012 email from Achilles Macris, CIO, to John Hogan, JPMorgan Chase, 

"s!snthetic credit- crisis action plan," JPM-CIO·PSI 0001220, Mr. Macris' request was granted. 

135 See, e,g" 4/20/2012 email from Mark Demo, JPMorgan Chase, to John Wilmot, CIO, and 

oiliers, "Largest OTC Collateral Call Dispute Report plus Update on Collateral Disputes 

Reported to Supervisors," JPM-CIO·PSI-H 0000141-146, at 142 (reporting that ilie 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. ld., at 141. 
443 

288 

weeks, the bank did not call, email, or otherwise update the OCC about 

any aspect of the SCP's worsening status.!376 

Then, on May 4, 2012, a few days before lPMorgan 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.,,!3?? 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 20 l2.!379 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.!380 

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 Erovide an incremental update on their work as we 

requested."! 8! 

The OCC had apparently decided to wait for the results ofthe 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 ofloss was "material" and should 

have prompted an immediate OCC communication to the CIO. 1383 

1376 See 5/6/2012 email from Fred Crumlish. acc, to James Hohl, acc, and others, "CIa 

Synthetic Position," aCC-SPI-00021853; Subcommittee interview of Fred Crumlish, acc 

(8/28/2012). 

1377 5/4/2012 email from Scott Waterhouse, acc, to Fred Crumlish, acc, "CIa Synthetic 

Position," aCC-SPI-00021853 ("Doug Braunstein and John Hogan called to provide an update 

on the CIa 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. Sec acc spreadsheet, aCC-SPI-00000298, printed in a chart prepared by the 

Subcommittee in Chapter IV. 

1378 Subcommittee interview of Scott Waterhouse, acc (9117/2012) (referencing his own notes 

of the call from Mr. Braunstein and Mr. Hogan at 5/5/2012 email from Scott Waterhouse, acc, 

to Fred Crumlish, acc, and others, "cia Synthetic Position," aCC-SPI-00021853). 

1379 Subcommittee interview of James Hohl, acc (9/6/2012). 

1380 Subcommittee interview of Scott Waterhouse, acc (9117/2012). 

1381 5/17/2012 email from Fred Crumlish, acc, to Scott Waterhouse, acc, "Your request of last 

ni~ht, re acc response on cio," aCC-00005554. 

1324/25/2012 email from Geralynn Batista, acc, to Fred Crumlish, acc, and others, "Weekly 

Market Summary period ending 4/20," aCC-SPI-00023753. 

1383 Subcommittee interview of Scott Waterhouse, acc (9117/2012). 
444 

289 

While the OCC examiner who normally reviewed that weekly report 

was then on vacation, his subordinates failed to notice the size ofthe 

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 ofthe 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 inforrnation. 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 of2012, one of the key OCC oversight issues 

involved questions regarding the accuracy ofthe 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 

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). 1385 5/6/2012 email from Fred Crumlish, OCC, to James Hohl, OCC, and others, "CIO Synthetic 

Position," OCC-SPI-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."). 

\386 Subcommittee interview of Fred Crumlish, OCC (8/29/2012); sec also 5115/2012 email from 

Fred Crumlish, OCC, to Scott Waterhouse, OCC, "May 15 CIO," OCC-SPI-000I0657 ("This 

uRdate wasn't supported by quantitative information requested yesterday."). 

I 87 Subcommittee interview of Michael Sullivan and Doug McLaughlin, OCC (8/3012012) 

(explaining that the OCC rarely looks at individual positions and does not have any access to 

rosition data without making a specific request to the bank.) 

388 Subcommittee interview of Scott Waterhouse, OCC (9117/2012). 

\389 See 5117/2012 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). 

\390 Subcommittee interview of Elwyn Wong, OCC (8/20/2012). 

\391 Sec 12/12/2012 OCC Supervisory Letter IPM-2012-66, atPSI-OCC-18-000001, at 003 

[Scaled Exhibit]. 
445 

290 

more favorable asset valuations than its usual practice and understating 

its losses. 1392 Despite growing evidence ofthe problem, when the OCC 

inquired about possible mismarking, the bank initially denied the 

allegations and only months later acknowledged what had happened. 

On May 9, 2012, the OCC held a meeting with JPMorgan Chase 

about the cro, which was attended by the bank's Chief Risk Officer 

John Hogan. 139J 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. J396 

The OCC told the Subcommittee that Mr. Hogan's quick dismissal 

of the mismarking allegation was surprising at the time. Criticisms of 

the cro's valuation practices had been reported by the bank's internal 

auditors 1397 and OCC 1398 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 

1392 For more infonnation about the mismarking, see Chapter IV. 

JJ93 See, e.g., 5110/2012 email from Michael Kirk, OCC, to Fred Crumlish and James Hoh!, 

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). 

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 collatcral 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 eountcrparties marks, without 

admitting your own marks were ineorrect."). 

1395 Subcommittee interview of Miehacl 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 ChiefInvestment 

Office, OCC-SPI-00033688-693, at 692 (identifying as a problem "CIO VCG practices where a 

number of risk & valuation models have not been reviewed by Model Review Group and 

included the absence of a fonnally applied price sourcing hierarchy, insufficient consideration of 

potentially applicable fair value adjustments (e.g. concentration reserves for significant credit 

indices positions) and the lack offonnally documented/consistently applied price testing 

thresholds."). 

1398 Subcommittee interview ofJaymin Berg, OCC (8/3112012); 3/9/2012 Supervisory Letter 

JPM-2012-09 from Scott Waterhouse, OCC, to Ashley Bacon, JPMorgan Chase, "Examination 

ofFSI Stress Testing Framework," (citing a Matter Requiring Attention: "Methodology for 

valuation should be described") [Scaled Exhibit]. 

1399 See, e.g., 5114/2012 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. 
446 

291 

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 Not more 

than a week later, the CIO began to 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 bls CIO personnel in June and decided it had 

to restate the SCP values. 14 5 

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 SCPo 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 

14005115/2012 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 OCe'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-CI0-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 ... "). 

1403 See 511412012 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."). 

1404 See JPMorgan Chase Press Release, "JPMorgan Chase to Amend Interim Financial 

Statements for 2012 First Quarter," (7/13/2012), 

http://investor.shareho lder .com/jpmorganchase/rel easedetail.cfm ?ReleaselD=691 703 (reporting 

that the bank would reduce its previously-reported net income for the 2012 tirst quarter by $660 

million -- $459 million after taxes -- due to increased CI0 losses); JPMorgan Chase Form 8-K 

(7113/2012) ("The restatement relates to valuations of certain positions in the synthetic credit 

portfolio in the Firm's ChiefInvestment 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, sec Chapter IV. 

'405 Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12112/2012). For more 

information, see Chapter IV. 

1406 Subcommittee interview of Michael Kirk, OCC (8/22/2012). 
447 

292 

E. OCC Aftermath 

The whale trades were made public three days before Thomas 

Curry took office as the new Comptroller ofthe Currency and head of 

the OCe. 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 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 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 ofthe 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 rep0rting,,,141I and stating that "CIO Risk 

Management was ineffective.,,141 

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 of2010 included the 

14075111/2012 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. 

14085/11/2012 email from Thoma, Curry, OCC, to Mike Brosnan, OCC "J.P. Morgan Chase," 

OCC-SPI-0000003!. 

1409 511 1/2012 email from Michael Brosnan, OCC, to Thomas Curry and Julie Williams, OCC, 

"J.P. Morgan Chase," OCC-OOOOI746. 1410 1d. 

1411 7113/2012 Form 8-K, JPMorgan Chase & Co., at 4, 

htty:llinvestor.shareholder.com/jpmorganehasel secfiling.efm?filingID=1193125-12-301391. 

141 See 7113/2012 Form 8-K, JPMorgan Chase & Co., at Exhibit 99.3, p. 2. 

http://files.shareholder.com/downloads/ONEI1934577619xOxS 19617-12-24811 9617/filing.pdf. 
448 

293 

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. 1 13 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 

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 

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 (111712011). 

1414 See 5112/2012 email from Carrie Moore, OCC, to Michael Bright, with Senator Corker, 

"JPM," OCC-00005121 ("These trades would have been allowed even if the Voleker 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, "PIs read, edit and send back. Thx," OCC-00002135 ("[T]heyare not running 

afoul of inappropriate 'proprietary trading' issues."); 5115/2012 email from Michael Brosnan, 

OCC, to Bryan Hubbard, OCC, and others, "updated talking points on site tcam is good with this 

version various," OCC-00002263 ("Corker was right. It is us/me that ,,~ll 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 (5114/2012), at http://www.pbs.org/newshourlbb/politics/janjunel2/wallstreet 05-14.html (Senator Corker: "We have been in conversations all weekend with 

the OCC, the Offi-;'e of [the Comptroller of the] Currency, and ... they have been very adamant 

that even if the Volekcr rule, which the senator was referring to, was fully implemented, that this 

would have been pennitted 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 5114/2012 email from Bryan Hubbard, OCC, to Al Zibel, Dow Jones, Ben Pro tess, New 

York Times, and others, "OCC on JPMC Trading," aCC-00001361 ("It is premature to conclude 

whether the Voleker Rule in the Dodd-Frank Act would have prohibited these trades and the 

hedging activity conducted by JPMC .... Previous positions artributed to OCC staff were based 

on incomplete details."); "JPMorgan's Trades Probed by U.S. National Bank Regulator," 

Bloomberg News, Cheyenne Hopkins (5114/2012), http://www.bloomberg.comlnews/2012-05-

14/u-s-national-bank-regulator-examining-jpmorgan-s-risky-trading.html. 

14175118/2012 handwritten notes of Julie Williams, acc, "SBC Staff Briefing," pSI-OCC-IO000001. 
449 

294 

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 

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. 

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. 

Since the spring of2012, the OCC has strengthened its oversight of 

the CIO and JPMorgan Chase. First, it increased the level of staffing, 

including expeli 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 taRped one, then two OCC examiners with derivatives 

expertise. 14 1 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. 

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 

1418 See "Closed-Door Battle Over Voleker Spills Into Public View:' American Banker, Kevin 

Wack (5/22/2012), http://www.americanbanker.comiissuesll77_98/Gary-Gensler-MarySchapiro-Volcker-Rule-JPMorgan-Chase-l 049494-l.html ("OCC Chief Counsel Julie Williams 

argued at the briefing that the trades were a risk-reducing hedge that would be allowable under 

the Voleker 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 (9113/2012). 

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 5117/2012 email from Fred Crumlish, OCC, to Scott Waterhouse, OCC, "Your request of 

last night," OCC-00005554. 

1422 10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, "Surrounding 

Losses at CIO and Lessons Learned," PSI-OCC-13-00000l [Sealed Exhibit]. 
450 

295 

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 tradins counterparties as an information source for potential valuation 

issues."14 8 The OCC also explicitly criticized the bank for providing 

inadequate information about the whale trades. 1429 Outside the CIO, 

OCC criticized IPMorgan Chase's audit coverage and practices for 

failing to "identify unsafe and unsound practices in the CIO.,,1430 

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 

1423 7/27/2012 OCC Supervisory Letter JPM-2012-33, "JPMorgan Chase Bank, NA 

Management Rating," PSI-OCC-17-000003 [Sealed Exhibit]. 

1424 12112/2012 OCC Supervisory Letter JPM-2012-66, "CIO Oversight and Governance 

Examination," PSI-OCC-18-00001 [Sealed Exhibit]. 

142510/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, "Surrounding 

Losses at CIO and Lessons Learned," at PSI-OCC-13-000011-012 [Scaled Exhibit]; 

Subcommittee briefing by the OCC (11/29/2012). The OCC Supervisory Letters address "Model 

Approvals and Risk Weighted Assets," "Audit Coverage ofCIO Activities," "CIO Risk 

Management Review," "Examination ofVaR Model Risk Management," "Examination ofCIO 

Valuation Governance," and "CIO Oversight and Governance." 

1426 1116/2012 OCC Supervisory Letter JPM-2012-52, "Chief Investment Office Risk 

Management Review," PSI-OCC-17-000015 [Scaled Exhibit]. 

14271116/2012 OCC Supervisory Letter JPM-2012-53, "Examination ofVAR Model Risk 

Management," PSI-OCC-17-000019 [Sealed Exhibit]; see also 8114/2012 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 12112/2012 OCC Supervisory Letter JPM-2012-66, at PSI-OCC-18-000001, at 003. 

14308/31/2012 OCC Supervisory Letter IPM-2012-40, "Audit Coverage of the Chiefinvestment 

Office," PSI-OCC-I7-000005 [Sealed Exhibit]. 

1431 1114/2013 In the Matter of JPMorgan Chase, N.A., OCC Consent Order, 

http://oec.gov/news-issuanees/news-releases/20 13/m-occ-2013-7a.pdf 
451 

296 

under 12 U.S.c. § 1818(b), which allows the acc 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 acc 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 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. 

In addition, Comptroller Curry has taken steps to strengthen the 

ace's regulatory culture. As a first step, he initiated an independent 

internal review of both the bank and the acc supervision, looking to 

gain "lessons learned.,,1434 With respect to the bank, the ace's internal 

review identified a number of problems with both the CIa 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 acc inquiries and provided 

sometimes incomplete or even incorrect answers.1435 The acc 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 acc 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 acc, 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 

1432 12 U.S.C. § 1818(b) (2011). 

1433 1/1112013 letter from John Hogan, lPMorgan Chase, to Scott Waterhouse, OCC, "JPM2012-66 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). 

143510/26/2012 OCC Conlidential Supervisory Report, at PS1-OCC-13-000037-038 [Sealed 

Exhibit]. 

1436 2013 lPMorgan Chase Task Force Report, at Ill. 

1437 10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, "Surrounding 

Losses at CIO and Lessons Learned," PSJ-OCC-13-000001-013 [Sealed Exhibitl. 
452 

297 

OCC to both u.s. and international regulators in addition to internal 

OCC groups of examination staff 1438 

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 20 I 0 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 20 12, 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 

OCe'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 ofthe 

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 

143S ld. 
453 

298 

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 acc tolerated resistance by JPMorgan Chase to regulatory requests 

and failed to establish a regulatory relationship that mandated the bank's 

prompt cooperation with acc oversight efforts. The new Comptroller 

appears to be taking actions to correct that fundamental oversight 

problem. In its 2012 examinations ofthe CIa, for example, the acc 

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 The question is whether the acc can 

recalibrate its regulatory relationship to achieve effective oversight, not 

only with JPMorgan Chase, but also other large financial institutions. 

1439 Subcommittee interview of Fred Crum1ish, acc (8/28/2012). 
454 

299 

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 SCPo 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 II, 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 
455 

300 

announcement on May 15 that Ina Drew was departing the bank,1440 

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 Ishare 

on June 4, representing an overall decline of 24%, without any other 

apparent intervening event during that time period. 

Given the information that bank executives possessed in advance 

ofthe 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 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 ofthe 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 ofthe SCPo 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 of2012, 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 

1440 See 5115/2012 JPMorgan Chase & Co., Fonn 8-K, at 3, htlp:llfiles.shareholder.coml 

downloads/ONE/2275559219xOxSI193125-12-233374119617/fi1ing.pdf ("On May 14,2012, 

JPMorgan Chase & Co. ("JPMorgan Chase" or the "Finn") announced that Ina R. Drew, the 

Finn's ChiefInvestment Omcer, had made the decision to retire from the Finn."). 
456 

301 

"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 LongTerm 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]1I 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 ofa credit crisis. The bank's description 

of the SCP was simply erroneous. 

Asserting SCP Trades Were Consistent With the Volcker Rule. 

The fmal point made in the April 13 earnings call by Mr. Braunstein 
457 

302 

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 V olcker 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 ofVaR 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 20 II 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 
458 

303 

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 ofthe 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 ofthe 

CIO's credit derivatives during the first quarter of2012. 

A. Public Disclosure of Whale Trades aud 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 ChiefInvestment Office. JPMorgan Chase's chiefspokesperson, 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 uecoming 

Volcker Rule, these activities could come under pressure." 441 He 

recommended that the bank convey the following message about the 

SCP and CIO: 

"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: 

14414/5/2012 email fromJosephEvangelisti.JPMorganChase.toIna Drew, CIO, Douglas 

Braunstein, JPMorgan Chase. and others, "WSJ/Bloomberg CIO Stories," JPM-CIO-PSI 

0000543, at 544. 
459 

304 

• The ChiefInvestment 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. 

o The investments and positions undertaken by the 

CIO are to hedge positions and losses in other 

parts ofthe 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 

1442 4/5/2012 email from Douglas Braunstein, JPMorgan Chase, to Joseph Evangelisti, JPMorgan 

Chase, "Revised: WSJ/Bloomberg CIO stories," JPM-CIO-PSI 0000543. 

1443 Id., atJPM-CIO-PSI 0000543-544. 1444 Id. 

1445 Id. 
460 

305 

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 ay reduction in Mr. Iksil's position could result 

in losses for the bank.144 On April 9, 2012, another Bloomberg article 

entitled, "JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets," 

linked the controversy over the CIO trades to implementation ofthe 

Volcker Rule, quoting legal counsel representing certain banks as 

stating, "1 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 The Subcommittee is unaware of any action taken by 

any personnel within the bank to correct this description of the SCPo 

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. 1453 JPMorgan Chase 

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-

059pmorgan-trader-iksil-s-heft-is-said-to-distort-credit-indexes.html. 

144 '''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), 

httr//www.zerohedge.com/print/ 446043. 

144 '''London Whale' Rattles Debt Market," Wall Street Journal, Gregory Zuckcnnan and Katy 

Burne (4/6/2012). 

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-fuels-prop-trading-debatewith-bets.htm!. 

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, JPMol'gan Chase (9112/2012). 

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 
461 

306 

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 

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 PIL [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 which seemed to confirm that the bank's 

communications were calming the market. 

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 

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 411012012 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-ClO-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. 

1458 4111/2012 email fromJavierMartin-Artajo.CIO.toIna Drew, CIO, "Single names CDS 

basis relative to IG 9 CDS - URGENT update," JPM-CIO-PSI-H 0002340 [emphasis in 

original]. 

1459 Sec 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. 
462 

307 

written materials did not address the SCP or the whale trades directly, 1460 

but Mr. Braunstein volunteered a number of comments about them 

during the earnings call. 

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.,,1461 In his 

remarks, Mr. Braunstein described the CIO and its excess deposits 

portfolio. He then went on to state: 

"[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. 

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 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 folIowing 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 

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.comidownloads/ONE/2063348229xOxS 1193125-12-

161533/19617 lfiling. 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). 

1462 Id., at 7. 
463 

308 

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."J464 Later 

that evening, she emailed them that there were "[v ]ery few questions on 

CIO" on the "[I]ast batch of calls."J465 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: 

"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 be~inning of 

April and specially since our loss on Apr 1O."J46 

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 Mr. Dimon, Mr. 

1463 Id., at 10. 

1464 4113/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon and Douglas 

Braunstein, JPMorgan Chase, "IQI2 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."). 

14654113/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon and Douglas 

Braunstein, JPMorgan Chase, "IQ12 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) -$1,094,24Ik (ytd)," JPM-CIO-PSI 0017022, at 

026. 

1461 "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 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. 

Maeris 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 
464 

309 

Braunstein, and other 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 CIa 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 CIa's risk 

management department, with copies sent to Mr. Braunstein, Mr. 

Hogan, and others. 1473 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. 

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 

Achilles Macris, CIO, to Douglas Braunstein, JPMorgan Chase, and Ina Drew, CIO, "Synthetic 

Credit Presentation," JPM-CIO-PSI-H 0002204-213, 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. 4112/2012 email from 

Ina Drew, CIO, to Jamie Dimon and others, JPMorgan Chase, "Synthetic Credit Materials," 

JPM-CIO-PSI 0001100, at 103. 

\

468 4111/2012 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 (9112/2012). 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 

p,rices of the instruments. 469 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 ofIna Drew, CIO (917/2012, 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 ofCIO VaR, CSOl, and CSWlO%, among otber 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. 

1413 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). 
465 

310 

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 potential impact on the market and our ability to reduce this 

position.,,1474 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 SCPo 

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 SCPo JPMorgan Chase 

reported that the SCP had incurred a $2 billion loss in the second 

quarter, and additional losses were expected. 1475 In addition, the 10-Q 

provided a chart on the CIO's VaR totals, showing a revised ~uarter-end 

VaR total that was nearly double the earlier reported figure. 14 6 

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 V AR at 67. It will now be 129. In the first quarter, 

we implemented a new V AR 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 

1474 5/2/2012 email from Ina Drew, CIO,toIna Drew, CIO, [no subject], JPM-CIO-PSI 

0001212-214, at 214. 

14755/10/2012 "Business Update Call," JPMorgan Chase transcript, at 1-2, 

http://i.mktw.neU newsimages/pd!7jpm-conference-call,pdf. 

1476 See 5/10/2012 JPMorgan Chase & Co., Form lO-Q, at 73, 

bttp:llinvestor.shareholder.comljpmorganchase/secfiling,cfin ?tilingID~ 1961 7-12-213, 
466 

311 

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 operate the 

company .... [W]e admit it, we willieam 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."J478 

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 

1477 5110/2012 "Business Update Call," JPMorgan Chase transcript, at 2-3, 

?4tir:11i. mktw.netl_ newsi mages/pdf/j pm-conference-call. pdf. 

Id" at 4. 1479 7113/2012 JPMorgan Chase & Co., Form 8-K, 

http://files.shareholder.comidownloads/ONE/1934577619xOx582872Id3 8931 ff-a849-41 ed-a804-

a94afOI3272/Restatement_8-K_Cover.pdf ("On July 13,2012, JPMorganChase & 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 
467 

312 

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 10b51480 and Section 17(a) of the Securities Act ofl933, 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. 

(1) Rule 10b-S 

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 ofthe 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 

eamings. 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 

2012 first quarter by $459 million (after-tax). The restatement relates to valuations of certain 

p,0sitions in the synthetic credit portfolio of the Firm's Chieflnvestment Office. "). 

480 SEC Rule IOb-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 madc, 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 lO(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). . 

1482 Basic, Inc. v. Lcvinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, 

In..;,,, 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., 40 I F.2d 833, 849 (2d Cir. 1968)). 

1484 In re 1. Douglas Elliott, Securities Exchange Act ReI. No. 34-40043 (May 29, 1998). 

1485 SEC v. Texas Gulf Sulphur Co" 40 I 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).). 
468 

313 

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 IOb-5, as well as Section 17 ofthe 

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 

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 lOb-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 

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 1d. 

1490 Sec, e.g., In re Ames Dep't Stores Stock Litig., 991 F.2d 953, 969 (2d Cir.1993) (annual 

rej,0rts, public statements, SEC filings). 

14 1 See SEC v. Koenig, No. CIVA 04-3370, at *2 (S.D. Tex. 2004) (final judgment); see also 

8/25/2004 SEC Litigation ReI. No. 18849, "SEC Charges Mark E. Koenig, Former Exccutive 

Vice-President and Director ofInvestor Relations at Enron," 

hltp:llwww.sec.gov/litigationllitreleases/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 

ReI. No. 6504 (Jan. 13, 1984) ("The antifraud provisions of the federal securities laws [citing 

Section 17 of the Securities Act of 1933 and Section lOeb) ofthe Exchange Act, and the rules 

thereunder, particularly Rule 10b-5] apply to all company 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 misstatemcnt or omission. To the extent that the standard for 

accuracy and completeness embodies in the antifraud provisions is not met, the company and any 

ferson responsible for thc statemcnts may be liable lfider the federal securities law."). 

49J 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 thc defendant acted intentionally or recklessly, thougb tbe Circuits differ on the 

degree of recklessness required. ") 
469 

314 

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 "disc1oses[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 

(2) Section 17(a) of the Securities Act of 1933 

In addition to Rule IOb-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 

IOb-5 and Section l7(a) "prohibit essentially the same type of 

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 aI., Securities Litigation and Enforcement, Cases and Materials, 3d Ed., at 116. See also 

Rolfv. 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 thc 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 ReI. 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 11), 5 I 3 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 confuses expected with realized benefits. [The CEO] may 

have thought there was a chance the situation regarding the two key products would right itself. 

Ifso, the benefits of concealment might exceed the costs."). 
470 

315 

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 0rerates or 

would operate as a fraud or deceit upon the purchaser.,,149 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 IOb-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 

IPMorgan 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 ofthe 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 ofthe SCP as a hedge was repeated again publicly in 

May 2012. 

1498 In the Matter of Lead dog Capital Markets. LLC, FIKIA Leaddog Capital Partners, Inc., 

Securities Exchange Act ReI. 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. Nafta1in, 441 U.S. 768,778 (1979); See also SEC. v. Am. Commodity Exch., Inc., 

546 F.2d 1361, 1366 (loth 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 aI., 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 clements 

required by a claim under Exchange Act Section lOeb) and Rule IOb-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)."). 
471 

316 

(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]1I ofthose positions are put on pursuant to the risk 

management at the firm-wide level.,,1502 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. 

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.1 50

3 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.ls07 

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. 

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. 1508 Mr. Goldman had no risk management 

experience and was still learning the job during the first quarter oflOl2. 

15024/13/2012 "Edited Transcript JPM - Ql 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, JPMCIO-PSI0013890. 

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. 
472 

317 

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 

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, CSO I, 

CSWIO%, and stop loss limits - by disregarding the limit or metric, 

raising the relevant limit to end the breach, or chanfing the model 

evaluating the risk to lower the SCP's risk profile. 1 11 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 possib1e.,,1515 

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; back-testing 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."). 

1511 See Chapter V. "Disregarding CIO Risk Metrics." 

1512 See 4119/2012 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 infonnation 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 

Praetices (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 (9112/2012). 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 411112012 email from John Hogan, JPMorgan Chase, to JesStaley, lB, Douglas Braunstein, 

JPMorgan Chase, and others, "Credit risk limits," JPM CIO PSI OOO} 086. 
473 

318 

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 of2012, 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. IS17 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?"lS18 Another analyst commented: "Pretty big 

confidence blow for best risk manager; very puzzling."lS19 

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. IS20 

The bank and CEO Jamie Dimon have long touted its best-inbusiness approach to risk management which it claims contributes to its 

"fortress balance sheet."lS21 By telling investors that its credit 

1516 See 511012012 "Business Update Call," JPMorgan Chase transcript, at 4, 

httrl Ii.mktw.netl _ newsimageslpdfl jpm.conference·call. pdf. 

151 See, e.g., 511012012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, 

JPMorgan Chase, and others, "I OQ call- Buyside and sellside comments (1 )," JPM·CIO·PSI 

0014783; 5111/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, 

JPMorgan Chase, and others, "IOQ call- Buyside and sellside comments (3)," JPM·CIO·PSI 

0017712 ("all, here are a few eommentslthemes 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, "I OQ 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 (8115/2012) (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 Traditiona.l Strengths Will Win Out," Fortune, Jamie Dimon (4/9/2009, 

last updated 412212009) 

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 
474 

319 

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 firm-level 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. 

(2) Mischaracterizing SCP as "Fully Transparent 

to the Regulators" 

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 on those positions on a 

regular and recurring basis as part of our normalized 

reporting." J 522 

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 

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://fcic-static.law.stanford.edulcdn_medialfcic-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 experienccd 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 -JPM C/documentlbusiness ~rinciples. pdf 

("Create and maintain a fortress balance sheet."). 1522 411312012 "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 

(8120/2012); Subcommittee interview of Michael Sullivan, OCC (8/3012012); 5118/2012 email 

from Michael Kirk, OCC, to Elwyn Wong, OCC, "CIO Call With Mike Brosnan," OCC-SPI00021628 at 630 (quoting 5117/2012 email chain from Fred Crumlish: "I told Mike B [Brosnan] 

that the Joe Sabatini emails with selected position infonnation were sent by the bank after initial 

OCC and FRB enquiries. We concluded this infonnation 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-SPI-00004312). 
475 

320 

Contrary to Mr. Braunstein's representation, the bank was not 

"fully transparent" with its regulators regarding the SCPo As detailed in 

Chapter VI, although the SCP was established in 2006, the bank did not 

include the name ofthe 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 

of20 12. 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 da~s 

before it disclosed such losses publicly as part of its 10-Q filing.l 27 

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 media had characterized 

as large enough to "driv[e] prices in the $10 trillion market."l528 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. 

1524 10/26/2012 acc Confidential Supervisory Report, PSI-aCC-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 CIa and it accounts for over 90% of the CIa VaR."). 

1525 See discussion in Chapter VI, citing, e.g., 1/31/2012 email from Jaymin Berg, acc, to Fred 

Crumlish, acc, "CIa Quarterly Meeting," aCC-SPI-00004695. 

1526 See discussion in Chapter VI, citing to 4!l9/20I2 email from James Hohl, acc, to Geralynn 

Batista, acc, "CIa portfolio," aCC-SPI-00021700 (regarding missing Executive Management 

Reports); 4113/2012 email from John Bellando, lPMorgan Chase, to James Hohl, acc, "CIa 

January 2012 valuation memo and metri[c]s," aCC-00004735 (regarding missing CIa Valuation 

Control Group reports); Subcommittee interview of James Hohl, acc (9/5/2012) (regarding 

missing CIa Executive Management Reports and missing CIa Valuation Control Group 

~~Eo~:1'discussion in Chapter VI, citing, e.g., 51412012 email from Scott Waterhouse, acc, to 

Fred Crumlish, acc, CIa Synthetic Position, aCC-SPI-00013763 ("Doug Braunstein and John 

Hogan called to provide an update on the CIa position .... Current losses are approximately 

$1.6 billion."). 

1528 "JPMorgan Trader's Positions Said to Distort Credit Indexes," Bloomberg, Stephanie Ruhle, 

Bradley Keoun & Mary Childs (4/6/2012), htlp:llwww.bloomberg.cominews/20I2-04-

05/jpmorgan-trader-iksil-s-heft-is-said-to-distort-credit-indexes.htrnl ("A lPMorgan 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."). 
476 

321 

(3) Mischaracterizing SCP Decisions as "Made on a 

Very 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]1l of those 

decisions are made on a very long-term basis."ls29 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 ofthe portfolio, as well as the 

portfolio's decisionmaking since at least 20 II. It was contrary to the 

facts. 

In general, the Synthetic Credit Portfolio did not have a "longterm" 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 ofthe larger Tactical Asset Allocation portfolio, had the shortest 

investment horizon of all of the portfolios in the CIO. 1S30 One of those 

presentations by Ms. Drew, reprinted below, took place in March 2012, 

just a month before the earnings call. 1S31 

15294113/2012 "Edited Transcript JPM - QI JPMorgan Chase & Co. Earnings Conference Call," 

at 7, JPM-CIO-PSI 0001151. 

1530 Sce, 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 [TOm John Wilmot, CIO, to Jamie Dimon, Douglas Braunstein, 

JPMorgan Chase, and others, "CIO Business Review Materials," JPM-CIO-PSI 0001940, at 949; 

9/20 I 0 "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-Iong 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. 
477 

322 

prc,scnl'ati(ln prepared by Ina 

Mr. Braunstein's --",nr,_"'r",' 

produced by JPMorgall in 
478 

323 

the first quarter of 20 12, 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 ofthe 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 ofthe 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 of20l2, 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. 153? Another was to enter 

into trades that would substantially lower the SCP's Risk Weighted 

Assets. J538 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 Each of these trading 

strategies is inconsistent with long-term decisionmaking. 

Whether or not Mr. Braunstein was aware ofthat 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 had increased in size since 

January and had changed from a net short to a net long posture,J54J 

signaling short-term changes in the portfolio's size and strategy. In 

addition, Achilles Macris, who oversaw the SCP trading, emailed Mr. 

1534 Undated sprcadsheet oftrades from 10/3/2011 to 5/14/2012 produced by JPMorgan Chase in 

response to a Subcommittee request. JPM-CIO-PSI 003750l. 

153, Scc data analysis by OCC, using DTCC data for the banle "JPMC-CIO timeline of 

Significant Events and OCC Discovery," OCC-SPI-00038895, at 6. See also 10/26/2012 OCC 

Confidential Supervisory Report, Appendix II-B, "Caveman Trade," PSI-OCC-13-000121. For 

more infonnation on this 2011 trading strategy, see Chapter Ill. 

1536 Subcommittee briefing by JPMorgan Chase (8115/2012) (Jeanette Boot); Subcommittee 

interview of Peter Weiland, CIO (8/29/2012). 

1537 Sce Chapter 1Il, "SCP Trading" on the strategy implemented by CIO traders. 

1538 See 111912012 email from Achilles Macris, CIO, to Ina Drew, CIO, and othcrs, "Credit book 

Decision Table Scenario clarification," JPM-ClO-PSl 0000152. Ms. Drew told the CIO traders 

to reduce RWA while still maintaining profit levels, that is, "review the unwind plan to 

maximizc p I [profit-loss]." See 111012012 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 1/2612012 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-PSIOOOOI6l. 

1540 See Subcommittee interview of Michael Sullivan, OCC (8130/2012). 

1541 See 4112/2012 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). 
479 

324 

Braunstein on April 8, 2012 that: "the most rewarding, short-term 

catalyst for CIO would be an MBIA related default event[.]"1542 His 

email did not discuss any "very long-term" decisionmaking measures 

regarding the SCP. 

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." 

(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, 

154241812012 email from Achilles Macris, CIO, to Ina Drew, CIO, and others, "Synthetic Credit 

Summary," JPM-CIO-PSI 0001588 [underline in original]. 

1543 "Making Waves Against 'Whale, '" Wall Street Journal, Katy Burne (411112012). 
480 

325 

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 long-term basis. 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.,,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. 

15444113/2012 "Edited Transcript JPM - Ql JPMorgan Chase & Co. Earnings Conference Call." 

at 7, JPM-CIO-PSI 0001151. 

1545 Id., at 10. 

1546 511 0/20 12 "Business Update Call," JPMorgan Chase transcript, at 2, 

htlp:lli.mktw.neil_newsimages/pdf/jpm-conference-call.pdC 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 Ill, section entitled "Purpose of the Synthetic Credit Portfolio: Undocumented, 

Unclear, and Subject to Change." 

1548 Subcommittee interview ofIna Drew, CIO (917/2012). 

1549 See 411112012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"updated," JPM-CIO-PSI 0001077 ("[w]e are working on Jamie's request for [c]orrelation of the 

credit book against the portfolio"). 
481 

326 

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 ifthe 

correlation analysis was sent to him. 1552 The Subcommittee found no 

evidence that it was. Mr. Hogan also requested a correlation analysis to 

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 AprilS, 2012, in 

anticwation of the press articles due to be published the following 

day, I 56 Ms. Drew sent Mr. Dimon, Mr. Braunstein, and other members 

ofthe JPMorgan Chase Operating Committee an email on April S 

stating: 

"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.,,1557 

1550 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 

1551 See 411 112012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"updated," JPM-CIO-PSI 0001077 ("[wle are working on Jamie's request for [clorrelation of the 

credit book against the portfolio"). 

1552 Subcommittee interview of Ina Drew, CIO (12111/2012). 

155J 411012012 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. 

1554 Subcommittee interview of Scott Waterhouse, oce (9117/2012). See also Subcommittee 

interview of Michael Kirk, OCC (8/22/1012); 4110/2012 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 ifthe 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."); sec 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 

su.p.port the stress loss hedge rationale associated with this particular strategy."). 

15)5 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9112/2012). 1556 4/5/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, "CIO," 

JPM-CIO-PSI 0000539 (HI 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 ld. 
482 

327 

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 ofthe 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 Mr. Iksil told an internal bank investigation that he 

believed the book needed to 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. 156 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 

1558 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9112/2012). 

1559 Subcommittee interview of John Hogan and Ashley Bacon, JPMorgan Chase (9/4/2012). 

1560 Subcommittee interview of John Wilmot, CIO (9/J 112012). 

1561 Subcommittee interview of Joseph Bonocare, CIO (9111/2012). 

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 Jan1ie Dimon, JPMorgan Chase (9/19/2012). 1565 Id. 

1566 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/J 2/20 12). 

1567 Subcommittee interview ofIrvin Goldman, CIO (9/15/2012). 
483 

328 

risk and that it did not need to provide a "payout."IS68 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. ls69 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."ls7o Even Mr. Braunstein admitted that 

"there is a point where [the portfolio 1 ceased to perform in a manner to 

protect credit positions" of the firm. ls71 

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.",ls72 

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 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 10ng.ls73 

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.ls74 On page 3 ofthat 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 

1568 JPMorgan Chase Task Force interview of Javier Martin-Artajo. CIO (partial readout to the 

Subcommittee on 9/6/2012). 

1569 Subcommittee interview afIna Drew, CIO (917/2012). 

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 (Jillle 13,2012), 

httrllwww.cq.comldoc/congressionaltranscripts-4105471. 

157 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9112/2012). 

1572 511812012 email from Elwyn Wong, OCC, to Michael Kirk, OCC, "CIO call with Mike 

Brosnan," OCC-SPI-00021602. 

157J 4/1112012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"s;;nthetic credit information," JPM-CIO-PSI 0001701. 

154 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC35-000001 (explaining that the presentation was prepared "with input from C.S. 

Venkatakrishnan and Olivier Vigneron"). 
484 

329 

which credit deteriorated and the risk of default increased - the SCP 

would lose money. 1575 

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Source: 411112012 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 J. 

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 "SprOI," in the row captioned, "Synthetic Total." The 

table also showed that if credit spreads widened by 1 0%, the book would 

1575 411112012 email from John Wilmot, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan 

Chase, and others, "synthetic credit information," JPM-CIO-PSI 0001701, at 704. 
485 

330 

lose $163 million. This result is shown in the next column, captioned 

"Spr+ 1 0%," 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 

As the February chart below 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 II, the SCP was projected to lose money not only when spreads 

widened by 10%, but also when they widened by 50%. 

1576 2/2012 "CIO February 2012 Business Review," JPM-CIO-PSI 0001940, at 963. 

1m Subcommittee interview of Douglas Braunstein, lPMorgan Chase (9/12/2012). 
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CIO International Core Credit: Tail Risk Book 

Currently the Core Credit Book is: 

1. An option with positive convexity, positive carry and upside on large 

spread widening and default waves (similar to 2008-2009) 

2. CUrrent Position: 

US mortgage-related issuers (Radian, MGIC, lLFC, RESCAP, ALLY) 

may file as the US Govemment and banks are looking for a settlement 

on past underwriting practices 

II. Europe countries including Greece and Portugal may opt to 

restructure some national champions like banks or telecom operators. 

These events could generate US$200mm-500mm pal gains 

Capital 

• This is a Tail Risk Book that had under Basel I an RWA cost of US$5bln and from 2007-2011 has generated US$2.4bln 

total return 

• Under Basel 2.5, Risk Weighted Assets are estimated to increase 5-Bx (methodology still in development); this would 

increase the RWA of the core credit book to US$36bln however, CIO is currently working to reduce this to US$20bln for 

year end 2012 

II Despite effectiveness of the Tail Risk Book hedging credit portfolio, the change in regulatory capital regime is likely to force 

are-size f run-off of synthetic portfolio in order to maintain RWA targets for the Firm 

III CIO continues to coordinate with IB Risk to improve the applicable RWA and capital levels 

[INTERNAL DISCUSSION] 22 JP:'vIORGA:" CH.\SE&CO. 
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Synthetic Credit Summary: Risk & P/L Scenarios 

• Realised P&L in 01 

Note regarding P&l 

Estimate of 10 April 2012 

Today's P&L estimate of 

$395MM represents a 

move 6.5x C1.Jrren! VaR95 

of$60MM. 

Off the run IG.9 curves bear 

steepened 3'o'g +7bps (30% of YTO move), and spreads 

widened avg +10bps 

til The IG component has been the main P&L driver of underpertormance In 01, as lG.9 forward long risk positions did not deliver anticipated profits given steepening of the 

curve. Current book is overall risk balanced, given the cross-market upside on defaults 

02 pal Estimates - these scenarios do not Include 10 April P&L. which would accrete back Into each scenario +S400MM, If re-callbtated for tOday'5 market moves 

b -$250MM (New Financial Crisis) Implies an average spread Widening of +25%, driven by bankslfinBnclals undergoing stress. In this case, the portfolio P&L is driven by: 

+250MM carry 

-100MM given relative undell'erformance of IG 'Is. HY (compression, led by bankslffnancials widening) 

-$300MM due to 'duration extension' as we project that the short-dated short risk duration in IG will conlract as expiry approaches 

- -S100MM due to spread widening, not offset in this CBse by curve nattenlng (we assume here that curves remain 43bps steep in IG equivalents) 

J:; -$150MM (Status Quo) in this case we assume that matketlevels and curves 'freeze' at current levels; in this scenario CIO would delta hedge around volatility throughout 

the quarter 

+200MM carry 

-$300MM due to 'duralion extension' as we project t!lat the short-dated short risk duration in IG wilt contract as expiry approaches 

due to long.-tiated tranche undBrperformance as observed in 01 

+$350MM (Central Scenario) in this case bull steepening of IG curves (+4bps), mote than offset by outperformance of IG.9 curve vs. an the run 

+170MM carry 

·$280MM due to 'duration extension' as we project that the short-dated short risk duration in IG will contract as expiry approaches 

+$11()MM due to rally in credit spreads ·15% 

+$200MM due to relative outperformance of IG 9 C1.Jrve v:::.. on the run IG curves (While counter-intuitive, the 'compression" effect of lG.9 vs. on the run IG 

complex is driver of performance) 

+$150MM due to long-dated equity tranche outperfofmance 

l! In the section Ootimistic"lhe convexitv of the Dortfolio ina hiQhlvoosillveora.oktl:dv.neo.ati-.:.e.marketoutcome is demonstrated 

·+'$702MM Tiilheevenfof:'::20% lightening of spreads, decompressiOn ot HY vs. !G credit, and lG.9 forward outpertormance (rolling d6wntne:-clirve 

$1,126 -End of QE" refers to a scenario of strong growth led by U.S., spreads avg. -50% tighter 

+1,725MM in kMany means wave of defaults among widest spread names (incl. MBIA, Radian, IStar) curve flattening, and +75% spread widening, 

driven by performance of HY shorts, IG flatteners and long protection positions In the portfolio 

In the section Extreme" it is estimated that the book would range -535SMM 10 

-$355MM in the event of bear steepening of curves, spreads wider by avg +10% 

-$650MM in the event of bull steepening of curves, spreads lighter by avg -25%, driven by underperlormance of IG.g (forwards do nat ran down curve in rally) 

7 J.P.Morgan 

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The three scenarios he referenced, numbered 4, 5, and 6, above, 

considered what would happen in the event ofa "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. Is8o Mr. Dimon 

explained that it was the original purpose of the hedge,IS81 and that the 

SCP had made money for JPMorgan Chase during the 2008 financial 

crisis as a hedge against credit widening. 1582 Yet by April 11, 2012, the 

bank projected that the SCP would lose money injust such a scenario, a 

projection inconsistent with a book intended to provide protection 

against stress loss from credit risk. 

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. 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 

1580 Subcommittee briefing by JPMorgan Chase (8/15/2012) (stated by Gregg Gunselman). 

1581 Testimony of Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co., "A Breakdov-m in 

Risk Managemcnt: 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), 

hl1p://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 

a~ainst back-tail events."). 

I 82 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 [finaneial] 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 4111/2012 email from Ina Drew, CIO, to Jamie Dimon, JPMorgan Chase, and others, 

"updated," JPM-CIO-PSI 0001077, with chart entitled "Synthetic Credit Summary," at 078 c300MM duc to 'duration extension' as we project that the short-dated short risk duration in IG 

will contract as expiry approaches "). 
489 

334 

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 ofthe SCP as an 

offset of the bank's other credit exposures or as stress loss protection. 

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 ifthe 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 II 

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 

1584 4/5/2012 email trom Ina Drew. CIO, to Jamie Dimon, JPMorgan Chase, and others, "CIO," 

JPM-CIO-PSI0000539, 

1585 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9119/2012), 

15865/10/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, "lO-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 V olcker; 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., 

511112012 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 ClO-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/l9/2012) (intervention by 

Stephen Cutler, JPMorgan Chase). 

1589 2/4/20131etter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC35-000001 (clarifying statements made about the Synthetic Credit Portfolio during the 9112/2012 

interview with the Subcommittee). 
490 

335 

with you and others on September 12, 2012, as to which I understand 

from discussions with my counsel that there may be some 

misunderstanding.,,159o The letter offered two additional explanations 

for Mr. Braunstein's comments on the earnings call, which are described 

below. 

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. 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 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, ifhe 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 

1590 Id. 

1591 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9119/2012). 

1592 2/412013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC35-00000 I (clarifying statements made about the Synthetic Credit Portfolio during the 9112/2012 

interview with the Subcommittee). 

1593 4113 /2012 "Edited Transcript JPM - Ql 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 (4111/2012) 

("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."); 4113/2012 "Edited Transcript JPM - Ql 

JPMorgan Chase & Co. Earnings Conference Call," at 10, JPM-CIO-PSI 0001151 (Mr. Dimon: 
491 

336 

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 ofthe 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: 

"The synthetic credit book, as a dedicated hedge to our credit 

longs, continues to be short HY. In Q4 [20 11], 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.netlong. 16oo 

"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, 

httf :lli.mktw.net/_ newsimages/pdf/j pm-confcrence-call. pdf. 

159 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSIJPMC-35-00000l (referring to 411112012 email fromJohnWilmot.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 fromInaDrew.CIO. to Jamie Dimon and others, JPMorgan Chase, "CIO," 

JPM-CIO-PSI0000539. 

1599 4/8/2012 email fromAchillesMacris.CIO.toInaDrew.CIO and others, JPMorgan Chase, 

"Synthetic Credit Summary," JPM·CIO·PSI 0001588 [emphasis added]. 

1600 4/5/2012 email fromlnaDrew.CIO. to Jamie Dimon and others, JPMorgan Chase, "CIO," 

JPM·CIO·PSI 0000539. 
492 

337 

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 [Le. 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 ofthe 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 counterbalanced. 1604 If the presentation were analyzing a hedging 

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 IG910ng positions, 

the CIO's Chief Financial Officer John Wilmot answered that the book sought to produce "carry 

(ic 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 

Bositions. 

602 4113 /2012 email from John Hogan, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, 

"CIO," JPM-CIO-PSI 0001753. 

160J See 4112/2012 email from Ina Drew, CIO, to Jamie Dimon, Douglas Braunstein, JPMorgan 

Chase, and others, "Synthetic Credit Materials," JPM-CIO-PSI OOOllOO, at lOl ("The way that 

we at CIO have book-run the Core book to balanee the negative carry cost ofthe 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 lor the 

cany 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 (9112/2012). 

1604 Pages five and six are entitled, "Single Name Risk & Forward Jump to Default Risk." JPMCIO-PSIOOOI706-707. 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 eorporations conelated to the 

portfolios that the SCP was purportedly hedging - either the available-far-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 (9117/20l2). The former Chief Risk 
493 

338 

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 ~resentation was prepared 

"with input from C.S. Venkatakrishnan,,,16 5 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 Vo1cker 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 long-term 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 Vo1cker 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-mitigating hedging activities," meaning 

Officer for the CIO also confirmed that for the Subcommittee. Subcommittee interview of Irvin 

Goldman, CIO (9115/2012). 

1605 2/4/2013 letter from Douglas Braunstein, JPMorgan Chase, to the Subcommittee, PSI-JPMC35-000001 (referring to 4111/2012 email from John Wilmot, CIO, to Jamie Dimon, JPMorgan 

Chase, Douglas Braunstein, JPMorgan Chase, and others, "synthetic credit information," JPMCIO-PSI 0001701, at 708). 

1606 Subcommittee interview ofC.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. 
494 

339 

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 VoIcker Rule's implementing regulation was still in draft form. 

Earlier in the year, on February 2,2012, representatives ofthe bank had 

met with the acc to voice the bank's views on the draft regulation. 1609 

According to both the bank and the acc, at no point did the discussion 

tum to the Synthetic Credit Portfolio, so the regulators could not have 

given the bank any guidance on the effect ofthe VoIcker Rule on the 

SCP during that meeting. 1610 an February 13,2012, the bank submitted 

an official comment letter to the acc and other bank regulators 

criticizing the draft regulation implementing the VoIcker Rule and 

offering recommendations for changes. 1611 Among other criticisms, 

JPMorgan Chase's comment letter expressed concern that the VoIcker 

Rule's proposed regulation might not permit the CIa to continue to 

manage the Synthetic Credit Portfolio. The comment letter stated: 

"Under the proposed rule, this activity [Le., credit derivatives] could 

have been deemed prohibited proprietary trading.,,1612 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 VoIcker Rule. 

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 V oIcker rule, wrote: 

"[Question:) In your view, could this trading fall afoul of 

VoIcker under a narrow definition (or even a broad one)? 

1608 See Subcommittee briefing by lPMorgan 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 ofthe synthetic credit portfolio). 

1611 2/1312012 letter from JPMorgan Chase, to Department of the Treasury, Board of Govemors 

ofthe 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 [that1 would have been endangered by the proposed rule."). 
495 

340 

[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 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 Vo1cker 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 Vo1cker 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: 

l.)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 

1613 4112/2012 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 4112/2012 email from Barry Zubrow, JPMorgan Chase, to Douglas Braunstein, JPMorgan 

Chase, Jamie Dimon, JPMorgan Chase, and others, "If asked about London 1 CIO and Volcker," 

JPM-CIO-PSI-H 0002418. 
496 

341 

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. 

(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-atRisk" 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 JPMorgan Chase 

uses the VaR-95 model to report its VaR results in its public filings with 

the SEC. 

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,,,161 including disclosure when banks change 

a VaR "model characteristics, assumptions, and parameters.,,1617 In June 

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 IIagan, 

CIO (21712013). 

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 ofVaR. 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 
497 

342 

2012, then Chairman of the SEC, Mary Schapiro, testified before 

Congress that the SEC had an ongoing investigation into the extent of 

lPMorgan Chase's VaR disclosure. 16 1

8 

lPMorgan 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 The report also explained the VaRs for the different lines 

of business, including the CIO: "CIO VaR includes positions, primarily 

in debt securities and credit products, used to manage structural and 

other risks including interest rate, credit and mortgage risks arising from 

the Firm's ongoing business activities.,,162o In addition, lPMorgan 

Chase's Form 10-K provided a table, reprinted below, ofVaR-95 totals 

for key lines of business, including the Investment Bank (IE) and the 

CIO. 

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 oflosses that the CIO was projected to be at risk 

oflosing 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 (IE) 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 

about market risk, including thc reasons for the changes."); 6/28/2012 email from Elwyn Wong, 

OCC, to Scott Waterhouse, OCC, and others, "2nd WilmerHale Call," OCC-SPl-00071386 

(~enerally describing bank obligations with respect to VaR disclosure under SEC rules). 

J 18 Testimony of Mary Schapiro, "Examining Bank Supervision and Risk Management in Light 

ofJPMorgan 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 oftha! disclosure, whether it was adequate, among other things."). 

1619 2/29/2012, JPMorgan Chase & Co., Form 10-K, at 162, 

rgrllfiles.shareholder.com/downloads/ONEI 2275559219xOxS 19617-12-163/1 9617/filing.pdf. 

Id., at 159. 

1621 Id., at 160. 
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The table below shows the results of the Firm's VaR measure using a 95% confidence level. 

Total IS trading VaR by risk type, Credit portfolio VaR and other VaR 

AS of or for the year ended December 31, 

(in millions) 

IB VaR by risk type 

Fixed income 

Foreign exchange 

Equities 

Commodities and other 

Diversification benefit to 16 trading VaR 

IB trading VaR 

Credit portfolio VaR 

DiVersification benefit to IS trading and credit 

portfolio VaR 

TotailB trading and credit portfolio VaR 

other VaR 

IChief Investment Office ("Cia") VaR 

Total other VaR 

Diversification benefit to totallB and other VaR 

Total IS and other VaR 

Avg. 

50 

11 

23 

16 

(42) la) 

58 

33 

(IS) (1) 

76 

70 

(45) w 

101 

2011 

Min 

31 

15 

NM (b) 

14 

19 

NM (b) 

42 

30 

NM 

46 

NM 

67 

Max 

$ 68 

19 

42 

24 

NM (b) 

80 

55 

NM 

102 

98 

80 

NM 

110 

NM 

147 

Avg . 

65 

11 

22 

16 

(43) ta) 

71 

26 

(10) 

87 

1':"\ 

71 

(59) (al 

99 

2010 

Min 

33 

6 

10 

11 

NM 

40 

15 

NM 

50 

44 

NM 

48 

NM 

66 

Max 

95 

20 

52 

32 

NM 

107 

40 

NM (tt) 

128 

47 

80 

NM 

100 

NM 

142 

At December 31. 

2011 2010 

49 

19 19 

22 

(55) 

54 

42 

(20) CII 

76 

16 

77 

(10) Cal 

81 

(46) tol) 

III 

52 

16 

30 

13 

(34) '" 

77 

27 

(5) <" 

99 

56 

(10) m 

55 

(65) jal 

$ 89 

(a) Average VaR and perfod-end VaR were less than the sum of the VaR of the components described above, which is due to portfolio diversification. Th

diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum 

of the risks of the positions themselves. 

(b) Designated as not meaningful (<IN"""). because the minimum and maximum may occur on different days for different risk components. and hence it is no

meaningful to compute a portfolio-diversification effect. 
499 

344 

model immediately recast the CIO's VaR-95 total, dropping it by 50% 

on the day it was put into place. 1623 Neither the VaR model change nor 

its effect on the CIO's VaR total was publicly disclosed at the time. 

Several months later, on April 6, 2012, media reports disclosed for 

the first time that the CIO was engaged in large credit derivative 

trades. 1624 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: 

Question: "Kush Goel Neuberger (Buyside) ... What was 

the specific credit position discussed in the article; where are 

these derivatives disclosed? ... 

Answer: "CIO VaR is disclosed in the Market Risk section 

ofthe 10K with a brief description ofthe 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 cal1. 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 (7119/2012); "CIO 10QVaR," JPMC-SenatelLevin 

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 (4/612012), 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). 

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 411312012 JPMorgan Chase & Co., Form 8-K, 

http://files.shareholder.com/downloads/ONE/2063348229xOxS 1193125-12-

161533119617/filing.pdf. 

1627 Id., at 42. 
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JPMORGAN CHASE & CO. 

MARKET RISK-RELATED INFORMATION 

(in millions) 

AND OTIIER V AR 

IB VaH by rIsk type: 

Fixed inccme Foreign exchange Equities 

Coounodities and other 

Diversification benefIt to IB trading VaR (8) 

IB trading VaH (b) 

Credit portfolio VaR (c) 

Diversification bentft to m trading and credit portfolio VaR (3) 

Total IB trading and credit portfollo VaR 

OtherVaR: 

....!2.!L 

60 

11 " 12 

17 19 

21 20 

63 " 32 39 

---.ilil ---..lll) 

__ '_I -..n 

Jl'.\10RC..\.'\ (:11.\,>[&(:0. 

QUARTERLY TRENDS 

1912 Change 

.2!lli... 2.2.!!... ...!2!!... ...!2.!l.. 

48 4' 49 7% 22% 

10 9 11 (lI) 19 " 29 (11) (41) 15 16 13 , 62 

---.ill) -.ill) 8 (21) 

53 " .. 11 (2) 38 27 26 (18) 23 

---..lll) ---® --.J:I) 33 (100) 

---Z!! ---II. ----.!!l 8 (2) 

I (d) : 20 16 at> (31) " 60 12 ••• J • Ii ---.ill) --.J!0 -.ilil 

TotBI othtt VaR ---1! ----.!!l __ 6_' (13) " 16 

Diversification benefIt to total1B IIfld other VaR (11) ---.ill) ---.illl --..J±!) -ill> 18 

TotalIBand othtt VaR(f) " 32 

(a) Average VaR was less than the smn of the VaR of the components described above, due to portfolio diversification The diversification 

effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum 

of the risks of the positions themselves. 

(b) For further information on lB trading VaR, see footnote (b) on page 12. 

(c) For further information on Credit portfolio VaR see footnote (c) on page 12. 

(d) Mortgage Production and Servicing VaR includes the Finn's mortgage pipeline and warehouse loans, MSR, and all related hedges. 

'(e) C"'10 VaR includes positions, primarily in debt securities and credit products, used to manage structural risk and other risks, including 

interest rate, credit and mortgage risks arising from the Firm's ongoing business activities. 

(f) Total IB, Credit portfolio and other VaR does not include the retained Credit portfolio. which is not reported at fair value; however, it does 

include hedges of those p:>Sitions. It also does not include DVA on derivative and structured liabilities to reflect the credit quality of the 

principal investments (mezzanine fInancing, tax-oriented investments, etc.); and certain securities and investments held by 

CorporatelPrivate Equity, including private equity investments, capital management po;;litions and longer-term investments managed by 

CIO. 
501 

346 

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 of2011. 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 and accompanying earnings call to the public, provided an 

incomplete and erroneous picture of the risks then facing the C10. 

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.J630 Under JPMorgan Chase 

policy, Mr. Dimon had to personally respond to breaches of the 

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; 1120/2012 email from Market Risk ManagementReporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, "JPMC 95% 10QVaR - Limit Excession Notification (COB 1119/12)," JPM-CIO-PSI 0001890; 112012012 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 01119/2012," JPM-CIO-PSI 0002457; 1127/2012 email from Market Risk ManagementReporting, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, Douglas Braunstein, JPMorgan 

Chase, and others, "JPMC Firmwide VaR- Daily Update - COB 01126/2012," 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. "); 1128/2012 email from John Hogan, JPMorganChase,to 

Jamie Dimon, JPMorgan Chase, "JPMC Firmwide VaR - Daily Update - COB 01126/2012," 

JPM-CIO-PSI-H 0001675 ("This should be the last day offirmwide 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 

1127/2012," JPM-CIO-PSI 0001339 ("The Firm's 95% IOQ VaR as of cob 01127/2012 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 0001940, at 942 ("Today's Attendees, 

Operating Committee, Jamie Dimon, Doug Braunstein," and others.). 
502 

347 

bankwide VaR limit and, in this case, approve a temporary VaR limit 

increase to end the CIO's breach. When the request was made ofMr. 

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 Despite having received 

multiple emails and having approved a 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 ifthere were a problem. 1633 Mr. Braunstein 

told the Subcommittee that he, too, despite receiving the emails, was not 

sure ifhe 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 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. 

1631 See lI20/2012 email from Market Risk Management - Reporting, JPMorgan Chase, to Jamie 

Dimon, JPMorgan Chase, and others, "JPMC Firmwide VaR - Daily Update - COB 

01119/2012," JPM·CIO·PSI 0002457 (noting that the CIO's "improved VaR model" will reduce 

the CIO's VaR "by 44%"); 1120/2012 email from Market Risk Management - Reporting, 

JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, "JPMC 95% I OQ 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% IOQ - VaR - Limit Excession Notification (COB 1119/12)," JPM·CIO·PSI 

0001890 (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% IOQ VaR One·OffLimit 

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 Jollo 

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 ManagementReporting, 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 - Reporting, JPMorgan Chase, to Jamie Dimon, 

JPMorgan Chase, Douglas Braunstein, JPMorgan Chase, and others, "JPMC Firmwide VaRDaily 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%"). 

1632 Subcommittee interview of Jamie Dimon, JPMorgan Chase (9/19/2012). 1633 1

d. 

1634 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 

1635 2/2012 "CIO February 2012 Business Review," JPM·CIO·PSI 0001940, at 942 ("Today's 

Attendees, Operating Committee, Jamie Dimon, Doug Braunstein," and others.). 
503 

348 

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-CIOPSI 0001940 [emphasis added with circles and arrow to denote changes in CIO VaR results]. 
504 

349 

The "VaR Highlights" section explained that an "[e]nhanced VaR 

methodology ... [is] helping to reduce VaR and RWA usage" at the 

CIO.!636 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 20 II. The line graph showed the VaR total peaking in January 

2012 at $120 million, followed by a precipitous decline.!637 That decline 

was the result of the new VaR model which had reduced the CIO's risk 

rating by 50%. 

Mr. Dimon told the Subcommittee that he did not specifically 

recall the February meeting, but stipulated that he saw the 

presentation.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.!639 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.!640 

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. 164! 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. 

16361d. 

1637 ld. 

1638 Subcommittee interview of Jamie Dimon. JPMorgan Chase (9/19/2012) (describing the "CIO 

February 2012 Business Review," JPM-CIO-PSI 0001940). 

1639 Subcommittee interview of Douglas Braunstein, JPMorgan Chase (9/12/2012). 

1640 Subcommittee interview oflrvin Goldman, CIO (9/1512012). 1641 511012012 "Business Update Call," JPMorgan Chase transcript, at 2-3, 

http://i.mktw.net/yewsimages/pdf/jpm-conference-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. "). 
505 

350 

I 

E 

c 

Source: 5110/2012 IPMorgan Chase & Co., Form 10-Q, at 73 [emphasis added with text box and 

outline offootnote 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 April13, 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 20 12, and $67 million in the fourth quarter of 20 11. 1643 

1642 5/10/2012 JPMorgan Chase & Co., Form lO-Q, at 73, 

http://investor.shareholder.comljpmorganchase/secfiling.cfm?filingJD= 19617-12-213. 

164 4/13/2012 IPMorgan Chase & Co., Form 8-K, at 42, 

http://files.shareholder.com/downloads/ONE/2063348229xOxS 1193125-12-

161533/19617/filing.pdf. See also 2/29/2012, .TPMorgan Chase & Co., Form IO-K, at 160, 

http://files.shareholder.com/downloads/ONE/2275559219xOxS 19617-12-163119617/filing.pdf 

(disclosing CIO average VaR in 2011 to be $57 million, and in 2010, $61 million). 
506 

351 

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 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 ofthe 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 ofthe call, Mr. Dimon explained orally 

what wasn't explained in the 10-Q filing: "In the first quarter, we 

implemented a new V AR 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 

1644 5110/2012 JPMorgan Chase & Co., Fonn IO-Q, at 74, 

http://investor.shareholder.com/jpmorganchase/secfiling.cfm?filingID= 19617-12-213. 

164 See 4118/2012 email fromKeithStephan.CIO.toAchillesMacris.CIO. and others, "CIO 

VaR," JPM-CIO-PSI 0001205 ("FYI-we discovered an issue related to the V AR market data 

used in the calculation .... This means our reported standalone var for the five business days in 

the period 10_161h April was understated by apprx $10 [million]."). For more information, see 

Chapter V. 

16465/10/2012 "Business Update Call," JPMorgan Chase transcript, at 14, 

http://i.mktw.netl_newsimages/pdf/jpm-conference-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."). 
507 

352 

have understated the risk ofloss by the SCPo 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 When 

making this statement, Mr. Dimon did not disclose that bank 

management had been aware of the significant impact ofCIO's VaR 

model change in January, but did not tell investors about the change. 

That information could and should have been, but 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 ofthe 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 ofMr. Dimon, he was informed 

about the new VaR model as part of his responsibility as CEO to 

approve breaches of Level I 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-at1647 Subcommittee interview of Patrick Hagan, CIO (21712013). 

1648 5/l0/2012 "Business Update Call," IPMorgan Chase transcript, at 4, 

http://i.mktw.netl_newsimages/pdf/jpm-conference-ca11.pdf. 
508 

353 

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?,,,165 I "How 

long was the 2012 model data tested?,,,1652 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 models.,,1653 Had the same VaR information been 

disclosed in April, it would likely have been of interest then, as well. 

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.,,1654 The OCC 

Examiner-In-Charge 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 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. 

1649 See, e.g., 511 112012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, 

JPMorgan Chase, and others, "IO-Q call- Buyside and sellside comments (6)," JPM-CIO-PSI 

0014803 (summarizing questions from analysts); 511 1/2012 email from Sarah Youngwood, 

JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, "lO-Q call- Buyside and 

sells ide comments (2)," JPM-CIO-PSI 0017754 ("What was the sequence ofthe 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?"); 5114/2012 email from 

Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan Chase, and others, "IO-Q callBuyside and sellside comments (10)," JPM-CIO-PSI 0018241 ("When you put out your 20 II 

10K, did you use the 20 II model for VaR? In April did you disclose that you changed models? 

... Is the increase in VaR all from the cm 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, "IO-Q call- Buyside and scllside 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?"). 

1650 511 \/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, "IO-Q call- Buyside and sellside comments (6)," JPM-C10-PSI 0014803. 1651 1d. 

1652 5/1l/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, "IO-Q call- Buyside and sellside comments (4)," JPM-CIO-PSI 0017987. 

1653 5114/2012 email from Sarah Youngwood, JPMorgan Chase, to Jamie Dimon, JPMorgan 

Chase, and others, "IO-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). 
509 

354 

D. Analysis 

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 ofthe 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,I657 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, 1 658 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 

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 profilewere 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 

1656 See, e.g., Subcommittee interview of Michael Cavanagh, JPMorgan Chase (12112/2012); 

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 JOb-5(b) do[cs] 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 (9112/2012) and Michael 

Cavanagh, JPMorgan Chase (12112/2012). 

1658 See discussion in Chapter 111. 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 (9127/2012) at 2, PSIDTCC-Ol-OOOOOI (showing total COX 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 rebound. See, e.g., undated chart entitled, "Credit Spreads on 

IG9 Index," prepared by JPMorgan Chase, JPM-CIO-PSI 0002062, reprinted in Chapter III. 
510 

355 

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 

lO-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. 

# # # 
r 

toJ :! 

g 

;; i ::3 

'#: 0 

.... :. 

= i. 

$180 

$160 

$140 

Q) $120 

-

$100 

Cil 

.S $80 

... 

0 

Z $60 

..... 

Q) 

Z $40 

$20 

$0 

-$20 

Growth of Synthetic Credit Portfolio 

(In Billions) 

-$4 

$1

Jan-3-2011 Mar-3l-201l Jun-30-20ll Sep-30-20ll Dec-30-20ll Mar-3

Source: Subcommittee chart created from data provided by JPMorgan Chase, JPM-CIO-PSI 0037609. 
Synthetic Credit Portfolio Daily Profits and Los

$50,000,000 

$0 

($50,000,000) 

($100,000,000) 

($150,000,000) 

'" = :;; I ($200,000,000) 

::3 i 

=u:: is I ($250,000,000) 

.... 

c:r 

($300,000,000) ($350,000,000) 

($400,000,000) ($450,000,000) 

m a ..... '" .... ..... ;; .... OJ "' m a ..... m a ..... I: 

.... .... N n;> J:, :6 :6 .!. .... N N .... .... 

" I: I: " of J:, .!. .!. .!. .!. '" <t c. ::;; « « 

Source: Subcommittee chart created from data provided by OCC spreadsheet, OCC-SPI-00000298; "Position Limit and Loss Advisory Sum
Synthetic Credit Portfolio Aggregate Profits and Lo

$0 

($500,000,000) 

($1,000,000,000) ($1,500,000,000) 

II ($2,000,000,000) 

f 

!!, 1i I ($2,500,000,000) 

=II: 

.... r> 

-

11 

ct, • ($3,000,000,000) 

($3,500,000,000) 

($4,000,000,000) -------------------

l <:> i j t-i :,; .". 00 <:> "! ::E ::E '" j M <:> j s: ! i;' ::E 00 

Source: Subcommittee chart created from data provided by acc spreadsheet, aCC-SPJ-00000298, Numbers do not reflect restated P&L figure
Synthetic Credit Portfolio Risk Limit Breaches 

CS01 

'" II CIO VaR 

t"'j ; 

.... 3 = § . 

.... ::10 

;!!i II CSW10% 

Q. 

;. 

CIOMTM 

Stress-Loss 

2012 January February 

• Tested Weekly. See 5/1312012 "Discussion Materials," aCC-SPI-00000023, at 030. 

Source: Subcommittee chart created from data provided by JPMorgan Chase, JPM-C[O-PSI 0000628. 

March A

(
200,000,000 

180,000,000 

160,000,000 

140,000,000 

n 120,000,000 

= .g 

trJ ;;. 100,000,000 

.. 

f 

1! .• 80,000,000 

::3 i 

;!!i !. 60,000,000 

= i_ 

40,000,000 

20,000,000 

° u '" 

0 Q " 

Value-at-Risk for the CIO (lOQ VaR) 

'" N " "! g 0 Q '" 'b 0 " 

... ,,'" 

, 

, Old VaR Mod

, , 

j ,,,.,,,-' , .. - -,-_ ........ 

New VaR Model 

Implemented 

N '" 1: 

., 

""' 

<l' '0 

.0 '" il "! til " -il ""' ""' ""' '" '" '" N 

N :5. til :5. -< -< 

-Reported VaR Model - - Old VaR Model --VaRLimit 

Source: Subcommittee chart created from data provided by lPMorgan Chase, lPMC-SenatelLevin 000155-6. 
t"J 

I 

'II: 

.... 

.... 

• 

• 

Inaccurate Public Statements on April 13, 201

Risk Managers: "All of those positions are put on pursuant to the risk mana

at the firm-wide level." 

Regulators: "[A]ll those positions are fully transparent to the regulators." 

• Long-Term Decisions: "All of those decisions are made on a very long-term 

basis." 

• Hedging: "[W]e also need to manage the stress loss associated with that port

. .. so we have put on positions to manage for a significant stress event in Cre

We have had that position on for many years .... " 

• Volcker Rule: "[W]e believe all of this is consistent with what we believe th

ultimate outcome will be related to Volcker." 

Source: 4/13/2012 "Edited Transcript JPM - QI JPMorgan ChaSe & Co. Earnings Conference Call," JPM-CIO-PSI 0001151. 
r-t: 

i: 

= 

Ed 

.... ::t: >-l g 

'lI: g 

tJQ'[ 

Trading 

D.te DailyP&L YIDP&L 

3-Jan .$2,331,403 ·$2,331,403 

4-1<", .$9,405,151 -$11,736,554 

S·lan $11,489,045 -$247,509 

6-Jan -$6.118,207 .$6,365,716 

9-1an -$8,161,497 

l()..}an -$1,147,064 -SI5,674.277 

II·Jan $223,462 ·$15,450,815 

12-Jan ·$19,003,403 

13-lan -$1,328,679 -$20,332,082 

16-Jan -SI,474,654 -$21,806,736 

17-1an S538,245 -$21,268,491 

IS-Jan $1,531,279 ·$19,737,212 

19-Jan ·$22,235,115 

20-Jan .$5,824,024 -$28,059,139 

23-J"" *$l4,937,654 -$42,996,793 

24-Jao ·$18,663,381 ·$61,660,174 

25-Jao .$5,349,602 -$67,009,776 

26-Jan -$1,609,067 .$68,618,843 

27-1an .$3,637,880 .$72,256,723 

30-Jan .$22,790,129 -$95,046,852 

3\-lan -SI00,367,767 

Synthetic Credit Portfolio 

Internal Profits and Loss Reports 

January - May 2012 

Synthetic Credit Portfolio - Daily and YTD Profit and Loss 

January 1, 2012 through Mav 15, 2012 

Trading Trading Trading Trading 

Date DailyP&L YIDP&L Dal. DailyP&L YIDP&L D." DailyP&L YroP&L D ... 

I·Feb $11,899,066 I-Mar $15,808,609 .$153,233,\46 $11,615,1l2 .$707,057,081 1.May 

-$2,476,245 2-Mar .$878,902 -$154,l12,048 3-Apr ·$\0,401,844 .$717,464,925 2-May 

3-Feb $800,677 .$90,144,269 5·Mar $1,171,999 .$152,940,049 4-Apr ·$1l,IOO,lS5 -$728,565,080 3-May 

6-Feb -$3,633,327 -$93,m,596 6-M", $3,161,395 -$149,778,654 5.Apr -$9.517,665 -$738,082,745 4-May 

7-Feb .$749,985 -$94,527,581 7-Mar $1,264,716 -$148,513,938 10-Apr .$415,342,049 -$1,153,424,794 7-May 

8.Feb -S23,773,934 -SI18,301,515 S-Mar $1,154,204 -$147,359,734 II-Apr -$6,301,198 -$1,159,725,992 8-May 

9·Feb ·$4,114,971 -$122,416,486 9-Mar -$4,565,697 12-Apr .$4,809,755 -$1,164,535,747 9.May 

100Feb $\,044,270 -$121,372,216 12-Mar ·1152,763,837 I3-Apr -$50,629,714 -S1,215,165,461 100May 

13-Feb -$5,029,818 ,$126,402,034 t3-Mar -$55,325 -$152,819,162 16-Apr -$37,415,502 -$1,252,580,963 l1-May 

14-Feb -$1.756,535 -SI28,158,569 14-Mar -$3,654,838 ·SI56,474,0IXl 17-Apr $9,948,665 ·$1,242,632,298 14-May 

DailyP&L 

·$794,944 

.$52,404,248 

-$91.590,554 

·$103,250,854 

-$58,065,892 

-SI95,248,051 

-$108,126,(195 

-$36,461,805 

-$570,159,849 

-$'lIl,592,n5 

IS-Feb -$131,468,930 I5-Mar -$730,181 -$157,204,181 IS-Apr -$28,338,553 .SI,270,970,851 IS-May -$119,236,467 

16-Feb $2,787,722 I6-Mar -$161,068,940 19-Apr ·$29,239.630 -$1,300,210,481 

17-Feb $151,612 19-Mar -$3,368,891 -$164,437,831 2Q.Apr -$32,236,022 -$1,332,446,503 

2O-Feb $1,402 -$128,528,194 20-Mar -$207,991,125 2J..Apr -$161,148,061 -$1,493,594,564 

21-Feb ·$3,647,248 21·Mar $701,825 -$207,289,300 24--Apr -$81,602,918 *$1,575,197,482 

22-Feb ·$5,258,735 M$137,434,177 22-Mar ,$1,786,282 ·$209,075,582 25.Apr -$187,629,766 .$1,762,827,248 

23·Feb ·$1,144,086 .$138,578,263 23-Mar ·SI2,555,383 -$221,630,965 26-Apr ·$162,235,258 -$1,925,062,506 

24-Feb ·$5,248,999 -$143,827,262 26-Mar -532,426,419 -$254,057,384 $15,364,325 -SI,909,698,181 

27-Feb .$7,575,866 -$151,403,128 27-Mar -$44,740,604 .$298,m,988 3D-Apr .$222,070,242 ·$2,131.768,423 

2S-Feb -$2,894,309 -$154,297,437 28-M", .$50,685,464 -$349,483,452 

29-Feb -$14,744,318 .$169,041,755 29-Mat ·$49,996,238 

3D-Mar -$319,192,503 .S718,672,193 

Source: Subcommittee chart created from data provided by acc spreadsheet, aCC-SPl-00000298, Numbers do not reflect restated P&L figure
$12 

$10 

$8 

$6 

$4 

o II 

Source: Subcommittee chart created from data provided by JPMorgan Chase, 6/2112()12 CIO Compensation Presentation, JPM-CIO-PSHI 0002
519 

Timeline: Key Events in JPMorgan Chase Whale Trades 

Nov. 2006 Bank authorizes Chief Investment Office (CIO) to trade credit derivatives. 

2008 Synthetic Credit Portfolio (SCP) acquires its name. 

2009 As financial crisis eases, SCP earns $1 billion. 

2010 OCC examines CIO investment portfolios; SCP is not explicitly mentioned. OCC requires 

documentation of investment decisions; Ina Drew criticizes OCC intrusiveness. 

2011 Over 2011, SCP's notional size increases tenfold from $4 billion to $51 billion. 

Nov. 2011 SCP makes $1 billion credit derivatives bet for gain of $400 million. 

Dec.2011 Bank & CIO managers decide improving economy lessens need for credit protection. 

Jamie Dimon instructs Ina Drew to reduce the CIO's Risk Weighted Assets (RWA). 

Dec. 22,2011 CIO traders propose reducing RWA, in part, by manipulating models. cro quantitative 

head Pat Hagan develops CIO models that artificially lower SCP risk results. 

Jan. 6, 2012 SCP trading breaches CSO 1 risk limit; breach continues and increases until CIO risk 

metrics are overhauled in May. 

Jan. 16-20,2012 SCP trading causes four-day breach in bankwide VaR; breach reported to Jamie Dimon. 

Jan. 23, 2012 Dimon and Chief Risk Officer John Hogan approve a temporary bankwide VaR limit 

increase to end the breach; told a new CIO VaR model will reduce CIO's VaR by 44%. 

Jan. 27, 2012 CIO names SCP for the first time in a routine VaR report to OCC. 

New VaR model approval is rushed through and drops ero's VaR overnight by 50%. 

Late Jan. 2012 SCP losses escalate. CIO traders begin mismarking SCP values to minimize losses. 

Late Jan. 2012 CIO trader Bruno Iksil gives presentation showing SCP lost $100 million in January and 

could lose $300 million more; proposes "trades that make sense" -- buying more longs to 

offset losses and reduce RWA. 

OCC holds standard quarterly meeting with cro; told SCP would be reduced. 

Feb. 2012 Over February, SCP loses another $69 million. 

Mar. 2, 2012 Comprehensive Risk Measure (CRM) used to calculate R W A indicates SCP could lose up 

to $6.3 billion in 2012, in worst case scenario. CIO risk manager calls result "garbage." 

Mid-Mar. 2012 Julien Grout, SCP trader, keeps 5-day spreadsheet showing reported SCP values deviated 

from midpoint prices by over $400 million. Trader Bruno Iksil calls SCP's booked values 

"idiotic" and calls SCP book "more and more monstrous." 

Over two weeks, CIO traders acquire $40 billion more in multiple long credit derivatives, 

in what OCC called "doubling down" on an already losing trading strategy. 

Mar. 20, 2012 Traders Iksil and Grout report internally $40 million loss, largest SCP loss to date, and a 

$600-800 million "lag" in SCP book, but Ina Drew says she did not read the email. 

Permanent Subcommittee on Investigations 

EXHIBIT#li 
520 

Timeline: Key Events in JPMorgan Chase Whale Trades 

Mar. 23, 2012 Ms. Drew orders "phones down" and stops SCP trading. 

SCP trading breaches CSWI 0% limit; it continues until risk metrics overhauled in May. 

Mar. 29, 2012 SCP trading breaches CIO Stress Loss limit, which is tested weekly, through April. 

Mar. 31, 2012 At quarter end, SCP's notional size triples from $51 billion to $157 billion, and SCP flips 

from net short to net long. Total quarterly losses reported internally as nearly $719 million. 

CIO London office head Achilles Macris says he's "lost confidence" in his team, SCP has 

moved into "crisis mode." 

Apr. 5, 2012 After media inquiries, bank prepares talking points that SCP is a "hedge" and regulators 

were "fully" informed of trades, but then drops both words from talking points. 

Apr. 6, 2012 Bloomberg and Wall Street Journal report whale trades by JPM CIO office in London. 

Apr. 9, 2012 Senate confirms new Comptroller of the Currency, Thomas Curry. 

Regulators have first meeting with JPM on whale trades; bank downplays any problem. 

Apr. 10,2012 CIO traders report internal SCP daily loss of $6 million, then 90 minutes later, different 

credit derivative values leading to a loss of $400 million. 

Apr. 11,2012 --Bank's chief spokesman, Joe Evangelisti, quoted saying whale trades were a "hedge" of 

bank's overall risk." 

--To prepare for earnings call, bank executives receive SCP presentation showing, in a 

financial crisis, SCP would not offset bank losses, but lose $250 million. SCP also lost 

money in 3 negative credit scenarios, showing it wasn't hedging bank's credit risks. 

Apr. 13,2012 Bank executives learn SCP positions are huge & hard to exit; SCP reports $1.2 billion loss. 

Bank files 8-K form previewing first quarter earnings and holds earnings call. 

--Bank CEO Jamie Dimon calls whale trade stories "a complete tempest in a teapot." 

--With respect to SCP, Chief Financial Officer Doug Braunstein says: 

--"All of those positions are put on pursuant to risk management at the firm-wide level." 

--"[A]ll those positions are fully transparent to the regulators" who get "information on 

those positions on a regular and recurring basis as part of our normalized reporting." 

-- "All of those decisions are made on a very long-tenn basis." 

--"[W]e also need to manage the stress loss associated with that portfolio ... so 

we have put on positions to manage for a significant stress event in Credit." 

--"[W]e believe all of this is consistent with what we believe the ultimate outcome will 

be related to Volcker." 

8-K filing discloses CIO's VaR results, but not the January change in CIO's VaR model. 

Apr. 19,2012 OCC inquires for first time about CIO breaches, including CSO I breach of over 1,000% for 

71 days. CIO Chief Market Risk Officer, Peter Weiland, tells OCC that risk limit will be 

replaced with something more "sensible" in the future. 

2 
521 

Timeline: Key Events in JPMorgan Chase Whale Trades 

Apr. 27, 2012 Bank's Chief Risk Officer John Hogan dispatches Ashley Bacon, his deputy, to London 

CIO office to analyze SCPo 

May 4, 2012 Bank caIls OCC Examiner-in-Charge Scott Waterhouse to disclose SCP loss of$1.6 

billion; internaIly, losses were reported to be $2.3 billion. 

May 9,2012 Bank meets with OCC; Chief Risk Officer John Hogan denies SCP books were mismarked, 

despite collateral valuation disputes. 

May 10,2012 Bank's Controller validates SCP marks, even though the marks were $512 minion off the 

midpoints, were "aggressive," consistently favored the bank, and minimized SCP losses. 

Bank files 10-Q form finalizing first quarter earnings and holds business update caIl. Mr. 

Dimon discloses: 

--SCP in much worse shape than disclosed a month earlier. 

--SCP lost $2 billion in second quarter. (Internally, losses reported as $2.8 billion.) 

--"[T]he synthetic credit portfolio was a strategy to hedge the Firm's overall credit 

exposure .... We're reducing that hedge." Calls SCP a hedge g times during call. 

--"In the fITst 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." lO-Q filing does not 

clearly disclose that same information. 

May 11,2012 Internally, bank reports SCP daily loss of $570 million, its largest; no public disclosure. 

May 14,2012 Bank fires London CIO personnel: Achilles Macris, Javier Martin-Artajo, Bruno Iksil. 

Ina Drew, CIO head, retires from IPMorgan Chase. 

June 2012 Bank discloses SCP has lost $4.4 billion. 

July 13,2012 Bank restates first quarter profits, disclosing additional SCP losses of $660 million. 

Fourth quarter OCC issues six Supervisoty Letters with 20 Matters Requiring Attention involving CIO. 

Dec. 2012 SCP losses for the year total $6.2 billion. SCP has been dismantled, with most credit 

derivatives transferred to IPMorgan Investment Bank 

Jan. 2013 Bank releases management task force report on whale trades. 

OCC issues Cease and Desist Order requiring IPMorgan Chase to take corrective actions. 

Prepared by U.S. Senate Permanent Subcommittee on Investigations, March 2012. 
522 

EXCERPT 

CHIEF INVESTMENT OFFICE· ORGANIZATION 

April 2012 

CONFIDENTIAL TREATMENT REQUESTED BY J.P; MORGAN CHASE & CO. JPM·CIO·PSI 0001875 

Permanent Subcommittee on Investigations 

EXHIBIT #2 
523 

Chief Investment Office - Direct Reports 

Ina Drew 

Chief Investment Officer 

[ Gina Serpico [ Doug 

Executive Assistant J Braunstein 

, 

1 1 1 1 1 : Irene Tse Norma Richard Achilles 

Corio Saba Macris John Wilmot 

ClONAl CIO SpeCial Cia !ntJCla MSR Investment Retirement Europe and Global CFO Hedging Group Pl!.m Asia 

CONFiDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, 

-- 1 

Phi! Lewis 

COO 

( John Hogan 1 

ltv Goldman 

Chief Risk 

Officer 

JPM·CiO·PSi 0001B76 
524 

"RepDrts ttl PhU Lewis _ CIO Global COO 

""ReportstoJohnWilmot-CIO Global CFO 

International CIO 

Achilles Macris International Chief Investment Officer 

CONADENTiAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

PhillipaAdam 

JPM-CIO-PSI0001879 
525 

International Chief Investment Office 

Equity and Credit 

AJexandreBorione 

LursBuraY21 VladimirAleksk 

EricLu 

Ashish Goya! 

TakashiMaldta 

Javier Martin-Artajo Head of Europe and Credit & Equity 

Francois Brochard 

SWell Nico!allS 

Andrew Penytnan Paul Southern 

James GaiUard 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

Elan Rowe 

Laura Dent 

JPM-CIO-PSI0001880 
526 

CIO RISK MANAGEMENT TEAM 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM·CIO·PSI0001885 
527 

Testimony of Jamie Dimon 

Chairman & CEO, JPMorgan Chase & Co. 

Before the U.S. Senate Committee on Banking, Housing and Urban Affairs 

Washington, D.C. 

June 13,2012 

Chairman Johnson, Ranking Member Shelby, and Members ofthe Committee, I am appearing today to 

discuss recent losses in a portfolio held by JPMorgan Chase's Chief Investment Office (CIO). These losses 

have generated considerable attention, and while we are still reviewing the facts, I will explain 

everything I can to the extent possible. 

JPMorgan Chase's six lines of business proVide a broad array of financial products and services to 

individuals, small and large businesses, governments and non-profits. These include deposit accounts, 

loans, credit cards, mortgages, capital markets advice, mutual funds and other investments. 

What does the Chief Investment Office do? 

Like many banks, we have more deposits than loans - at quarter end, we held approximately $1.1 

trillion in deposits and $700 billion in loans. CIO, along with our Treasury unit, invests excess cash in a 

portfolio that includes Treasuries, agencies, mortgage-backed securities, high quality securities, 

corporate debt and other domestic and overseas assets. This portfolio serves as an important source of 

liqUidity and maintains an average rating of AA+. It also serves as an important vehicle for managing the 

assets and liabilities of the consolidated company. In short, the bulk of ClO's responsibility is to manage 

an approximately $350 billion portfolio in a conservative manner. 

While ClO's primary purpose is to invest excess liabilities and manage long-term interest rate and 

currency exposure, it also maintains a smaller synthetic credit portfolio whose original intent was to 

protect - Or "hedge" - the company against a systemic event, like the financial crisis or I;urozone 

situation. Among the largest risks we have as a bank are the potential credit losse~ we could incur from 

the loans we make. The recent problems in CIO occurred in this separate area of ClO's responsibility: 

the synthetic credit portfoliO. This portfolio was designed to generate modest returns in a benign credit 

environment and more substantial returns in a stressed environment. And as the financial crisis 

unfolded, the portfolio performed as expected, producing income and gains to offset some of the credit 

losses we were experiencing. 

What Happened? 

In December 2011, as part of a firmwide effort in anticipation of new Basel capital requirements, we 

instructed ClO' 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 adding positions that it believed would offset the existing 

1 

Permanent Subcommittee on Investigations 

EXHIBIT #3 
528 

ones. This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in 

even more complex and hard-to-manage risks. 

This portfolio morphed into something that, rather than protect the Firm, created new and potentially 

larger risks. As a result, we have let a lo't of people down, and we are sorry for it. 

What Went Wrong? 

We believe now that a series of events led to the difficulties in the synthetic credit portfolio. Among 

them: 

Cia's strategy for reducing the synthetic credit portfolio was poorly conceived and vetted. The 

strategy was not carefully analyzed or subjected to rigorous stress testing within Cia and was not 

reviewed outside cia. 

In hindsight, Cia's traders did not have the requisite understanding of the risks they took. When the 

positions began to experience losses in March and early April, they incorrectly concluded that those 

losses were the result of anomalous and temporary market movements, and therefore were likely to 

reverse themselves. 

The risk limits for the synthetic credit portfolio should have been specific to the portfolio and much 

more granular, i.e., only allowing lower limits on each specific risk being taken. 

Personnel in key control roles in cia were in transition and risk control functions were generally 

ineffective in challenging the judgment of Cia's trading personnel. Risk committee structures ~nd 

processes in cia were not as formal or robust as they should have been. 

Cia, particularly the synthetic credit portfolio, should have gotten more scrutiny from both senior 

management and the firmwide risk control function. 

Steps Taken 

In response to this incident, we have taken a number of important actions to guard against any 

recurrence. 

We have appointed new leadership for Cia, including Matt Zames, a world class risk manager, as the 

Head of CIO. We have also installed a new cia Chief Risk Officer, Chief Financial Officer, Global 

Controller and head of Europe. This new team has already revamped cia risk governance, instituted 

more granular limits across cia and ensured that appropriate risk parameters are in place. 

Importantly, Qurteam has made real progress in aggressively analyzing, managing and reducing our 

risk going forward. While this does not reduce the losses already incurred and does not preclude 

future losses,.it does reduce the ,probability and magnitude of future losses. 

We also have established a new risk committee structure for cia and our corporate sector. 

We are also conducting an extensive review ofthis incident, led by Mike Cavanagh, wh'o served as 

the company's Chief Financial Officer during the financial crisis and is currently CEO of our Treasury 

2 
529 

& Securities Services business. The review, which is being assisted by our Legal Department and 

outside counsel, also includes the heads of our Risk, Finance, Human Resources and Audit groups. 

Our Board of Directors is independently overseeing' and guiding these efforts, including any 

additional corrective actions.' 

• When we make mistakes, we take them seriously and often are our own toughest critic. In the 

normal course of business, we apply lessons learned to the entire Firm. While we can never say we 

won't make mistakes - in fact, we know we will ~ we do believe this to be an isolated event. 

Perspective 

We will not make light of these losses, but they should be put into perspective. We will lose some of our 

shareholders' money - and for that, we feel terrible - but no client, customer or taxpayer money was 

impacted by this incident. 

Our fortress balance sheet remains intact: as of quarter end, we held $190 billion in equity and well 

over $30 billion in loan loss reserves. We maintain extremely strong capital ratios which remain far in 

excess of regulatory capital standards. As of March 31, 2012, oUr Basel I Tier 1 common ratio was 

10.4%; oUr estimated Basel III Tier 1 common ratio is at 8.2% - both among the highest levels in the 

banking sector.' We expect both ofthese numbers to be higher by the endofthe year. 

All of our lines of business remain profitable and continue to serve consumers and businesses. While 

there are still two weeks left in our second quarter, we expect our quarter to be solidly profitable. 

In short, our strong capital position and diversified business model did what they were supposed to do: 

cushion us against an unexpected loss in one area of our business. 

While this incident is embarrassing, it should not and will not detract our€mployees from our main 

mission: to serve clients - consumers and companies '- and communities around the globe. 

In just the first quarter of this year, we provided $62 billion of credit to consumers. 

Over the same period we provided $116 billion of credit to mid-sized companies that are the engine 

of growth for our economy, up 16% year on year. 

For America's largest companies, we raised Or lent $368 billion of capital in the first quarter to help 

them build and expand around the world. 

We are one ofthe largest small business lenders and the leading Small Business Admini'stration 

lender in America, providing $17 billion in credit to small businesses in 2011, up 70% year on year. In 

the first quarter, we provided over $4 billion of credit to small businesses, up 35% year on year. 

Even in this difficult economy, we have hired thousands ofnew employees across the country-over 

61,000 since January 2008. We also have hired nearly 4,000 veterans over the past two years, in ' 

1 On June 7m, the Federal Reserve Board issued proposed Basel III rules, and we wi!! be reviewing these ratios under the proposal. 

3 
530 

addition to the thousands of veterans who already worked at our Firm. We founded the "100,000 

Jobs Mission" - a partnership with 45 other companies to hire 100,000 veterans by the year 2020. 

Recently, we launched a groundbreaking and consumer-friendly reloadable card - Chase Liquidthat offers customers financial control and flexibility. 

And over the past three years, in the face of significant economic headwinds, we made the decision 

not to retrench - but to step up - as we did with markets in turmoil when we were the only bank 

willing to commit to lend $4 billion to the state of California, $2 billion to the state of New Jersey 

and $1 billion to the state of Illinois. 

All of these activities come with risk. And just as we have remained focused on serving our clients, we 

have also remained focused on managing the risks of our business, particularly given today's 

considerable global economic and financial volatility. 

Last, I would like to say that in the face of these recent losses, we have come together as a Firm, 

acknowledged our mistakes, and committed ourselves to fixing them. We will learn from this incident 

and my conviction is that we will emerge from this moment a stronger, smarter, better company. 

Thank you, and I'd welcome any questions you might have. 

4 
531 

From: Mcinerney, James A 

To: 

cc: 

Dianne.Dobbeck@ny.frb.org; Waterhouse, Scott; \/Vatemouse (Regulatory, Scott X; Sullivan, Michael; 

Crumlish, Fred; cneedharr@FDIC.gov; Oarya@FDIC.goV; Arya(Regulator), Om; jyao@fdic.gov 

Genova, Diane M.; Gunselman, Gregg B; HRI, Erin 

Sent: 7124120128:08:37 PM 

Subject: 

Attachments: 

ctG: Response to Regulator Requests on NBIA, Risk Tolerance and FoUow-up VaR model questions 

CIO Risk Appetite 2010 FlNAL.PDF; CDS amerrlmern CDS Residential MBS-doc.zip; Credit &. 

Equity-pdf.zip; NBIA AmerrlmenUTRAXX~CM8X-dDC.zlp; NSIA_am_Sov_CDS -doc.zip 

CONFIDENTIAL 

As ·requested, please see our response to YOII questions on NBIA. Risk Tolerance and the VaR Mode!: 

1) NBIA: Attached is the NBIA for the CIO relating to Credit and Equity Capability in NA and EMEA. The·approval 

document !ists the Initiative Sponsors, the Key Contacts and the Working Group members. There are em ails attached 

to the document evidencing the individual approvals. Also attached are the approvals for additional activities within 

CIO: . So.vereign CDS Trading, Credit Default Swaps referencing Residential Mortgage Backed Securities and Credit 

Default Swaps referencing Markit CMBX index. 

2) Risk Tolerance: Attached is the presentation made to the Risk Working Group on September 16, 2010. 

3) Follow up to VaR model questions: Patrick Hagan will attend a meeting with you tomorrow and is prepared to give 

oral answers to your questions relating the VaR model. 

Kind regards, 

Jim McInerney 

Vice President & Assistant General Counsel 

JPMorgan Chase Bank, N.A. 

Mortgage Banking Legal Deparbnent 

237 ParkAvenue 

New York. New York 10017 

Direct: (212J 622-0560 

james a mClnerney@ipmcbasecom 

BANK PROPRlETARY AND/OR 1RADE!NFl 

Permanent Subcommittee on Investi ations 

EXHIBIT #4 

OCC-SPI-000S1611 
532 

OS/22/2808 15: 32 212834555E 

• Nll1"fte of Jnitiative 

Portro~Oiiii 

Initiative Snonsor 

Initiative Annrov!l' 

Brief Initiative Description 

Economic: RatiomJ fOT 

Proeet=dWg 

• 

Key Changes From CQlrCJlt 

Actt.ity 

• Changes to Operational 

Processes 

EXCERPT PAGE 61/30 

Chief Investment Off,ce 

New Bnsiness Initiative ApprovaJ 

Executive Summary 

Credit and Etnritv CzoabilitY 

NAiEMEA 

Aobilles Macris. Aodv Panmres 

ClO nC<ds broad product "'p,l>ilityl""l>~ to oly..",;colly .no", .. 

e:a:pital and invest across asset classes, 3.$ well as to effectively manage 

n:$icb1a1 expoMCS created by the Fino's operating busjne:tSes. 'fbe key 

areas where CID need!! to initially but1d QUI: its product capability are :in 

Credit & Equities. 

Cr«!it: 

• Th. Finn h>s )mg. cyclieel expo_ to cmfi~ wIrlch is 1he single 

largest risk c""""",ti",, from lhe operating businesses. 

• Credit _. and capital.,. increasingly fimgibl. (Bos.l 11). 

• CIO to 21(ki credit capsbilitics to manage macro overlay progr.rros 

similar to iIrt:e:rest rates, mortgages. and furdgn excimnge. 

Eq1lity: 

!'ovid", ClO with copebility to opportunistically 011""" .. "'Pita! to 

equiticsto: 

• Refine and tlu'get exl$ting macro \1O'NS. 

• Complement CIO's ~g product capability ill constructing 

macro 'hedges oyer the economic: cycle.. 

Credit 

CIO ~t1y has very limited eredit caP~ility~ main1y being confined 11'1 

yield tnhaneemem: mutegles, This initia:tive will provide tile. platform to 

builCl CIO's capability in order to anow CID to 'lD8tlagC coxporate credit 

expostJre$ and diversify-its asset cla$$e$, 

Eq1lity: 

, Redacted by the I \ 

Permanent Subcommittee on Investigations 

I ClOwil1relyontheEoultvDerivativc>r~mlEI>ma"""""mode1. Thi> 

I 

I 

I 

BANK PROPRlETARY AND/OR TRADE INFORMATION OCC-SP!-D0081631 
533 

65/22/2068 15: 32 212a346550 eIO PAGE ei2/30 

• 

•• 

• 

will be deu=incd and gov=ed by a 8eIv:ic. Levcl ~ ao will 

retain ~ of balance sheet substmtiation. 

Jay Risk Issues 

CIO will be reliant upon fIl' EDG rtriddl< office prooe,rlng and 

con:5rrnatiOI1 activity. Tb..i.s will be addressed '\Iia st.A between em and 

ElJGsupport. 

Risk Rating (1, l OY 3) 

2~ Medj'~lm 

Ne:wproducts and systems to CIO~ batnGt to !be Firm 

I 

:Prill-ritv Ra1lD~ BorCl A-tr;"h 

Other Signifieant Informatitm 

~ Launch Date 

Date Authorized to Prot«d wttb 

Develonment 

GuidaD(.e; 

Iuitis.tivl! Approver:. ~ initiative dl;vel~ ag:rttS the initiative b:ouch am. prloritizes-mitiatives fur 

&velopm"". '!be initiati"" approver should be a direct teport oftbe 00. 

Initiative Sponsor. the Spcnsorrutould. typicelly be a PQrtfullo Manager. 

tusk lbIting is b:t~ on incre:mmtaJ risk Ilnd materiality orris); change: 

1-High rusk - signlflCant tncremcniaI rl$k w new business for the w:ea, !rigni£eant residual risk after risk maoag~nt, 

mam.m.1ly :intensive environment, ~d!:tablc lcgal ~~, CJ'Q$S border issues, signiftcant effort for Rr::gn1atm 

appro'V'al, infrastructure und~ s:h;t$, major investment of capitt~ sigoifieant balance sheet implication 

7 - M.edium tusk - maaerC4!e incremental ritk ~ mu1tipl~ risk controJ areas are affo..."ted requiring C109S c5isCI.lSSion abcrot 

the risk$. and operational considerations. 

3 ~ Low Jllik -little incremental risk - impl~btirm of 8. vmrilla initiative reqt'liring the: involvt:m:J:rt of seve:rn1 risk 

coptrol .areas VIhc:rc only minor con!;~s are anticipated . 

BANK PROPRIETARY k'ID/OR TRADE INFORMATION OCC-SPI-00081631 
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• 

• 

• 

JPMorganChase 0 

Chief Investment Office 

New Business Initiative Approval 

Prop.OsaJ 

Credit & Equity Capability 

mitiativt Sponsor 

KcyConiact 

Date Authorization to DevelOP Received 

T_tmnchDm 

Roger Kibbl~White, 

Alis(Jl'l Qimrannetti, • 

BiM'odonKonigsberg. 

=.~~~~. 

BANK PROPRIETARY AND/OR TRADE INFORMATION 

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TobIe of Con1ents 

• 1. hopo.al Summary 

2. Working Groop & Appro"er List 

g. Initiative Ovel1'lew 

4. Trade & Legal Entity Flow 

5. Market RiskIVCG/Credit Risk 

6. Fiuance ~ Accounting 

7. Finanee - Regulatory Capital 

8. Finance - Controls 

9. T &0 - Tecbnology 

10. T&O - Operation. 

• 11. Tax 

U. Legal 

• 

13. Compliance 

14. Funding 

IS. Audit 

Appendix 1, CFTC Speculative Position Limits 

Appendix 2: NOD-Statistical Limits 

Appendix 3: System Arcilitecture 

Appendix 4: Equity Sector Index Futures 

BANK PROPRIETARY AND/OR TRADE INFORMATION 

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1. Proposal Summary 

• Nsml' o(Initiative Credit and Equity Capability 

P.rtfoUo(s)JRegions(s) NAlEME.A " 

Initiative SpolQOOr Acl:iilles Macri&, Andy Pmrures 

;Initiative Appro'Vet" 

Brief IniUI'IUva :Description 

cro needs broad. product capability/expertise 10 dynamicilly alloeatt: 

capital and invest across asset classes, as well as to effectiv~ manage 

residual exposmT.$. crearcd by the FUm's operating: businesses. 'Ibe key 

ateas where CIO needs to btilld out its product capability are in Credit &. 

Equities. 

Ecom)mie ratio.nale {or proceeding 

cr.dit 

• The Pitm. has large cyclicil 'exposure tocedit, wbicm ill the: single 

largest risk cODCCIlt:retion :fi:mn !he operating busines$t:$. 

• Credit exposure and oapilal are ~ fb.gible (B~ D). 

• 00 to add credit capabilitif!ll to manag~ macro Q\lecllry" programs 

si:mil.m to interest r.ms. JIlO11gagezj and torejt;u excbange. 

Equity: 

I Provides 00 with ""pohility to opportunisticolly aliOCSlC capiW to 

equlties to: • • Refine omd taIget e'>istiDg ID2.CW vle-..v.;., 

• eomplemrut eto's existing product capability in constructing 

rnacrQ hedges OVer 'the economic ~le. 

Key .changes from current activit}" 

Credit 

elO OllII'ently b .. vert linlitcd =dit capabilby, malJ!ly being confined 

1:0 yield cnhance.ment strategie$. 1'h:k initiative \\ill provide the p1B1form 

to build ClO~s capability in ocl~ to allow 00 tQ nlBllage corporate 

properties and diversify its asset cl:wes, 

Equity: 

I Redacted by the I J 

Permanent Subeommiltee on Investigations 

I 

Key rusk issues 

CIO will be rdian! upon the !!DO middle office pro<;eSsing and

l 

\ • confirmation activity. This will be: addressed .... i.a SLA between CIO.and 

BANK PROPRJETARY AND/OR TRADE INFORJ"'ATION OCC·SPI·00081631 
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EDGsupport 

• )lis. )!>ting (1, 2 or 3) 

2-Medlum 

NewplOd_ and'l'"'=' to CIO, botnotto theFmn 

Priority Rating (Ao B or C) A-l!lgIt 

Proeessing Locotio. 

Main sYstems impacted STS, PYRAMID 

Other LOn's or l.egal Entities Bank and Whitefriars me. 

Impacted 

Opcrsrtional impact Anticipated 

(include: antic-ipated 'Volumes md key MonthyVols 

C'lp,,,:.ity J1'Bmcs) Credit IDdice$: ;Tra~ CDX etc. 80 

CreQjt default ~s 40 

: Redacted By 

Permanent Subcommittee on Investigations 

• Otpet signUicant lnformation 

:a.egutatory approwl15 required N. 

Ba,laJ1-=e Sheet tl5age 

Otber Polides impacted 

Mdttional HeadcoUDtRcqwrt'.d 4traders-2 inEMEA,2 iIi New York 

2 F1'E !;ost al1OG<Itio1;l frmn. Equity Dtrivanves group 

2 00 Middl~ Offi~e Fl'E, t in EMEA • 1 in New York 

Date anthtJrized to proceed witb 

development 

TaJ'~et Launcb Date Late April 

Key Contact for' questi<Jru R.o-ger Kibblc"White, Alison OiQvmme:tti., Brandon. K.onigsberg, BQru:D.(: 

Kindler, Jason Hughes 

Person responsible fo-r 'fo$1: 

Jmplementation Re'View 

• 

BANK PROPRIETARY AND/OR TRADE INFORMATION OCC-SPI-00081631 
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• 2. Working Group and Approven 

WorkingGlwp 

Achilles Macris, Andy 

p"""", 

, BrtiMOl'I:Konigsberg. 

Roger Krbblc-Wh:i!~ 

Colvit: Lee 

Alison CiQV:t1}f)ctti. 'l'hil ·s 

ero 

Beb R Rona Lon ir 

MmAII!l:I:I,AIllII/d' 

1 David~er 

Keith EnfidtllMm Weber 

Sliot Hooeyfie1d, Nancy 

• 

• 

BANK PROPRlliTARY AND/OR TRADE INFORMATION 

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3. 

• 

• 

• 

Initiative Ovemew 

i.lrtftitrtlw: d(!lC"iption, er:onolnicjldtiftCbtirm. ;1ralq:iJ=fir.. gruIWhfi'r,etlSJ. cxperu:d l'Ofr.lme, =pDdry limit: 

/I. JJus~ Rati<mak i1l.dlldfng 11U1rUJ (lf1J10rtWltripz QOO riri:s 

Please see Exec:ui:ive S1!1l:lma.1"Y. 

Proposed initial product lis-t: 

- Credit lndices: ITraxx, COX de. - see below fur illdlcC5 

- Credit default swaps (not on corporate names) - ate below for indlces 

- Option::; OIl CrerlitIndices- sec bclowfot indices. 

For EMEA, Opticru on Credit in..dicF4 are dependent upon t1t({ bWld out of C1'edit ptoduct1 Within 

Pyramid Squill .. , scheduled for May/J",," 2006, and should not b< traded >nISi1 thiJ 

implr;ine1f1afkm. IE cmnpleM. 

Europe: I=. USA, cox, Jap"" I""", 

CompOO!!:llts: 

Xovcc5yr 

- Ilivol S yr 

- MalnlG5yr 

- MAinlG lOyt 

- Financial Sub Index 5 yr 

- F""",cialSubln~""lOyr 

- Xcver 5yr 

- llivolS yr 

Maln IG ,yr 

r Redacted by tbe 

~rmanent Suboommittee on Investigations 

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• 

4. Trade & Legal Entity. Flow 

• L.._P)'ra __ 1DJ_·d_--1HL ___ ST_S __ ....JH General Ledger 

- ClieTrt facing tmd~ captJ.[red in Pynunid 

- nad< ,ott1ed Ikcugh STS 

Confirmation generated throllgb XDG a subset of srs - Pyramii;l :rutJ;I g~te!l a ba~k to back trade ~ the Bank lind JP Morgmt Wbitefrim Ine.. 

- P:r.amid!l1I1:O fceds"JPMCB and JP Morgan Whitcfrim Inc Oene::ra1 Ledger 

- Cliep.t risk recorded in JMPCB 

- Trad~ risk recorded iD 11' Morgan Whitcfrlats Inc 

L.. __ S_treet __ ---'H1... ___ B_ank __ ~H Whitefriars Inc 

- Lol'ldcm B1'1UlCb (trades back-tD-back thronth tho branch) 

- NY lmnoh (trades back·'o·b.ck ,",ougb the branch) 

- JP Morgan Whitefrian; Inc. (ultimate tcpOsitory oftbe risk) 

• 

BANK PROPRIETARY AND/OR TRADEINFORMATION OCC·SPI·00081631 
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5 • 

• 

• 

• 

Market RiskN.lnation CODtrollCredjt Risk 

Markel Risk 

The iDjtia} product slate is: 

Credit ~ VaR limit): 

- Crodit Indici",· 

- Credit ddault ""1" 

- Opticms on credit indices 

EqUity($lOmmVaRlimi.....;·Q_: ---------------, 

I Rediiited by tbi: l Permanent Subcommittee on Investigati ODS I 

The Business bas, to date, operated 1IIlda a fC:gional Imrlts i:nfrWltrnCture thctclo.rc: itlmY be Deee9&!1ry to 

real.igo the ~Y to be more refltctive of a global ris'k. framewt'Jl'k by M$et eia!9. 'I'lW will require 

devclopmental wcrk from tl)e V.ARS MO and the risk reporting teams. 

Redacted by the 

Permanent Subcommittee on Investigations 

Credit il'ading: 

Cre(lit trndi:og is esstJrtial1y a new business and fuett':fore requires a new limits infrastructute con::¢lriSing 

both V2I,R and noI.i~statistical mea..o:ures $1,Jch as 10% credit spread witlenillg, csbpv Q1' default exposure. 

Meally CID should clone the Credit Hybrids version ofPynrrpid and utilize tho "'Trcvcr" datt!lbase to ensure: 

(i) ind~ exposures axe fed OD a decomposed name-by--name basis for more l(lcurate VaR CCt::lpl,1tatiQJ:I and 

to feed tho Single Name Jlolrition Risk monitoring PT.QCe5S, 

(i.i) options can be appropriately handIed (the Equities "{t:J'$jQtl dOtS not support credit options) 

CIO ","in also need to clone the separate 1'CM: feed from ~or fOT regulatory ca:pttal purposes. 

It 15 understood that owing to syr;tems ~~ints the Credit Hybrids functiooW:ty within Pynnnid Wl.'n not 

be availab1e fOT us!!: by CIO um:il MaylJune Z00.6. CIO sbould therefore refrain from undertaking 

credit optiorts trtding until tills time. Sinee the Equities. vct!i.on ofPyrunid is the only plaifonn ava.ilable 

then there....;n be a numb;r of snort-cwnings, I1BJ:nely: 

a) no dtc:omposed index. feed 

bJ nQ SNPR fttd 

c) reIiance on the Pyr.mtid lOOdcl for«nnputing VaR. (m wlrl¢l. cn::rlit. Ckta.. ia 1.l:Oderstood t\} be d'tlbious) 

CIO will reed to odditionally 01""" the PCM feed for regulatory capitllJ. pmpo,e, and sh""ld ",..,.1hM tho tc:1evant credit productllare.:set up accordingly. 

BANK PROPRIETARY AND/OR TRADE INFORMATION OCC·SPI-00081631 
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• 

• 

• 

QivCI1 ~ dc:fieiencies of the P)TLimid E~itit;S yernion for the t;~djt trading activity, MY AR WQl,lld msist ~t in th;: e'r-ent tbe required systems development docs not occur by end ofHl '06 DOW aclivities must stop 

ud ~ \3-0 Ri:sk Cormnrtttt must evp}uate how to proceed. 

VtJ/uawm Control 

CIa i5 Dot a matktt maker and us.es the mvcstI:nl:Dt BnDk~s risk and valuation ~ to ~ its 

products. Al o;och ClO ~ • price toke< .,ing pri'''' IlIld ""lnation inp1m <Xllltr1llle<l and d.1eIJ!tin<rl by the 

market lIlakiDg "",",",oos of the bank. QO'. Valuation Control. Groop eoordinator will .= that where 

pricing adJu~ art identified from the month end price test process fur 1DBlket making groap:s in the 

Investment B~ that where CIa hold the same positions the adjustments are also discuss~d 'W):thiapplied to eIO. . 

Credit tr.ding: 

The only candidateS: for reserves -are ~t $pfi2d options wlri:~ may qualify for Unobservable Panttncter 

Rt:scrv-=s de:pencliJ)g on the s.ize and type of positions held. Index CDSs tend not to incur reserves, however, 

:i.f th.c business were to venture mto single Dame ~ce theses positiom would qualify for Price Discovery. 

Recovery Rate and/or Coneentration reserves. 

6. Finance - Accounting 

The inmumt!ltS in the iniwl prodw:t slate ate derivatives and 3l such must be mrrked-tQ...rna'["1cet These 

items l.wl be treated as trading im.trn!:DCD13. ETF's will also be troatod I!.S trading ms1nlments. 

Regulatory Cl;IIls1d.erariconS ~ considcrt:d in Section S below. 

The a~ounting will he-automated using the ACE accounting e.ngJnc to generate entries. 

7. Fmanee - Regulat"l'Y Cal'itBI 

JP Morg:m Wlritc:friars IDe. bas no st3:ndalonc regulatory a!pit:'il rcq'L6'cments. Positions in IF Moygan 

'Wbitefrian Inc. will be subject to the Finn's regulatory capita1requircmCIrts: 

Has thiE prodm:1. bEOt 1"S'I'im«4 lJy replmQry rqx:>rtfl'fg (US and Il{m-ti.$) UJ 4mSII1'II mat i1 will N rrponed!ll. accordanc/! witl 

~lotDt1' fq)Orrfng 1'I!'f{tlirement:.. Uri dn, "regui(U.ary rqxming r~ (US D1!d ItQIl-u;:lJ U! rwlalil17t to Ihe j;CIf' 

pl"Olf=t QIId providt; a tlCCI'I'p/klrt f)/tI1?'/'f!IIj'llirrzmC11tt 11m! d!ffl!l' foam aMP. 

This product bee:n reviewed by re:gula.tory reporting (US and non-US) w ensme 1bt it Wlll br;: reported 

in a~oroa,nce wffiJ, regu1.a.tory reporting requ:iremtnts.. 

il. For Rbt·br;:ed capiltlI purpMt;!. win lh/s pnxJ~ be. ootlbMi !Ind!::l' tn/dIJfg ur DQ1Iktng bcok ndt:{ and 1tm- ltgttl lIM 

n':/P'la!ury (~ning rmf!'ft'Cd fh~propc~' lrEaImGl{, 

For Risk-ba<ed capital_os. this produot wJ11 b. booked tmder "ading book xu)" and legal ,nd 

regglatory reperting m\.'icwed the propoSed t{'tatmc:nt. 

B~"lK PROPRIETARYANDIORTRADE lNFORMAIION OCC-SPI-00081631 
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• 

• 

• 

iii. Willthi$ prtodIlct ftd Ur1{t trppropril1.11l mtlrkr.r,. CCl:ll'1l1epm1J' eradlt mid sp~dj1c rl,d: ~tem.t trfl':'J. p/t!tlS1! dtscriN the fea1 

/I./1/1fe.\'. i:ntemltl mMcI, risk tm(l bDoIt:ilfI! Q'.TI'!mr. and C!ppropr!mJ!. .:antDCI'3' in toCJ;hnofugy rmd m/dt:11e qjJi~! 1f nm. ha;>e 

~"YC.raMwlt1",ls~pUlbJp/M:slGre;pIlrfl1b1tJ1fllau,.Qndw/z(lwil1belheCMlal!t.PO'$lJnformartUc1~g1 

'J1,t fonow:ing approach~ wJ1l be used to feed the Firm;s specific risk systm)lS"; 

- Cr<:dil: CIO wlllleverago the )lquity Dorlvativ .. Gr<>up's PYRAMID _ctm.. 00 will "'. 

the infrasb:uctnrt to fr:ed the Fiml's PCM model which v.ill be 1,1$e6 to c:a1tolate sptcl:fic risk on the 

credit ~ "Wjth the exctption of Credit OptiQllS v.>bich wiD be ea.Ico\ated using the fc;!llawing 

rule.:-

Por option positiOJ):$, long 01 short, the risk weighted amount is the market value of the effeedve 

llOtional amount of the underlying instru:m.ent. or index 1mI1tiplied by the option."s delta. These are 

required. to be reported on <I IIJ3l:IUal template, For credit eptions which arc NOT price ba~ we 

may not be ~le U$e a ~pti~n delta .l!pproach (wt; may need to use a notiOllaJ;X; ~% approach). 

Eg.ity,' 

Redacted by the 

Permanent Subcommittee on Investigations 

No spc~i:fic colhterai will be: held a.gairut the proposed ptOduci!, however derivative MTM 

coDalaalliation WIll be subject to nor.mal F'n:m. collateral grOl,lP process. 

v. ~~ Jhu podllr::l tmp::ct ~ rmd, ifw, h.u rhb bee1! I:lUml'l'tllllimFnf 11' rq>'l(.ltcQ' rq>Dr/Jtegf~ pwpM~ r:f =1OfIntirq:. 

"PpropriLlJtrr.ruva. 

This product does not impact deposits, 

BANK PROPRlETARY AND/OR TRADE INFORMATION OCC-SPI-00081631 
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.05/22/213E18 15: 32 2128346.5513 elD PAGE 13/30 

• 

• 

• 

8. 

... 1. Hcu aIrY tmpact 111 risk wcigMcd ~ bun itlr:nriJld, ~JIIQlcd onJ ccmmWliNItDi /0 t'tIgtIla/tl,l)' l'eptJl'!Utg_ A)'II' tbt 

appn1J1rltIJ/! rl:k ~fr1edJZW!1l!"'its flip/ace WI!l ban ~ h;y tAeapplicar,le am 

Givim the use of approved models as de:tailM above,. 1he impact to risk "Weighted assd$ is not~ced 

to be matt.ria] and caD. be- a~o)'JJfflodatcd within OO's existing limib_ 

vii. Hr;: Ilu: 1TlI!:lhudo[oEl IN' CCI!cultnillg rUk 'rIIl!ighiM a.ueJs flJT VAn (lfld spec1fir: rid: bef!II commwlfet:tcd and apprr;1illll by 

rr:gulQtorr repor1~d: Markd R!d MlI~en1? 1: any r(!gTJll11Dry oIlJlptOVtl.l or s~ rb/r:mudd tifM!!.lC1jH1ltt:/ rCllfHrcd/cr 

llJUpnxblCI't 

Th~ methodology for calC'Jlz.ting risk weighted assl!:t5 for V AJ!,. and specific; risk been I;OmmJ;lll:;jcated 

and approved by regnlatory reporting_ T"he models have: been approved by the regnlators. and hence no: 

specific regulatory approval or specific ri:sk model devc-lapment Is. t.cqo:ired for this product. 

viii. IJthilr prTld/((;l M{UI~ rblr. (mdudmg gc!CM=1, spe.ci[Jt!. lind -'Cmf~.fZ'P"'?') N:u thllprrxilleJ h_ ll'bmlrted to ~a1ory 

reporting to "pda:.n tlH. n'lrklli~ I/sr?' 

The product slate is part of the bank's existing approved products. 

Finanee - Controls 

caMWvclu:z~ ttl thQ colltrolerr...,tronm!!'1 itrchidlrrgprr1=, l!DIj~rpl'Oc~~orad revfew 

Snr/1GIl'e>' O:dey rmplICl1~: qWn.ertltip ojnew prtlCeS!: j!ml.plrztl2S. test!ng 

Th~ Credit and Equity busInoss will ultimattly reside in JP Morgan Wbitefrian Inc.. A new QPEIation:il 

~OI'lttols tempI::!\!!. wi!! be created for SO-':: purposes specific to tho Credit & Equity buSncss and will 

address all key cDntrols. Also. additicrmu control steps win be added to the "ero CFO" SOX template 

covering this Dew acth'ity, 

Discreet coSt centers, SPN"s ruxl books are being established f~ em Europe and New York to suppOrt 

and segregatetbe acti-vity. 

9. T&O - Te<hnology 

BANK PROPRIETARY AND/OR TRADE INFORMATION OCC.SPI-00081631 
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OS/22/2008 15: 32 21283465513 GIG 

• CIO New :Su';" ... 'nltiatjv. i\>pproval Policy 

Post-Implementation Review 

Sec:tion 1 .:. to be complEted at the time Dr lIpprovul 

NlilJnl?;QfInitllrtive: 

Line of Business: 

Post Implementation Key 

Contact: 

Launch ADnrovaI J).tte.: 

First Transaction Da.te.: 

J3rief de$Cripttan oftb~ approved Initiative; 

I (copy/;"," u.itiatiw J1ntl1M1)~ 

PAGE 19/30 

List lI,;JJY tanditions associated with the approv:aJ, comment on o~ (ten)$: and the timetrame (I)T (:omplt;6oi'l • 

• Sectinn 2- -' to be oompteted within 6 months of tbe activity going live 

Is the initiative as descn'bed Tn the proposal when it was approved? 

Is the ixritiative- 'Within the volumes and limits agreed when Olpproval was gnmted? 

Have there been any operational errrns as a result of introducing this initiative? 

What economic value has been received rmd how does that valu.e CO~ to the initial-projcetiom.? 

Have '!'here been material Qpentiortal changes that 'i\'eI"& or should be documented? 

OOm:-points of nate 

Post implementation review comPleted by 

Date j {lnsort date comoletedi 

s""~ """l'lctod copy to LOB ORM, Regional E>q>edit1or and Audjt 

• 

BANK PROPRIETARY AND/OR TRADE lNFORMATION OCC-SPI-00081631 
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0512212008 15: 32 2128345558 eID PAGE 21/30. 

• 

• 

Credit 

10% Credlt Spread Wid""mg $2""" (Total) $2mm (By Sub-IndOll e.g. i1Iaxx main, itt"", mvol) 

CSBFY S2mm(Toml) 

$2mm (By Sub-Index) 

lb. (ToW- "'P="d;" O.! bp hi. Il:rms) • Vega 

BM"K PROPRlETARY ANDIOR TRADE INFORMATION OCC-SPl-00081631 
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• credit & Equity NSIA sign-off,txt CIa & GFLM 

Alison C Giovannetti 20/04/2006 12,44 

TO: Jason LON Hughes(JPMCHASE@JPMCHASE. Roger X 

Ki bb 1 e-Whi tell PMCHASE@.lPMCHASE c:c:: 

Thi s dOC~~~~~c~~nta; ns a R¥h ~r~~~~c*m~~~;~t~BiJ\i 1 ~i ~~ z~t;;f 1.9U KB. 

Signed off 

~~f;~~Sl 

Ali son Gi ovannetti --"" Redaded by the Prrmanent 

GOP : a 325 6025..... Subcommitteeonlo\'estigBtionJ EXternal ; (020) 

• 

• 

COrpora:te._ Reporting euslness Advisory Tel 212-834-9425 Cell Keith ."field 20/04/2006 14: 51 

~~; .~~~~~ ~D~;~~?~~~h~~~7~~~~~~~HASE subject:: Roe: CrE!.dit & Equity NBIA 

~r~§E~~~e (~ft y~U t~!~~ b~~e S~~~j rl a~dk~r:d~~t~wi~~f og~n(~h~~ 1 ~o~q~~;y g! a~~~~~t~~ ~~:d~~~ :~ti:{\~~~l~~~~~ntlY approved for PCM) wi 11 need to 

phil lew; 5 

21/04/2006 13: 57 

To: Jason LDN Hughes!JPMCHASE@.JPMCHASE CC: Alison C G1Qvannetti/JPMCHASE@JPM.CHASE, 

thoma.!ii".j .11'Iauro@jpmorgan.c:om@.JPMCHASE. 

111;5 doc~~~~~C~~nt.a;ns aR¥-h~r~mc*m~~~i~¥t.~B~file size of 198.2 KB. 

J~son - ok to sign-eff. 

AS- ·s'L.ated in the document I next: step is to ft na 1; se the SLAs and SOPs 

~fi~~~dS 

David M A1exander 25/04/2006 14:ll 

~~; ~~~~ ~~i~~~~~~~~~~~CHASE Subject' R~' credit & EquitY NBIA page 1 

BANK PROPRlETARY AND/OR TRADE INFORMATION OCC-SPI-OOOS163J 
548 

• 

• 

135/22/213138 15: 32 21283465513 elD 

Credit & Equity NBIA sign-off. txt 

Jason .. 

You have my a.pproval. I traded vms with Roger - a11 of these positions will be mtm in a trading book. please revert back to me if any other types of positions are held beyond what is included in the NBIA that might - warrant different acctg. I.e. Loans or non-marketable equity securities. 

Thanks. 

Nancy E. Dennery Chief Investment office - Tel (Z12) 834 - 9485 

~~(6H~~nTI~9 

~~ ~ ~~~~~ iO~i ~bl~~~~~~5~~~~i~~~HASE subject: R.e; Fw: creqit & Equity NBIA This document contains a file attachment with a file size of 198.2 KB. 

Yes, I have revi"ewed and sign off for -the controls section. 

Treasury - Tel +44 20 7777 0034 Frederi c Mouchel 03/05/2006 09:56 

To; ~ason. LON. Hughes@jpmorgan.com@JPMCHASE cC~ 

This dOC~~~~~C~~ntain5 aRf~1~r:~iic*m~~i;~rt~B~fill! size o-t 19S.~ KB • 

Fi ne with me. 

Rgds 

F 

Investment Bank - Technology Nicholas JS wood 03/05/2006 17: 50 

To: ,"son LDN Hughes/JPMCHASE CC; joseph g co1eman 

This doc~~~~ic~~nta;n5 aR~l~r~~ic~m~ri~i~t~B~fi'a size of 199.4 KB. 

Jason -- this lookS fine frQJJ1 my point of view. off the top of my head the are.as 'that we. need 'to include in the p1an are: 

~~n r~~~c~~ a~a~O~~!y 1:~~t o~oho:ati ~e t~:~e~~~ n6e C~o~o~l~~d~f t~:B~ese but 

creat.e appropnat.a id admin workflows for the existing apps (Pyramid 7 STS. etc) for the CIO staff - unless we will use thre same approvers as for EDG and E&H update the Be plans far CIO as these new systems wi11 need to be included.' 

regards, 

Ni ok Wood-

• ~ob"rt J. tole compliance- Tel 212/270-1554 Fax 212!<70-3450 "Robert J Co 1 e page 2 

BANK PROPRlETARY ANDIOR TRADE INFORMATION 

PAGE 25/30 

OCC-SPI-OOOS!63! 
549 

0S/22/2BeJS 15: 32 2128346559 elD 

• 05/0>/2006 20:19 credit & Equi~y HBIA sign-off."tXt 

• 

• 

~~;, ~6~~~ iD~i~~1~~~~:5j~~~~~~ASE, Brandon 

Konigsberg/' PMCHASI';@'PMCHASE, carolyn MMroe-Koatz!JPMCHASE@JPMCHASE, colin R Harrison/JPMCHASE@JPMCHASE 

Subject~ Re: NBIA - compliance section 

.:Jason- sl!e my comment.s below (in red and strikethrough). whi ch i ncl ud@s ,new langua!ile regarding compliance a.pproval required bEfore trad;n~ in cr-edit!equlty ;I'\dices with less 't,han 20 names as we discussed. With th~t! 

changes, we are ok from us Compliance perspective. 

Fee.l free to ca.ll me with any questions. 

- Tel (201) 595-5696 Fax (201) 595-6776 Arthur Ki rshenbaum 04/05/2006 15: 48 

~~~ ~~~~ ~D~i~~~~~~~l~~~~i~~~~~~2HASE subject: Re: Fw: credit &. Equity NBIA 

Jason, 

I have no further comments or questions and approve~ 

Is t.hi s e-mail suffi ci ent or do you have a. more forma' process? Arthur 

MCl.rk. Fted, ani 27/04/2006 15:25 

~~; ~~~~ iO~i ~b~~:~~ ~~7~~~~~i~~~EHAS E subjec't; Re: Fw~ Credit & Equity NB.IA 

This document contains a file attachment with "a file size of 778.5 KB. 

Jason, 

I don' t have any issues: pl ease accept thi s e-mail as my 51 gn-off. 

Regards. 

Mark 

Robert R RUpp 

28/04/2006 20: 49 

To! Achilles 0 Macris/JPMCHASE,@JPMCHASE. Andrew panzures/l pMCHASE@JPMCHASE 

cc: Ina Drew/JPMCHASE@JPMCHASE, Enric:o Dalla. vecchia!JPMCHASE@)PMCHASE, Joseph s. Banacore!JPMCHASE~JPM01ASE. Roger X Ki bbl e-W11i tel) PMCHASE@.JPMCHASE. 6randon ~oni9sb.rg/JPMCHASE@.J PMCHASE, 

)asoT'l LON Hughes/JPMCHASE@JPMCHASE, Fiona. J. LongmuirfjPMCHASE@JPMOlASE. 

subject: 

Enrico, Fiona and I met to review 'the credit and equity NBIA and we agreed to si9n~offt for purposes of "[he new product approval process. 

Fi ana prepared a summart; of our· di SCU$s'i on whi ch includes a li st of 

;~~~~~~~'jo~si~eing~aea .~nb~~~a~6~ a~~u~~~~chm~~i' ofM~;;! ~~~~!~e~re page 3 

BANK PROPRIETARY AND/OR TRADE INFORMATION 

PAGE 27130 

OCC-SPI-OOOS163J 
550 

0.5/22/20.08 15: 32 2128346550 cro 

• 

• 

• 

. credit 1\ Equity NBIA Sign-off. txt related to feeds and reports that Roger/Fiona/Jason and others ha.v@ been 

working ora. ;rn addition to those. issue.s, there ~re two items I want t9 note here: 

1. We assemb1ed an approach to 1imits that para1'e1s the method used in the IB for, these J:!roducts. while we are set on VAR limits, we need to 

~~~;~!~e~~~) t~u~~~~u~ n t~he 0i~~~cg~~~~~ed limits (e9 de ta, vega, 

2. p1s note the systems issues around credit options which need to be resolved before proce~ding with that product. ' 

Any questions/issues, 1ets discuss early next week. thanks 

Bob 

00 / GFLM Technology - Tel 212-622-6136 Joseph G ·Col eman 25/04/2006 13:03 

To: Jason LDN Hughes/JPMCHASE@JPMCHASE cc: Alison C Giovannetti/JPMCHASE@JPM'CHASE subject; Re; credit & Equi~y NSIA 

confi rmed - I s; gn off 

Elliot ~ Honeyf;eld 20/04/2006 10:39 

~~; ~~~~~ ~tl~i~~~~:;h~~:~~~l:~~~HASE 

Ttl;. doc~~~~iC~~nUi fl' aR~~l ~r~~~~c~m~~~i~l t~a!:" file .;ze of 19S. 2 KB. 

Happy to sign off, just noticed a few grammar err_ors that I wi" advise' of 

regards 

Elliot 

LONDON BRANO! LEA LEGAL ENTITY CONTIOLlF;RS - Tel 44 207 777 2275 Fax 44 207 777 2010 Mark S. Allen 09/05/2006 18; SO 

To: :J~sori lJ)N Hughes/JPMCHASE@JPMCHASE 

CC: Andrew Marcovitch/JPMCHASE@.JPMCHASE. Arthur Ki rshenbaum/JPMCHASE@lPMCHASE. Dermot M walsh/JPMCHASE@.JPMCHASE. Rachel E Le; gh/JPMCflASE@JPMOIASE. Madhura shah/JPMCHASE@.JPMCHASE 

subjec~: Re; PM; credit & EquiW NUA This document cont.a;ns a fi'@ attachment with a file size of 778.5 KB. 

Jason, 

~u~~~~;{]fnf~~S~~~~~;!: ~~~~~~ ~~ ~~~~h~r L~~~~~o~~~roval to use the 

Regards, page 4 

BANK PROPRIETARY ANDIOR TRADE INFORMATION 

PAGE 28/30 

OCC·SPI-OOOS1631 
551 

135/22/2008 15: 32 2128346550. eID 

• 

• 

• 

credit & Eq1Jity NBlA sign-off.1:Xt 

Mark 

Roger X Kibble-white 10/05/2006 12: 10 

To: ~'$on LON Hugh"/~PMCHASE@JPMCHASE 

cc! 

subject: FW= cr~d;t & E.quity NBIA 111is document contains a file attachment with a file size of 198.2 KB. 

Jason 

si9ned-off. 

T11anks 

Roger 

chief Investment office Finance and 8usiness Management - Tel CBS2)2800-7091 or GDP2BO-7091 Fax CBS2)2810-6709 Colvis Le.e 10/05/2006 14:52 

To: Jason LON Hugh"/~PMCHASEiOJPMCHASE 

cc: charle.s K.t. Mong/)PMCHASE@JPMCHASE;. Roger X 

Ki bb 1 e-Whi t:"/JPMCHASE@JPMCHASE 

subject: Re: equity and credit initiatives 

Hi Jason, 

ihere is no issue. from "Asia ao CFO perspective, The market riSk 1indts granted are on a g10bal basis. We are 1n the proce.ss of coordinating a 

:~~:~~~:n~~I s;1~-~:~efihi~$!~ .~d s~~~ff~fer 'to the global limits in our 

Thanks, 

colvis 

chi sf Investment Off; c:e CFO/COO 

igi65?2506 B~g~o~r • 

. ~~~ ~~~~~ iD~i~~~~~~~~~51j~~i~~~HASE, lna Dr"",/ J PMCHAS~@J PMCHASE Subject:: credit(Equities NBlA 

Approved. 

Joe 

.Chi ef Investmen't Off; ce Ina Drew 10/05/2006 16:19 page 5 

BAN"K PROPRIETARY AND/OR TRADE lNFORMATION 

PIIG£ 29/30 

OCC-SPI-00081631 
552 

flS/22/2008 15: 3'2 2128346.55E1 CID 

• 

• 

• 

credi t &< Equi ty ~BIA 5; gn-off. txt 

To, Jason LDN Hughes/J PMCHASE@JPMCHASE CC: Roger X Kibble-White!JPMCilASE@)PMCHASE. Joseph s: Bonocore./JPMCHAsE@.JPMLHASE subject: FW: Credit/Equities N8~A 

APproved t 

Xna Drew 

carolyn L. MOl'lrOe-Koa.tz Managing Director & Assoc. General counsel carolyn Monroe~Koat.z 

15/05/2006 14: 59 To: Roger X K;bble-white/)PMCHASE@J~MCHASE 

cc: . subject: credit and Equity Capability NBrA 

Roger - can't find the. mail asking me to sign off. I am signed off, but I am going to send you la"ter today a rev"ised NSIA. MY assis'tant is inputting more materia' "into the Legal section right ntWtI~ CMJ{ 

~age 6 

B.A.NK PROPRIETARY AND/OR TRADE INFORMATION 

PAGE 30/30 

OCC·SPI·0008163! 
553 

Audit Department Report 

Report Number: 

Audit Rating: 

Report Date: 

AuditType: 

No Prior Report Explanation: 

Business OVerview and Context 

CIO Global Credit Trading 

G-07/005 

Satisfactory 

November 29, 2007 

Audit 

First Time Review of New Business, Product or Service 

Chief Investment Office (CIO) credit trading activities commenced in 2006 and are proprietary position 

strategies executed on credit and asset backed indices. Trades are executed in London and New York. 

CIO has its own dedicated Middle Office, Market Risk and Valuation Control Groups (VCG), but utilizes 

the 18 Equities PyramidlSTS suite of applicatkms and IB Operations groups to process, confirm and settle 

the trades. 

Audit Scope 

Audit reviewed the following global risk and control processes operating in London and New York: 

Trade capture processes & controls (including cancel, amends & late trades) 

Daily P&L and market risk calculation, sign off & reporting processes and controls 

Monthly VCG valuation & reserves 

Middle Office reconciliation break item clearance & oversight 

Key Findings 

Based on the results of our evaluation and sample testing, the contro! environment is rated "Satisfactory". 

However, addressing the following matters will further enhance the effectiveness of control procedures: 

We noted an aged item of$500,000 (debit balance) in a suspense account. While this was identified 

by Middle Office, month-end reronciliations did not highlight the item on a timely basis. Management 

is currently determining proper disposition of the item and is strenghtening reconciliation procedures. 

While not material to the overall year-to-date CIO P&L, we noted some calculation errors in the VCG 

price testing for September month-end. We identified 6 errors, resulting in net under-reserving of 

$386,000. Management is currently in the process of adjusting the entries and implementing 

additional rontrols over the review of calculation results. 

Status 

Management has agreed with the audit findings and is implementing corrective actions. No further 

response is necessary. 

Business Details 

Level 1: 

Business Executive: 

Level 2: 

BltSiness Executive: 

Chief Investment Office 

Ina Drew 

CIO 

Achilles 0 Macris, Joseph S. Bonocore 

Permanent Subcommittee on Investigations 

EXHIBIT #5 

CONFIDENTIAL TREATMENT REQUESTED BY J JPM-CIO-PSI-H 0006022 
554 

Location: 

Business Executive: 

Aud~Detaiis 

Management Team Member: 

Audit Manager: 

Auditor In Charge: 

Issue: Suspense l!em 

New York, New York, US 

Javier X Martin-Artajo, Phi! Lewis, Roger X Kibble-lNhite 

HalZopoulos, Alexander X 

William K McManus 

Sally Russel! 

Detailed Findings and ManagementActl.on Plans 

The September month end balance on a reserve account (with a debit balance of $24.9 miUion) inducted a $ 50(}\( 

debit which appears to have been outstanding since April 2007. This had been identified at August month end by Cia 

and is under investigation by Finance and Middle Office to determine dispositiof\ including write-off if necessary. This 

item arose when an unrelated brokerage adjustment item posted in May was erroneously matched as a reversal of 

the April month end P&L adjustment for late trades executed after end of day. The month end reconciliation process 

had failed to identify the errOL 

Management should continue their investigation and strengthen their reconciliation procedures over this account 

Action Plan 

CIO agrees with the point raised and the accompanying recommendation. As stated, CIO was aware of the issue and 

we have already acted to strengthen our processeS around this reconciliation. Specifically, pricing adjustments and 

trade related adjustments (for example late trades) are rKlW recorded in separate PYRAMID books and reconciled 

discretely. Pricing reserves are also specifically substantiated against Pridng Testing results. 

Target Date: 12131/07 

!~ue Own~~ __ " '."wm.,,,~~~!i~~J2~~,.h .. ~!~m.'.~~~~=~ ___ ~~_~ ______ 4~~~_=Y=== 

Issue: VCG Calculation Errors 

While not material to the overall year-to-date CIO P&L, we noted some calculation errors in tfle VCG price testing 

calculation for September month end. We identified 6 errors, resulting in net under-reserving of $3861<. Detalls have 

been provided to Management While controls over reviewing more material differences are operating effectively, 

VCG should enhance their current procedures for validating final price testing calculations. 

Action Plan 

By nature VCG process for Credit Price testing is a manual operation pulling together large amounts of 

infonnation from multiple sources. Whie the errors recorded were small the size of positions in certain 

strategies multiplies the effect. To avoid similar mistakes going forward CIO has instigated extra controls, 

including separately recording aU prices received in "soft copy" from brokers, dealers etc, a review ofthe 

calculations and prices used by other members of the group and CIO has moved to running the process 

weekly to provide on-going feedback and identify potential issues prior to month end. 

CIO has also identified new sources of prices for a number of strategies where there had previously been 

difficulty in sourcing information. 

Not to be disbibuted without prior penrission from Audit . 

- End Report -

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PSI-H 0006023 
of PoSltlollU" .... ·'o..! 

Notional usn Facto(ol., 

!if!..: 

CDS !NDEX 

COS=SINGLE_NAME 

CDS TRANCHE 

Date 

2011-01-03 : 

14,211,090.5321 '18,981.099,113i 44,976,S85,30e! 17,869.281,011 1 17,803,310,690! 99,809,214,3351_ 15,922,982,448 

10,212,156,7451, 4,620,952,252 L 3,021,344,404j 26,371,449,362 1 33,283,389,737! 51,269,099,3!?O 1 

j j ___ 

Summary 9' posmpve by TyP' and Serles Notfonal USO Factored 

1re--

CDS_!NDtx 

trlg' 

63 e . 

.... 

0-3 

'It :: 

a-, 

PraductSerles 

CDx.NA-HY CDX.NAJG CDx.NA-1G.HVOL 

CO)(.NA.XO 

ITRAXX,EUR.FINSEN ITRI\XX.EUR,FINSUB 

lTRAXX.EURHIVOL 

ITRAXX.EUR MAIN ITRAXX.EURSOVXWE 

ITRAXX.EURXOVER 

LCDX.NA 

Cti.iCNAHY 

COX.NAJG 

ITRAXX.EUR.MAIN 

lCO)('NA 

Dol' 

2011-01-03 2011_03_31 2011-06_30 ,2011-09-30 2011.12.30 !2012-03-30 201

15,87Z,894,OOO.· 1,014,951,5001 11,932.826,5001 3,114,116,5001_ j' 22,047,733,000 • 

17,5ag,50',"5/" 12,051.602,3951· 62,123,218,005 

' O· O! - I - j . i ! ",:::::::::1· o· r 155,664,1911 o! 73,241),757 L 613,097,189

1

¥ 1,861,67[1,8931- 2,32a,273,S6S j- 

O! ! i ",872,,66';"1 71,774.454,42.4 1 

I 46,665,000 

L 73,700,579). 1,421,626,410 r 1,682.545,056 i- t a,6SO,974,446· 4,236,164,000 1,266,300,000 '. 1,232,532,000[- 1,184,996,000 -

14,212,090632, 18981,099,123 44978,685,30& 17869281,012, 17,803,320690 99,809214,335 " 

I i . ! 

8,116,656.6441 

i 

9,367,799,720 10,394,268,29Q I 12,369.757,;691 , 13,117,165,194 1 

10,810,447,157 19,648,039,6141- 13,545,590,664 1_ 5,911,55-4.oo6j- 5,360,701.943 1- 7,356",130,465 -

6,354,776,'253 3.3Z5,954,275i- 3,111,768,897! 15,957,3&4,718 { 23,239,155,626. 47,355,169,73-Zj 

3,300,027,930 3,382,476.443' 3,241,766,861 : 3,148;472,796 i 3,055,178.686 2,961,884,575 

10,212,155,745 4,820,952,252,- 3,021,344,404/ 26,:)11,449,362 3:),283,389,737, 67,269,099,:)90 

3,999,933,181 14,180,1-46,870 __ '!-4.240,73!!,,315 l . 167,078,313,725 ! 

JPM
556 

From: Drew. Ina <Ina.DreW@jpmorgan.com> 

Sent: Tue, 10Jan201217:05:41 GMT 

To: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

CC: Macris, Achilles 0 <acbilles.o.macris@jpmorgan.com> 

Subject: Re: International Credit Consolidated P&L 09-Jan-2012 

Let's review the unwind plan to maximize p !. We may have a tad more room on TWa, Pis schedule asap. 

From: Martin-Artajo, Javier X 

To: Drew, Ina 

Cc: Macrls, Achilles 0 

Sent: Tue Jan 10 12:01:01 2012 

Subject: RE: International Cred~ Consolidated P&L 09-Jan-2012 

Total reserve is.30 MM, ! do not thinkthatwe wHf have a release for sometime unless we get an opportunity. 

Bruno has been unwiding some of these postions opportunistidy . The other side of the P/l is that It has been 

som~hat costly to unwind too So net net we have actually lost a little bit of money to unwind, 

From; Drew, Ina 

Sent: 10 January 201216:17 

To: Martin-Artajo, Javier X 

Cc: MarriS, Achilles 0 

Subject: RE: lntemational Credit Consolidated P&L 09-Jan-2012 

OK, thanks. Can you forv.rard the schedule for releases, Ie: what is the release planned given the budgeted 

reduction. 

From: Martin-Artajo, JaVier X 

Sent: Tuesday, January 10, 2012 11:05 AM 

To: Drew, Ina 

Cc: Macns, Achilles 0 

Subject: RE: Internation.1 CredttConsoJldated pal 09-J'n-2012 

Management line is the release of PjL that comes from unwinding off the run positions. This is an adjustment 

that was made in 2009 for i1fquidity of the credit derivatives book .In a way it Is a reserve release for lIiquid 

indexes. 

From: Drewl Ina 

Sent: 09 January 2012 21:25 

To: Martin-Artajo, Javier X 

Cc: Macris, Achilles 0 

Subject: FW: International Credit Consolidated P&109-Jan-2012 

~_~ __ ~~::!~.Ff":!!.'.~~~J.i.ry.~.l~!~._~.~~~~.: .. _ .... " .............. ~._. __ "._ .. 

From: Munjayi, Tendai 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.P ... ___ EiiiiXHiiiiiiiiiiiffi_liiiiT....,#.7 ___ .. JPM-CIO-PSI 0000075 
557 

Sent: Monday, January 09, 2012 3:58 PM 

To: EOD Cred~ estimate 

Cc: CIO P&l Team 

Subject: International Credtt Consofidated P&L 09-Jon-2012 

MTM Credit P&L as at 09/01/2012 

Daily Est 

Strategic 

Redacted By 

USD 000', 

MTD 

Permanent Subcommittee on Investigations 

Tactical Core Tactical -1,824 -3,306 

Tactica12 31 

Credit Single Names 35 161 

Total Core -4,329 -30,811 

Investments 

Redacted By 

Permanent Subcommittee on Investigations 

Total Investments 

Management 

Totallntemational Credit: -4,068 ~7t740 

TRR Credit P&L as at 09101/2012 

USD OOO"! 

Daily Est. MTD 

Strategic Redacted By 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-ClO-PSI 0000076 
558 

Redacted By 

Permanent Subcommittee on Investigations 

Tactical Tactical 1 -1,824 -3,306 

TaGtical2 31 

Credit Single Names 35 161 

Total Gore -4,329 -30,811 

Investments 

Redacted By 

Permanent Subcommittee on Investigations 

Total Investments 

Management 20,772 

Total International Credit: -4,068 -7,740 

CREDIT MARKET COMMENTARY 

Synthetic O"edit 

Another day with very. little realized volatility, and a bit more weakne5s, coming from European bank equitie5 

(Italian banks such as Unicredito), pushing single names, then F!NSEN then ITraxx.Main index wider. Overall 

levels: of spreads remain very high, relatively to the recent move kl convexity instruments ~ credit volatility was: 

once more very much for sale, especially in Europe (-3pt in ITraxx. Main ATM March), and longer date mezzanine 

tranches are decently tighter too. US credit was wider'- consolidating a bit after the recent outperformance 

given the good numbersforthe US economy. Ol,Jr fTraxx positions are getting hurt mostly due to the long 

overiay, and the compres.slon between iTraxx.Main and iTraxx.Xover. In CDX.lG super senior tranches are 

~tching a bid ~ causing mezzanine tranches to tighten, hurting our positioning in this complex. In CDX.HY short 

dated off the run index are decently outperforming today, causing ~y curves to steepen· we are also benefiting 

from higher mE'nanine tranches across the board. 

Redacted By 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.P. Morgan & Co, JPM-CIO-PSI0000077 
559 

Many Thanks and Kind Regards 

Tendal, 

Tendai Munji!'fi 

Chief Investment OffICe JP Morgan ctuise &: Co. 

100 WDOd St, London Er:2V 7AN 

Tel 'if +44 (O) 207 n7 9424 

Email 8t:end2l1.murtlavi@jomoroan.com 

Confidential Treabnent Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000078 
560 

From: Iksil, Bruno M <bruno.m.lksll@jpmchase.com> 

<:ent: Wed, 18 Jan 2012 15:58:26 GMT 

,: Grout, Julien G <julien.g.grout@jpmchase.com> 

Subject: FW: Meeting materials for llam meeting 

Importance: High 

From: Penyman, Andrew X 

Sent: 18 January 2012 15:57 

To: Serpico, Gina 

ee: Iksil, Bruno M; Martin·Artajo, Javier X; Macris, Achilles 0; Hagan, Patrick 5 

Subject: Meeting materials for 11am meeting 

Importance: High 

Hi Gina, 

Please find attached a copy of the meeting materiaisfor Ina's 3pm meeting with Javier! Achilles and Bruno. Any questions 

please do not hesitate to give me a call. 

Kind regards, 

Andy 

Andrew pSlman I (POO"f : Chief Investment Office i 100 Wood Street, 6th Floor, london, EC2V 7AN : If D1rect.: +441D 77T7 1070 : III 

Blackbeny: : a andrew.perryman@jpmorgan.com 

__ "" Redacted by the Permanent 

Subrommittee on Investigation! 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.I ... __ ..;oE;;.X~H_IB_I.T.#iii8 ___ .. JPM·CIO·PSI 0000098 
561 

EXCERPT 

lVI1N30L:lNO:J aNY 31VI\J~d Al.1'JII:l.iS 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000099 
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Core Credit Book - Current RWA Summary 

.11 The table below is the cia International desk model's Core Credit Book RWA summary (Strategic + 

!lli As of COB 16th January 2012 the cia calculated Core Credit Book RWA was USD20.9bln IIIl This compares to average USD40.3bln RWA for December 2011 provided by QR 

His!Var 86,566,113 273,746,085 3,421,826,066 5,431,270,000 

StressVar 189,476,958 599,178,751 7,489,734,393 17,557,570,000 

CRM 802,991,095 802,991,095 10,037,388,685 18,274,000,000' 

*Avel'age CRM for Q4 provided 

J.P.Morga
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Credit book highlights 

3 blocks of forward spread exposure 

III Main ITraxx 59: 20% book RWA - gross notional: USD90bln - estimated carry: USD

II COX IG9: 3S% book RWA - gross notional: USD278bln - estimated carry: USD200mII COX HY10 and 11: 45% book RWA -gross notional: USD11Sbin - estimated carry: 

Main P&L components 

II 3S% reduction cost USDS90mm (not a worst case but based on today's market depth

III -USD130mm Main 

II -USD2S0mm CDX IG 

II -USD210mm COX HY 

III Expected carry over the year with regular reduction: USD300mm - SOOmm 

III Remaining optionality: USD200-300mm on defaults 

III Potential drawdown: USD100-200mm in US HY 

Expiration schedule: 

III Main ITraxx 59": June 2013 (SO% position) 

III COX IG9: Dec 2012 (40% position) 

III COX HY10 and 11: Jun 2012 and Dec 2012: (30% position) 

J.P.
564 

From: Martin-Artajo. IavierX <javier.x.martin-artajo@jpmorgan.com> 

Sent: Thu, 19 Jan 2012 14:01:52 GMT 

To: Drew, Ina <lna.DreW@jpmorgan.com>; Wilmo, John <JOHN.WILMOT@jpmorgao.com> 

Macris, Achilles 0 <achilles.o.macris@jpmorgao.com>;Weiland,Peter cc: <peter. weiland@jpmchase.com:> 

Subject: Credit book Decision Table - Scenario clarification 

Ina. 

as a follow up from yesterdays conversation regarding the tranche book! would like to further darify the 

different scenarios and assumptions for each of them . 

The first scenario is the one discussed when you were in London an is a scenario that we reduce our book to the 

agreed target at year end 2012 of 20.5 Bin but the current model used by QR remains. This would need the path 

of reduction to beto reduc~the RWA using a strategy that postions the book for max.imum carry and would 

have high trading costs and a higher risk profile so that we could have also a large drawdown . 

The second scen;;lrio or Centra! Scenario discussed with you and John Wnmot is a scenarto that we meetthe year 

end target by opportunistically reducing the necessary legs and optimization is used following the current OR 

model guidelines and assumes that we get a reduction on the cost of capital using the new VAR. 

The third scenario is posible if we get the neW model but we do not get diversification and we would re~onsider . 

The fourth scenario is our Target scenario and the one we are hoping to implement again by midyear. 

Let me know if you want to further discuss. 

Best regards 

Javier 

Permanent Subcommittee on Investigations 

Confidential EXHIBIT #9 Treatment Requested by J.I ... ___ iiiiiiiiiiiiiiiiiiii _____ • JPM-CIO·PSI 0000105 
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Credit book Decision Table in "no diversification" 

oclat QR model prevalls 

Scenarios. and perceived feaslbHlty I REDUCTION 

ias of today (as discussed at 7th December 

2011 meeting London and follow 

uPQn Xmas) 

,odel applied and diversification QR Model no diversification 

Data? No detaHed data 

ReductIon In RWA I RWA reduced from USD 43 BIn to 

U5D 20 Bin 

RWA target EOY (ufldiVerslfied) usn 20 SIn 

Estimated DiversifIed RWA Usa 20 Bin 

Risk management Systematic reduction of the 

largest leBs across the book 

radlng cost 

arry 

iOptlonaUty 

iPltl range 

IDrawdown needed 

Unwind of existing trades across 

the board 

USD 590mrn 

USD400·500mm 

USD O-SOmm 

USD ·150mm to USD ·SOmm 

USD )OOmm 

Possible if approved by QR 

J.l!Morg
566 

From: Iksil, Bruno 1-1 <bruno.m.iksil@jpmchase.com> 

sent: Thu, 25 Jan 2012 09: 11: 17 GMT 

" Grout, Julien G <julien.g.grout@jpmchase.com> 

Subject: FW: credit book last version 

From: Iksil, Bruno M 

Sent: 26 JanualY 2012 08:31 

To: Perryman. Andrew X 

Subject: credit book last version 

latest version for ismg .. for ur record 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by EXHIBIT #10 J ... __ ~ _________ • JPM-CIO-PSI 0000159 
567 

EXCERPT 

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Confidential Treatment Requested by J.P. Morgan & Co. JPM·CIO·PS10000160 
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Credit book executive summary 

1-The credit book has a YTD P&L -100MUSD and conveys a further 300M USD drawdown 

.. Where the YTD loss coming from? 

Ill! Short risk HY exposure ( -50M USD) + off the run vs on the run basis ( -2.00MUSD) 

ID What would generate the drawdown ? 

m Further distorsion on forward spreads: -200M USD 

" Rally in US HY and defaults at the same time ( as Eastman Kodak this year) : -200M USD 

" Which trades were done sO far this year?: sold protection in Itraxx main-xaver and CDX IG ( no US 

Iii Offsetting gains to the loss: new trades (+110MUSD) and carry (+40MUSD) 

2- the trades that make sense 

III The trade that makes sense: sell the forward spread and buy protection on the lightening move 

'" Use indices and add to existing pOSition 

m Go long risk on some belly tranches especially where defaults may realize 

" Buy protection on HY .and Xaver in rallies and turn the position over to monetize volatility 

'" Start with a long risk bias and use the equity tranches on tighter spreads to optimize upside on stress. 

3- Profile ofthe book and main scenario considered: 

'" The book is long vega short gamma (like tactical but 15-20 time larger): daily carry +2M 

II Main scenario is spread tightening. : we add gamma via flatteners and sell protection 

m The plan: buy protection on the way to tighter spreads 

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Credit book Risk Profile 

1-The credit book conveys l!pside on defaults in IG and a decompression trade HY vs IG 

m W. are both lorig risk on forward spreads and carry Jump to d.fauit upside in itraxx Main 59 a

.. Tho long risk overiay in series 9 is mostly hedging short risk in U5 HY and Itraxx Xaver 

13 We also ca.rry a "spread basis" rIsk between series 9 In IG versus on the runs IG Indices 

2- The main P&L drivers 

Pi! The forward spreads in series 9 IG j in particular in Equity tranches ; 

" 10M$ per Bp in Main itraxx S9 

" 20M$ per Bp in CDX IG9 

" The Hy1 O-HY11 2yr into 2yr forward spread (via equity tranche) Versus the HY14 5yr (3yr) : 1-2M$ p

" A compression trade: US HY vs US iG ( 3.5M$ per BP), itraxx Xover vs itraxx Main ( 1.25M$ per BP) 

3- The current strategy; 

m We receive forward spreads in IG series 9 and HY series 10·11 versus on the run spreads 

" We hedge the downside In HY delauils with an overlay short risk in HY on the runs 

.. We position for cheap upside on Jump to delault in high grade space within a RWA reduction plan 

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i·Where doe,s the loss and potential drawdown come from? 

m The book started the year short risk long vega; spreads tightened 20% across the board (IG-25Bp HY-1

'" Estimated loss on pure spread tightening & HY to IG compression = SOM USD' 

" S9/1G9 forward spread vs on the run = 100M' USD (5bp)' 

" HY off the run legging on the runs ( EK) = 100M USD' ( 6Sbps)' 

" Which is current loss, which is further drawdown 

'" Current loss shows the spread rally mitigated by new trades: -100M USD 

m Most of the drawdown will come from basis risk from Off the rUns series where We have longs versu

series where we have shorts 

2· What triggered this loss: position unwinds and book rebalancing? 

" In 04 2011 : we sold out some of the biggest exposure to reduce RWA 

" Sold HY8 to Hy11 indices to reduce longs: 10 bin (60% of the long) 

m Bought back 0-3 Sx10 in ig9 and s9 : total400m ( 10-15% of the position) 

.. Sold protection on super-senior IG and sold risk in HY on the runs to cover hyll 3yr expiry 

.. Markets were in high stress level and we had to keep P&L in check, thus stay short risk long vega 

3· What was done this year so far? : 

" Sold protection across the board: 10Bln main, 10bln IG versus short risk 7Bln US HY 

., Added flatteners: 5bln S9, 10bln ig9 to maintain the upside on defaults, 

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Credit book trades that makes sense ... 

1-Sell protection across the IG board - buy protection in HY 

II Stress levels in Europe should recede similarly to 03-04 2008 between Bear stearns and Lehman 

III The L TRO plus potential coming collateral criteria changes will help stabilization 

.. Unlcredit "'successful"' recap provides a temporary "'floor"' to bank tangible equity 

" Market players were deeply shaken and started the year very defensively 

III IG credit spreads have been plagued by financial stress 

o the memory of 2008 has triggered a deep rooted sell off in financials 

l!I Yet US banks and some european banks have made genuine efforts to clean their exposure 

2- add flatteners in IG and HY on a large credit rally 

" The deleveraging process will not stop: 

OJ Rates are very low but credit spreads are explosive 

" Banks will tier out the weak lenders in a low potential growth environment 

" HY and Xaver names are the most vulnerable if growth does not pick up while rates stay low 

'" The long risk exposure and the flatteners should provide a low level of RWA versus the upside on cre

3- Use belly tranches on wide spreads and equity tranches on tight spreads 

OR Go long risk belly tranches when spreads are wide and about to collapse 

iii Go long risk equity tranches when spreads are tight, stable and' about to become volatile 

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Credit book profile change proposed and main scenario ... 

1-The credit book has still a long vega, short gamma profile 

OJ Current carry is +2M; VAR, 60-70MUSD diy, net short risk of +200MUSD in 50% spread 

III Central scenario: 

III Spreads tighten another 50%, curve barely moves 

IilI The book started the year long vega, short risk and suffered as risk aversion receded fa

III What the plan is short term: sell more protection especially in Xaver and HY to maintain R

check and neutralize the +/- 50% Credit spread moves scenarios 

2- The target risk profile 

" The book will step into positive gamma- long risk profile 

.. The upside on delault will be reduced due to the long risk but remains elevated thanks to the flatteners 

iii The carry will be maintained on a constant spread basis but will diminish with spreads tightening 

.. Larger shorts will remain in Xaver and HY names 

3- Adverse scenarios and possible drawdowns 

" Defaults show in series where we are long risk ( HYl O-HY11) and not In others: this can cost 200m uplront 

iii The curves steepen and spreads do not tighten: this can cost another 300M. 

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Credit book profile P&L summary table 

Compression effec.t Relatlw CompressIon Bp Value 

CR.>: HY sTfQ5Y7"' .134"[ USD 

CDX IG 511 05Y . 

1-rnA XO S 16 05V ·130 6 1.25M USD 

fTRA M' S 16 05Y ·25 

Relallw perl'orrnancEI ollwtl w om 

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ITRAXXMN 515 OSY' ·26 BP Value. 

ITRAXX MN 509 5X5 ·27 -;',-1 10M USD 

CDXHY 81.7'0 y,' BP Value 

COX- HY 5.10 .5X7 ; ·64 1M US D 

SKEW 5YR ( as of 25/01 cia,.) Skew as of Dec30,l1 ClOSE 

ITRAXX.lG -7.0 ITRAXX.IG -9.3 

ITRAXX.XO -14.7 ITRAXX.XO -5.3 ITRAXX.HV -11.2 ITRAXX.HV -7.2 

ITRAXX.fIN5NR -S.9 ITRAXX.FINSNR -11.0 

ITRAXX.fINSUB -17.2 ITRAXX.FINSUB -21.6 

ITRAXX.SOVX.WE -11.1 ITRAXX.SOVX.WE -3.2 

CDX.lG -8.1 CDX.lG -9.8 

CDX.HY .... 0.2 

C."" 10.0 2.0.0 

NBwTrades PnL 70.3 110.4 DirecUone!ily ·1l,S 

RV compression 7.0 -93 . 

Forward Underperlorme.nce .13.9 -12.5.4 

Europa USA 

Tolal 60.5 ·161.£:1 

J.
574 

Confidential Treatment Requested By 

JPMORGAN CHASE & CO. 

Confidential Treatment Requested by J.P. Morgan & Co. 

SlH~!1H~!f-i }1Q08 ~!a31:1:::> 3'/dO~ 

JPM-CIO 0000168 

JPM-CIO-PSI DDDD167 
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Core Credit Book - Current RWA Summary 

,3 The table below is the CIO International desk model's Core Credit Book RWA summary (Strategic 

;] As of COB 16th January 2012 the CIO calculated Core Credit Book RWA was USD20.9bln 

Iti1 This compares to average USD43bln RWA for December 2011 provided by QR 

HlstVar 86,566,113 273,746,085 3,421,826,066 5,431,270,000 

StrllssVar 189,476,958 599,178,751 7,489,734,393 17,557,570,000 

CRM 802,991,095 802,991,095 10,037,388,685 18,274,000,000' 

'Ave-rage CRM forQ4 provided 

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Credit book highlights 

3 blocks of forward spread exposure 

III Main ITraxx S9: 20% book RWA - gross notional: USD90bln - estimated carry: USDIII COX IG9: 35% book RWA - gross notional: USD278bln - estimated carry: USD200m

iii COX HY10 and 11: 45% book RWA - gross notional: USD115bln - estimated carry: 

Main P&L components 

III 35% crude reduction cost USD590mm (in case we get no detail from QR computation

III -U80130mm Main 

Ell -USD250mm COX IG 

II -U8D210mm CDX HY 

iii Expected carryover the yearwith regular reduction: USD300mm - 500mm ill Remaining optionality: USD200-300mm on defaults 

m Potential drawdown: US0100-200mm in US HY 

Expiration schedule: 

iii Main ITraxx 89: June 2013 (50% position) 

Ill! COX IG9: Dec 2012 (40% position) 

IU COX HY10 and 11: Jun 2012 and Dec2012: (30% position) 

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Credit book possible paths 

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QR method prevails: target RWA 20Bln 

III Path 1 : QR provides regular and detailed data about CRM-stress var and.var s

m Active and opportunistic reduction necessary: trading cost estimated to be 25

fill Estimated carry accrued over the year 200MUSD 

m Potential gains from remaining convexity: 50-150M USD 

IDI P&L range: -50MUSD to +100M USD 

III Path2: QR does not update (2011 scenario) : Central scenario so far 

fiI Systematic reduction necessary: estimated reduction cost 590M USD 

III Estimated carry accrued over the year 400-500M USD 

III Potential gains from remaining convexity :.50M USD 

III P&L range: -150MUSD to -50M USD 

12 Path 3: QR grants diversification in VAR-STRESS VAR_ CRM 

ill P&L range to be defined 

III NO DATA or any Hint for now 

til Optimisation possible 

Trading costs 1 DO-200M USD depending on scale target 

- Carry flat 

_ Optionality 200-300M USD 

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CIG method prevails: target RWA 20Bln 

III Path.1: 15 Bin RWA target no optionality targeted: the books expires natural

l!i Risk management and trading costs: 100M USD 

I!lI Estimated carry accrued over the year 200MUSD 

!iii Potential gains from remaining convexity: 0-50M USD 

III P&L range: 100M-150M USD 

iii Path2: 20 Bin RWA Jump optionality : the book is actively managed 

iii Risk management and trading cost 100M USD ill Estimated carry accrued over the year 50M USD 

III Potential gains from convexity: 0-250M USD 

ill P&L range: -50MUSD to 200MUSD 

iii Path 3: Diversification granted 

m P&L range to be defined 

IlIl NO DATA or any Hint for now 

III Optimisation possible 

_ Trading costs 100-200M USD depending on scale target 

Carry flat 

_ Optionality 300-500M USD 

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Credit book possible paths 3 

Possible risk management options as the book options for upside on Jump-to-default expire

ill Path 1 : the risks are neutralized and the book accrues the remaining carry 

III We buy protection on long term tenors where we have long risk exposures 

JIll Ideal scenario if forward credit spreads compress 

fill The cost will be very Iowan a bull market. 

iii Target positions IG9 10yr, Main Itraxx 1 Oyr, HY10 7yr, HY11 7yr 

III Path2: The upside on jump to default events is maintained the book is not reduced 

l1! We roll over the jump upside by adding flatteners on low spreads 

Iil We lock a good positive carry by selling the forward credit spreads on wide spreads 

rn The cost can be limited but this requires some increase in nationals 

iil Target trades: flatteners on mezzanine tranches, flatteners on indices, directional trad

the-run indices 

Ili Path 3: Diversification granted 

Ill] With data: the book can be scaled according to stress scenarios 

III NO DATA or any Hint for now 

Ell Optimisation possible 

- Trading costs 1 DO-200M USD depending on scale target 

Carry flat 

OptionaJity300-500M USD or more .. 

13 J.P.Morga
581 

From: 

Sent: 

Iksil. Bruno M <bruno.m.iksil@jpmchase.com> 

Mon, 30 Jan 201218:07:48 GMT 

To: Martin~Artajo. Javier X <javier.x.martin-artajo@jpmorgan.com> 

SUbject: RE: update on core credit book 

yes. Are you available now 7 

From: Martin~ArtajOt Javier X 

Sent: 30 January 2012 18:05 

To: Iksil, Bruno M 

Subject: Re: update on core credft book 

Let's discuss when you have a second. Can you caU me on my mobile? 

From: Iksi!, Bruno M 

Sent Monday, January 30, 2012 04:41 PM 

To: Martin--Artajo, Javier X 

Ce: Grout, Julien G 

Subject: update on core credit book 

We 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. 

We get closer but each day the dealers report unreliable runs, wider bid~ask quotes and this cost us. 

To trade them is costly and leads to increase in nationals. 

We have some evidence that our counterparties need to frame the prices to our disadvantage but here the book 

is really balanced, Ie there is this foward spread exposure that has nice features but this is not a profile where 

we can control the P&l unless we just let it roll off. 

We need to discuss at this stage I guess: 

the book is now set to carry positively and get some extra gains depending on where defaults show up. A no 

default scenario is now also a good outcome. Yet, the final result is unknown. Alii see is.that liquidity is so poor 

that we just add nationals with the street. So that improves the outright final P&l number but this increases the 

issues with the risks and the size, as well as our sensitivity to price moves and trading costs. 

Because the views in the book are much more benign than in the past,. the mean reverting pattern of the P&l is 

stronger { ie we face an ever.lower risk to be wronged}. Yet, to avoid this accumulation we need to let go on one 

way: the onry one I see is to stay as we are and let the book simply die. That we should take some hits because 

the markets might create noise inthe P&lis a certain reality. Yet, the control of the drawd.own now is 

generating issues that make the book only bigger in notionals. 

As a paradoxical result, I have to take directional views on the market-ciirection, in order to pre-empt the moves 

that the dealers wi!! do against us. And I see that the trading I run is closer and dose to dealers' with a 

directional bias. This is a problem v.:e had many times but only when we had views going counter to consensus. 

At the current stage, we still have the long risk in forwaed spreads but the notionals become scary and upside is 

limited unless we have really unexpected scenarios. In the meantime, we face larger and larger drawdown 

pressure versus the risk due to notional increases. 

Please let me know the course of action I should take here. 

Permanent Subcommittee on Investigations 

EXHIBIT #11 

Confidential Treatment Requested by .. -------_____ 1 JPM-CIO-PSI0001223 
582 

From: 

Sent: 

1ksO, Bruno M <bruno.m.iksil@jpmchase.com> 

Mon, 30 Jan 2012 17:28:21 GMT 

To: Buraya, luis C <Iuis.c.buraya@jpmorgan.com>; De Sangues, Eric 

<eric.de.sangues@jpmorgan.com> 

Subject: FW: update on core credit book 

From: Iksil, Bruno M 

Sent: 30 January 2012 16:42 

To: Martin-Artajo, Javier X 

Cc: Grout, Julien G 

Subject: update on core credit book 

We 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. 

We get closer but each day the dealers report unreliable runs, wider bid-ask quotes and this cost us, 

To trade them is cost!y and leads to increase in nationals. 

We have some evidence that our cQunterparties need to frame the prices to our disadvantage but here the book is really 

balanced, ie there is this toward spread exposure that has nice features butthis is not a profile where we can control the P&l 

unless we just let it roll off. 

We need to discuss at this stage! guess: 

the book is now set to carry positively and get some extra gains depending an where defaults show up. A no default scenario 

~s now also a good outcome. Yet, the final result is unknown. All ! see is that liquidity is 50 poor that we just add nationals with 

the street. So that improves the outright final P&L number but this increases the issues with the risks and the size, as well as 

our sensitivity to price moves and trading costs. 

Because the views in the book are much more benign than in the past, the mean reverting pattern of the P&l is stronger (Ie 

we face an ever lower risk to be wronged). Yet, to avoid this accumulation we need to let go on one way: the only one 1 see is 

to stay as we are and let the book simply die. That we should take some hits because the markets might create noise in the 

P&L is a certain reality. Yet, the control of the drawdown now is generating issues that make the book only bigger in 

nationals. 

As a paradoxical result, I have to take directional views on the market direction, in orderto pre~empt the moves that the 

dealers wll! do against us. And 1 see that the trauing I run is closer and close to dealers' with a directional bias. This is a 

problem we had many times but only when we had views going counter to consensus. At the current stage, we stHI have the 

long risk in forwaed spreads but the nationals become scary and upside is Hmited unless we have really unexpected scenarios. 

In the meantime, we face larger and larger drawdown pressure versus the risk due to notional increases. 

Please let me know the course of action I should take here. 

Best regards 

Bruno !KS!l 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by EXHIBIT #12 ... _______ ioii_ .. __ ... JPM-CIO-PSI 0001766 
583 

From: Iksil, Bruno M <bnuno.m.iksil@jpmchase.com> 

Sent: Tue, 31 Jan 2012 12:36:28 GMT 

To: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

Subject: hello, quick update in core credit ... 

ok they keep playing games in itraxx now, I will show up for small in the hope we can limit the pain. 

as to IG9, things look much better. not that we are imune but we can show that we are not at mids but on realistic level. 

I wait for Hy and wi!! keep you in the loop when 1 have a final number. 

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. 

It will be time then: I just reminded the episode of 09 when I feared the drawdown and! ended up with the right position but 

not the right timing. 

I hope I did right. 

Let me know your thoughts, 

Regards 

Bruno 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.I .. ___________ EXHIBIT #13 .. JPM-CIO-PSI 0001229 
584 

From: Macris, AchilleS 0 <achilles.o.macris@jpmorgan.com> 

Sent: Tue, 31 Jan 2012 13:42:51 GMT 

To: Drew, loa <Ina.DreW@jpmorgan.com> 

Subject: Core book p&ldrawdown and main exposures 

FYI -further to our discussion, please see my comm~nts to Javier below: 

---Original Message--

From: Martin-Artajo, Javier X 

Sent: 31 January 2012 12:44 

To: macris@ M:acrls, Achilles (j 

SUbject: Re: Core book p&J drawdown and main exposures 

Achilles, 

The meetings so far are positive with respect to VAR. good for Stress Var and not clear. for CRM: . Been 

working on the presentation for today this morning, I am in a meeting with Risk now and with Q~ in 45 

minutes. Then Ina and Hogan briefly. The process here in NY is complicated because Market Risk 

needs to coordinate with the guys that talk to the regulators on a very regular basis. 

So we are going to see a further reduction of the Var of at least 15%in the next 3-4 weeks. Now I am 

working on the CRM with QR. Then to see Adam Gilbert on the regulatory side. 

- Original M ... es.sa.g.e •••• Fr.om: macris@. 

-= Ibdaded by the Permanent 

SUbc:ommittee on Investigations 

Sent: Tuesday, January 31, 2012 07:58 AM 

To: M:artin-Artajo, Javier X 

Ce: fuil, Bruno M; Stephan, Keith; Kalimtgis, Evan 

Subject: FW: Core book p&l drawdown and main exposures 

Hi Javier~ 

How is it going in NY? 

Are you dialling into ISMG? 

We need to discuss the synthetic book. 

The current strategy doesn't seem to work-oot. 

The intention was to be more bullish, but the book doesn't behave as 

intended. 

Taking into aCCOlll1t the conservative year-end marks and the January positive 

carry, the financial 

Performance is worrisome. 

I think that we need to urgently revaluate the core position in bearish 

steepeners and the associated maximum drawdoMlts. 

The lltiminglf issues on the older series are somewhat predictable~ and the 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J .. ___ EXHmlT#14 .. _________ 1 JPM-CIO-PSI 0000221 
585 

second order p&l discrepancies should be viewed differently from the core 

position. 

Thanks, 

A 

-----------------------;:::===::----

-- Original Message-- -::;: Redacted by the Permanent 

From: Iksil Bruno [maHto, ••••••• Sent: Tuesday, January 31, 2012 06:28 AM 

Subcommittee on Investigations 

To: Iksil, Bruno M 

Subject: Core book p&l drawdown and maln exposures 

The book currently conveys a short risk exposure in us' hy and a long risk 

exposure in ig indices series 9 (both CDx and itraxx). This exposure 

balances the jump to default risk of the book: we would lose money now on a 

default in us hy and make money if the default occurs in ig world. One can 

summarize the net exposure as: the book has a bullish flatteners in ig and 

a bean sh steepeners in us hy. 

Since the start of the year, the book loses money on the short in hy and 

makes money overall in ig as expected. Now, the loss in hy is higher than 

expected because of equity tranches moves ( linked to Kodak default). The 

gain in ig is lower than expected due to the lag in series forward spreads. 

The drawdown in p&1 is Jarge because the nationals are large and the trade 

on fOf\¥ard spreads involve many legs all of which incurs a loss. The 

drawdown is sudden because the spreads have squeezed but capital has not 

come back to the markets yet The skews and the b~sis remain large while the 

spreads have tightened 200/0 ytd. 

VVhy does it impact the book? 

The book used the forward spreads ( a net long risk exposure) to buy 

protection on defaults short term and buy some upside on large spread 

widening. This worked very well last year. 

Now January is very bullish and the street owns the protection we sold on 

the forwards. Towards month end the spread on series 9 remains sticky and 

tends to widen more than the rest especially the on-the-run indices where 

the book stiU has short risk overlay_ So the book is squeezeq on both ends 

and we saw this pattern from the first days of the year. It did [Jot really 

correct since then. This explains why the ig part of the book does not 

perform as expected. 

The book is also hurt on the hy ieg and this is linked to the U1I\Vinds from 

last year: I sold out some longs in hy&-9-10-11 series. The street was 

caught long risk in the on the run indices ie hy14-1S-16-17 when AMR filed 

: they entered flatteners by selling what I was selling in order to limit 

the losses. In this rally, with Kodak filing for chapter 11, they have 

sponsored their own position at the expense of the book. No one can tell 

what will happen after Kodak is removed rom the indices because the recovery 

is quite low already ( 73%). The on the runs indices have rallied a lot 

Confidential Treabnent Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000222 
586 

since December catching up with the equity marke!. The book has lagged the 

rally on its longs via equity tranches but would catch up if there isn't any 

defauh in us hy over the next 3-6 months (in hylQ.-ll series): 

Yesterday and today most likely. no matter what the market will do, the 

series 9 forwards will uuderperform and for hy I expect some framing too. 

Yet here this is broad based. I tried to fight it in the last sessions and 

it was unsuccessful. 

If you have time I will seudyoti a memo that describes the technicals of the 

market positioning in igworld. Let me know if you care to read it. 

Best regards 

Bruno Iksil 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000223 
587 

_ ... Rtdaded by the P.ermanent 

From: Achilles Macris <macris@ . Subcommittee on Innstigations 

Sent: Thu, 01 Mar 2012 11:10:42 GMT 

To: 'Martin-Artajo, Javier X' <javier.x.martin-artajo@jpmorgan.com> 

Subject: priorities 

Hev Javier, 

Here are some thoughts: 

• Focus on the metrics and P+l of the synthetic book. I am worried that the $20b RWA committed be year-end, is too 

aggressive. If we need to 

Actually reduce the book, we will not be able to defend our pO.!iltions .... We need to win on the methodology and then the 

diversification. Hogan, doesn't not understand the book and it should be explained through Ashley etc. Let's meet Ashley 

soonest, 

As this would be driving all things important to us, it would be important to focus on the P+L and the post methodology 

RWA, should be what it takes to achive the P+L ..... 

We need to find a low RWA spread trade for size. Something between George and Tolga. Maybe Austria or EU, and buy 

$lSb spread with low RWA ..... 

OR, step-in and buy the RMBS at new tights if you think that would generate issuance .... 

In Credit, to focus on some MtM low hanging fruit. .... to assist the B/E for Bruno etc 

Thanks, 

Achilles 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by .. ____________ EXBmIT#15 1 

JPM-CID-PSI0001219 
588 

From: 

Sent: 

Grout, Julien G <julieIlg.grout@jpmchase.com> 

Tue, 20 Mar 201219:52:02 GMT 

To: CIO ESTIMATED P&L <CIO _CREDITJ&L@jprnchase.com> 

CC: CIO P&L ream <CIO J&L_Team@jprnchase.com> 

Subject: CIO Core Credit P&L Predict [20 Mar]: -$39,686k (dly) -$275,424k (ytd) 

Daily P&L: -$39,685,995 

YTD P&L: -$275,424,307 

Daily P&L($) YTD P&L($) 

Redacted By 

Permanent Subcommittee on Investigations 

Europe High Grade -21,802,054 32,664,651 

--------------- -----------------

Redacted By 

Permanent Subcommittee on Investigations 

Redacted By 

Permanent Subcommittee on Investigations 

US High Grade -20,314,624458,833,337 

Redacted By 

Permanent Subcommittee on Investigations 

US HY & LCDX 11,562,342 -404,083,807 

----------------

Redacted By 

Permanent Subcommittee on Investigations 

Permanent Subcommittee on Investigations 

EXHIBIT #16a 

CONFIDENTIAL TREATMENT REQUEST I" ... nnl""-A'" I""-UI\C"~ 0 1""-"" JPM-CIO-PSI0016487 
589 

Redacted By 

Permanent Subcommittee on Investigations 

US ABXITABX -155 -20,081 

Redacted By 

Permanent Subcommittee on Investigations 

New Investments -10,802,807 -392,038,020 

Redacted By 

Permanent Subcommittee on Investigations 

Dead Books (Core) -85 1,377 

Redacted By 

Permanent Subcommittee on Investigations 

WashbooklCosts ° ° 

Explanatory P&L (in $1000s): 

Name Total Dirctnl Tranche Carry IR Ntr Adiust FX 

Redacted By 

Permanent Subcommittee on Investigations 

(]oseCOD 

Redacted By 

Permanent Subcommittee on Investigations 

CONFIDENTIAL TREATMENT REQUESTED BY I P Mn~U:::litJ f':l-Ili.C:::W:: R. r.n 

--=> :"~::ted ~Y tbe Permanent 

rnmutee on Investigations 

JPM-CIO-PSI0016488 
590 

SOVXO 

CDX IG 83.5 -1.5 

CDX HY 100 -0.063 

LCDXI02 

The roll period creates distortions in prices that impact us. The hit comes mostly from the rally in credit market 

where the series 9 both Ilraxx.Main and CDXJG lag. The book does not have enougb CSOI to balance this lag' 

as the breakdovm shows the book loses a lot of money on directional ($105M) while it is long risk in CDXIG 

credit and short risk in CDX.HY and iTrax:x.Xover credit. Yet, we estimate the gain on decompression as $30M 

in Europe and $30M in the US while the series 9 lag versus the market is of 1-2bps or $1 OOM The net result is 

a loss of $40M and we must expect more to come until investors opt to profit from the ongoing lag in those 

series 9. 

As of today, reconstructing the CDXIG9 10yr performance from the on the run indices and the 4 widest names 

in CDXIG9 (Radian, MBIA, Istar, Sprint), the underperformance of the CDXJG9 curves is between 6bps to 13 

bps, whieh amount approximately to $450-500M for the sole CDXJG9 series. iTraxx.Main S9 is also lagging 

by 3-4 bps or another $60-80M. Arlded to this the CDXHY loss of $ lOOM for Kodak and Reseap, plus the lag 

of the CDXHY10-CDXHYll series versus the on-the-runs that is also $100-200M, the lag in P&L is material 

($600-80011), As to the potential Dutperforrnance, it is much more a function of whether some names default 

and which one will default. We estimate the carry daily to be $lM while it may not show as it is stored in the 

ability of the forward spreads to "roll.downn the curve. So far they did but at a much lower pace than the on the 

run indices rally. both in CDXJG, iTraxx.Main and CDXHY curves: in IG space, the long term forward 

rolled down slower than the market (i.e. short term spreads outperformed) while in CDX.HY, it is the opposite, 

i.e. long term spreads outperfonn short term spreads. This can be explained by the recovery in CDXJG space 

while RES CAP and KODAK failed in CDXHY space. 

The CDX.HY bucket is now protected against any default and the cost of buying the protection is covered with 

selling protection in CDXJG on the run indices. We sold more protection today in CDX.IG and iTraxx.Main in 

order to improve the carry and the recovery of the book looking forward. 

Again,. a lot of prices are stil1 being framed and we are providing our best estimate. 

CONFIDENTIAL TREATMENT REQUESTED BY 

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From: Oaikhiena, lsi <isi,oaikhien.a@jpmchase.com> 

Sent: Tue, 20 Mar 2012 20:40:57 GMT 

To: EOD Credit estimate <EOD _ Credit_ estimate@jpmchase.com> 

CC: eIO paL Team <CIO]&L_Team@jpmchase.com> 

Subject! International Credit Consolidated paL 20-Mar-2012 

trategic 

Tactical 

otalCore 

nvestments 

MTM Credit P&L as at 

Europe High Grade 

US High Grade 

US HighYie!d 

US ABX and TABX 

Europe Sub Fin 

IRHedges 

New!nvesLments 

Total Strategic 

Core Tactica! 

TacUcal2 

CredltSing!e Names 

MTM CLO 

MTMABS 

InvesimentEquity 

ABS CDS 

CONFIDENnAL TREATMENT REQUESTED BY 

J.P, MORGAN CHASE & CO. 

2010312012 

USDOOO's 

Daily Est. MTD QTO YTD 

Redacted By 

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Redacted By 

Permanent Subcommittee on Investigations 

-41,814 ·35,852 ,222,8851 

Redacted By 

Permanent Subcommittee on Investigations 

JPM-CIO·PSI0019484 

Permanent Subcommi~ee on Investigations 

EXHffilT#16b 
592 

otallnvestments 

anagement 

Totallntemational Credit: 

trategic 

Tactical 

otalCore 

nvestments 

TRR Credit P&L as at 

Europe High Grade 

US High Grade 

US High Yield 

US ABX and TABX 

Europe Sub Fin 

IR Hedges 

Newlnvestmenls 

Total Strategic 

Tactical 1 

Tactical 2 

Credit Single Names 

MTMCLO 

MTMABS 

InvestmonlEqulty 

ASS CDS 

AFSABS (TRR) 

AFS CLO (TRR) 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

Redacted By 

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-41,595 -86,205 -36,20 

20/03/2012 

USOOOO's 

DailvEst. MTO QTD YTO 

Redacted By 

Permanent Subcommittee on Investigations 

·39,686 -41,621 ·275,425 

Redacted By 

Permanent Subcommittee on Investigations 

·35,852 ·222,885 -222.8B51 

Redacted By 

Permanent Subcommittee on Investigations 

JPM.CIO·PSI0019485 
593 

Redacted By 

otallnvestments Permanent Subcommittee on Investigations 

Management 

Totallntemational Credit: -41,595 ·21,584 -36,205 -86,20 

CREDIT MARI<ET COMMENTARY 

The roll period creates distortions in prices: that impact us. The hit comes mostly from the rally in credit market where the series 9 both Itraxx.Main and CDX.IG 

lag. The booK does not ha .... e enough (SOl to balance this lag: as the breakdown shows the book loses a lot of money on directional (S105M) while it is long risk 

in CDX.!G crE'dit and short risk in CDKHYand iTraxx.XoYE'rcredit. Yet, we estimate the gain on decompression as $30M in Europe and $30M in the US while the 

series 9 lag .... ersus the marbt is of 1-2.bps or $l00M. The net result Is a loss of $4DM and we must expect more to come until investors opt to profit from the 

ongoing lag in those series 9. 

As of today, reconstructing the COKIG910yr performance from the on the run Indices and the 4 widest names in COK1G9 (Radian, MBIA, !star, Sprint), the 

underpertormance of the COX.lG9 curves is between 6bps to 13 bps, which amount approximately to $4S0-500M for the sole CDX.IG9 series. iTraxx.Main $9 is 

also lagging by 3-4 bps or another $60-BOM. Added to this the CDX.HYloss of $l00M for Kodak and Rescap, plus the lag of the CDX.HYlO-CDX.HYll series versus 

the on-the-runs that is also $lOO-2.ooM, the lag in P&l is material (S6ro-8ooM). As to the potential outperformance, it is much more a function of whether some 

namel; default and which one will default We estimate the carry daily to be $lM while it may not show as it is stored in the ability of the forward spreads to ~ron 

down" the curve. So far they did but at a much lower pace than the on the run indices faHy: both in CDX.IG, iTraxx.Majn and CDX.HY curves: in lG space, the 

long term forward rol!E'd down slower than the market (i.e. short term spreads outperformed) while in COKKY, it is the opposite, i.e. long term spreads 

outperform short term sprE'ads. This can be explained by the recovery in CDX.lG space while RESCAP and KODAK failed in COX.HY space. 

The COX.HY bucket is now protected against any default and the cost ofbuylng the protection is covered with selling protection in COX.1G on the run indices. We 

sold more protection today in CDX.IG and iTraxx.Main in.orderto improve the carry and the recovery of the book looking forward. 

Again, a lot of prices are stH! being framed and we are providing our best estimate. 

The market continues to trade well with mezzanine pape.r dosing in on their peak levels from mid-2011 and a continued shortage of senior vanilla ABSjMBS 

continuing to put pressure on spreads. We continue to fE'ceive healthy amortisations across the asset daSSel;. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM..cIO~PSI 0019486 
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March20,2012 

DR::A:F+-Transcript oreaD # S601SJO;!,OS3S0J323@ JPM~CIO-A 00000055 

Date: March 20 2012 

Time: 16:09:36 - 16:31:56 

Participants: Martin~Arlajo and Ik!til 

Iksil 

Martin -Artajo 

Iksil 

[ksil 

Martin~Artajo 

Ilksil 

:Ma.rtin-Artajo 

Iksil 

Martin~Artajo 

Iksil 

Hello. 

Hi Bruno. 

Yea. Hi Juvier. 

Hello maD. 

Yea so, yea "We sent an estimate domt40 mil1ion today. 

Yea. Wby did you do that? 

Because you know, it was. we actually did not recover what we:re gaining on 

decompression we are making like 50, 60 million on decompression and we were 

losing [inaudible] in this lag and--

Okay. okay, I just don't want you to do this, 1 don't know why you've done it 

anyway you've done it, so that's it. I don't know why, anyway, you should have 

told me this because it doesn't help us for the conversation for tomorrow 

Yea but I thought that because you have discussed already, you know, r thought we 

should actually you know, not do like minus~5 every day but just say okay 

boom you know there is. there is something hIlppening, it's the roll date 

(overlapping voices) --

Okay, okay listen you've done it Vou 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 it's just that urn--

I know it's embarrassing but--

.g,..,.!\....,."'y~;~~~'-P._~.,~, 

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Mal1:h 20, 2012 

I Martin-Artajo 

I !ksil 

I MMtin-Artajo 

I !ksil 

Martin~Artajo 

I ]k,il 

Iksil I Martin-Artajo 

Yea 1 don't understand your logic mate, Ijust don't understand, I told Achilles, he , 

told me that he didn't want to show the loss Wltil we know what we)e going to do 

tomorrow. But it doesn't matter I know that you have a problem you want to be at 

peace wi1h yourself, okay its okay Bruno. I've, it's alright I know that you're in a 

bard position here, because, you know 

I can tell you how I got there. You know I work with Julien that's why we are still 

there and, you know, what we've tried to do is to say okay you know for month's 

end, we want to fight, where are we you know, so and you know really, really, if 

we want to just be realistic as to what we can expect to do, I \\'anted to show like 

upfront, precisely before ~ 'We discuss, you know, what it's going to look like 

that 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 bere, a 

crossover point in high yield there. It's just that, you see, just 

No, no, no, it's okay, it's everywhere I know. I've sent you, I've sent you a report 

there to illustrate what the problem is. I don't know if you've read it, but it just 

highlights 1he v.hole conversation we've had. OkayUrn, it basically says the following, it basically says that we've reduced 

enormously the volatility of the book, the VaR and the stress VaR and the CRM:, 

okay? Now the problem that we have 1S !MLwe've increased th@IRebecauseof 

the extra long lets say okay 

Yes yes [inaudible], right? 

Yes. 

Yes,Isawitycs. 

So the problem that we have ffflffl.-with this ok is that the problem that we have 

from this is that really it just shows the problem, this spreadsheetjll'>t shows the 

problem. It shows tha~..§.h.Q?1Lth!!t~we havc a book that has been reduced in risk 

temlS II lot It shows that these guys have been doing something with the model 

that is stupid okay because the CR.M now, they just don't know how to explain 

what we do okay? They're just stupid quants really okay? The only guy that has 

been able to understand a little bit is the new guy, this Venkat guy. He understands 

what the problem is okay. He knows that this book, we need to keep doing what 

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Iksil 

I Martm-Artajo 

I Ibil 

I Martin~Artajo 

I Ibil 

Martin-Artajo 

Iksil 

we're doing. It's just that we need to get rid of the CRlviby externalizing the trade 

which is what the investment bank needs to do and then at some point we need to 

time !he extra long, okay, which means that, you know, we can keep the long until 

it gelS very, very tight or, or you do what the investment bank does is that you short 

IG and you go long high yield and then you get the benefit of that because happens 

to be the problem that the CR.11 bas, okay. It barrens to be capital for free. And 

that's what the that's what the investment bank has done if YOll think about it okay. 

The investment bank has the short as the overlay okay, let's put it the hedges, right? 

So our hedges are kind of !!..long according to the model that these guys use okay. 

You follow me? 

No, no. I know, I know you see but that's why 1 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 haw to be, the 

rally is on IG but guess what you know it's lagging so milch that actually we have 

to show loss, and I explained that this is a lag that keeps goin,.g, that amounts to a 

potential of 800 bucks, right, that.Jlli!L--

What are yOIl saying Bruno? \Vhat are you talking about? What is y¥ou're losing 

your mind here, man, whv did, you're sending an email that you would get, what is 

!his 800 bucks? 

It's just thc lag that we have in IG, I+?-~in main that is a11 over the 

bo{lk that makes U}.;1.t this book is just bleedlllgffi-the money but it's just the Jag, 

that's just the lag 

Okay but this is j-ttst what we need to explain tomorrow you don't need to explain 

in the email man 

Yea but I had to put the comment on this big move, I thought, I thought that was~ 

that was a way to, to, to sbo\,.,: what's happening on a day like --

Yea but why do you do it today when we are going to ex.-plain it tomorrow. 

Anyway, listen you've done itohy I don't know man, I've been, I don't know why 

you didn't ten me when I was there I don't know why, why. 

Because, because, becm.L'le that's, that's what we saw today, you know we've tried 

everything, we've run though all the runs, all the prices, all the way we should--

I know Bruno but listen mate, listen the problem that, okay it's fine you've done itl 

cannot really tell you, you know, not to do this, you've done it because you feel 

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Martin~Artajo 

IIbi! 

Martin-Artajo 

Iksil 

I Martin·Artajo 

lksil 

you have to do it, that's okay. What I don't understand at all is why are you 

explaining this, this wayan the email? \Vhy 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? It's not going to help me here as much, right? Because 

then tomorrow I'm going to say look you know this is, \Vhat happens if she tells 

me that we cannot keep going long? )justdon't, anyway, no it's not a big deal, 

okay 40 million, to be honest is not a big deal, it's not a big problem. okay so don't, 

don't, okay, I don't know, I'm just, I'm just tired, man, I just, I don't know what to. 

You know we are really getting into something that the m-investment bank hates, 

okay, and you know they just do. They just have it because they have the opposite 

p:!sition here because they have optimized their model".righ!1.,...so they've 

optimized this model and now we're going to have to challenge them not only in 

the market but on the model side, because otherwise, you know, otherwise, we're 

going to have to trade at some point you know, and that's what I, that's what Ju 

~ That's what you fear. 

Sorry? 

That's I¢s.-what you fear, right? That at some stage we are in a comer because no 

one wants to go on -with this challenge with the D3, yes? 

No, I don't know Bruno, you're logic sometimes, let's talk tomorrow because wc 

have all morning to prepare for this okay? I, listen man, I, I don't know, I know 

that you're doing your job, you're trying your best, okay, so, you know I don't 

think you mean, you know, I just sometimes don't connect with you, I don't know, 

Ijust don't know how to explain this, 

Yea it's difficult because you know the thing is -we're on the desk and we're really 

looking at it you know and everything and I said you know it's like there were 4 

basis points missing on 10 9 or 4 basis points missing on ~S2..so we by 

to you know·· 

Okay okav oQkay man, this is, this is okay, I wish I had, sorry about I didn't get 

your call. I um~ 

No, I tried, I waited, I waited, I sent you an SMS because I thought you would you 

know receive it on you blackberry before everything, but you know and we kept 

looking for it, and I tried and tried, and I'm not fooled by that you know it's just 

that, I have to, I don't know I thought, I thought that was that -was not realistic 

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Mart::h20.2012 

Martin-Artajo 

I 

full 

Martin-A.rtajo 

Iksil 

I MMtin-Artajo 

know what we were doing, and urn, and I said probably I was wrong you know, I 

thought that it was this estimate before t.omorrow, you know, was the way to, 

because I know 100 is going to read the comments, so maybe it will leave some 

time, and she will have different questions, or I don't know, because usually when 

we discuss you know we're really short and squeezed and I 'wanted to say these 

things before we actually, I actually have to explain the whole thing, but in 

summary that's what we, we discussed today right, that it's just a mark to market 

noise, that's um. So that, I don't know, ~Gk¥ieHnade the mistake right, 

but that, it's one mistake [QrfR:Ha another here, because if I don't--

No, no, no, man, no man. 

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 bod thing and one thing that I think was wors~. 

Yea no I, listen I'm not going to I'm not going to sugar coat things, you know. I 

don't know if you're tbinklng that you,you know I'm just trying to do this the best 

possible way, !ill!!1..okay so, I'm trying to get all the facts in front of Achilles and 

Ina, the fact that we show a loss here it's okny 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 CRM and we're 

going to talk about the problems. You know I've sent you WI email on 'What she 

'WtUlts to discuss tomorrow she wants to see the changes in the book okay so you 

need to rrmke sure Julien does that. 

It, I "''as working on it 

Okay. Thank you for that man, I am, I know, I've been. I'm working on this other 

deaJ that I need to get done for the -geek-for the book, for the secured credlt book. 

It's just that I um, shit, I wish, I don't know, just explained this a little bit better 

because what happens is that you know, I think that, it's nor here nor there, it just 

highlights that there [lfe problems in the book. You know in that sense I understand 

what you're saying. The problem 1hs+-I have is that J wish that urn because I also 

think that what~.happens-flefe, ~h8t's happening here if!sjust the investment 

bank that we have in front of us is doing things I mean, this, the call that I had 

today you know when Anil Pinto l§i.dcalled I know that they have fl problem here 

okay. So the more we recognize that we have a probJem okny. -S.e-4Ihe more we 

:LQ!!.recognize that 8 ha e a j9f8'Blem filE&:! , it's, tJie mere J sa reeegruL8 the harder 

it 1S to settle with the IB at a better priee if that 'Wbnt's going to happen. You 

understand what I'm saying? 

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Iksil Yea, yea because we settle the pal at I'llevel where we acknowledge more and 

more and more, which means that it's more and more acceptable, and therefore it's 

more and more [iaaooieIej iSBliIesdifficult to refuse, That's the way I understand 

that,yes. 

I Martin"Artajo Yes, so in a way, what happL"Ils is that, imagine if tomorrow. imagine if tomorrow 

they say we need to settle with the IE, okay. If there is a chance, I'm saying I think 

it's a, I don't know, a 15 percent, 25 percent chance because we are over the capital 

here, okay. Listen to me tomoITowwe'll go through this, but I don't know you 

probably are tired now, But 25 percent chance, why? Because we are over the 

capital right and we have a loss here that is, it's not a dramatic loss, okay. It's a 

loss that you know that we can takc andwe--e&It-get out because the books are SO 

big now in terms ofP&L that you know, you know if I take the other side of this, 

and say, If you are Adl1lles, if Achilles is going to decide on this okay, he would 

say okay let's get out of the trade and settle with the ill and whatever it is right? 

You follow me? 

lksil Yes, yes 

I Martin-Artajo So, ~<ou blOW there is a chance that this happens and they say okay stop this, 

we're going to stop this, they call the investment bank and they settle this okay, 

they settle the delta difference that we need and the eRN[ that we need to 

extemali7,c okay. There is a chance that this happen, I'm not saYlllg.i.t:§~going 

to happenBnmo I'm just telling you that this could happen. So let's sit down 

tomorrow to discuss because I want to see all the, all the scenarios that we need to 

discuss, the other scenario that we need to discuss is how, what is the trade that 

puts us back inside the capital right, inside the 36 billion. Well, it's very easy to do 

now 1:eeause all you need to do is reduce the reduce the extra delta that Pat has in 

his oook by a third., right? A little bit more than a third, a little bit more than a 

third You followme'l 

Iksil Yes. 

Martin-Artajo You understand what I'm saying? 

Iksil Yes, yes, yes, yes. 

N[artin-Artajo Okay so, you know it could be that they say okay well let's reduce the extra delta, 

i.e. the long in IG-investment grade by a third, which menns that we need to reduce 

the extra delta that we have by, I don't know, the num1:er could be .... I don't know 6 

g,.."!l·:r.''''',..... ''''''\-_,,,'~,j,>&·t ..... p~ .. ;,...'''''''''l!"''"'' 

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Iksil 

I Martin-Artajo 

I Martin-Majo 

billion, okay? 6 billion, okay? And then we're inside the capital nOWaM we, you 

and I, don't want that, because because we don't because we've decided that's not 

what we want to do. But I'mjust giving you all the, we need to discuss this 

tomorrow, it's not the right time, okay you've sent the email Ina's going to see it, 

she's not going to be surprised by the loss because I've discussed it -with her. She 

-will send me an email, and Achilles tonight, so we!ll-lYillLhave to answer this 

email you see. So, so any'l,.'olaY, you've just created something I need to return, 

respond that's aU. That's why I'm telling you. Ijmrt want you to know that this is 

what's going to happen so you know, it's a consequence that maybe I could have 

avoided but it's unavoidable tomorrow, because we need to we need to explain 

what are the options that we have, and when we explain the options we're going to 

say okay, what are the options here'! The options are wttle with theIBinvestment 

bank, not settle with the -IB-investment bank but then we have to time the exit of the 

book so, you know, and that's, so they give us extra capital for let's say a quarter or 

two, right? And then, you know, you know, then other things happen I think that, I 

think that, I think, you know, l...!l.!illk.we have to be honest with what we do here, 

that's going to be OUT issue. It's not going to amount to $40 million I agree with 

you so I don't think this is an issue, but I wish I could have discussed it with you 

So thank you for urn, thank you for urn, for the work I don't know man. I know 

that you're late in the office and you should go and rest, and we'll tlilk tomorrow. 

Okay, okay. 

Everything else, everything else okay? You tired, you okay man vou tired are you 

sleeping well? 

No it's no it's relatively okay because you know again, !...thc discussion with 

Achilles you know I ~tried again the question I have, do I miss something? Did 

I miss something? And I did feel, you know, unsettled by his questions, you know, 

and I just think that, I agree with you it's really a question of ~perception 

and yea probably I should not have done that it's just that you know that, that's the 

situation still I thought that that would be you know a way to start ~ the 

discussion--

Okay, it's not here nor there, okay I'mjustsaying it's, I don't know. I wish I could 

discuss it with you, because urn, I didn't....lJfu!zD want to show the P&L and 

AchIlles toJd 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. Okay, alright man -- Sorry? 

I Iksil No I said sorry for that. it's just that, yea, I in any case I ~feel bad. 1fT ,{~=~~~::~::~:~~~~~~:~::~~~J 

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JPM-C!O 0009369 

JPM-CIO-PSI-H 0006398 
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March2tl,2012 

I Martin~Artajo 

I Iksil 

I Mn1m-Artajo 

do that I know I'm not making your life any easier, and if--

No, no, no, YOll know I,think that you're an honest guy, ~t's just that, I 

did not want you to do this way, but you know you feel that the bid offer spreads 

are giving YOll a headache, and you want to release it this way, wluch is your own 

way of doing it, and it's fair, it's fair, it's fair. I don't want you to-~ Sorry? 

The thing is yOll know today, I said I told Julien you know okay let's tIy 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 H¥-~ou know, try to do the minimum size everywhere you 

know so that the book ~ a little bit but not too much, so that we are, YOll 

know, we maintain knowledge the level where we are, and I inaudible] we aren't 

too far off. I thought~that tomorrow, at one stage, after, tefore at one stage 

later, I would show YOll, you know what the plan can te, ~how many basis 

points here and there we are chasing and what size we can expect to do, right? And I realizes! we were, we were, we had 1D get closer to where the market is even if the 

market is \\Tong, YOll see? Because, because that's where we start, you know, it's 

also, I want to avoid you know a second stage where I say something and YOll 

know, I don't,. I cannot deliver because then you know there will be a lot of 

questions and doubts, and I didn't see you know we fire close enough 10 where the 

market is it may move you know, I'm aware of that,. so we didn't want to show 

somethlng, like. The number I search, you know, is the result of where I thought, 

you know, we could take a reference. So that whatever ---

Okay Bnmo. no, no, no, it's fme, okay, I see what you're going through. okay I 

trunk you're going through your own logic here 1D explain it, and there is, there is 

you know, I think yOll have a reasonable way of explaining this, I urn, you know, it 

would have been okay. I wish I discussed it with you, but that's, that's done, okay. 

You've done it, jt's~fme, and tlns is what you beheve and I'm sure you have, 

YOll know, we'l! sit do\VIl tomorrow and we'll look at the spreadsheet. I'm sure 

you've done some numbers that make sense and you that think this is a part of 

somethIDg that you can't recover~erefore you've released, and you 

know, r know what you're doing nnd 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. So I, I hope, you know. Let's go 

and relax a little bit if you can, and let's start tomorrow, and we'll start again., 

because this is not going to te, you know, there's nota lot we can do on the phone 

.g,.~!I·"I~~"_A<1~~l-!~ 

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Mall:h20,2012 

now and you know I want you to be fresh tomorrow too. So I, I, thank you for at 

least letting me know and calling me, and I'll see you tomorrow, okay? 

Iksil Okay, okay. 

Martin-Artajo Okay man. Bye. 

Iksil Bye. 

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JPM-ClO 0009371 

JPM-CIO·PSI·H 0006400 
603 

From: Grqut, Julien G <julieILg.grout@jpmchase.com> 

Sent: Thu, 22 Mar 201217:46:07 GMT 

To: CIO ESTIMATED P&L <CIO _CREDIT ]&L@jpmchase.com> 

cc: CIO P&L Team <CIO]&L_Team@jpmchase.com> 

Subject: CIO Core Credit P&L Predict [22 Mar]: +$82k (dly) -$276,990k (ytd) 

Daily P&L: $82,141 

YID P&L: -$276,990,321 

Daily P&L($) YID P&L($) 

Redacted By 

Permanent Subcommittee on Investigations 

Europe High Grade 25;839,314 124,436,937 

Redacted By 

Permanent Subcommittee on Investigations 

Redacted By 

PeTID~nent Subcommittee on Investigations 

US High Grade -82,388,848 409,065,325 

Redacted By 

Permauent Subcommittee on Investigations 

US HY & LCDX 94,962,354 -347,851,042 

--~---.--

Redacted By 

Permanent Subcommittee on Investigations 

Permanent Subcommittee on Investigations 

EXHIBIT #18 

CONFIDENTIAL TREATMENT REQUEST ... ---------.. J.P. MORGAN CHASE & CO. JPM-CIO·PSI0016499 
604 

Redacted By 

Permanent Subcommittee on Investigations 

US ABX / TABX -155 -21,008 

Redacted By 

Permanent Subcommittee on Investigations 

New Investments -20,633,978 -461,330,052 

Redacted By 

Permanent Subcommittee on Investigations 

Dead Books (Core) -13 2,017 

Redacted By 

Permanent Subcommittee on Investigations 

WashbooklCosts 0 0 4 --- . I Redacted by the I c.~~~ub\:ommittee on Investigations t 

Explanatory P&L (in $1000s): 

Name Total Dirctnl Tranche Carry lR Nrr Adjust FX 

Redacted By 

Permanent Subcommittee on Investigations 

Close COD 

Redacted By 

Permanent Subcommittee on Investigations 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CD. JPM-CID-PSI 0016500 
605 

Redacted By 

Permanent Subcommittee on Investigations 

Another day of weakness triggered by negative news from China overnight, a very poor set ofPMI in Europe. 

The market feels shaky here, with European financials, iTraxx.xover and CDX.IG underperforrning. 

Volatilities are higher by about +4pt across the board, but there was no flattening of index curves - some market 

playen; were actually marking curves a tad steeper, on the off the run series (S9, 1G9). No obvious theme in 

tranches today - equity tranches were steeper again, in CDX.IG, but slightly flatter in iTraxx. 

The behaviour of the book was close to what happened yesterday - the book is making money thanks to the 

decompression trades in Europe and in the US (our shorts in CDXHY, SI4,15,16, 17 widened), with gains 

estimated to $80M. Again, the book is getting hurt with losses in index forward spreads in S9 and 1G9, 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), iTraxxXover (300M), CDX.IG (3.95B) 

and FINSUB (100M). Beside providing carry, these trades should reduce the VaR, but increase the IRe. We are 

pausing in our sale of protection,. to see what the overall impact on capital numbers is going to be. 

Again. a lot of prices ar.e still being framed and we are proViding our best estimate. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0016501 
606 

From: Goldman, Irvin J 

Sent: Thu, 22 Mar 201219:53:19 GMT 

To: Weiland, Peter <peter.weliand@jpmchase.com> 

Subject: RE: I would like to understand the increase in positions in credit 

Ina Is freaking - really! call me 

---CJriginal Message----

From: Weiland, Peter 

Sent: ThursdaY, March 22, 2012 03:26 PM Eastern Standard Time To: Goldman, Irvin] 

Subject: FW: I would fike to understand the increase in positions in credit 

Here ls my best estimate. 

Defta-adjusted on-the-run equivalent position increased from $918 to $1228, up 34%, same pct as csOl~ C5W 10% and 50% 

only went up 11-13%. So my estimate would be somewhere in between but onthe high side. 1 would say IRC increases from 

S 18.756 to about $268, which would take total RWA to $528. 

Starting with the $458 we discussed the other day: 

Assu~ing that the CRM didn't change because most of the <;IctMtv has NOT been in tranches, I got lndex posItion changes 

from George: 

21-Mar-12 

COX IG 

ITIWO< MN 

Combined Total 

52,1Z7,750,005 00,961,565,761 -39,87~.14Q 

,,\~i;;~~~:· ::·1~t~~:~~:t.·',~:,: ;;:,:.~;~~" 

-431,420,257 ~2,114,101t8S9 

'~<~~~~~~!"-: ::.~~~:~~U;". 

[);. 

CDXIG 

Notional De~~::o~TR Spr01 Spr+10"D UpSOt>"" 

V .£83,000,000 22,670,656.318 ~10,J74,650 --55,sn,B1J2 ·28o,m,456 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by a. ____________ EXHIBIT #19 __ JPM-CIO-PSI0000410 
607 

24,444,750,005 64,290,907,463 -29,497,000 -375,847,455 -1,833,328,404 

07-Mar-12 

COXIG 

rrRA)(XMN 

CorOOined T etal :t:;r::~;~~':~::~ai~~';'~.'~~l, :>:~:.m;~s::. ".217,2~1 ,657 ·1,004,000,582 

..5~,1hg;31d::.:~:~::;~i.fmm.'J, 

Peter Weiland 

Tel: +l 212 83.4.5.54i••• 9 Mob: +19141 

From: Drew, Ina 

Sent: Thursday, Marcil 221 2012 2:00 PM 

To: Weiland, Peter; Goldman, Irvin ] 

_... Redacted by the Permanent 

Subcommittee on Investigations 

SubJ~: 1 would Ii~ to understand the increase in pDsitlons In credit 

Since our meeting yesterday and what the RWA implications are. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000411 
608 

Confidential Treatment Requested By 

JPNlORGAN CHASE & CD. 

Confidential Treatment Requested by J.P. Morgan & Co. 

JPM-CIO 0000419 

JPM-CIO-PSI 0000412 
609 

From: ADE ADETAYO <AADETAY01@ .•••••• 

Sent: Fri, 23 Mar 2012 16:35:37 GMT 

-- Redattro by the Permanent 

Subcommittee on Investigations 

To: 

Subject: 

ADE ADETAYO <AADETAY01@'-!!~I!I!I!I~!I!I"; ADE ADETAYO . 

<ADEBOWALE.O.ADETAYO@JPMORGAN.COM>;BRUNO IKSIL <BIKSILZ@' •••••• 

BRUNO IKSIL <bruno.m.iksil@jpmorgan.com> 

03/23/201205:17:22 ADE ADETAYO, MORGAN (J.P.) has joined the room 

03/23/2012 05:17:22 ADE ADETAYO, MORGAN (J.P.) says: 

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03/23/201205:17:30 ADE ADETAYO, MORGAN (J.P.) says: 

hi bruno 

03/23/201205:17:30 BRUNO IKSIL, JPMORGAN CHASE BANK, has joined the room 

03/23/2012 05:17:30 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

*** JPMORGAN CHASE BANK, (748320) Disclaimer: THIS IS FOR INFORMATION ONLY, NOT AN OFFER OR 

SOUCITATION FOR THE PURCHASE OR SALE OF ANY ANANCIAL INSTRUMENT, NOR AN OFACIAL 

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03/23/201205:17:34 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

hello 

03/23/2012 05;17;45 ADE ADETAYO, MORGAN (J.P.) says; 

can I call you 

03/23/201205:18:10 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

sure 

03/23/2012 05:18:14 ADE ADETAYO, MORGAN (J.P.) says: 

.if you are free,\ 

03/23/201205:18:25 ADE ADETAYO, MORGAN (J.P.) says: 

thanks, whats your number ... 

03/23:.,/2.0.12.05.:.18.:3.9.BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

0044.-

03/23/2012 05:5.0.:2.3.B.RIliU

IIN.0

1lli

1.KSIL, JPMORGAN CHASE BANK, says: javier mobile is _ 

Permanent Subcommittee on Investigations 

EXHIBIT #20 

Confidential Treatment Requested by J. JPM-CIO-PSI0001240 
610 

03/23/2012 06:16:13 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

did you get Javier on the phone 

03/23/201206:16:15 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

? 

03/23/2012 06:16:23 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

btw we take a big hit today 

03/23/2012 06:16:36 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

across the board 

03/23/2012 06:16:44 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

right where we have a position 

03/23/201206:17:17 ADE ADETAYO, MORGAN (J.P.) says: 

yes I called spoke to him quickly 

03/23/2012 06:17:24 ADE ADETAYO, MORGAN (J.P.) says: 

he said will call me back 

03/23/2012 06: 17:28 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok 

03/23/2012 06:17:30 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

cool 

03/23/2012 06:17:35 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

thx for that 

03/23/2012 06:18:34 ADE ADETAYO, MORGAN (J.P.) says: 

seems people in the mkt know the position 

03/23/201206:18:41 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

yes 

03/23/2012 06:18:42 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

they do 

03/23/2012 06:18:56 BRUNO IKSILi JPMORGAN CHASE BANK, says: 

and they have a chief commander 

03/23/2012 06:19:30 ADE ADETAYO, MORGAN (J.P.) says: 

no good 

03/23/2012 06:19:42 BRUNO IKSIL, JPMORGAN CHASE BANK, says: no 

03/23/2012 06:19:45 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

usee 

03/23/2012 06:19:S5 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

u will feel less alone very soon 

03/23/2012 06:20:06 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but like u 

Confidential Treatment Requested by J.P. Morgan & Co. JPM·CIO·PSI 0001241 
611 

03/23/2012 06:20:09 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i did not fail 

03/23/201206:20:16 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

this is not what i will be told 

03/23/2012 06:20:25 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

unlike you 

03/23/2012 06:20:25 ADE ADETAYO, MORGAN (J.P.) says: 

damn 

03/23/2012 06:20:29 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i picked the trades 

03/23/2012 06:20:36 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

so us ee 

03/23/2012 06:20:55 ADE ADETAYO, MORGAN (J.P.) says: 

hope it turns out well for you 

03/23/201206:21:03 ADE ADETAYO, MORGAN (J.P.) says: 

I really hope so 

03/23/2012 06:21:10 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

no well it is not the end of the world 

03/23/2012 06:21:19 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but the end of what i have done so far 

03/23/201206:21:20 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

for sure 

03/23/201206:21:26 BRUNO IKSIl, JPMORGAN CHASE BANK, says: 

i cannot fight 

03/23/2012 06:21 :29 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i cannot wait 

03/23/2012 06:21 :32 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i cannot argue 

03/23/2012 06:22:51 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i may not come back on Monday 

03/23/2012 06:23:00 ADE ADETAYO, MORGAN (J.P.) says: 

really? 

03/23/201206:23:03 ADE ADETAYO, MORGAN (J.P.) says: 

oh no 

03/23/2012 06:23:04 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

well 

03/23/2012 06:23: 10 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i will know this afternoon 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001242 
612 

03/23/201206:23:15 ADE ADETAYO, MORGAN (J.P.) says: 

damn 

03/23/201206:23:25 ADE ADETAYO, MORGAN (J.P.) says: 

hope goes okay 

03/23/2012 06:23:30 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

this is a big setup i think 

03/23/201206:23:35 ADE ADETAYO, MORGAN (J.P.) says: 

I relly hope so 

03/23/2012 06:23:40 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but i comes from the top 

03/23/2012 06:23:56 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

and there is little i can do 

03/23/2012 06:24: 19 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

if they let the book roll that will be a gain in the end 

03/23/2012 06:24:26 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but the drawdown is huge 

03/23/2012 06:24:39 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

a bit like the guys blowing on the super seniors 

03/23/201206:25:38 ADE ADETAYO, MORGAN (J.P.) says: 

damn, so sorry to hear this 

03/23/2012 06:26:23 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ah it could be worse 

03/23/2012 06:26:30 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

I could have doe a bad trade 

03/23/2012 06:26:37 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

u know some real big mistake 

03/23/2012 06:26:40 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i did not 

03/23/2012 06:26:45 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but u know how it is 

03/23/201206:26:49 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

once the loss is there 

03/23/2012 06:26:58 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

good trades look like very abd trades 

03/23/2012 06:27:07 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

and this is where all this stops 

03/23/2012 06:27:19 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i am not so much at loss 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PS10001243 
613 

03/23/2012 06:27:21 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

net net 

03/23/201206:27:28 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

if they just freeze the book 

03/23/201206:27:32 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

that will be a gain 

03/23/2012 06:27:44 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but the damage to me is irreversible 

03/23/201206:27:52 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

and that was the aim i think 

03/23/2012 06:28: 10 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

it is flattering to see all these guys devoting so much energy to that aim 

03/23/2012 06:28:33 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

the pain for me is sam as for you 

03/23/2012 06:28:48 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

to distance myself from wat ketp alive for so many years 

03/23/2012 06:29:06 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

and to keep a positive memory of all this 

03/23/2012 06:29:18 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ie not giving too much importance to today's events 

03/23/201206:30:41 ADE ADETAYO, MORGAN (J.P.) says: 

wow 

03/23/2012 06:30:52 ADE ADETAYO, MORGAN (J.P.) says: 

so sad this is happening 

03/23/2012 06:30:59 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

it had to happe 

03/23/2012 06:31:08 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

it started back in 2008 you see 

03/23/201206:31:15 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i survived pretty well 

03/23/201206:31:23 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

until i was alone 

03/23/201206:31:29 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

to be the target 

03/23/201206:31:39 ADE ADETAYO, MORGAN (J.P.) says: 

u alone now? 

03/23/201206:31:53 ADE ADETAYO, MORGAN (J.P.) says: 

you have the backing of londin right? 

Confidential Treatment Requested by J.P.MDrgan & CD. JPM-CIO-PSI 0001244 
614 

03/23/2012 06:31:58 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

yes i mean the guys know my position because i am too big for the market 

03/23/201206:31:59 ADE ADITAYO, MORGAN (J;P.) says: 

london 

03/23/2012 06:32:02 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

yes . 

03/23/2012 06:32:04 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i did 

03/23/2012 06:32:11 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

because i made a lot of money 

03/23/2012 06:32:17 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

there was no other reason 

03/23/2012 06:32:21 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

this year 

03/23/2012 06:32:47 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

for the first time, achilles started thinking i could be of use other than to make money 

03/23/2012 06:32:56 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

just to protect the whole group 

03/23/2012 06:33:02 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but here is the loss 

03/23/2012 06:33:10 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

and it becomes too large 

03/23/2012 06:33:13 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

and this is it 

03/23/201206:33:28 ADE ADITAYO, MORGAN (J.P.) says: 

will he bck you? 

03/23/2012 06:33:28 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

we realize that I am too visible 

03/23/2012 06:33:37 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

up to a point yes 

03/23/2012 06:33:44 ADE ADITAYO, MORGAN (J.P.) says: 

good 

03/23/2012 06:33:47 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

but here this is too big an issue 

03/23/2012 06:33:56 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

it is out of my hands already 

03/23/2012 06:35:19 ADE ADITAYO, MORGAN (J.P.) says: 

so what happens now? 

Confidential Treabnent Requested by J.P. Morgan & Co. JPM-CIO-PSI0001245 
615 

03/23/201206:35:37 ADE ADETAYO, MORGAN (J.P.) says: 

you having a meeting witih Javier and Achilles 

03/23/2012 06:35:39 ADE ADETAYO, MORGAN (J.P.) says: 

? 

03/23/2012 10:20:58 ADE ADETAYO, MORGAN (J.P.) has left tihe room 

03/23/2012 11:30:22 ADE ADETAYO, MORGAN (J.P.) has joined the room 

03/23/2012 11:30:22 ADE ADETAYO, MORGAN (J.P.) says: *** MORGAN (J.P.) (20833) Disclaimer: THIS IS FOR INFORMATION ONLY AND NOT THE PRODUCT OF 

JPMORGAN 's RESEARCH DEPT.IT IS INTENDED FOR THE RECIPIENT ONLY.IT IS NOT AN OFFER OR 

SOLICITATION FOR PURCHASE OR SALE OF ANY FINANCIAL PRODUCT AND NOT SUITABLE FOR PRIVATE 

CUSTOMERS. PRICES ARE INDICATIVE ONLY.WE MAY HOLD A )l."posmoN OR ACT AS MARKET MAKER IN 

ANY FINANCIAL PRODUCT DISCUSSED ABOVE. CLIENTS SHOULD CONSULT THEIR ADVISORS ON 

TAX,ACCOUNTING,LEGAL OR OTHER ISSUES ARISING AND EXECUTE TRADES THRO!JGH A JPM ENTITY IN 

THEIR HOME JURISDICTION UNLESS GOVERNING LAW PERMITS OTHERWISE. FOR A'INFORMATION 

ABOUT JPM UK ENTITIES REFER TO )l. .. www.jpmorgan.com/pages/disclosures 2009 JPMORGAN CHASE & 

CO. JPMSL IS AUTHORISED AND REGULATED BY THE FSA. 

03/23/2012 12:35:37 ADE ADETAYO, MORGAN (J.P.) has left the room 

Confidential Treabnent Requested by J.P. Morgan & Co. JPM-CIO-PSI 0001246 
616 

__ "" RedKteel by the Permanent 

Subcommittee on Investigp,tions 

From: JULIEN GROUT <JGROlJT3@ •••• _ 

"ent: Fri, 23 Mar 201218:37:47 GMT 

JULIEN GROUT 1'0: BRUNO IKSIL <O.ll\~.lLLI!ll •• 

Subject: 

JULIEN GROUT <julien.g.grout@jpmchase.com>; 

IKSIL <bruno.m.ik!;iI@jpmorgan.com> 

03/23/2012 05:45:49 JULIEN GROUT, JPMORGAN CHASE BANK, has joined the room 

03/23/201205:45:50 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

*** JPMORGAN CHASE BANK, (741671) Disclaimer: THIS IS FOR INFORMATION ONLY, NOT AN OFFER OR 

SOLICITATION FOR THE PURCHASE OR SALE OF ANY FINANCIAL INSTRUMENT, NOR AN OFFICIAL 

CONFIRMATION OF TERMS. THE INFORMATION IS BELIEVED TO BE RELIABLE, BUT WE DO NOT 

WARRANT ITS COMPLETENESS OR ACCURACY. PRICES AND AVAILABILITY ARE INDICATIVE ONLY AND 

ARE SUBJECT TO CHANGE WITHOUT NOTICE. WE MAY HOLD A POSmON OR ACT AS A MARKET MAKER 

IN ANY FINANCIAL INSTRUMENT DISCUSSED HEREIN. CLIENTS SHOULD CONSULT THEIR OWN 

ADVISORS REGARDING ANY TAX, ACCOUNTING OR LEGAL ASPECTS OF THIS INFORMATION AND 

EXECUTE TRANSACTIONS THROUGH A J.P. MORGAN ENTITY IN THEIR HOME JURISDICTION UNLESS 

GOVERNING LAW PERMITS OTHERWISE. 

03/23/201205:45:54 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

bruno 

03/23/201205:45:54 BRUNO IKSIL, JPMORGAN CHASE BANK, has joined the room 

03/23/201205:45:54 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

*** JPMORGAN CHASE BANK, (748320) Disclaimer: THIS IS FOR INFORMATION ONLY, NOT AN OFFER OR 

SOLICITATION FOR THE PURCHASE OR SALE OF ANY FINANCIAL INSTRUMENT, NOR AN OFFICIAL 

'ONFIRMATION OF TERMS. THE INFORMATION IS BELIEVED TO BE RELIABLE, BUT WE DO NOT 

.IARRANT ITS COMPLETENESS OR ACCURACY. PRICES AND AVAILABILITY ARE INDICATIVE ONLY AND 

ARE SUBJECT TO CHANGE WITHOUT NOTICE. WE MAY HOLD A POSmON OR ACT AS A MARKET MAKER 

IN ANY FINANCIAL INSTRUMENT DISCUSSED HEREIN. CLIENTS SHOULD CONSULT THEIR OWN 

ADVISORS REGARDING ANY TAX, ACCOUNTING OR LEGAL ASPECTS OF THIS INFORMATION AND 

i;l<ECUTE TRANSACTIONS THROUGH A J.P. MORGAN ENTITY IN THEIR HOME JURISDICTION UNLESS 

GOVERNING LAW PERMITS OTHERWISE. 

03/23/201205:45:59 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

salut 

03/23/201205:46:01 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

salut 

03/23/2012 05:46:03 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

c mort la 

03/23/2012 05:46:28 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

david de CS appoeUe au sujet des skew trades. je lui dernande un prix ferme sur indice vs single names? 

03/23/201205:46:32 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

co~pons matched etc 

03/23/2012 05:46:33 JULIEN GROUT, JPMORGAN CHASE BANK, says: ?". ", 

13/23/2012 05:46:42 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

pui 

Confidl!ntla] Trt!atm"nt il:eqll.stl!!! 

by JP'MQRGAN CHASE S. CO. 

'n1l.U:Inl=t..1TllU T~l=lI.TMl=NT RI=OIIF~TFn RY.l P 

Permanent Subcommittee on Investigations 

EXHIBIT #21 

JPM'{:IO·PSI·H 000543B 
617 

E-MAIL TRANSLATION 

ConllderrtlaITre2tm"!1tRequosted 

by JPMDRGAN CHASE & CO. 

r:n"n::;InI=MTI41 TI:1F4TMI=MT RFnI1F~TFn RV.I P MOR[.;AN CHASE.\ CO. JPM-CIO-PSI-H 0006450 
618 

Fmm: JULTEN GROUT <JGROUT3@ •••••• 

Sent: Fri, 23 Mar 201218:37 :47 GMT 

--"" Redacted by the Permanent 

Subcommittee on Inl'ntigations 

To: mnEN GROUT <JGROUT3@ , JULIEN GROUT 

<j uliea .g.grout@jpmchase,com>;BRUNO IKSIL <BIKSIL2@~iii •• IBRUNO 

IKSIL <bruno,rn.iksil@jpmorgan.com> 

Subject: 

03/23120]205:45:49 JULIEN GROUT, JPMORGAN CHASE BANK, hasjomed the mom 

03/23/201205:45:50 mLIEN GROUT, JPMORGAN CHASE BANK, says: 

*** JPMORGAN CHASE BANK, (741671) Disclaimer: TIllS IS FOR INFORMATION ONLY, NOT 

AN OFFER OR SOLICITATION FOR THE PURCHASE OR SALE OF ANY FINANCIAL 

INSTRUMENT, NOR AN OFFICIAL CONFIRMATION OF TERMS. THE INFORMATION IS 

BELIEVED TO BE RELIABLE, BUT WE DO NOT WARRANT ITS COMPLETENESS OR 

ACCURACY PRICES AND AVAILABILITY ARE INDICATIVE ONLY AND ARE SUBJECT TO 

CHANGE WITHOUT NOTICE. WE MA Y HOLD A POSmON OR ACT AS A MARKET MAKER 

IN ANY FINANCIAL INSTRUMENT DISCUSSED HEREIN. CLIENTS SHOULD CONSULT 

THEIR OWN ADVISORS REGARDING ANY TAX, ACCOUNTING OR LEGAL ASPECTS OF 

TIDS INFORMATION AND EXECUTE TRANSACTIONS THROUGH A IP. MORGAN E'NTITY 

IN THEIR HOME IURISDICTION UNLESS GOVERNING LAW PERMITS OTHERWISE. 

03123120 ]205'45 :54 mLIEN GROUT, JPMORGAN CHASE BANK, says: 

bruno 

03123120 1205:4554 BRUNO IKSIL, JPMORGAN CHASE BANK, has joined the room 

0312312012 05 :4554 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

** * JPMORGAN CHASE BANK, (748320) Disclaimer: TIllS IS FOR INFORMATION ONLY, NOT 

AN OFFER OR SOLICITATION FOR THE PURCHASE OR S,'\LE OF ANY FINANCIAL 

INSTRUMENT, NOR AN OFFICIAL CONFIRMATION OF TERMS. THE INFORMATION IS 

BELIEVED TO BE RELIABLE, BUT WE DO NOT WARRANT ITS COMPLETENESS OR 

ACCURACY. PRICES AND AVAILABILITY ARE INDICATIVE ONLY .A,}<l) ARE SUBIECT TO 

CHANGE WITHOUT NOTICE. WE MAY HOLD A POSmON OR ACT AS A MARKET MAKER 

IN ANY FINANCIAL INSTRUMENT DISCUSSED HEREIN. CLIENTS SHOULD CONSULT 

THEIR OWN ADVISORS REGARDING ANY TAX, ACCOUNTING OR LEGAL ASPECTS OF 

TIllS INFORMATION AND EXECUTE TRANSACTIONS THROUGH A IP. MORGAN ENTITY 

IN THEIR HOME IURISDICTION UNLESS GOVERNING LAW PERMITS OTHERWISE. 

03/231201205:45:59 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

salnt 

hi 

031231201205:46: 01 JUL TEN GROUT, JPMORGAN CHASE BANK, says: 

salut 

hi 

03/231201205:4603 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

cmortla 

it is over/it is hopeless now 

03123120 1205:46: 28 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

david de CS appoelle au sujet des skew trades. je lui demande un prix fcrme sur indice vs single rurmes? 

David from CS calls about skew trades. I ask him a finn price on index vs single names? 

03/23/201205:46: 32 JULIEN GROUT, )PMORGAN CHASE BANK, says: 

Cotlfit:lentl&TrIlatm"ntR"'ll.!l!S'ted 

by JPMORGA.N CHASE& CO 

Draft TranSCript ~ Subject to ReView and Correction 

Likely Contajns ETtors 

r.n~U;:lm::::I\ITI.a1 TRFATMFNT RFOlJESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PSI-H 0006451 
619 

coupons matched etc 

coupons matched etc 

0312312012054633 JULIEN GROUT, JPMORGAN CHA.8E B~"IK, says: 

? 

? 

031231201205:46:42 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

aui 

yes 

031231201205:46:46 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

c un full upfront 

it is a full upfront 

031231201205:46:54 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok understood 

ok understood 

OJ 1231201205:48: 11 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

pour revenir a ton premier point 

to get back to our ftrst point 

031231201205:48: 14 BRUNO IKSIL, JPMORG",'" CHASE BA}''K, says: 

continue a vendre la ss 

keep on selling the ss 

03/231201205:48 :25 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

leve la 0-3 IOyr 

levylraise/exercise the 0-3 lOyr 

031231201205 :48 :28 JULIEN GROUT, JPMORGAN ClLA.SE BANK, says 

on en discutera lundi si tu veux bien, 

we 'Will talk about that on Monday if it is fmc \\.-:ith you 

OJ 123120 1205:48 :32 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok ok je continue ca 

ok ok I continue that 

03123120 1205: 48 : 38 BRUNO IKSIL, JPMORGAN CHASE RA.NK, says: 

yes 

03/23/201205:48:48 BRUNO IKSIL, JPMORGAN CHASE BMlK, says: 

je tcdis 

I tell you 

031231201205:48:52 BRUNO TKSIL, JPMORGAN CHASE BANK, says 

ils vont nous defoncer 

they are going to trash/destroy us 

031231201205:48 :56 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

y a bep a dire, maisje ne veux pas chargerta charette qui est deja bien remplie 

there is a lot to say, but I don't want to burden you more than you already are 

0312312012 055228 BRUNO IKSIL, JPMORGAN CHASE BAN'K, says 

c saIT tu as au mains 600m 

tonight you'll have at least 600m 

03123/201 2055236 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

BID ASK 

BID ASK 

03123120120552:40 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

MID 

MID 

Connl:lerrtlaiTreatmentRoquested 

by JPMORGAN CKASE It. co, 

Draft Transcript· Subject to Review and Correction 

Likely Contains Errors 
620 

031231201205 :52 :51 BRUNO TKSIL, JPMORGAN CHASE BANK says: 

BID ASK TU AS 300M AU MOINS 

BID ASK YOU HAVE 300M AT LEAST 

031231201205:54:46 JULIEN GROUT, JPMORGAN CHASE BANK s"Ys: 

tu as vu Ie run de jospehine .. attilCk full force. 

You have seen Josephine's run .. attack full force. 

0312312012 05: 57: 56 BRUNO IKSTL, JPMORGAN CHASE BANK s"Ys: 

aui 

yes 

03123120120557: 59 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

c partont 

it is everywhere/all over the place 

03123120120558:04 BRUNO IKSTL, JPMORGAN CHASE BANK, says: 

on est mortje te dis 

we are dead I tell you 

031231201205:58 : 19 BRUNO IKSIL, JPMORGAN CHASE BANK, S"YS: 

mms bon c hOTS de mon controel maintenant 

but then it is out of my hands now 

031231201205: 58: 27 BRUNO TKSIL, JPMORGAN CHASE BANK S"YS: 

j'ai fait ce qu'il fuHait 

I did what I had to do 

031231201206:04:04 JULIEN GROUT, JPMORGAN CHASE BANK S"YS: 

ok 

ok 

031231201206:18:11 JULIEN GROUT,JPMORGAN CHASE BANK says 

aula bnp .. 

wowbnp .. 

0312312012 07:2702 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

bruno! 

bruno! 

03/23/2012 07:30:46BRUNO IKSTL, JPMORGAN CHASE BA.'lK, says: 

aui 

yes 

031231201207:31:38 JULIEN GROUT, JPMORGAN CHASE BANK says: 

l'arret du trading c nous 3 Qujuste moi? 

The stop of the trading, is it the 3 of us or only me? 

03123/2012 07:31: 49 BRUNO IKSIL, JPMORGAN CHASE BANK says: 

toi 

you 

0312312012 07: 31 :52 BRUNO IKSTL, JPMORGAN CHASE BANK, says: 

on core 

031231201207: 31 :52 JULIE GROUT, JPMORGAN CHASE BANK, says: 

ok 

ok 

031231201207: 32:05 JULIEN GROUT, JPMORGAN CHASE BANK s"Y' 

ericlluis ils peuvent continuer, sur leur tactical 

ericlluis can go on, on theu- tactical 

03/23/2012 07: 32: 06 BRUNO IKSIL, JPMORGAN CHASE BANK, s"Ys: 

COl'lfldentialTreatmI>!rtR"quested 

by JPMORGAN CHASE & CO. 

Draft Transc::ript • Subj~t to Review and Correction 

Likely Contains Errors 

I'"'n.MI:"It"o~"ITIl!.1 TR~IlTMI=""T Rl=nlll::~n:n RY.I P. MORGAN CHASE & CO. JPM-CIO-PSI-H 0006453 
621 

continue sur la ss les 0-3 1 A yr 

go on with the S5 the 0-3 1 A yr 

0312312012 07: 32:07 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok? 

Ok? 

031231201207:32:11 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

oui 

yes 

03123120 1207: 32:27 BRUNO IKSIL, JPMORGAN CRI\,SE BANK, S"YS: 

continue sur les 25-35 HY 

go on with the 25-35 HY 

03123120120732:32 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

pas les 15-25 

not the 15-25 

03/23/201207:32:53 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok 

ok 

031231201207:33 :02 JULIEN GROUT, JPMORG,,"'i CHASE BANK, says: 

tu pourr~ me donner la eouleur stp? s'il y en a, 

will you give me the color please? if.there is some. 

03123120 1207.33: 17 BRUNO IKSIL, JPMORGAN CHASE BA}lK, says: 

nen poour Ie moment 

nothing [Dr now 

031231201207:33 :20 JULIEN GROUT, JPMORGA,,"1 CHASE BANK, says: 

ok 

ok 

03123 /20 120733 :28 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ea va se negocier avec l'IB 

it will be negotiated with the IB 

03123/201207:33:34 BRUNO IKSIL, JPMORGAN CHASE BANK, S"YS: 

tout en baut 

at the top 

031231201207:33:41 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

et je vms en prendre pour mon grade 

and I am going to be hauled over the wa1s 

03/231201207:33:44 JULIEN GROUT, lPMORGAN CHASE BANK, S"YS 

today? 

tod<IY? 

03123120120733:49 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

mais bon on a du carry 

but we have some carry 

031231201207:33 :51 JULIEN GROUT, lPMORGAN CHASE BANK, S"YS: 

ah? cela t'a ete confume/ 

ah? it was confIrmed to you? 

03123120 1207: 34:03 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

c pas necessaire 

it is not necessary 

03/231201207:34:20 BRUNO IKSIL, JPMORGAN CHASE BA.NK, says 

tu ne perds pas 500M sans conseuqences 

you don't lose 500M v.':ithout consequences 

C!>flflderrt!alTrn"tmellt~"'1u~ed 

by JPMORGAN CHASE &; ca, 

Draft Transcript - Subject to Review and Correction 

Likely Contains. Errors 

.IPM ... CJO~PSI-H 0006454 
622 

031231201207: 34:30 BRUNO TKSIL, JPMORGAN CHASE BANK, says 

gar-de Ie pour toi 

keep it for you 

03123/201207:34:39 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

oh aui 

ohyes 

03/23120120734.-52 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

c Ie bon sons qui me lit ca 

good sense tells me so 

03123120120746.-55 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

tua as parle a august? sinon, je lui dis de nOllS montrer Ie skew trade (SOllS Ie bon format)? 

Did you talk to august? otherwise, I tell him to show us the skew trade (under the good fonnat)? 

03/2312012074729 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

aui 

yes 

03/23/2012074735 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok 

ok 

03123/20120747:38 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

essaie de col1ecter des prix fermes 

try to collect ftnn prices 

03/23/20 12074 745 BRUNO IKSIL, JPMORGAN CHASE BAlIK, says: 

je n'ai nen vu de ferme pour Ie moment 

I haven't seen anything ftnn for now 

03/23/20 12074815 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok 

ok 

03123/201207:56:47 JULIEN GROUT, JPMORGAN CllASEBANK, says 

Bruno? tu as besolll de qqchol 

Bruno? do you need anything? 

03/23/201208:13:16 JULIEN GROUT, JPMORGAN CHASE BANK, says 

bon bruno 

well bruno 

03/23120 1208: 13 .-26 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

javier est reparti dans un canf can avec A 

javier is back again in a phone call with A 

0312312012081332 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

je n'ai pas pu lui parler 

I couldn't talk to him 

03/23120120814.-05 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok 

ok 

031231201208.-14.-24 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

mais bon i1 n'avaitpas I'ai conceme par des slidse .. plutot autre chose 

but BIlyway he did not seem concerned by the slides., rather something else 

03123 12012 08.- ]4.-35 JULIEN GROUT, JPMORGAN CHASE BANK, says 

je "IDS chercher Ie dej etje reviens 

I am going to get lunch and I come back 

03/2312012 08:26.- 17 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

tu es Ia? 

Are you here? 

ConfidE>ntlal Tre«tmen1 Re'lU_dby JPMQRGA.N CHASE & CO. 

Draft Tl<lnscript" Subject to Review and Correction 

Likely Contains Errors 

r.n~JI::::mFNTIAI TRFATMENT REOUESTED BY J.P. MORGAN CHASE & CO. JPM.{:IO·PSI·H 0006455 
623 

03/23 12012 08:3N2 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

urgent 

urgent 

031231201208:3349 JULIEN GROUT, JPMORGAN CHASE BANK, say s: 

aui 

yes 

0312312012 085930 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

regarde ton email 

look at your email 

03123120 1209:0002 BRUNO IKSIL, JPMORGAN CHASE BANK, say" 

essaye de retrouver les run de roman shukhman sur ig9 pour montrer qu'ils sont plus steep et mettent Ie 

ig9 lOyr plus que Ie marche 

try to fmd roman shukhman'5 runs on ig9 in order to show that they are "more steep"/steeper and that 

they put the ig9 10 yr more than the market 

031231201209:01 :36 JULIEN GROUT, JPMORGAN CHASE BA.NK, says: 

bruno 

bruno 

03123120 120902:07 BRUNO IKSIL, JPMORGA.N CHASE BANK, says 

essaie de reirouver les chat sur les chat de jp ou ils nOll sniffent 

try to find the chats about the jp 's chat where they sniff us 

03123/2012090213 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

tu te rappeUes l'histoire de debut d'annee avec Sylvain sur Ie roll 89 5y? 

do you remember the story from the beginning of the year with Sylvain on the 89 5y roll? 

03123120120902:20 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

TID 

03/23120 1209:02.'26 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

c'etait koi deja? 

'What was it again? 

03123120120902:41 JULIEN GROUT, JPMORGAN CHASE BANK, says 

j'avais checke sylvain, et fait une gross taille de roll 59 5y 

I had checked with Sylvain and done a big size of roll 89 5y 

03/231201209:0251 JULIEN GROUT, JPMORGAN CHiI,SE BANK, says: 

peux de temps apres il me dit que jpm Ie lift dessus 

shortly after he tells me thatjpm lifts him from it 

03/231201209:0256 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ah oui 

ohyes 

03123120 1209:03:04 BRUNO TKSIL, JPMORGAN CHASE BANK, says: 

il faut le retrouver celui la 

we need to find this one 

031231201209:03 :13 JULIEN GROUT, JPMORGAN CHASE BANK, says 

je 'ai, en francais malheureusement 

I have it, in French unfortunately 

03/23120120903 :21 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

c pas grave envoie 

it does not matter, send it 

03123/20 120903:3 I JULIEN GROUT, JPMORGAN CHASE BA.'lK, says 

en rrecanche peux tu me rappeler ce que tu avw.s trade/booke? 

However could you remind me what you tI-adedlbooked ? 

03123120120903 :33 BRUNO lKSIL, JPMORGfu'1 CHASE BANK, says: 

COl'lfldent\aITreatmentR~quo:sted 

byJPMORGIl.N Cl-!ASE& co, 

Draft Transcript" Subj~t to Review and CorrectiDn 

Likely Contains ErrDrs 

JPM-C10·PSI·H 0006456 
624 

achilles comprend tres bien Ie francais 

achilles understands French very well 

031231201209:03:42 BRUNO IKSIL, lPMORG,,"-'1 CHASE BANK, "ys: 

cad? 

Which means? 

031231201209:03:48 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

je veux Ie timing exact 

I want the exact timing 

031231201209:03:56 BRUNO IKSIL, lPMORGAN CHASE BANK, says 

de quoi? 

of what ? 

031231201209:04:03 JULIEN GROUT, lPMORGAN CHASE BANK, says 

ben des evenements 

well, of the events 

03/23/2012090416 JULIEN GROUT, lPMORGAN CHASE BANK, says 

parce que si tu as deja traite du roll avant moi la dessus 

because if you have already treated some roll before me on that 

0312312012090420 JULIEN GROUT, JPMORGAN CHASE BANK, says 

ca sera encore plus limpide 

it will be even clearer 

03123120120904:23 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

tu yois? 

Do you see? 

031231201209:04:32 BRUNO IKSIL, JPMORGAN CHASE BAN", says: 

je ne me souviens plus 

I don't remember 

03/23/201209:04:39 JULIEN GROUT, lPMORGAN CHASE BANK, says 

ok je regarde Ie blotter 

ok I look at the blotter 

03/23/201209:04:41 BRUNO IKSlL, lPMORGAN CHASE BANK, says: 

c queljour? 

What day is it ? 

031231201209:05:27 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

ah ui 1 tu as traite 250m de roll s9 avec db a 7h55 I! 

oh yes I You dealt with 250m of roll 59 with db at 715511 

03123120 12 0905 :29 JULIEN GROUT, lPMORGAN CHASE BANK, says 

Ie 4~jan 

on 4th Jan 

03123120 120906: 11 BRljNO IKSlL, lPMORGAN CHASE BANK, says: 

ok 

ok 

031231201209:0618 BRUNO IKSIL, lPMORGAN CHASE BA."lK, say., 

tu as Ie chat? 

Do you have the chat? 

03123120120906:22 BRUNO IKSIL, JPMORGAN CHASE BA."lK, says: 

ajoute Ie 

add it 

03123120 1209:06 :29 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

avec sylvain? oui 

Confidential T",atment Requ!$Ii!'lI 

by JPMORGAN CHASE s.. co. 

Draft Transeript ~ Subject to Review and Correction 

Likely Contains Errors 

CONFIDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, 

JPIII-CIOO0!l3534 

JPM.cIO-PSI-H 0006457 
625 

mth Sylvain? yes 

03123120120906:31 BRUNO IKSIL, JPMOEGAN CHASE BANK, "ys; 

je ne vois rien chez moi 

I can't see anything on mine 

03123120 1209:06:37BRUNO IKSTL, JPMORGAN CHASE BANK, says' 

maisje me rappelle 

but I remember 

03123 1201209: 14:32 IULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok apparemment tu as booke Ie trade vers 8h20 ce jour 1a, moi j'ai trade a 9h< 

ok apparently you booked the trade around 8h20 this day, and I traded at 9h. 

031231201209: 14 :52 BRUNO IKSIL, JPMORGAN CHASE BANK, "ys 

cool 

cool 

031231201209:5007 IULIEN GROUT, JPMORGAN CHASE BANK, says: 

pour l'instantje n'ai que 5 'pieces' au dossier 

for now I have only 5 documents in the file 

03 1231201209:53:45 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

regarde ton email 

look at your email 

031231201209:53:49 J\JLlEN GROUT, JPMORGAN CHASE BANK, says: 

seen 

031231201209:53:50 IULIEN GROUT, JPMORGAN CHASE BANK, says: 

un de plllS 

one more 

031231201209:54:03 BRUNO IKSIL, JPMORGAN CHASE BAc'lK, says 

ben oui on ne va pas basser comme sian etait parana tout Ie temps aussi 

well yes, we are not going to work as if we were paranoid all the time! 

031231201209:54:25 IULlEN GROUT, JPMORGAN CHASE BA-NK, says: 

6 pieces 

6 documents 

03/23120120956:24 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

regarde tes chats a toi avec JP guys 

look at your own chats with the JP guys 

031231201210:05 :37 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

je fais Mark Shirfan 

1 look at Mark Shman 

031231201210:2250 IULlEN GROUT, JPMORGAN CHASE BANK, "ys: 

vois les emails stp 

look at the emails please 

03123120121023 14 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

jevois 

1 see 

03123120 12 10.'23: 21 BRUNO IKSIL, JPMORGAN CHASE BA-'lK, says: 

la var explose 

the var explodes 

031231201210:2328 IULlEN GR01.JT, JPMORGAN CHASE BANK, says: 

oui 

yes 

Confidential Tra<rtntentReq,uested 

byJPMORGANCHASE&t:O. 

Draft Transcript ~ Subject to Review and Correction 

Likely Contains Error.:; 

r:nr-.II:mFNT161 TJ::!FlI.TMFNT RF(jIlF~TFn RY.I p. MORGAN CHASE & CO. 

JP~iOOOOlSl."i 

JPM-CIO-PSI-H 0006458 
626 

031231201210:23 :35 BRUNO IKSIL, JPMORGAN CHASE BANK says: 

c foutu 

it is over 

031231201210.'23 :37 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

le sule moyen c Ie book a zero 

the only way is the book at zero 

031231201210:25 :04 JULIEN GROI.JT, JPMORGAN CHASE BA-NK, says: 

tu peux me din;:: ce que t'a dit ade Ce matin? 

Can you ten me what ade told you this morning? 

03/23/201210:2550 BRUNO TKSIL, JPMORGAN CHASE BM'K, says 

3 gars de l'ib sont venus lui demander rna taille sur ig9 

3 ill guys came to ask him my size on ig9 

03/2312012 1026:08 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

je ne veux pas savoir qui c 

I don't want to know who it is 

03/23120121026: 19 BRUNO IKSIL, JPMORGAN CHASE BM'K, says: 

je sills sur Ie call 

I am on the call 

03/23/2012 10:28:01 BRUNO IKSIL, JPMORGAN CHASE BM'K, says: 

as tu ell des updates sur les mrogina1? 

Did you get the updates about the marginal? 

03/231201210:28:06 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

no 

03/23/201210:28:10 BRUNO IKSIL, JPMORGAN CHASE BANK says: 

rwa 

rna 

03/231201210:28:22 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

48.7 

48.7 

03/23/201210:2848 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

les marginals sur Ie Twa 

the marginals on the rwa 

03/231201210:29: 15'JULIEN GROUT, JPMORGAN CHASE BANK says: 

non rien .. en COUTS 

no, nothing .. in progress 

03/23 12012 10:29:33 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

j'en ai besoin 

I need them 

03/2312012 10:2939 JULIEN GROUT, JPMORGAN CHASE BANK, says 

je sais 

I know 

03/23120J 2 10:2944 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

je viens de relancer pat 

Ijust asked Pat again 

03123/2012 10:29:59 BRUNO IKSIL, JPMORGAN CHASE BA}''K, says: 

merci 

thanks 

03123/2012 10:31: 18 JULIEN GROUT, JPMORGAN CHASE BANK, says 

tu peux IDe faire les transcripts de david gldenberg a CS stp? 

ConfideJrtlal TI'!!:rtmerrt Requ.,g.,d 

by JPMORQAN CHASE !I. CD. 

Draft Trans.cript. Subject to Review and Correction 

Likely Contains Errors. 

,..... ...... "n::·ft"'lt::MTI II. I TDt::ATI\IIC::1'I.IT oc::nlll=C:;T'I=n RV.I P MnRr;:AN CHASE & CO. JPM-CIO-PSI-H 0006459 
627 

Can you please dolcheck david gldenberg's transcripts to CS ? 

0312312012 10:31 :38 BRUNO IKSIL, lPMORGAN CHASE BANK, say s' 

je suis sur Ie call 

I am on the cull 

03/23/201210:3145 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

ok 

ok 

03123/2012 10:3148 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

tout est sur Ie chat de cs 

everything in on cs's cbat 

0312312012 10:31 58 BRUNO IKSIL, lPMORGAN CHASE B.A.NK, says: 

peux tu Ie fme 

can you do it? 

0312312012 10:3203 mLIEN GROUT, lPMORGAN CHASE BA.'IK, says: 

ok 

ok 

03123120121057: 13 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

appelle moi qd tu peux 

call me when you can 

03123120 12l! :36: 16 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

tjs en ligne? 

Still online? 

031231201211 :3842 mLIEN GROUT, lPMORGAN CHASE BANK, says: 

dis moi quand tu as pu retrouver les chats de David Goldenberg 

ten me when you can find David Goldenberg's chats 

031231201211 :3843 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

stp 

please 

03123120121200:09 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

c sur Ie chat de cs sur la fm de mois 

It is on cs' s chat at the end of the month 

03123120 12 1200 16 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

et il ya celui de citi 

and there is the citi one 

03123120121200:28 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

i1 faut montrer les deux en parallel 

you need to show both in parallel 

0312312012 12 00 3 4 mLIEN GROUT, lPMORGAN CH!\SE BA.'IK, says 

peux til me les envoyer stp? 

Can you send them to me plea')e? 

0312312012 12:0106 BRtmO IKSIL, lPMORGMJ CHASE BANK, says 

ok je fqis citi 

ok I do citi 

0312312012 12:01 :12 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

tu peux fqire cs? 

Can you do cs please? 

031231201212:0339 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

C'ETAIT SUR QUO! DEJA? LES 6B? 

About what was it again? The 6B? 

CQnftclentlalTreatmentRequested 

by JPMORGAN CHASE I!.. co. 

Draft Transcript ~ Subject to Rev-iew and Correction 

Llke!yContains Errors 

r.:nM~mFNTI.o..1 TRF.o..TMFNT RFOllFRTFn RY.1 p, MORGAN CHASE & CO. JPM-CIO-PSI-H 0006460 
628 

031231201212:0440 BRUNO IKSIL, JPMORGAN CHASE BAliK, says: 

ok laisse tomber 

ok give it up 

031231201212:0441 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

je e fais 

I do it 

03123120121204:54 JULIEN GROUT, JPMORGAN CR"SE BANK, says: 

desoley avaitjavier j 'ai perdu Ie Ell 

sorry Javier was here and 1105t track 

031231201212:04:59 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

pas de pb 

no pb 

0311312012 n05:06 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

regarde tes email 

look at your em ails 

03/23/2012 1205: J6 BRUNO TKSn .. , JPMORGAN CHASE BANK, says: 

je faire janvier et fevrier sur credit suisse 

I am going to do January and February on credit suisse 

03/13/2012 J2:05:44 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

peux tu te rapJleler des chats au les traders te disaicnt que I'lB poussait surig9? 

Can you remember chats where the traders told you that the IE insisted on ig9? 

03/23J2012 J2:07:45 BRUNO TKSIL, JPMORGAN CHASE BANK, says: 

non 

no 

03123 1201212:07:47BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

aueun 

none 

03/23 120J 2 12: 19:23 JULIEN GROUT, JPMORGAN CHASE BA,,,l(, says: 

bruno 

bruno 

03/13/2012 J2: i9:39 BRUNO IKSIL, JPMORGA,'1 CHASE BANK, says: 

aui 

yes 

03/23/201211: 19:46 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ignore Ie derrLier email pour csfb* 

disregard the last email for csfb 

03/2312012 J 2 19:49 BRUNO TKSIL, JPMORGAN CHASE BANK, says: 

c un dnpe 

iti5 a trick 

03/23/2012 12: 1952 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

bon j'm les marginals old fashion 

well, I have the old fashion marginals 

0312312012121956 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

ah demande a lavie:r 

ab ask Javier 

03123/2012122001 BRUNO IKSIL, JPMORGAN CHASE BANK says: 

quel pol on print today 

what pnl we"print today 

03/2312012 12:20:08 BRUNO IKSIL, JPMORGA."l CHASE BANK, says: 

je ne sais plus la 

Conl'ldentWTre<rttnentReqUestliOd 

by JPMORClAN CHASE& ca. 

Draft Transcript * Subject to Review and Correction 

Likely Contains Errors 

rn"lI::lnt:MTII'II TOI=ATMI=MT Rl=nln:~Tl=n RY.I P MnRGAN CHASE & CO. JPM.cIO-PSI-H 0005461 
629 

1 don't know anymore 

03123120121220:22 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

j'ai aussi les marginals pour un split IRC/optimal trunches book,. ca t'interesse? 

I also have the marginals for a split IRC/optimal tranches book, are you interested? 

03/23/20 12 12:20' 29 BRUNO lKSIL, JPMORGAN CHASE BANK, says: 

oui 

yes 

03/23/2012 12:20:33 BRUNO lKSIL, JPMORGAN CHASE BANK, says: 

stp va voir jmrier 

please, go see j avier 

03/23/2012 12;20AO BRUNO lKSIL, JPMORGAN CHASE BANK, says: 

jc nc sais pas quel pnl envoyer la 

I don't know which pnl I should send 

031231201212:20:42 JULIEN GROUT, JPMORGAII CHASE BANK, >oys 

ok je vais alier lui demander. il pense que les pieces que j'ai amassees ne sont pas assez 

ok I am going to ask him, he thinks that the documents that I conected are not enough 

03/231201212: 20'44 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok 

ok 

03/23120 12 12:20:49 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

je vais aller lui envoyer 

I am going to send them to him 

03/231201212: 22:32 BR1JNO IKSIL, JPMORGAN CHASE BANK, says: 

dis moi qd core delta est updated 

tell me when COTe delta is updated 

03/23/201212:24:27 JULIEN GROUT, JPMORGAN CHASE BANK, says 

done 

done 

0312312012 12:24:51 JULIEN GROUT,JPMORGAN CHASE BANK, says: 

si on doit faire bcp plus de ig9 vs ig18 il faut faire une simulation sur Ie nva via Pat 

if we must do much more ig9 vs ig18, we need to do a simulation on the TWa via Pat 

03/2312012 12:27: 17 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

bon je fais Ie pnlla 

well, I do the pnl now 

03/23/2012 1227: 18 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ok? 

ok? 

031231201212:29:55 BRUNO IKSlL, JPMORGAN CHASE BANK, says 

ah non on neferajamais ca 1 

oh no, we will ncvcr do that 1 

031231201212:2959 BRUNO IKSIL, JPMORGAc'l CHASE BANK, says: 

yen a mare ala fm 

enough is enough 

03123/2012 12:30 13 BRUNO IKSlL, JPMORGAN CHASE BAl,iK, says: 

tu as parle a Javier? 

Did you talk to Javier? 

03/2312012 12:37: 12 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

tu noteras qu'il yeut faire les sUnuls de capital AVANT de tralter 

you'll notice that he wants to do the capital simulations BEFORE dealing 

Confidential Troi!lme"t Reqllestood 

by JPMORGAN CHASE /I. co 

Draft Transcript ~ Subject to Review and Correction 

Likely COntains Errors 

CONFIDENTIAL TREATMENT REQUESTED BY J.P, MORGAN CHASE & CO. 

JPM-CIO!)OD3539 

JPM-CIO-PSI-H 0006462 
630 

031231201212:51 :30 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

bon ca va douiller sur la compression la 

it is going to be spent/expensive on the compression now 

03123120 1212:52:46BRUNO IKSlL, lPMORGAN CHASE BANK, says: 

oui 

yes 

031231201212: 53:00 JULIEN GROUT, lPMORGAN CHASE BA."<K, says 

as tu parle a Javier? 

Did you talk to j avier ? 

0312312012125606 JULIEN GROUT, lPMORGAN CHASE BANK, says 

b? 

b? 

031231201212:56:35 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

oui 

yes 

03 12312012I2:56:39 JULIEN GROUT, lPMORGAN CHASE BA."K says: 

ok 

ok 

031231201212:57: 19 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

we show ~3 until month end on this one 

we show -3 until month end on this one 

03123120 12 12: 57: 21 BRUNO IKSIL, lPMORGAN CHASE BANK, says 

anyway 

anyway 

03/23120121303 :35 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

je peux appeler? 

Can I call? 

03123120 121303:47 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

si tu veux 

if you want 

03123120 1213:0752 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

Ie be ne va rien faITe, parce que1e pb aujourd'hui c'est 1a compression 

the be is not going to do anything, because today's problem is compression 

0312312012 13 08:07 BRUNO IKSIL, lPMORGAN CHASE BANK, says 

arrete 

stop that 

031231201213 :08 :19 BRUNO IKSIL, lPMORGAN CHASE BANK, says: 

tu ne perds pas 200m en compression 

you do not loose 200m with compression 

03123120 12130&55 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

bon 

well 

031231201213:09:28 JULIEN GROUT, lPMORGAN CHASE BANK, says: 

on a 34m de csOl en ig. hy unc'd today (par rapport aDOS marques) et ig+325. ca fait 110m 

we have 34m ofesOl in ig. Hy unc'd today (in comparison with our mades) and ig+325. it makes 

!lOrn 

03/2312012 J309:35 JULIEN GROUT, lPMORGAN CHASE BA.NK, says 

ok? 

Ok? 

Corlfld~nt\:alTruatmentReq~ 

by JPMORGAN CHASE" CO. 

Draft Trans.eript. Subject to Rev~w and Correction 

Likely Contains Erro~ 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

JPM--CIOOOO3S4O 

JPM-GIO-PSI-H 0005463 
631 

0312312012 1309:44 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ecoute je n'ai pas Ie temps 

listen, I don't have time 

031231201213:09:49 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

pok 

why? 

03123120 121309:51 JULIEN GROUT, JPMORGAN CHASE BANK, says 

ok 

ok 

0312312012130953 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

je suis avec pat pour voir les trades 

I am with pat to see for the trades 

031231201213 :10:04 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

tout co que je te demande c de dire a Javier ce que tu "Dis 

all that I am asking you is to tell Javier what you see 

031231201213: 10: 14 BRUNO IKSTL,JPMORGAN CH.A.SEBANK, says: 

c tout et ils decide ce qu'on montre 

that's it and he decides what we show 

03123/201213: 10:20 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

parce que Ia moi je ne sais plus 

because me, I don't know anymore 

03123120 12 13 1026 BRUNO IKSIL, JPMORGAN CHASE BANK, says 

je regarde la reduction du rwa 

I look at the reduction in the rwa 

,031231201214 :37 :47 JULIEN GROUT, JPMORGANCHASE BANK, has left the room 

CnnflOentlalTrutrnentRe,,1l1!fted 

by JPMOFtGAN CHASE & CO 

Draft Tmnscript - Subject to Revil'!W and Corr~tion 

Ukely Contains Errors 

CONFIDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CD, JPM-CIO-PSI-H 0006464 
632 

from: Goldman, Irvin J <irvin.j.goldman@jpmchase.com> 

Sent: Mon, 26 Mar 2012 22:23:58 GMT 

To: 

cc: 

Macris, Achilles 0 <achilles.o.macris@jpmorgan.com>; Martin-Artajo, Javier X <javier.x.martinartajo@jpmorgan.com> 

Drew, Ina <Ina.Drew@jpmorgan.com>; Wilmot, John <JOHN.WILMOT@jpmorgan.com>; 

Weiland, Peter <peter.weiland@jpmchase.com>; Stephan, Keith 

<keith.stephan@jpmorgan.com> 

Subject: Tranche Plan 

All, 

Now that we have the new RWA increase, Ina would like to ~ the forward plan for reduction. She does not want any 

trades executed until we an discuss it, We will have a call first thing in the morning. 

Irv 

{n'in Goldmw ~ J.P.Morgan i Chicflmcstmcnl om~",,; 270 Park Av..:. ! 'iii' Tel;"-1 212 834 2331 : c:.~ 'odD i eoJdman@jpmchasecorn 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J ... __ .E.XHiiiiii.I•

B•

IT_#.2.2 ___ • JPM-CIO-PSI 0001267 
633 

From: Macris, Achilles 0 <achilles.o.macris@jpmorgan.com> 

Sent: Fri,30 Mar 2012 14:15:25 GMT 

To: Bacon, Ashley <Ashley.Bacon@jpmorgan.com>; Goldman, Irvin J 

<irvin.j.goldman@jpmchase.com> 

Subject: synthetic credit -- crisis action plan 

FYI 

From: Macris, Achilles 0 

Sent: 30 March 2012 15:13 

To: Hogan, John J. 

Cc; Drew, Ina 

Subject: FW: synthetic credit -- crisis action plan 

Hi John, 

I have asked Ashley for help with the synthetic credit book. 

In the first quarter, my team failed in targeting RWA and we need your urgent help to do a better job in Q2. 

~h!ey, Javier and myself think that the most experienced person at the firm is Olivier. Olivier is both familiar with the 

c'orre!ation product as weI! as the capital attributes of correlation. 

rwould be grateful jf you could approve dedicating Olivier to (10 priorities for Q2. 

"lackground: following years of exceptional performance in this book utilizing Sb RWA, we have decided to risk neutralize the 

book post the large gains on the AA events around thanksgiving. While we remained short in HY, we have bought !G to 

achieve a risk neural stance. Since then, and' while both IG rallied and the RV between HY and lG wo'rked in our favour, the 

proxing of lG long via lG 9 forwards, did not work and resulted in almost total 1055 of hedging effectiveness: Additionally, the 

RWA increased beyond my targets and I have lost confidence in my team's ability to achieve the targeted RWA and their 

understanding of the synthetic levers to achieve the RWA objectives, 

Due to the size of the book, our market manoeuvrability is limited, I am further worried that the "best" course of action from 

a" risk and economic point of view, may be co.nflicting with the appropriate capital utilization. 

Many thanks, 

Achilles 

From: Bacon, Ashley 

Sent: 30 March 2012 14:14 

To: Macris, Achilles 0 

Subject: RE: synthetic credit -- Crisis action plan 

AchHles, John asked that you send him a note (cc Ina) just summarising that you want Olivier, what the ask iSI and that this 

has s,ome urgency. Then! think we move ahead. 

Thanks 

From: MaoiSt Achilles 0 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.' ... ___ EXHIBIT iiiiiiiiii ______ #23 .. JPM-CIO-PSI 0001220 
634 

Sent: 30 March 2012 13:50 

To: Goldman, Irvin J 

Cc: Drew, Ina; Martin-Artajo, Javier X; Tse, Irene Y 

'ubject: RE: synthetic credit -- crisis action plan 

Hi Irv, 

I just spoke with Ashley regarding the issue and he has agreed to dedicate Olivier to help us with RWA targeting for QZ. 

Ashley immediately understood the issue and agreed with the approach to get the firm's best talent involved early in the 

process. 

Without any doubt, Olivier is very familiar with the correlation product as we!! as the management of the capltal attributes of 

correlation. 

Following our call, Ashley spoke with Venkat who also agreed with our proposal to dedicate OHvierto our priorities for Q2. 

We ha~e jointly agreed to have Olivier based in our office for Q2. Ashley wi!! be informing John Hogan. 

80th Ashley and Venkat are displaying very strong support and partnership on this. I am indebted to both, 

best, 

Achilles 

From: macris@ 

Sent: 30 March 2012 10:38 

-~: Martin-Artajo, Javier X; Stephan, Keith 

.c: Brown, Anthony M; Po!ychronopoulos, George H; Uzuner, Taiga I; Enfield, Keith; 'Chris'; Weiland, Peter 

Subject: synthetic credit crisis action plan 

Hi guys, 

On Tuesday we will be presenting the final action plan forthe book for Q2. 

As we already had several meetings on this! we must get it right this time, otherwise we could lose our collective credibility. 

Due to the size of the book, we only have "one move" to achieve our dual objective of stabilizing the risk and P+L of the book, 

while achieving our 

targeted RWA objectives for the end of QZ. 

We must insure that we don't overtrade, or alter the risk profile to an uncertain RWA result. 

Therefore, 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, 

Additionally, we must "price" the best economic solution in terms of average and final QZ RWA. 

Regarding RWA targeting, I wi!! be asking Ashley for help. Hopefully, Olivier wi!! be made ava)lable to exclusively focus on the 

CIO RWA targeting for Q2. 

Clearly, we are in a crisis mode on this. The crisis team is to have short daily meetings and your daily update and progress 

report needs to be commercial and forward looking to mark to implementation of the stated objectives. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0001221 
635 

We will be discussing the suspension. of our investment programs as well as potential DC! crystallizations at the ISMG. 

"Thanks, 

Achilles 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CICi-PSI0001222 
636 

THE WAIL Sl'REET JOURNAL. 

April 6, 2012, 1:19 p.m. ET 

'London Whale' Rattles Debt Market 

By GREGORY ZUCKERMAN And KATY BURNE 

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." 

That trader, according to people familiar with the matter, is a low-profile, French-born J.P. 

Morgan Chase & Co. employee named Bruno Michellksil. 

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 the credit-default swaps, or CDS. Mr. Iksil has been selling the protection, placing his 

own bet that the companies won't default. 

Mr. Iksil, who works primarily out of London, has earned around $100 million a year for the 

bank's Chief Investment Office, or CIO, in recent years, according to people familiar with the 

matter. 

There is no suggestion the bank or the trader acted improperly. 

Mr. Iksil didn't respond to calls and emails seeking comment. 

J.P. Morgan said the CIO unit is "focused on managing the long-term structural assets and 

liabilities of the firm and is not focused on short-term profits." 

The bank added, "Our CIO activities hedge structural risks and invest to bring the company's 

asset and liabilities into better alignment." 

Kavi Gupta, a trader at Bank of America Merrill Lynch, wrote a message to investors Thursday' 

about the mystery trader, saying hedge funds are accelerating wagers against "the large long," 

or bullish investor. "Fast money has smelt blood," he wrote. Bank of America declined to 

comment. 

The hedge funds are wagering that the cost of default protection using the index will increase, 

potentially putting Mr. Iksil in a money-losing position and forcing him to reduce some of his 

holdings. 

Buying protection on the index is currently cheaper than what it costs to protect the index's 

component companies individually. 

Any reduction in Mr. Iksil's position could result in profits for the hedge funds and losses for the 

bank, according to a person familiar with the matter. There is no indication that any such 

reduction is planned. 

Permanent Subcommittee on Investigations 

EXHIBIT #24a 
637 

J.P. Morgan Chase has emerged from the financial crisis as one of the strongest global banks, 

and Chief Executive James Dimon often boasts of the company's "fortress balance sheet." 

Mr. Iksil's trades are partially hedged, or protected by some offsetting trades, according to 

people close to the matter. Mr. Dimon is regularly briefed on details of some of the group's 

positions, these people added. 

One person familiar with the matter said the bank has run tests that show Mr. Iksil's positions 

likely will be profitable in any economic or market downturn. 

Some analysts who follow J.P. Morgan Chase, the biggest U.S. bank by assets, said they 

weren't aware of the group's trading. "They've talked about their investment strategies and 

procedures and risk controls but haven't highlighted this division," said Gerard Cassidy, a 

banking analyst at RBC Capital Market. 

J.P. Morgan said the CIO unit's "results are disclosed in our quarterly earnings reports and are 

fully transparent to our regulators." 

Mr. Iksil, who has worked at J.P. Morgan since January 2007, commutes to London each week 

from his home in Paris, and works from home most Fridays. He sometimes wears black jeans in 

the office and rarely a tie, according to someone who worked with him. 

Mr. Iksil works with two junior traders and focuses on complex trades in credit markets, 

developing most of his investment ideas and then getting approval from senior bank executives, 

according to someone close to the matter. 

In the past, he often has been bearish on markets and placed trades to express that downbeat 

perspective, sometimes criticizing colleagues as too optimistic on markets. Some of his best 

performances have come during market downturns, though he has also made trading mistakes 

in volatile times. 

However, Mr. Iksil has turned more upbeat recently. He has been selling protection on an index 

of 125 companies in the form of credit-default swaps. That essentially means he is betting on 

the improving credit of those companies, which he does through the index-COX IG 9-tracking 

these companies. 

Mr. Iksil has done so much bullish trading that he has helped move the index, traders 

say. Now, even as Mr. Iksil is selling credit protection on the company index, a number 

of hedge funds and other investors are buying protection on it. 

Some investors say they are betting that Mr. Iksil could have to exit some of his bullish 

trades, perhaps because the pending Volcker rule limiting bank risk-taking would push 

up the cost of credit protection. J.P. Morgan has said the Volcker rule doesn't prohibit its 

CIO unit from investing or hedging activities. 

A sign of how hot the trade is: The net "notional" volume in the index ballooned to 

$144.6 billion on March 30 from $92.6 billion at the start of the year, according to 

Depository Trust & Clearing Corp. data. 

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Katy Burne at 

katy.burne@dowjones.com 
638 

Bloomberg 

PrintBack to story 

JPMorgan Trader's Positions Said to Distort 

Credit Indexes 

By Stephanie Ruhle, Bradley Keoun and Mary Childs - Apr 6, 2012 

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. 

The trader is London-based Bruno Iksil, according to five counterparts at hedge funds and rival 

banks who requested anonymity because they're not authorized to discuss the transactions. He 

specializes in credit-derivative indexes, a market that during the past decade has overtaken 

corporate bonds to become the biggest forum for investors betting on the likelihood of company 

defaults. 

Investors complain that Iksil's trades may be distorting prices, affecting bondholders who use the 

instruments to hedge hundreds of billions of dollars of fixed-income holdings. Analysts and 

economists also use the indexes to help gauge perceptions of risk in credit markets. 

Though Iksil reveals little to other traders about his own positions, they say they've taken the 

opposite side of transactions and that his orders are the biggest they've encountered. Two hedgefund traders said they have seen unusually large price swings when they were told by dealers that 

Iksil was in the market. At least some traders refer to Iksil as"the London whale," according to 

one person in the business. 

Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Iksil's 

specific transactions. Iksil didn't respond to phone messages and e-mails seeking comment. 

Most-Active Index 

The credit indexes are linked to the default risk on a group of at least 100 companies. The newest 

and most-active index of investment -grade credit rose the most in almost four months yesterday 

and climbed again today. 

The Markit CDX North America Investment Grade Index of credit-default swaps Series 18 

(IBOXUMAE) rose 3.3 basis points to 100.2 basis points as of 10:18 a.m. in New York, after 

jumping 4.4 basis points yesterday, according to Markit Group Ltd. The price of the index is 

quoted in yield spreads, which rise along with the perceived likelihood of increased corporate 

defaults. 

Permanent Subcommittee on Investigations 

EXHmIT#24b 

1 
639 

A credit-default swap is a financial instrument that investors use to hedge against losses on 

corporate debt or to speculate on a company's creditworthiness. 

Iksil may have "broken" some credit indexes -- Wall Street lingo for creating a disparity between 

the price of the index and the average price of credit-default swaps on the individual companies, 

the people said. The persistence ofthe price differential has frustrated some hedge funds that had 

bet the gap would close, the people said. 

Close Supervision 

Some traders have added positions in a bet that Iksil eventually will liquidate some holdings, 

moving prices in their favor, the people said. 

Iksil, unlike JPMorgan traders who buy and sell securities on behalf of customers, works in the 

chief investment office. The unit is affiliated with the bank's treasury, helping to control market 

risks and investing excess funds, according to the lender's annual re.QQ!1. 

"The chief investment office is responsible for managing and hedging the firm's foreignexchange, interest-rate and other structural risks," Evangelisti said. It's "focused on managing 

the long-term structural assets and liabilities of the firm and is not focused on short-term profits." 

Iksil probably traded under close supervision at JPMorgan, said Paul Miller, an analyst at FBR 

Capital Markets in Arlington, Virginia. 

'The issue is how much capital they're putting at risk,"said Miller, a former examiner for the 

Federal Reserve Bank of Philadelphia. 

Volcker Rule 

A U.S. curb on proprietary trading at banks, meant to reduce the odds they'll make risky 

investments with their own capital, is supposed to take effect in July. Regulators are still 

determining how the so-called Volcker rule will make exceptions for instances where firms are 

hedging to curtail risk in their lending and trading businesses. 

Wall Street banks including JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley have 

submitted comment letters and met with regulators to discuss their complaints about the rule. 

"Several agencies claiming jurisdiction over the Volcker rule have proposed regulations of mindnumbing complexity,"JPMorgan Chief Executive Officer Jamie Dimon said in his annualletter to 

shareholders released this week. "Even senior regulators now recognize that the current proposed 

rules are unworkable and will be impossible to implement." 

2 
640 

Combined Revenue 

JPMorgan had $4.14 billion of combined revenue last year from the chief investment office, 

treasury and private-equity investments, according to the annual report. The treasury and chief 

investment office held a combined $355.6 billion of investment securities as of December 2011, 

up 14 percent from a year earlier, according to a year-end earnings statement. 

Chief Investment Officer Ina Drew, who runs the unit, was among JPMorgan's highest-paid 

executives in 2011, earning $14 million, a 6.8 percent pay cut from 2010, the bank said in a 

regulatory filing this week. Drew referred a request for comment to Evangelisti. 

Iksil has earned about $100 million a year for the chief investment office in recent years, the 

Wall Street Journal said in an article following Bloomberg News's initial report, citing people 

familiar with the matter. 

Iksiljoined lPMorgan in 2005, according to his career-history record with the U.K. Financial 

Services Authority. He worked at the French investment bank Natixis (KN) from 1999 to 2003, 

according to data compiled by Bloomberg. 

Trader's Position 

The French-born trader commutes to London each week from Paris and works from home most 

Fridays, the Journal article said, citing a person who worked with him. 

The trader may have built a $100 billion position in contracts on Series 9 (IBOXUG09) of the 

Markit CDX North America Investment Grade Index, according to the people, who said they 

based their estimates on the trades and price movements they witnessed as well as their 

understanding of the size and structure of the markets. 

The positions, by the bank's calculations, amount to tens of billions of dollars and were built 

with the knowledge ofIksil's superiors, a person familiar with the firm's view said. 

To contact the reporters on this story: Stephanie Ruhle in New York at sruhle2@bloomberg.net; 

Bradley Keoun in New York at bkeoun@bloomberg.net; Mary Childs in New York at 

mchilds5@bloomberg.net 

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; 

Shannon D. Harrington at sharrington6@bloomberg.net 

3 
641 

From: Hogan, John J. <JohnJ.Hogan@jpmorgan.com> 

~~nt: Tue, 10 Apr 2012 23:17:16 GMT 

~: Braunstein, Douglas <Douglas.Braunstein@jpmorgan.com> 

Subject: Re: Credit 

Lovely 

From: Braunstein, Douglas 

Sent: Tuesday, Aprtl 10, 20n 07:14 PM 

To: Hogan, John J. 

Subject: Fw: Credit 

A bit more than we thought 

From: Drew, Ina 

Sent: Tuesday, AprtllO, 2012 07:08 PM 

To: Dimon, Jamie; Braunstein, Douglas; Wilmot, John; Zubrow, Barry L; Staley, Jes Subject: Credit 

The mtm loss is 412 mil today, an 8 standard deviation event mostly from the steeping of the 199 curve. SPECIFIC to our 

position. No other high grade or high yield index moved much dearly anticipating our liquidation, 

I ~'m in the office further reviewing the pI scenario with London and wi!! send it on shortly. 

CI>n1identilllTrv-lIbnentRtquested by 

JPMORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J 

Permanent Subcommittee on Investigations 

EXHIBIT #25 JPM-ClOOOOZ81T 

JPM-CIO-PSI-H 0002276 
642 

From: Wilmot, John <JOHN.WILMOT@jpmorgan.com> 

:-"nt: Tue, 10 Apr 2012 22:50:48 GMT 

Dimon, Jamie <jamie.allTlon@jpmchase.com>; Braunstein, Douglas 

<Douglas.Braunstein@jpmorgan.com>; Hogan, John J. <JohnJ.Hogan@jpmorgan.com>; Drew, Ina 

<Ina.Drew@jpmorgan.com>; Zubrow, Barl)' L <barry.Lzubrow@jpmchase.com> 

cc: Goldman, Irvj~ ] <irvin.j.~oldma~@jpmchase.com>; Stephan, Keith <keith.stephan@jpmorgan.com>; 

Weiland, Peter <peter.welland@Jpmchase.com> 

Subject: Net positions vs average trading volumes 

00 Net positions in Selected tndkes 'o'S. 1m daitytrading volume: 

The below tabl~ shows that CDX.lG.9 net position for CID is .$82.2bio, which i! apprcJ:(imatety 10·15 days of 100% of trading volume' 

based on the 1m avg volume published by JPMorgan Research... 1TX.9 net position for [10 is $35bio, which is approximately 8-12 days 

of 100% uading volume based on the 1m avg volume. For on the run positions the numbers are much sma\ler, ranging from 0.25 days 

to 2 days volume in IG aod HY, Tecspetlivety. 

cid:imageOO&'png@OlCD1696.F4E58380 

John c.. Wi1m~ I Ollerlnves.tm.mt Offic~ I G'!john...wllmot@jpmorp.n.tom I Ii! Wor\:: {212; 1!)4.54~"! 'il" Cell: ••••• 

- - Redacted by the Permanent -SUMommittH on Investigations 

Confldenti"al Treatment Requested By 

JPMORGAN CHASE & CO. Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J.' .. ____________ EXHIBIT #26 iI 

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644 

From: 

To: 

Sent: 

Subject: 

Wong, EIIN'yn 

Kirk, Mike 

5118120123:20:16 AM 

RE: C!O call with Mik;e Brosnan 

This 'is just a strategy and not an explanation.! A..""1d this i"s Ina Drew speak before she was 

fired. 

They t::.ok up a strategy to redu::.e thEir nake believe vood::JO magic "Composite Hedge" linearly 

to change in 5ryr - 10 yr fwd CDS spread, 

thern first prize for "consistency", B'clt 50 what? Why were they right and as hindsight 

have it, they were wrong. 

Hay 17, 2012 6:20 PM 

To: Wong, Elwyn 

Subject.: RE: CIO call with Mike Brosnan 

That's the pOint! 

The relatic1'.shtp 'Obviously 'didn' t hold, and I wou:\-d be if We Flotted the graph today the 

locations vmuld be far from the diagonal ... and I be if we ha:i access to the data that the red 

portion is moving up and farther to the right with each passing day in April 

Fro;n; wong, Elwyn 

Sent: Thursday, Hay.17, 2012 5:58 PM 

To; Kirk, Mike; Crmnlish, Fred; Hohl, James 

Cc: Waterhot:se, Scott 

Subject: RE: CIO call with Mike Brosr::aYl 

1 was not at the Apr;!'l 16 meeting. But let me VET\ture to guess what it is trying to say. 

! cid: image001.png@OlCD3459.B17C27DO] 

The y-axis is .:::011ing 10 yr cds - rolling 5 yr cds. They had a few Bloomberg graphs showing 

how this rolled spread from being NEGATI"IlE i:) 2008 and 2009 (just like Greece and Italy) 

towards more normalization when it eventually returned to being positively sloped. 

The x-axis is the Hedge Index Composite. I venture to guess this is the aggregate hedge that 

think they need to put on, rela.ted to the a.ggregate number on the extreme lower right hand 

side, the $158 .498 mil. They have a whole matrix of longs and shorts and tha;:'s the 

composite. As fear resided and rolling 10 yr minus rolling 5 yr:. returned to positive, they can 

reduce their total hedge. As Mike .5aid, the REDS are which they are at now --- so their hedge 

i:;; not that unreasonable, IF THE liEDGE. AMOUNT DID AAVE THIS EELATIONSHIP TO THE SLOPE of 5yr 

to lOyr CDS 

The sentence which is :3omewhat perplexing is "the relationship is bounded by the off-the-run 

HY shotts and the on-the-run IG ~horts. Meaning that this is their core hedge? 

f cid: image002 .png@QICD3459.B17C27DO] 

The whole scenario thing about convexity is talking their book/advertizing - in a panic 

5i tUation, people will run to put protection in the short end and not the long end. So the 

curve FLATTENS again like in 2D07. In other ''''ards, their hedge has analytica.l underpinning. 

Not only are they reducing their short risk hedge prudently according to the slope of the 5yr 

-lOyr, as plotted on Bloomberg, the flattener would hilve been a safe bet because in case they 

Were reducir:g their hedge too fast and the e::::-onomy tanked against, the built in flattener 

would be there to help. 

Per anent Subcommittee on Invest! ations 

BA.'IK PROPRlETARY AND/OR TRADE SEC ... __ E;;;XH~.I.B;,;;IT~#oii2,;,7 __ ... 

e-IFORMATION 

OCC-SPI-00021602 
645 

From: Kirk, Mike 

Sent: Thursday, May 17, 2012 4:51 l;'M 

To: crumlish, fred; Hohl, James; Wong, EI\-.'yn 

Cc: Waterhou.se, Scott 

Subject: RE: CIC call with Mike Bro.snan 

Fred, 

Happy to join you in your calls with "",ike B. 

In respect to your gtlestions, in the order asked: 

Th.e graph on page 7 shows the slippage of their portfolio compared to the hedge. The closer 

to the diagonal the more closely the hedge tracks the portfolio. The red highlighted area is 

recent period they were discussing where hedges were breaking doym, and markets were not 

moving according to their modeled projections based upon hi...,torical correlations. 

To make the chart you would· need two i terns. A targeted portfolio a:1d a hedge portfolio. Vie 

could ask for this chart of the strategy prior to re working the hedge position to remove part 

of the hedge (why we were told they deoided to sell IG with fallen angels). This request may 

be instructive and could settle the issue of whether the original portfolio \0103.5 an effective 

hedge. P&L for previous 4 years, however, was fairly reasonable, :50 that would tend to support 

the banks statement that the hedge worked ,,,ell for years. It \-"ent astray when they reduced the 

hedge. 

I think Matt Zames would likely have a different vieN of the choice of strategy with 

hindsight being a benefit. Position really went bad as shown in Harch/}\pril, ql1esLi::m is did 

the London desk continue selling in IG in April with the curve steepening and spreads widening 

and basis Ito theoretical) trading rich. This is something we do not. at this time know. 

You can give Mike B my cell phone r.umber. 

Please note Elwyn and James will likely have quality information to add so you may Hant to 

v,ait t::J hear fr;rn them before passing along. 

From: Crumlish, Fred 

Sent: Thursday, May 17, 2012 4:22 PM 

To: Kirk, Mike; Hohl, James; I\long, Elwyn 

Cc: Waterhouse, Scott 

Subject: CIa call with Mike Brosnan 

Scott and I spoke to Mike Brosnan today about what -..;re ",ere doing now and going forward on the 

CIa book. We Hill likely have a call with him frequently. and, particularly with re~pect to 

t.he intricacies of the position, will need to include you. 

A couple of things specific to the pre-April 16 interactions and some of the emails that are 

circula ting: 

- I told Mike B that the Joe Sabatini. emails with selected position information were sent by 

the bank after initial ace and fRB enquiries. We concluded that this information was pretty 

much useless, as it did not tell us what was happening risk wise. l'I'e also talked about a 

couple of .those other ernaj.ls I but I erLphasized that the culmination was getting a meeting with 

Ina Drew and company on April 16. 

- With respect to the April meeting, Mike B. is going through the "synthetic credit deck" and 

he had a few t.echnical questions, not all of which I was able to fully answer s~nce I didn't 

recall or had been focusing on other issues and didn't think of those questions. With respect 

to this presentation: 

o Mikeand James: Pl2-ase have a look at your notes for page 7 as I wasn't fully able to explain 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION OCC-SPI-00021603 
646 

the graph on the bottom. Also if you have details on the scenario description on page 11, we 

should pass that "long. 

o It would be nice at some point if we could get a chart such as that on page 5 "before"" the 

was put on. Maybe we will request it, maybe not. Let's see if we need it aite.r: going 

ne"" reporting 

o More to the point, I told Mike that the bank would likely not stand behind (aside from a 

statement that it was the best they knew at the time) this analy::;i::; at this point, as the 

position turned out to be far more problematic than presented and 50 the descLiption of risk 

was missing. 

o !1ike Kirk as usual, don't be surprised if Mike just calls you .sometime. 

- I told Mike that next Monday we will he going over current risk reporting and positions in 

more detail, as the repcrting is evolving. He mig~t want to :speak with us shortly after. I'd 

expect to ha.ve Mike and Elwyn to help speak to technical details etc. 

So, keep your notes current. jI.~1 emails get sirculo.ted 'Widely, end of course generate 

questions. 

ape 

-1-** If you have received this message in error, please delete the original and ,,11 copies, and 

notify the sender immediately. Federal law prohibits the disclosure or other use ot this 

infonrtation. ""+' '" 

BANK PROPRIETARY ANDIOR 1RADE SECRET 

INFORMATION OCC-SPI-00021604 
647 

Permanent Subcommittee on Investigations 

EXHIBIT #28 
648 

From: Iksil, Bruno M <bruno.m.iksil@jpmchase.com> 

'ient: Fri, 16 Mar 2012 18:12:42 GMT 

0: Grout, Julien G <julien.g.grout@jpmchase.com> 

Subject: FW: update on Core PNL 

From: Iksil, Bruno M 

Sent: 16 March 2012 17:34 

To: Martin~Artajo, Javier X 

Subject: update on Core PNL 

The divergence has increased to 300 now; the rescap news is pushing the tranches and HY indices against us. 

I worked on the IG9 ans main S9 a bit today. There is some size. Not large. But if I trade 2 bps tighter, I reckon there will be 

size. 

Tactical starts being impacted despite the trading gains. Small though. But the hits show anywhere but the spots I tried to 

correct. 

It has been like this since the start of the year and the drift keeps going. I reckon we get to 400 difference very soon. 

;uno 

ccn!idan'tla! Tt .... tl'1'lcrrt Rcquclited, 

by JPMORGAN CHASE &. CO. 

Permanent Subcommittee on Investigations 

EXHIBIT #29 JPM-CIODO(l3d7$ 
649 

From: Drew, Ina <Ina.Drew@jpmorgan.com> 

Sent: Fri, 23 Mar 201211:13:55 GMT 

To: Martin-Artajo, Javier X <Javier .x.martin-artajo@jpmorgan.com> 

CC: Macris, Achilles 0 <amilles.o.macris@jpmorgan.com> 

subject: Re: Synthetic Book - URGENT 

You guys need to get irv and call hogan and explain. I can give hlm a. heads up. Smart to involve ashl~y. More later 

From: Martin-Artajo, Javier X 

~nt: Friday, March 23, 2012 06:48 AM 

To: Drew, Ina 

Cc: Macris, Achilles 0 . 

Subject: Synthetic Book - URGENT 

Ina. 

during the last week we.have been trying to work on our best path forthe Synthetic Book trying both to reduce our overall 

RWAs and get the book in a balanced w"ay . The problem with this has been that we have engaged in a dialogue with Risk 

Management( Ashley Bacon) ,QR ( Venkat) and the IS ( Guy America and Daniel Plnto) and this has. resulted In a hightened 

alert about our positions In the IB and is really hurting us in various ways. 

While we have been. reducing the VAR and SVAR we have inc.reased our over-Ill RWAs because of the increase of the IRe ( 

New"to ClQ given the problems that we highlighted with QR) and also we have worse marks against our ~rrent.book. 

We are left here with two optiorl5: 

Option A : We do not settle with the!B ! we do not change the current book and eXCI;!ed the RWA that is going to be in the 

region of 44~47 Bin {this has to be confirmed by QR next week}. This-option will have a bad month end mark p/l impact 0 to 

-150-200 MM. This is our favoured choice that gives us tIme to correct mistakes with QR I positive carry and upsIde on 

defautt5. Wewould still need to reduce RWA by reducing our IRCor joining the IS with reducing the CRM outside. Sothjs will 

be a mark to market P/l problem and we are left with a book that has positive carry and upside on defaults. 

Option B:We settle with the IB : we dose the extra long position with the IB and we will have a book that. 15 not as well 

balanced will have a short bias , will reduce RWA by 10-15 Bin and have an impact on pjt that could be as Jarge as - 350MM. 

This loss will be,permanent and would leave the book with a small negative carry and optIon on defaluts but a permanent loss 

for the 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 esptrnl 

that we are seeing in the market because we have disclosed too much information to them and we are severlly affected by 

this. SpecIfically on the long IG 9 position that Is getting the attention of the market. 

I need to discuss this as soon as posibJe 

regards 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by, 1.. __ .:E;:;;X;;;H,;;;IB.I.T. #.3.0 ... __ • JPM-CIO-PSI0000416 
650 

From: 

Sent: 

ACHILLES <macris@itI •••••• 

Fri, 06 Apr 2012 20:29:53 GMT 

- = Redacted by the Permanent 

Subcommittee on In\'estigations 

To: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

cc: InaDrew <ina.drew@jpmorgan.com> 

Subject: Re: Update 

The issue remains; what is "fair value" for the T09, as this will drive the marks. 

As the IG9 is not "pure play" IG due to the risky HY names included, the regular IG participants are not likely to be 

supporting it. Therefore, relatively small selling (against single names etc) could drive the marks further. 

In our case, we are ultimately secure on those risky names (as they are included in our BY short), however we must 

project what the possible negative marks may be resulting in P+L terms and what would be the exact market 

mechanism to stabilise the series absent an event. 

From: Martin-Amjo, Javier X 

Sent: Friday, April 06,201207:59 PM 

To: Drew, Ina 

Subject: Update 

Ina, 

I just had a conversation with Achilles and I would like to update you on two topics: one relates to compliance and 

another one relates to work I am doing on the book to estimate the worst case P/L for Q2 . 

Redacted by the 

Permanent Subcommittee on Investigations 

In terms of the worse case scenario for us for Q2 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 at the end of Q2 with the current book as it is . I will have all 

the numbers ready on Sunday afternoon NY time and send it to you as soon as I have them. 

I will send this information and an update from compliance too on Sunday . 

Best regards 

Javier 

This email is confidential and subject to important disclaimers and 

conditions including on offers for the purchase or sale of 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J.P ... __ .E.X .... H.IiiiB.I.T .... #.3.1 ___ • JPM-CIO-PSI0001429 
651 

March 16, 2012 

Call #560153070B350439469, 

Julien: Bruno? It's Julien. I'm at minus 4 with a lot of effort, plus 2 points. t can do better 

but ... 

Bruno: No, don't waste your time, it won't help.' Check the new trades because! don't 

think.there areas many winning trades.! did some "coquilles" in the booking, 

J, There's SOOmln de F91OY. I think that's BNP 

B. No, 500 min, I applied at 143 ! think. 

1. At what level on the SY? 

B.93. 

J. Oh yes, OK, that's much tighter, you have 9, 9.50, you lose a lot. (discussion] It's logical. 

B. Yes, yes. 

J. Do you know what you did with nealia? 

B. I went ahead at 30. 

J, In fact it's flat, with the Delta, it's flat. 

B, Yes. 

J. 250 min of 5Y, what level? 

B, 121 and something. 

J.1211 

B. 100,000, yes, there's about a million there. 

J. Yes. The big items, 450 of... 

B. yes, you mark SIB, right? 

J. No, I was obliged to mark at 3/8. 

B. 50 that makes ... that will (, .. ] a lot. 

J. you projected at what level? 

B.3/4 

J. Yes, that makes 1.7 min, 1.6 min. 

B. This makes no sense. Is [ ] still there? 

J. Yes, he's locked away. But he seems relaxed, I don't know what you told him just now. He 

said not to worry, not to worry. 

COnfld~nt!a! Tnoatment Requested 

Dy JPMORGAN CHA.SE & CO. 

Ora" Transcript ~ Subject to Review and Correction 

likely Contains Errors 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. r Permanent Subcommittee on Investigations 

EXHIBIT #32a 

JPM-CjOOOOSG1~ 

JPM-CIO.PSI·H 0003820 
652 

March 16, 2012 

B. But there is no hope, these are contracts of "debi/s" (idiots). I'm in the middle of analysing 

something- at the end of the afternoon we did the book and it's much smaller than 1t is today, 

and if they had applied the RWA methodology that we are going to use, in fact this makes a 

huge difference. 

J. Wait a second, can we send 2.1 on "tactleo?" 

B. Yes. [uninteIHgble - but I think he is saying something of the family of ... ! will take it up the 

as$1. 300 minimum, minimum. 

J. Days like this are hard when you look at the basis that is narrowing". 

B. No, there is no way, look at a class, we take 300 min of new PnL 

j. You did this today? 

B. No, these are not real new trades, just eXercise of options, there's a freakout, no one is able 

to explain what happened. 

1. Did you speak to { ... ] 

B. Ves, yes. He says nothing, t find that ridiculous. I'll send you the thing 1 sent. 

j. You sent something to propose doing that? 

B. Yes, that's what! 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 expecting is a remarking at the end 

of the month, you can't do it unless it's monthend. It's clear that I'm the { J. He can't imagine 

a bank, a dealer, a hedge fund [unintelligible]. I don't know where he wants to stop, but it's 

getting idiotic:. OK, go ahead with the commentary. 

J. Yes, I agree. I think what he's expecting is some hope on the rolls. 

B. No, but it's exactly that that he doesn't understand, he doesn't understand, there is no roll, 

there isn't, you see, that's al!. And Monday we'll start with a $100 gap and end the week with 

a $300 gap. The market has done nothing, it's rallied. 

J. And instead there has been movement on the [CLM] that could have justified some things. 

B. No, !Iooked at that, it's not that clear. It's off by 50. 

J. Where do you see the 50? 

B, 30, 32, 

J. That's before the marking. 

B. Yesterday it was at 30 mid, today it's at 30 and a half mid, on the same quater. Today it's 

almost normal. Once we get the feedback we need to ask what was the RWA now with your 

way of looking at the book atthe beginning of the year, beginning of 2011 because in my 

opinion there is a huge mistake. The more! think about it, the more emotional! am, looking at 

Con,""",til'llTreatmantReq>le5ted 

by JPMOR.GA.N CHA.SE & co. 

Draft Transcript ~ Subject to Review and Correction 

Likely Contains Errors 

CONFIDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, 

JPM-ClO0005616 
653 

March 16,2012 

the book in 2010, there was no reason to do work on the RWA at the time. When! see the ORE 

on the PnL, we had DRE on the PnL, there were aggressive movements on the book of the 

same type, but itwas 3 times, maybe 4 times smaller. There's no use, it's ridiculous, it's 

ridiculous. t tried to call him but he didn't answer, I don't wal"lt to ruin his long weekend. Did 

you tell him that the difference was so high or not? 

J. No, because it was before 1 did the estimates, 

{unintelligible - difficult to understand] 

B ••• Yes, but a marginal difference means we should have recouped ... now it's worse than 

before, I don't want to overstate it but it's worse than before, there's nothing that can be 

done. This is the first time j've ever seen this, there's nothing that can be done, absolutely 

nothing that can be done, there's no hope. There is no solution, the book cOl"ltinues to grow, 

more and more monstruous, Can you send me the prices of where you are? Send me the 

positions in advance so I can make my comments because I don't want to ruin my weekend on 

that. At this point we need to be lucid with the solutions. Someone is calling me .. it's [ralia], 

ciao. 

J. 

Conlldential Tnlatment Requesteod 

byJPMORGAN CHASE Ii CO. 

Draft Transcript ~ Subject to Review and Correction 

Ukely Conlains Errors 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PSI·H 0003822 
654 

03/16/2012 12:19:32 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok 

03/16/2012 12:19:43 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i have the loss 

03/16/201212:19:45 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

right? 

03/16/2012 12:19:55 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

the new trade pnl is f*ck up because the prices are stupid, have a look into new trade tab 

03/16/2012 12:20:01 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

th call 1300 

03/16/2012 12:20:29 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

the fV should be 105.11, that it is where it is closed. I don't understand why they are still pricing it at 

998.29 

03/16/2012 12:21:06 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

same with the call 1350 and with the call 1160 

03/16/201212:21:13 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

and 1320 

03/16/2012 12:21:21 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

the fV should equal the price 

03/16/2012 12:21:26 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

how and when does this clear? 

03/16/2012 12:21:29 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

the ESDP is 1405.11 

03/16/2012 12:21:39 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

the reported pnl is correct 

03/16/2012 12:21:43 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

or should be 

03/16/2012 12:23:26 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

do you follow me? 

03/16/2012 12:35:25 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

SX5E vol going very bid into the close, very squeezy, outperforming the rest of europe by 30bps across the 

curve. 

03/16/2012 12:36:46 LUIS BURAYA, JPMORGAN CHASE BANK, has left the room 

03/16/2012 12:39:18 LUIS BURAYA, JPMORGAN CHASE BANK, has joined the room 03/16/2012 12:50:55 LUIS BURAYA, JPMORGAN CHASE BANK, has left the room 

03/16/2012 12:54:30 LUIS BURAYA, JPMORGAN CHASE BANK, has joined the room 

03/16/2012 12:57:46 ERJC DE SANGUES, JPMORGAN CHASE BANK, says: 

Bruno: Tactical pnl 1st draft -73M USD 

03/16/2012 12:58:07 ERJC DE SANGUES, JPMORGAN CHASE BANK, says: 

block 4 -8.4M divs + 1.8M 

Conrtdentiat Trl!3tment RequesteQ 

by JF'MORGAN CHASE & co. 

CONFIDENTIAL TREATMENT REQUESTED B' Permanent Subcommittee on Investigations 

EXHIBIT #32b 

.JPM-C!OOOO!!S1D 

JPM-C10-PS1-H 0003815 
655 

03/16/2012 12:59:37 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

block 4 detail: 71 eur +3.5M / 71 USD - 5M / 75 USD -7M / 74 + 76 +0.6M (atlas is +1.3M) 

03/16/2012 12:59:49 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

Recovering from yesterday 

03/16/2012 13:01:05 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

what do you want us to do Bruno? 

03/16/2012 13:06:48 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok 

03/16/2012 13:06:59 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

is the atals pnl correct? 

03/16/2012 13:07:22 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

Reported pnl should be correct 

03/16/201213:07:26 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

However 

03/16/2012 13:07:27 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

with the option expiry I cannot guarantee that 

03/16/2012 13:07:34 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

so new trade is correct 

03/16/2012 13:07:36 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

? 

03/16/2012 13:07:43 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

my reported pnl is wrong in the strats where I have expiring options 

03/16/2012 13:08:24 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

The options are misprice in atlas, I donit know the situation in Scala. 

03/16/2012 13:08:50 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

can you send me the pOSitions eric? 

03/16/2012 13:09:08 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

If there's pnl coming we will check if it is from those instruments 

03/16/2012 13:09:46 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

The cash is supposed to correctly reflect the pnl 

03/16/2012 13:09:54 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

poSitions and predict in your mailbox bruno 

03/16/2012 13:10:07 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

The problem is as usual, the fair value concept 

03/16/2012 13:11:45 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

Eric, what is the pnl in equities only? In the option rewport 

03/16/2012 13:12:26 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

In MT 

ConflOOntial Trotment RGquested 

b'y JPMCRGAN CHASE & CO. 

CONFIOENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

JPM-CIDOOO5S11 

JPM-CIO~PSI-H 0003816 
656 

03/16/2012 13:12:27 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

thx eric 

03/16/2012 13:12:30 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

let me see 

03/16/201213:12:42 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

where is core pnl here? 

03/16/2012 13:14:17 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

julien? 

03/16/2012 13:16:23 JUUEN GROUT, JPMORGAN CHASE BANK, says: 

yes 

03/16/2012 13:16:32 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

306 

03/16/2012 13:16:45 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

hy taking a beating today actually, esp in tranches 

03/16/2012 13:16:49 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok 

03/16/2012 13:17:20 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

so the pnl in tactical is doen wiht thos eprices that brings up 306 in core right? 

03/16/2012 13:17:34 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

correct 

03/16/2012 13:17:41 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok 

03/16/2012 13:17:55 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i think u should set ig9 levels as follows 

03/16/2012 13:18:03 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

5 yr at 72 

03/16/201213:18:08 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

7yr at 88 

03/16/2012 13:18:24 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

10 yr at 110 

03/16/2012 13:18:53 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

well rite now i am 70.25 86.25 109.75 

03/16/2012 13:19:00 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

ref 88.75 

03/16/2012 13:19:17 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

i will use your levels 

03/16/2012 13:19:27 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i see ur levels 

ConfldentlalTJ1l>rtment!'!equested 

by JPMORGAN CHASE & CO 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & co. 

JPM-C1000Cll\612 

JPM-CIO-PSI-H 0003817 
657 

03/16/201213:19:34 JUllEN GROUT, JPMORGAN CHASE BANK, says: 

ah ok 

03/16/2012 13:19:37 JUllEN GROUT, JPMORGAN CHASE BANK, says: 

one sec 

03/16/2012 13:19:53 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

or u do the corrections ur self 

03/16/2012 13:20:00 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i do not mmind 

03/16/2012 13:20:04 LUIS BURAYA, JPMORGAN CHASE BANK, says: 

Be back in 15mins 

03/16/2012 13:34:10 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

sent an Email to javier anoundng this is more 300 now 

03/16/2012 13:34:19 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

that was 100 Monday 

03/16/2012 13:34:22 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

it is 300 now 

03/16/2012 13:34:30 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

1000 for month end? 

03/16/2012 13:35:08 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

ouch 

03/16/2012 13:35:23 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

well that is the pace 

03/16/2012 13:45:03 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

any update JUlien? 

03/16/2012 13:47:57 JUllEN GROUT, JPMORGAN CHASE BANK, says: 

still working on this, sorry it's taking time 

03/16/2012 13:48:05 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

i am sonry too 

03/16/2012 13:48:11 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

tlhis is the end 

03/16/2012 13:48:18 JUllEN GROUT, JPMORGAN CHASE BANK, says: 

? 

03/16/2012 13:48:18 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

hey hey 

03/16/2012 13:48:24 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

no talk like tlhat 

03/16/2012 13:48:29 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

cheer up 

Cgnfldentla! Treatmel1t Req1.!ested 

by JPMORGAN CHASE&CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PSI-H 0003818 
658 

03/16/2012 13:48:39 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

yes JP 

will not lose a cent on this 

03/16/2012 13:48:59 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

we'll see 

03/16/2012 13:49:10 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

one day after the other 

03/16/2012 13:49:20 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

like in 09 

03/16/2012 13 :49:42 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

no 

03/16/2012 13:52:00 BRUNO IKSIL, JPMORGAN CHASE BANK, says: 

ok call me when u have something ready 

03/16/2012 13:53:34 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

will do 

03/16/2012 13:53:40 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

sorry it's taking so long again. 

03/16/2012 14:04:03 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

bruno 9m de new trade? 

03/16/2012 14:04:38 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

currently -4m 

03/16/2012 14:04:42 JULIEN GROUT, JPMORGAN CHASE BANK, says: 

core 

03/16/2012 14:06:21 ERIC DE SANGUES, JPMORGAN CHASE BANK, says: 

tactical now +2.1M 

03/16/2012 14:13:21 ERIC DE SANGUES, JPMORGAN CHASE BANK, has left the room 

03/16/2012 14:55:50 LUIS BURAYA, JPMORGAN CHASE BANK, has left the room 

03/16/2012 14:58:47 LUIS BURAYA, JPMORGAN CHASE BANK, has joined the room 

03/16/2012 15:00:36 JULIEN GROUT, JPMORGAN CHASE BANK, has left the room 

03/16/2012 15:17:02 JULIEN GROUT, JPMORGAN CHASE BANK, has joined the room 

C:o!li'ldo:ontlal TrtI3trIItl"t R/OquedMl 

IJy JPMQRClAN CHASE & CO 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & co. 

JPM-Cl00005614 

JPM·CIO·PSI·H 0003819 
659 

TRANSCRIPT OF AUDIO RECORDING PRODUCED 

TO THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Date: Undated (likely late April 2012) Telephone Call 

Parties: Javier Martin-Artajo, Ina Drew, Gina Serpico 

Identifier: JPMC Box 10\20120827 _Audio Documents\20120827 ]SI-A_WH\NATIVES\ 

JPM-CIO-PSI-A 0000076.wav 

Mr. Martin-Artajo: JP Morgan. 

Ms. Serpico: Yes, may I please speak to Javier? 

Mr. Martin-Artajo: Yeah, it's me. 

Ms. Serpico: Oh, hi! I don't recognize your voice. It's Gina. Can you hold for Ina,please? 

Mr. Martin-Artajo: Sure. 

Ms. Serpico: Thank you. [Speaking to Ina] It's JavMs. Drew: Hi. 

Mr. Martin-Artajo: Hi, Ina. 

Ms. Drew: Excuse me. Just so you know, I tried to call Achilles. You might want to let him 

know. 

Mr. Martin-Artajo: Yeah. 

Ms. Drew: I saw Hogan. I delivered the message on what we can and cannot deliver on limits 

this week or next. That we are doing an appropriate review, that there is a 

divergence between the single name system that's [Indecipherable.] the number 

and the index system, and he needs to take the pressure off in terms of penciling in 

a number quickly. 

Mr. Martin-Artajo: Ok. 

Ms. Drew: I think he's fine with that. And what we can pencil in, we will, but we don't have to 

do everything. And then I just wanted to get a really brief update on, you know, 

what the P&L might look like. It looked like the curve, the forward curve was 

flattening a little. 

Mr. Martin-Artajo: Yes. We are going to be showing a slight positive today. I just want to confirm that 

with Bruno. I think we are going to be up like somewhere around $20 million today, 

ok? So this is the first, this is a big event for us, because we are starting to get 

money back. The guys are a little bit unsure, because we are not trading in the 

Permanent Subcommittee on lnvesti ations 

EXHIBIT #32c 
660 

Ms. Drew: 

market. Maybe, maybe, maybe there's a little bit more money in the trade. I, I 

want them to just show me what they think is for sure, ok? So I think we are going 

to be up probably somewhere in the $20 million, o"k? Somewhere around that. 

That, that's on the curve? 

Mr. Martin-Artajo: That's on the curve. It's a little bit on the curve. And, you know, if we mark the full, 

the full, I think, I think, to be honest with you Ina, we don't know where the market 

is trading, so reallyMs. Drew: I understand. 

Mr. Martin-Artajo: Because the bid/offer spread is a little bit wide, it's getting better every day so we 

are within the bid offer spread. Now, that means that probably the real P&l is 

probably like $50, but I'm going to show about half of that, ok? I just want to make 

sure that we don't, because I, I, I really want to make sure what we put in the P&l 

what we know for sure. And, so we are, but it is very important, because this is the 

first day that we are -If you forget about the idiosyncratic thing that happened 

yesterday in Rescap, I mean - this is a, this is a market that actually is starting to 

trade a little bit better for our position. It is slightly better. I'm not saying that this 

is going to be a fast process, but it, it is important that we start getting positive 

numbers now, right? 

Ms. Drew: The curve that I put on, Manish put on the screen for me with Julien's help, that it 

was starting to, point upwards slightly. 

Mr. Martin-Artajo: Yeah. Yeah, it is starting to get a little better. The only thing is I don't know how 

much it's trading and I don't want to, I, I, I don't want to show the P&l until these 

guys confirm. 1 mean we are normally quite conservative in that. And, and I, you 

know, you know, if, if, if the price gets outside the, the bid-offer spread, then we 

mark that, ok? So, so 3 bps as you know is 150 bucks. 

Ms. Drew: Yeah. 

Mr. Martin-Artajo: So the instruction to you that we have here is probably around $100 million, ok? So 

I don't want them to show $100 million today if they are not sure, ok? So, so just 

for you to know that, you know, it's about, you know, you know, if this is, you know, 

we need to have a real, sort of 3bps move to, to, to recognize that. I hope it 

happens and, if it happens between now and the end of the day or, or, whenever it 

happens, I'll show you. I'll let you know, ok? I'll send you an email when, if, if things 

are improving. 

Ms. Drew: Here's my guidance. It's absolutely fine to stay conservative, but it would be 

helpful, if appropriate, to get, to start getting a little bit of that mark back. 

Mr. Martin-Artajo: Exactly, I know. 

2 
661 

Ms. Drew: If appropriate, so you know, an extra basis point you can tweak at whatever it is I'm 

trying to show, you know, with demonstrable data and if not, then the description 

is, you know, we have a conservative mark but the curve is starting to trend 

[Indecipherable.]-

Mr. Martin-Artajo: Ok, I will write that. I will write that. It's just that I don't want to do it until I'm sure, 

ok? Because I, I, I know that we need this. I know that we need the reversal, and it 

does help our case enormously, right? It starts to give us a little bit of credibility 

that I've lost by, by explaining this in, in, in such a bad way, really. 

Ms. Drew: Ok. But are you ok? 

Mr. Martin-Artajo: I'm ok. I'm ok. Thank you very much for - I thought that today's meeting was very 

good, Ina. I, I really felt that, that we had a good meeting, today. I think thatMs. Drew: Get our arms around everything, and we will, you know, go forward, but sometimes 

you gotta, like, look back to go forward. 

Mr. Martin-Artajo: Yeah. Yeah, I mean we've shown a lot of our mistakes today. I think that, I think 

that, you know, I think this post mortem is, is actually a, a realistic one. I, I, I, you 

know, I think that we've, we've made quite a lot of mistakes. I think that we 

communicated poorly internally. You know, I think we also forgotten how, how, 

how difficult it was, you know the positions that we've made given everything, 

right? Given, given, you know, year end. Given how fast things have happened in 

Europe. How, how, you know, I, I, I, I'd liketo go to New York after, you know, in a 

week or two or three to, to, to just, you know, maybe, maybe we can sit down. 

Because I feel, you know, we have cathartic things here that maybe heal some of 

the things that maybe were not as good in the past. And, and, you know, things like 

this, it's like the twin towers falling down and suddenly we get, you know, we 

remember, how privileged this thing is andMs. Drew: Ok, I've got it. I'm just reaching out to mostly tell you about the limits and get the 

P&L, and I'm going to L&C and 1 will look, look out for the email later. 

Mr. Martin-Artajo: Thank you, Ina. Thank you. 

Ms. Drew: Call if you need me. Bye. 

### 

3 
662 

May 8, 2012 

Javier Martin-Artajo and Alistair Webster Conversation 

Javier: Hi Alistair 

Alistair: Hey how are you? 

Javier: I'm good man, tell me 

Alistair: I have a very quick question for you. Apologies for pestering you on this. 

Javier: Yeah, no no that's absolutely fine. Tell me .. 

Alistair: So I have, we've obviously been through a lot of detail on sort of pricing moves and how we got 

to where we got to at each position level. 

Javier: Yeah. 

Alistair: But there's just one sort oftrend that I'm being asked for a sort of sense of how we think it 

happened from a trend perspective. 

Javier: Right 

Alistair: And that is if we look at the 18. You remember our famous population of 18? 

Javier: The 18? What is the 187 

Alistair: The 18 positions that we reviewed with Doug. 

Javier: Yeah. 

Alistair: So if Ilook at those back in January, the front office marks were all either mid or somewhere 

close to mid. 

Javier: Right. 

Alistair: That .. 

Javier: In terms of conservative and aggressive. That's what you're asking? 

Alistair: Well, it's subtly different, subtly different. 

Javier: Okay. 

Confidential Treatment Requested 

by JPMORGAN CHASE & CO. 

1 

Drnft ........................ ... 

liket Permanent Subcommittee on Investigations 

EXHIBIT #32d JPM.oa 0003631 
663 

May 8, 2012 

Alistair: But they were, none of them were actually at the boundaries of the bid or offer. 

Javier: Right. 

A: 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 ofthem, not all of them, to the aggressive side, but they've also migrated from 

either mid to somewhere close to being at the, you know, the bounds of the bid or offer. 

J: Yeah, but I think that's because we were trading there. I think that's because we were trading them; 

quite heavily. 

A: Um hmm.ln March .. ? 

J: Yeah, in March we were not trading as, I mean, we traded as I mean, to be honest with you, we 

traded a lot in March and we traded a lot in January. We didn't trade as much in February right? I 

mean, that that's kind of how it went for us. We traded a lot in January and we traded a lot in the 

middle of ... towards the, I think, the peak ofthe trading was like the 20-23rd of March. That's when we 

traded a lot. So we were on one side ofthe market obviously because that's what we were doing. 

A: But would that be, if you were trading would you, you would be on the conservative side of the 

market as opposed to the the aggressive side, right? 

J: If you're trading, I don't understand your question. 

A: I think that .. 

J: I mean are you saying that we had a trend at the end ofthe month to mark a little bit towards more 

one side of bid offer as opposed to the trend that we had at the beginning of the year. That's what 

you're saying right? 

A: Yeah, cause before the beginning of the year you guys ... 

J: 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. I mean, listen, you can have any 

interpretation you want, but, ... 

A: Agreed. 

J: I don't think so. I do not think that they were, let's not forget that we stopped trading at the 28th of 

March, cause Ina just wanted us to stop trading, so maybe the last three days, I mean, if you're asking 

about the last three days we traded less. I don't think they changed the way they mark their books to be 

honest with you. I don't think that's what I would say happened. 

A: Um hmm. 

Confidential Treatment Requested by JPMORGAN CHASE II. co. 

2. 

Draft Transcript ~ Subject 'to Review and Correction 

Likely Contains Errors 

JPM-CiD 0003632 
664 

May 8, 2012 

J: What I would say happened is that the most surprising thing to me that, and I told you before and I 

will tell you again Redacted Attorney Client Privilege 

A: Um hmm. 

J: The thing that I experienced that was incredibly strange to us, right, is not only that you're telling us 

about about mid offer spread, but we were actually finding very surprising is a move between the actual 

marks that we mark the book at the end of the month okay ... 

A: Um hmm. 

J: and what we got from Markit and Totem three days later, okay. 

A: Um hmm. 

J: That is an incredibly surprising thing to me and to the traders. How much that difference was. So 

what my conspiracy theory is telling me is that there's information between when we dose our books at 

the end of March and where they agreed where the market was three days later. 

A: Um hmm. 

J: That is very very difficult for me to explain and, to be honest with you, I still don't know, I mean I still 

don't know why that happened. I'm still looking into it and I will never give up until I find out what 

happened there. My guess is that they were already, Bloomberg and Wall 5treetJournai were already 

writing their story so so their story was ready then. I think they were ready to publish it. 1 think they 

only needed to confirm a few things and they just delayed it for one week. So I think that information 

was already in the dealers and the hedge funds to be honest with you. that is a big move for me, and 

when we look at the actual move of that and we look at how the difference of our book marks at the 

end ofthe month, and when I look atthe IB marks at the end of the month that they gave us, and Ilook 

at Totem marks, what surprised me incredibly was the same amount that the IB would have priced our 

book atwas actually the price that at which Totem would have marked it. Now, I think that is very very 

very interesting to look at that and compare to the quotes that we had from JPMorgan at the end of of 

March. 

A: Um hmm. 

J: and that is an amazingly, interesting thing for you as an auditor and as an accountant. I'd love you to 

help me with that once this is a little bit less critical, because ... 

A: Okay 

J: I do not know, I don't understand how can it be that the quotes we get form our own IB and from the 

market that we trade on on the end of the month and during the day of the end of the month, which, 

you see the history of that ... 

ConfirJential Trf!atrQent Requested 

by JPMORGAN eliAS£. & co. 

3 

Draft Transcript ~ Subject to Review and Correction 

Likely Contains Errors JPM-ClO 0003G13 
665 

May 8, 2012 

A: Urn hmm. 

J: You .. then, you see what happened when the Totem numbers were published. 

A: Urn hmm. 

J: This is an amazing thing for me and not only that, what is amazing to me is that the actuallB marks 

agree with Totem marks which is even more surprising to me, so this is what I would say is more than 

where the traders mark their book which I would like to, you know, I don't think they have a bias. I still 

don't think they have a bias now. I do think that on April3Dth, I think you're going to see the same thing. 

I think, I mean Ashley was saying the same thing as your're telling me. 

A: In April it would revert back to the norm in the sense that there's some mid, some, somewhere 

between bid and offer, and that there's two ... 

J: I know you're saying that, but let me tell you what Ashley told me. He says that we are not. He told 

me that I should be even more conservative than that, so, there's lots of opinions on this. 

A: Oh no, I have to agree with that... 

J: This is an OTe market. We trade in the markets. We have an interpretation. We are changing it into 

what you guys are guiding us that we should do and we're going to do it. I mean I will do what the Firm 

wants me to do. I just, you're asking me if I think that the traders had a change in the way they marked 

their books. I don't think so. To be honest with you, we traded less at the end of March, the very last 

three days of March, but, we were very alert on what the close would be because it was very material 

for us since we had been losing a lot of money that week. And the books experienced a very large 

drawdown that week. So obviously these guys were looking at the markets, you know, even more 

attention than ever. On Friday as you can see, the market was very volatile and also that explains quite 

a lot of things if you look at the spreadsheet I sent you. 

A: Urn hmm. 

J: But I wouldn't say that we were aggressive or particularly aggressive in March. I wouldn't say that. I 

would say that it it was very difficult to mark books even though we didn't trade as much then and I 

don't think that. I don't feel that, Iwas aggressive to be honest with you. Doug's asked me thatthree 

times already. 

A: Urn hmm. 

J: You're asking me twice, umm. 

A: No no I'm not, I'm not. 

J: And Ashley is already asking me. Ashley is asking me the samething. look, first of all, I wasn't aware 

that this was going to be an issue because I wasn't, I mean I don't, I don't, you know, mark books. You 

know we have a lot of valuation processes that you know very well. 

Confidenlial Treatment Requested 

by JPMORGAN CHASE & CO. 

4 

Draft Transcript - Subject to Review and Correction 

Likely Contains Errors 

JPM..ctO 0003634 
666 

May 8, 2012 

A: Urn hmm. 

J: and you know, we contribute to the marking of the books. As you know, we do the estimates and the 

best estimates that we can. Today we still have issues because today, I was just before this meeting, 

trying to explain, you know again, you know, how we did it for last week. So it's not exactly like we are 

yet with a firm way to explain this. Unfortunately, it's difficult to to get to the right methodology. We 

differ from the IB--we trade at different times we have different different markets and, I know that the 

firm wants us to have one standard but you know that I think it's difficult to agree with that because you 

know I was stiliI'm still doing this in parallel to see what it means for our book, and I think we're going 

to get a lot of volatility if we do that so I think it's better if we actually get some tolerance which is lower 

and we try to price everything in ICE or Markit everyday. And then the tranches do what the guys are 

doing, which is give the best estimate based on the quote, so at least we align the indexes with ICE and 

or Markit. And I'd like to do that-- more than aligning that to the IB quotes. I really think that having the 

IB quotes is a problem and I don't want to be, you know, dealing with that. I think that the IB has a 

different business model and they are buyers on certain things and they don't trade quite a lot ofthe 

things that we own, so I think Markit or ICE is the reference we should use,or close to that, and then, 

you know, without interpretation of the traders, so no interpretation on that and then we do what we 

can on the tranches. I think this would remove some of the bias I think that you are referring to. 

A: Urn hmm, the possible bias, the possible bias. 

J: I don't think there was a bias to be honest. 

A: Understood. 

J: Is that what you wanted from this call? 

A: No, I mean, to be honest with you, I mean you you can interpret it any which way you want to and 

I'm not here to accuse you or anything like that. It was more, just a sort of, someone will ask that, you 

know, cause obviously we've documented everything you've done and you know we've been through 

the process, position by position, and well, they say, well they did this on that one and what they did 

with this on that one. I was just trying to catch if there was some sort of general trend you know and 

essentially what you articulate is look, you know; less trading at the end of the month, you know 

potentially the information is already out there so the banks are starting to move against us and there's 

volatility in the market. 

J: That is basically what I am saying. 

A: So that was very helpful. 

J: Ok, you're welcome. 

A: As always, Javier, I'm not certainly not trying to, you know, be an accuser. I'm just trying to get to a 

grip with everything. I'm just a simple guy. 

CfinfidenHal Tnialment Requcsl:ed 

by JPMORGAN CHASE & CO, 

5 

Draft Transcript - Subject to Review and Correction 

Likely Contains Errors 

JpM-ClQ OOD36l:S 
667 

May 8, 2012 

J: Ok. 

A: But I do certainly appreciate all the time and effort that you've put into helping me and you know ... 

J: I have to say the same Alistair. I, you have to understand, that I get probably, I'm getting between 

100 and 150 calls a day. I don't know how many does Jamie Dimon get, but·' am sure I get more, but, I'm 

the. only one here, ok, thank you, man. 

A: That's why I say I'm grateful... 

J: Alrighty. 

A: for the time. Thanks a lot. 

J: Cheers. 

Confidentiai Treatment Requested 

by JPMORGAN CHASE & CO. 

6 

Draft Transcript ~ Subject to Review and Correction 

Likely Contains Errors 

JPM-ClO 0003636 
668 

From: Grout, Julien G <julien.g.grout@jpmchase.com> 

'>ent: Tue, 10 Apr 2012 19:02:01 GMT 

'0: CIO ESTIMATED P&L <C!O_CREDIT]&L@jpmchase.com> 

cc: CIO P&L Team <C!O]&L_Team@jpmchase.com> 

Subject: CIO Core Credit P&L Predict [10 Apr]: -$S,711k (dly) -$626,834k (ytd) 

Daily P&L: -$5,718,991 

YTD P&l: -$626,833,772 

Daily P&L($) YTD P&L($) 

Europe Financials 

Redacted By 

Per~anent Subcommittee on Investigations 

Europe High Grade -72,418) 493 -83,1326,416 

Redacted By 

Permanent Subcommittee on Investigations 

Redacted By 

Permanent Subcommittee on Investigations 

us High Grade -3113 J 657} 1348 -178,547,277 

Redacted By 

Permanent Subcommittee on Investigations 

'IS HY & LCOX 410,592,536 281,987,487 

Permanent Subcommittee on Investi ations 

EXHIBIT #33 JPNI.cIOOOO3S70 
669 

Redacted by the 

Permanent Subcommittee on Investigations 

US AB)t ( TARX • -774 ,., ••• , .. _-26,312 

--- -- --- ----,-- • .• I 

t • '\"'THl~W:l'Hl .)UUluHilidUn. Un 111\ c~l.IgatIOns , 

New Investments 6,522,635 - 529,210,342 

---------------------- ------------

'

Redacted by the ji 

Perm~~~~ Subcommittee on Investigations. 

Dead Books (Core) -337 1,790 

-- ------- -- -- ---- --- --

Redacted by the I 

Permanent Subcommittee on Investigations 

Washbook/Costs o 0 

1-----------------·----------- Redacted! by the I 

Permanent Subcommittee on Investigations 

JPM-CtO 0003571 
670 

Redacted by the 

Permanent Subcommittee on Investigations 

Big moves in credit index today. US crean:. naa already taken a hit·following Friday's poor NFP 

report. Today' 5 sell off was amplified by further concerns in the European complex, with Spain 

(+Z1bp at 488bp) and Italy (+29bp at 438bp) leading the way wider. This is pushing financials and 

iTraxx.Main too) and credit. 15 actually compressing in Europe, thus despite the worsening of the 

economic situation there. This compression is causing a 713M 1055 today. The loss however is 

partially compensated by decompression in US credit" with the CDX.HY complex underperforming. 

Today saw a significant bear steepening in off the run CDX.IG9 and iTraxx.Main S9 index curves: 

for instance iTraxx.Main S9 jun18 is underperforming the on the run benchmark index by +3bp while 

the front end iTraxx.Main 59 Jun13 is outperforming by -2bp . It is difficult to find a catalyst 

for these moves - one would have expected some flattening in those; despite the substantial move 

in spreads (and in credit volatility in general) and some flattening seen in single name curves) 

the front end .of these curves is still outperforming.. Note that the moves happened in small 

volumes - if any .. in iTraxx.Main 59. 

No trade today. 

·raxx.Main 517 

Jun17 

iTraxx.Main 59 

Jun18 

SilO 89 

5y 89 

iTraxx.Xover 517 

OTE 5y CDS 

PORTEL 5y CDS 

BESPL 5y CDS 

DXNS 5y CDS 

CDX.IG18.1un17 

CDX.IG9 Dec17 

IG9 SilO 

5y IG9 

RDN 5y CDS 

MBI 5y CDS 

FON 5y CDS 

SFI 5y CDS 

HY10 

HY11 

HY14 

HY15 

HY16 

IiY18 

ESCAP 5y CDS 

10-Apr12 30-Mar12 

Again, a lot of prices are still being framed and we are providing our best estimate 

ConfidomtiaITreatmentReque.$led 

by JPMORGAN CHASE & CO. 

JPM-CIO OOOlsn 
671 

From: Grout, Julien G <julien.g.grout@jpmchase.com> 

<;ent: Tue, 10 Apr Z012 ZO:30:4ZGMT 

'0: CIO ESTIMATED P&L <CIO_CREDlT_P&L@jpmchase.com> 

CC: CIO P&L Team <CIO_P&L_Team@jpmchase.com> 

Subject: CIO Core Credit P&L Predict [10 Apr]: -$394,735k (dly) -$1,015,858k (ytd) 

Dail y P&l: - $394,735 J 120 

YTD P&L: -$1,815,857,982 

Daily P&L($) YTD P&L($) 

Europe High Grade -189,451,352 -288, 859, 275 

Redacted by the 

Permanent Subcommittee on Investigations I 

Redacted By 

Permanent Subcommittee on Investigatious 

us High Grade -449,375,2130 

Redacted by the 

Permanent Subcommittee on Investigations 

Redacted bv the l Pernl=~~.m~tte~ on Investigations 
672 

Redacted By 

Permanent Subcommittee on Investigations 

US ABX / TABX -774 < -26,312 

Redacted By 

Permanent Subcommittee on Investigations 

New Investments -62,215,"559 -597,948,537 

Redacted By 

Permanent Subcommittee on Investigations 

Dead Books (Core) -343 1,784 

Redacted By 

Permanent Subcommittee on Investigations 

Wash book/Costs a a 

Redacted By 

Permanent Subcommittee on Investigations 

JPM-ClOOOOJS74 
673 

Redacted By 

Permanent Subcommittee on Investigations 

Big moves in credit index over the long week end. US credit had already taken a hit following 

Friday's poor NFp· report. Today's sell off was amplified by further concerns in the European 

complex, with Spain (+21bp at 488bp) and Italy (+2Bbp at 438bp) leading the way wider. This is 

pushing financials and iTraxx.Main too~ and credit is actually compressing in Europe (iTraxx.Xover 

outperforming by -9bp) 1 thus despite the worsening of the economic situation there. This 

compression., along the directional moves in the index) is causing a 8aM loss today_ In the US the 

compression is less obvious .. although CDX.HY has been outperforming equities. 

Today saw a significant bear steepening in off the run CDX.IG9 and iTraxx.Main 59 index curves: 

.for instance iTraxx.Main 59 Jun18 is +15.75bp wider while the. on the run benchmark index 517 is 

+12bp and the front end iTraxx.Main 59 Jun13 is only +7 .25bp~ thus a steepening +8.5bp; similarly 

CDX.IG9 Jun17 is marked +12bp wider while the on the run CDX.IG18 is +9bp and the front end 

CDX.IG9 Dec12 is only +6bp~ thus a +6bp steepening. It is difficult to find a catalyst for these 

moves - one would have expected some fla1;tening in these curves; despite the substantial move in 

spreads (and in, credit volatility in general) and some flattening seen in single name curves" the 

front end of these curves is still outperforming. Note that the moves happened in small volumes 

if any J in iTraxx.Main 59. These moves are causing a loss of 160M in CDX.IG and 140M in 

iTraxx.Main. 

--, trade today. 

iTraxx.Main 517 

Jun17 

iTraxx.Main S9 

Jun18 

5/10 S9 

5y S9 

iTraxx.Xover S17 

OTE 5y CDS 

PORTEL 5y CDS 

BESPL 5y CDS 

DXNS 5y CDS 

CDX.IG18 Jun17 

CDX.IG9 Dec17 

IG95/10 

5y IG9 

RDN 5y CDS 

MBI 5y CDS 

FON 5y CDS 

SFI 5y CDS 

HY10 

HY11 

HY14 

iY15 

HY16 

HY18 

10-Apr12 

Cord'identialTrelllmentRequested 

by JPMORGAN CHASE & CO. 
674 

Redacted By 

Permanent Subcommittee on Investigations 

I RESCAP 5y CDS 

lin .. a lot of prices are still being framed and we are providing our best estimate 

Confidellllal Trntml!f1t Requasted 

by JPMORGAN CHASE & co. 

JPM-ClOOtlrlJS76 
675 

From: Hughes, Jason LDN <Jason.LDN.Hughes@jpmorgan.com> 

Sent: Fri, 20 Apr 2012 19:07:35 GMT 

To: Kastl, Edward R <kastl_edward@jpmorgan.com> 

Subject: RE: Credit Index and Tranche Book 

Exactly. Marked within bid offer except for the positions where you see an adjustment 

Instrument 

ITRAXX MN S09 lOY 22-100 

cox HY S10 05Y 15-25 

cox HY Sll 05Y 15-25 

COX IG S09 lOY 00-03 

COX HY SOB 05Y 10-15 

COX IG S09 05Y 00-03 

ITRAXX MN S09 07Y 22-100 

ITRAXX MN S09 07Y 

COXHY S10 07Y 10-15 

ITRAXX MN S09 lOY 00-03 

COX IG S09 lOY 30-100 

COX HY Sll 05Y 10-15 

COX IG S09 07Y 30-100 

ITRAXX MN S16 05Y 

ITRAXX MN S09 05Y 00-03 

COX LCOX S10 05Y 12-15 

COX HY S11 07Y 

COX LCOX S10 05Y 15-100 

COX HY SOB 07Y 15-25 

Regards, 

Jason Hughes 

ero Europe 

020 7777 3301 

From: Kastl, Edward R 

Sent: 20 April 2012 19:52 

To: Hughes, Jason LDN 

Cc: Wilmot, John 

Tolerance 

5 bps 

0.5 price points 

0.5 price points 

1.Sbps 

1 price points 

1bps 

0.75 bps 

6bps 

1.5 price points 

0.75 bps 

0.5 bps 

2 price points 

Obps.75 

2bps 

0.5 bps 

1 price points 

0.5 price points 

0.5 price points 

2 price points 

Subject: RE: Credit Index and Tranche Book 

When you say "most advantageous" you mean within Bid/Offer tolerances, correct? Only the $17mm at the bottom would be 

outside of tolerance and that is where we posted an adjustment. 

Generally speaking, what are the tolerances for these 19 positions? 

Ed 

From: Hughes, Jason LON 

ConfldentlalTrw.b1>entRequll'Ctecl 

by JPMORGAN CHASE & co. 

CONFIDENTIAL TREATMENT REQUESTED 8 

EXHIDIT#34a 

JPM-CIO-PSI-H 0006636 
676 

Sent: Friday, Apri! 20, 2012 2:41 PM 

To: Kastl, Edward R 

Subject: Credit Index and Tranche Book 

Ed, At March month end the Cia Fa marked their book at the most advantageous levels based on the positions they held in 

specific indices and tranches. cia VCG price tested the positions initially mid versus mid and that resulted in the following 

adjustments 

Differences Differences 

Global (Ccy) ($) 

S4 FIN SlID -18,443,604 -24,560,425 

S6_EU -4,268,031 -5,683,523 

SIl_EU 0 0 

SI4_EU -27,536,181 -36,668,556 

S6_US 3,466,609 3,466,609 

SIS_US -80,183,976 -80,183,976 

SHB_US 2,223,732 1,113,731 

SHe_US 5,371,007 5,371,007 

SI5B 16,090,018 26,090,038 

SI5C 9,122,647 9,122,647 

SI5D ~37,O88,552 -37,088,552 

S9_US 0 0 

S27A~US 5,178,854 5,178,854 

S27BJU ~2,285,717 -3,043,776 

S27C_US ~61,254,250 ~61,254,250 

S27D_US 5,492,713 5,492,713 

Core Credit Total ~174,114.711 -191,537,457 

Tactical14_EU 

Tactical 32_EU -89,449 ~ 119, lIS 

Tactical 70 _EU -19,890 -26,487 

Tactical 70_USD -7,689 -7,689 

Tactica171_EU -1,067,544 ~ 1,421,595 

Tactical 71_ USD 0 0 

Tactica175_USD 

Tactical Total -1,184,572 -1,574,886 

Credit Total ~175,299,284 -193,112,343 

However, based on our normal practice we then applied market derived thresholds to each of the individual positions. If a 

position was within tolerance then no adjustment was required and if a position was outside tolerance an adjustment was 

passed to bring it back within tolerance. After applying these tolerances the adjustment became 

Differences 

Global (Ccy) 

S4FINSUB -1,757,551 

56_EU 

SI2_EU 

S14_EU 

S6_US 

SI8_US 

SHB_US 

slIe_us 

SI5B 

-987,157 

-2,920,748 

2,218,438 

0 

confldentIalTreatmentRequest911 

b!f JPMORIJAN CHASE& co 

Differences 

($) 

~3,672,O94 

-1,314,547 

0 

-3,889,415 

2,218,438 

0 

CONFIDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, 

JPM..cl00003600 

JPM-CIO-PSI-H 0006637 
677 

S15C 

Sl5D 

S9_US 

S27A_US 

S27B_EU -6,028,625 ~8,028,OI8 

S27C_US 0 0 

S27D_US 0 

Core Credit Total -10,475,644 ~14,6S5,636 

TacticBl14_EU 

Tactical 32_ ED ~89,449 -119,115 

Tactical 70_ EU -505,906 -673,690 

Tactical70_USD -7,689 -7,689 

Tactical71_EU -1,067,544 -1,421,595 

Tactical 71_ USD 0 0 

Tactical 75_ USD 

Tactical Total ~1,670,5SS ~2,222,OS9 

Credit Total -12,146,232 ~16,907,725 

The difference between the 2 numbers highlights the size of the positions CIO hold and the difference that can result from 

marking within a normal market bid/offer spread. 

Liquidity Reserve 

Our policy has been to exclude Series 9 of the ITAXX and CDX IG based an the liquidity of these series as they are still very 

liquid for the correlation markets, The following table shows the changes we have been able to make to our positions in these 

indices and tranches during 2012 (POSitions are in local currency) 

Dec-31 Jan-31 Feb-29 Mar M 31 

ITRAXX MN S09 05Y 25,376,375,000 19,682,625,000 13,748,375,000 17,304,875,000 

ITRAXX MN S09 05Y 00-03 -2,480,000,000 -2,595,000,000 -2,615,000,000 -2,950,000,000 

ITRAXX MN S09 05Y 03-06 35,000,000 -5,000,000 -300,000,000 -360,000,000 

ITRAXX MN S09 05Y 06-09 -15,000,000 280,000,000 340,000,000 340,000,000 

ITRAXX MN S09 05Y 09-12 25,000,000 165,000,000 280,000,000 280,000,000 

ITRAXX MN S09 05Y 12-22 -1,075,000,000 -375,000,000 -175,000,000 -125,000,000 

ITRAXX MN S09 05Y 22-100 7,300,000,000 11,300,000,000 7,500,000,000 7,100,000,000 

ITRAXX MN S09 Oly 3,855,000,000 3,837,000,000 4,353,250,000 5,016,250,000 

ITRAXX MN S09 Oly 00-03 -480,000,000 -480,000,000 -490,000,000 -590,000,000 

ITRAXX MN S09 Oly 03-06 -10,000,000 -10,000,000 -140,000,000 -160,000,000 

ITRAXX MN S09 07Y 06-09 10,000,000 -25,000,000 -25,000,000 -25,000,000 

ITRAXX MN S09 07Y 09-12 230,000,000 180,000,000 180,000,000 180,000,000 

ITRAXX MN S09 OlY 12-22 -950,000,000 -750,000,000 -450,000,000 -450,000,000 

ITRAXX MN S09 07Y 22-100 6,575,000,000 6,675,000,000 9,975,000,000 10,950,000,000 

ITRAXX MN S09 lOY 7,892,750,000 10,573,750,000 10,339,750,000 12,957,600,000 

ITRAXX MN S09 lOY 00-03 1,425,000,000 1,415,000,000 1,445,000,000 1,270,000,000 

ITRAXX MN S09 lOY 03-06 -220,000,000 -100,000,000 -140,000,000 5,000,000 

ITRAXX MN S09 lOY 06-09 160,000,000 270,000,000 270,000,000 380,000,000 

ITRAXX MN S09 lOY 09-12 -30,000,000 235,000,000 235,000,000 235,000,000 

ITRAXX MN S09 lOY 12-22 -1,015,000,000 -495,000,000 180,000,000 155,000,000 

ITRAXX MN S09 lOY 22-100 5,100,000,000 7,775,000,000 12,070,000,000 15,810,000,000 

CDX IG S09 05Y -30,569,500,000 -40,103,500,000 -49,563,000,000 -32,722,500,000 

CDX IG S09 05Y 00-03 -2,580,000,000 -2,725,000,000 -2,995,000,000 -3,570,000,000 ConfldenU1JITl'ilatmentRequestlld JPM-C\OOOO360t 

by JPMaRGAN CHIl.SE & co. 

CONFIDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, JPM-CIO-PSI-H 0006638 
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cox IG S09 05Y 03-07 

COX IG S09 05Y 07-10 

COX IG S09 05Y 10-15 

COX IG S09 05Y 15-30 

COX IG S09 05Y 30-100 

COX IG S09 07Y 

COX IG S09 OlY 00-03 

COX IG S09 OlY 03-07 

COX IG S09 OlY 07-10 

COX IG 509 OlY 10-15 

COX IG S09 07Y 15-30 

COX IG S09 OlY 30-100 

COX IG 509 lOY 

COX IG S09 lOY 00-03 

COX IG S09 lOY 03-07 

COX IG 509 lOY 07-10 

COX IG 509 lOY 10-15 

COX IG S09 lOY 15-30 

COX IG 509 lOY 30-100 

-1,090,000,000 

-1,435,000,000 

-2,905,000,000 

-12,215,000,000 

-270,000,000 

30,253,500,005 

-705,000,000 

165,000,000 

-345,000,000 

-925,000,000 

-4,940,000,000 

10,380,000,000 

37,219,500,000 

3,300,000,000 

-20,000,000 

155,000,000 

-785,000,000 

-1,345,000,000 

11,975,000,000 

-1,355,000,000 

-2,045,000,000 

-2,905,000,000 

-12,215,000,000 

-270,000,000 

28,885,000,005 

-555,000,000 

165,000,000 

-345,000,000 

-1,195,000,000 

-5,340,000,000 

10,980,000,000 

54,764,500,000 

3,290,000,000 

60,000,000 

345,000,000 

-1,730,000,000 

-2,075,000,000 

16,625,000,000 

-1,395,000,000 

-2,045,000,000 

-2,905,000,000 

-12,215,000,000 

-270,000,000 

33,546,000,005 

-370,000,000 

-190,000,000 

-410,000,000 

-1,820,000,000 

-6,290,000,000 

10,780,000,000 

67,790,500,000 

3,370,000,000 

-120,000,000 

265,000,000 

-1,900,000,000 

-2,750,000,000 

15,875,000,000 

-1,395,000,000 

-2,045,000,000 

-2,905,000,000 

-12,215,000,000 

-270,000,000 

33,847,000,005 

-405,000,000 

-215,000,000 

-365,000,000 

-1,970,000,000 

-6,965,000,000 

11,430,000,000 

80,343,500,000 

2,805,000,000 

60,000,000 

775,000,000 

-1,980,000,000 

-3,800,000,000 

16,725,000,000 

These moves only show the changes month on month and do not show the significant volumes we have been ab!e to trade 

intr-month. 

Regards, 

Jason Hughes 

CIa Europe 

020 77773301 

COt1f1dentI3lTruIlMntReque&ted 

by JPMORQAN CHASE & CO. 

CONFIDENTIAl TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, JPM-CIO-PS~H 0006639 
679 

From: Iksil, Bruno M <bruno.m.iksil@jpmchase.com> 

Sent: Fri, 20 Apr 2012 10:27:58 GMT 

'0: Bates, Paul T <paul.t.bates@jpmchase.com> 

Subject: RE: URGENT::: Huge Difference for iTraxx & CDX trades 

thx Paul. We can address that partly because it is possible here that BofA and MS are not in Hne with other market 

participants, 

._-----------------_._------_ .. __ ._----_._._----------------- From: Bates, Paul T 

Sent: 20 April 2012 11:23 

To: Iksll, Bruno M Cc: Grout, Julien G; Martin-Artajo, Javier Xi O'neill, Rory H; Hughes, Jason LON 

Subject: RE: URGENT ::: Huge Difference for rrraxx & COX trades 

Hi Bruno, 

The file we were sent only had the top 15 trade breaks with either BOA or MS in it. They were not 

complete trade lists therefore I do not know the complete valuation difference with each of these 

(p's. 

Here are the two summary pivots based on the trades we were given: 

BOA: 

M5: 

As you can see the bigger differences are on the Itraxx 59 22% 11313%. 

have attached the files with these pivots so you can drill down to look at the underlying 

~,'ades . 

ConfldentJal Treatment Requested 

by JPMORGAN CHASE & CO. 

Permanent Subcommittee on Investigations 

EXHIBIT #34b 
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If you need more details please let me know. 

'anks 

Paul 

-----Original Message-----

From: Iksil J Bruno M 

Sent: 28 April 2812 11: 88 

To: Bates, Paul T 

Cc: Grout, Julien G; Martin-Artajo, Javier X 

Subject: RE: URGENT::: Huge Difference for iTraxx & CDX trades 

thx Paul. Could you help us "decipher" in plain words what we should look at and come back to you 

on the issues raised here? 

-----Original Message-----

From: BateSJ Paul T 

Sent: 28 April 2812 18: 58 

To: Grout, Julien G; Iksil, Bruno M 

Cc: O'neill,. Rory H; Coombes, Hema 5; Hughes, Jason LDN 

Subject: FW: URGENT::: Huge Difference for iTraxx & CDX trades 

Here are the detailed files we were sent from the collateral guys. 

---Original Message-----

From: Hughes, Jason LDN 

sent: 28 April 2812 18;31 

To: O'neill, Rory H 

Cc: Enfield) Keith; Bates, Paul T; CoombesJ Hema 5 

Subject: FW: URGENT::: Huge Difference for iTraxx & CDX trades 

Rory) Can you liase with Julien on this 

Regards, 

Jason Hughes 

CIO Europe 

B2B 7777 3381 

-----Original Message-----

From: Iksil J Bruno M 

Sent: 28 April 2812 18:38 

To:· Hughes, Jas~n LDN 

Subject: RE: URGENT::: Huge Difference for iTraxx & CDX trades 

would like to know the detail of the instruments and the counterparties claiming this. Please 

'form Julien and Javier about this. 

-----Driginal Message-----

From: Hughes,. Jason LDN 

Confidentia! Trealmltnt R."'luested 

by JPMORGAN CHASE & CO. 
681 

Sent: 20 April 21312 1G: 13 

To: Iksil .. Bruno M; Grout, Julien G 

bject: FW: URGENT ... Huge Difference for iTraxx & CDX trades 

Bruno/Julien, We've had some queries from the collateral group around some of our tranche marks. 

Major query seems to be on Itraxx Series 9 1Gyear 22-11313 tranche. I've had a quick look at some 

data and my thoughts are shown in the mail below and just wondered if there was anything else you 

wanted to add (or if I got anything wrong) of if you had any further evidence for the prices. 

I'm working from home today but happy to speak on phone if required 

Regards, 

Jason Hughes 

CIa Europe 

020 7777 3301 

-----Original Message-----

From: Hughes, Jason LDN 

Sent: 20 April 2012 09: Sl 

To: O· neill, Rory H; Bates, Paul T; Green, James E; CIa EMEA MO; CIa P&L Team 

Cc: Coombes, Hema 5; Enfield, Keith 

Subject: RE: URGENT::: Huge Difference for iTraxx & cox trades 

I've quickly looked into ITRAXX Series 9 113year 22-1130 tranche which seems to form the majority of 

:: issues in both files. 

AS of 30th March 21312 for this tranche CIa were marked at 33 versus an independent price of 34.75. 

Considering that the bid offer seen in the market is anything between 3 and 6 bps we considered 

the position to be marked within tolerance and therefore at fair value. For the same date 

Dataquery (JPM data but independent of CIa) shows a level of 35. 

For 18th April, the date that these files refer to, CIa is marked at 45.75 Dataquery has a price 

of 48. Even using the tolerances we applied at last month end (which are now probably too tight) 

we would still fall within tolerance and so from my perspective we still look to be well marked. 

It is probably worth confirming with BrunolJulian but I'm sure with all the sensitivity around the 

book they are going to be very sure of all their marks. 

Any questions let me know 

Regards, 

Jason Hughes 

CIa Europe 

020 7777 3301 

-----Original Message-----

')m: O'neill, Rory H 

~"nt: 20 April 2012 09: 23 

To: O'neill, Rory H; Hughes, Jason LDN; Bates, Paul T; Green) James E; CIa EMEA MOj CIa P&L Team 

Cc: Coombes, Hema S; Enfield] Keith 

ConfidentlalTreatmentRequested 

by jPMORGAN CHASE & CO 
682 

Subject: RE: URGENT::: Huge Difference for iTraxx & COX trades 

'oth files attached) 

-----Original Message-----

From: O'neill) Rory H 

Sent: 20 April 2812 09: 14 

To: .Hughes) Jason LON; Bates) Paul T; Green, James E; CIa EMEA MO; CIa P&L Team 

Cc: Coombes) Hema 5; Enfield) Keith 

Subject: RE: URGENT::: Huge Difference for iTraxx & CDX trades 

-----Original Message-----

From: Hughes) Jason LDN 

Sent: 20 April 2012 08: S9 

To: Bates) Paul T; O'neill) Rory H; Green) James E; CIa EMEA MO; CIa P&L Team 

Cc: Coombes) Hema 5; Enfield, Keith 

Subj ect: RE: URGENT ::: Huge Oi fference for iTraxx & COX trades 

Paul) Valuations were OK as of March month end. I can't do an intra-month valuation as we don't 

get sufficient market data especially around tranche positions 

Regards, 

son Hughes 

_..La Europe 

020 7777 3381 

-----Original Message-----

From: BatesJ Paul T 

Sent: 20 April 2812 08:46 

To: Hughes, Jason LON; O'neill, Rory H; Green J James E; CIa EMEA MO; CIa P&L Team 

Cc: Coombes) Hema 5; Enfield) Keith 

Subject: RE: URGENT;:: Huge Di-fference for iTraxx & CDX trades 

Rory) Can you and James check all the trades are ok and they are getting the correct MTM fed 

down. Have they sent us the full population? Do we know the size of the difference? 

Jason, Can you look in detail at these valuation differences and check that you are happy with our 

current marks on these instruments. 

Thanks 

Paul 

-----Original Message-----

From: Hughes) Jason LDN 

nt: 20 April 2012 08: 27 

.J: O'neill, Rory H; Green} James E; CIa EMEA MO; CIa P&L Team 

Cc: Bates, Paul T; Coombes, Hema S 

Subject: RE: URGENT::: Huge Difference for iTraxx & COX trades COrol'identlalTreatmentR..quested 

by JPMORGAH CHASE & CO, 
683 

Rory. Assuming you meant end of March and not ApriL There were differences between the desk and 

'e independent marks at month end. The desk marked the book at the boundary of the bid/offer 

~~read 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. We had a small number of 

positions where they fell outside these tolerances and hence the adjustment that was passed. with 

the· volatility seen around month end and the size" of our positions even small price differences 

would be expected: 

Regards, 

Jason Hughes 

CIa Europe 

020 7777 3301 

-----Original Message-----

From: O'neill, Rory H 

Sent: 20 April 2012 06:22 

To: Green, James Ej CIa EMEA MO; CIa P&l Team; Hughes, Jason LON 

Cc: Bates, Paul Tj Coombes) Hema 5 

Subject: Re: URGENT::: Huge Difference for iTraxx & COX trades 

Can you confirm the 30Apr VCG result on these instruments? Do we have any known discrepancies ~.."ith 

the mkt? 

,lanks .. 

Rory 

------Original Message------

From: Vaz, Daniel X 

To: Green, James E 

To: CIQ EMEA MO 

To: CIO P&L Team 

Cc: 1BOD Collateral Project Team 

Cc: Miller.. Charles R 

Cc: Demo, Mark 

Cc: Daryanani, Nilam I 

Subject: URGENT ::: Huge Difference for iTraxx & CDX trades 

Sent: 20 Apr 2012 01:43 

Hi James .. CIa, 

Can you please validate the marks for the CDS trades booked with ref entity as iTraxx Europe s9 

22%-lee% or CDX.NA.IG.B 3e%-lee%? We are, seeing huge differences in these trades when we compare 

our marks with CP marks. I took a sample of 15 trades from ~SCS & BOA portfolio with greater MTM 

differences. Can you please investigate & advice why we would have such huge differences at a 

trade level which is impacting our margin calls? 

CP 

tal portfolio diff 

.jmp]e trade count 

Comments 

Internal Colla"teral tracking number 

Conndential Treatmellt Reque.sted 

by JPMORGAN CHASE & CO. 
684 

MSCS 

USD 36.2 MM 

15 

All trades are booked with ref entity as iTraxx Europe 59 22%-1130% cart=3519SB BOA USD 46 MM 

15 

Trades are booked with ref entity as iTraxx Europe s9 22%-109% or 

CDX.NA.IG.8 30%-100% 

·t=3S19S2 

Daniel Vaz I Team Leader I Collateral & Derivatives Confir'ms I Investment Bank I ] .P. Morgan I T: 

+9122612604138 I daniel x vaz@jpmorgao com I jpmorgan. com I JPMC Internal use only 

ConlidentlarTreatmentRequ..sted 

by JPMORGAN CHASE & CO. 

JPM-CI00003&B7 
685 

From: Braunstein, Douglas <Douglas.Braunstein@jpmorgan.com> 

Sent: Fri, 20 Apr 2012 15:31:33 GMT 

To: Hogan, John J. <John.J.Hogan@jpmorgan.com> 

Subject: Re: Collateral Disputes 

Is this the first time this has happened 

,. __ ._--_ .. _----_._-- From: Hogan! John J. 

Sent: Friday, April 20, 2012 11~24 AM 

To: Braunstein! Douglas 

Subject: Fw: COllateral Disputes 

This isn't a good sign on our valuation process on the Tranche book in ClO. I'm going to dig further. 

From: Goldman, Irvin J 

Sent: Friday, April 20, 2012 11:21 AM 

To: Hogan, John J, 

Subject: FW: Collateral Disputes 

-----Original Message-----

From: Lewis, Phil 

Sent: Friday, April 20, 2012 11:20 AM Eastern Standard Time 

To: Goldman, Irvin J; Weiland, Peter 

Cc: Kastl, Edward R; Bates, Paul T 

Subject: RE: Collateral Disputes 

Yes we are-- we have collateral disputes from a number of cQunterparties (obviously on positions that aren't novated to ICE, 

so the tranches and ICE ineligible indices). Biggest are with MS and G5. First we heard of these was this morning (collateral 

process is done at -a Legal entity I-evel- when differences become big enough they reach out to MO & VCG}. MO are checking 

all bookings and flows, with the desk and VCG (Jason Hughes/Ed Kastl) are checking marks. We are also trying to get some 

granularity by product 

I'!! forward you a note from the collateral guys. 

This table shows differences by cpty and the Gross Absolute PV across all outstanding trades with each cpty 

Sum ofABS Sum of 

CP (Local) MTM DIFF % 

BBVASA 856,948 -141,471 -17% 

BNPP 1,427,575,108 17,698,254 1% 

BOA 3,135,860,802 72,455,626 2% 

BPLe 1,078,123,886 -427,385 0% 

CA 28,737,306 2,032,294 7% 

CGML 49,019,323 -667,742 -1% 

em 4,417,744,863 60,630,170 1% 

eSI 421,675,999 27,289,077 6% 

esx 474,311,803 15,227,896 3% 

DBKAG 3,080,139,893 56,005,118 2% 

GSI 4,701,978,454 89,576,979 2% 

Permanent Subcommittee on Investigations 

CONFIDENTIAL TREATMENT REQUEST 1 ___ E.XHiiiiiiiiiiliiiB.I.T .. #.3.S __ .. 

J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000108 
686 

HSBCEU 100,908,403 

HSBCUS 35,801,766 

MLI 6,244,692 

MSCS 4,124,526,028 

MSIL 222,395,628 

NOMURAIP 256,811,944 

RBSl'LC 61,168,415 

SGCIB 3,004,157,922 

UBSAG 2,576,649,497 

Grand Total 29,226,690,681 

From: Goldmanl Irvin J 

Sent: Friday, April 20, 2012 11:00 AM To: Lewis, Phil 

Subject: FW: Collateral Disputes 

Please let me know. 

-----Original Message-----

From: Hogan, John J. 

121,569 

6,027,808 

-156,884 

114,910,670 

1,724,699 

-2,974,037 

.2,607,779 

16,656,449 

46,660,667 

519,983,977 

0% 

17% 

·3% 

3% 

1% 

-1% 

-3% 

1% 

2% 

2% 

Sent: Friday, April 20, 2012 10:22 AM Eastern Standard Time 

To: Goldman, Irvin J; Weiland, Peter 

Subject: Collateral Disputes 

Are you havlng any in the trafi{~he (or index) positions? 

CONFIDENTIAL TREATMENT REQUESTED BY 

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JPM-CIO-PSI-H 0000109 
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Table of Contents 

Background 

II. JPMorgan Chase Fair Value Measurement Policy 

III. CIO Valuation Approach 

IV. Conclusions 

V. AppendixA-3/31/12 Position Marks 

VI. Appendix B - Ql Price Testing Analysis 

VII. Appendix C - Cl0 Transaction Data 

Privileged and Confidential 

Attorney Client Work Product 

May 10, 2012 

This memo summarizes the Firm's review of the valuation of its CIO EMEA credit portfolio in 

light of the current market conditions and dislocation that occurred in April 2012, 

Background 

The CIO EMEA credit portfolio is made up of Investment and Core Credit portfoliosl

. The 

Investment portfolio consists of available~for-sale investment securities, while the Core 

Credit Portfolio primarily consists of synthetic credit positions -~ credit derivative positions 

on various credit indices and tranches of those indices (the index and tranche credit 

derivatives portfolio). These synthetic positions were entered into to manage the market 

value deterioration in a potential stress scenario associated with investment securities held 

in the available~for~sale portfolio; the positions have changed over time depending on the 

Firm's view of credit risk. 

CIO has a substantial presence in the financial markets, and the breadth and depth of its 

activity has generally given CIO a good sense of the market, with strong market contacts and 

market intelligence. In particular in these credit products, ClO executed a significant volur:ne 

in the market and therefore had deep access to market pricing and color. 

During January, February and through the first few weeks of March, C10 was buying, to add 

to existing positions, the risk of (i.e. selling credit protection) the following indices and 

tranches to reduce the short high yield credit risk position in the portfolio: 

• CDX Investment Grade North America Series 9, 10 year and 7 year. 

ITraxx Main Series 9, 10 year and 7 year. 

In addition, on April 6, the business press began reporting on certain of these positions! 

providing other market participants with some level of information regarding the Firm's 

positions and activity. 

1 CIO also has a North America credit portfolio, but that portfolio does not include synthetic credit positions and 

therefore is not subject to this review. 

Permanent Subcommittee on Investigations 

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In April1

, market activity and market prices for these credit derivatives changed significantly 

and a number of unusual trends were observed, including: 

• The difference between cost of protection on investment grade indices and high 

yield indices in Europe and North America reduced significantly. 

• The difference between cost of protection on short dated risk and long dated risk in 

a number of indices increased significantly. For a number of indices the cost of 

protection on the index moved inconsistently with the prices of protection on 

various tranches of the index. For example, for the iTRaxx Main Series 910 year 

during April: 

o Spread moves for the index itself implied some increase in losses due to 

increased correlation within the index, 

o Price moves in the super senior tranche implied losses due to very much 

larger increases in correlation within the index. 

o Price moves in the more junior tranches implied limited increases in 

correlation, 

lThese trends began to emerge in late March, but developed and became much more 

significant in April. 

These changes have been unusual compared to the historical relationship between 

investment grade and high yield indices, as well as the relationship between index and 

tranche exposures. Due to the complexity and the size of the Firm's positions, the effect of 

these changes, in conjunction with other market factors, on the estimated fair value of the 

Firm's positions has been significantly negative during April, As noted throughout this 

memo, relatively small variations in price can have a relatively large impact on the estimated 

fair value of the entire portfolio, given the size of the Firm's positions. 

Size of Position Dota 

The following table provides the absolute notional amounts (in US D) of these positions at 

various dates. 

Table 1: Notional amount of ClO positions 

~.~~~{~t ... ... ............................... ~M)ac-H . ,~~~~.~.:!.~. ,,, ...... ~.~,~~;:t.~ ..... 63,677.901,370 76.235,846,930 97,S46,01Q,Q20 

CDXIG (1~ .. ~:<f, 5;(/ G ,.;) (./!"\"E!,$t.fi,~~'.\j 6,2"2(),451,026 

CDXHY 8,123,512,169 4,610,608,419 t1.;)'!>.'1:24,in,;.) 

I"f'RA'IO(XO (:),20?,6C10(,IO) (.4,.::11,339,000) (7.0'7,1'1.0f-0) 

ITRAXXF!t-.lSUEl i~ . .s::4,~aO.G()0) (2,'19~ ,;;30,000) \.Hr;S.32C.QCC) 

1.856,414,68(; 1,626,851.61' 1.796,888,575 

!l"RI>XXFIt-.lSEN {79,8iO,{l:)O) (':4C,7C(J()[!(JI 

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.. .. . .. ~!H~!:'I~ ...... 116,982,003,490 

54,767,087,520 

17,,':i~',;;57,,1:-;,n 

te eeS.~6!l.50C) 

(Z.1'Z,G4GJ'GC) 

1,798,688,575 

73,150.000 

.1~~~~~ 118,505,911,681 

56,054,146,920 

CU,5IS,49M) 

(Kr3E;Ae:S.~n 

(.cCt10.2\3CCIXI 

l,796,66e.575 

100.106.250 

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Table 2: ClO's share of market volume 

The following table compares the absolute notional amount of CIO's transactions in selected 

indices and to the absolute notional of street-wide transactions, in order to provide a sense 

of the relative size of ClO's activity in the market for the first four months of 2012. This data, 

as well as similar data from 2011, demonstrates two key points: I} prior to late March 2012, 

CIO was a substantia! participant in these credit markets, and Z} even without ClO's 

involvement (throughout these periods and in April after CIO substantially reduced its 

activity), the remaining street volume was substantial. 

ITRAXXSERIES 9 7Y 

Nbnth CO N.olional Traded ..... ,9.~~<~,ty9.~!:l.IT!~ __ ." ... ".... CIO % Jan-12 ··············$'··"· .. ··· .. ····99'3-;iio·o·:o·o'o··,, 6,181 ,250,000 '1"6o/~" 

Feb-12 4,751,750,000 9,754,250,000 49% 

Mar-12 775,000,000 8,325,375,000 9% 

Apr-12 487,500,000 5,004,150,000 10% 

J2~L.v. _,,,._ "",v,,t ._~,,~9g!>~?§'Q}!QQ, A~A~ '"c __ .'"X~~?§~P?:§~9.9.9_.~~ ___ "~",,. __ ~ ... 

ITRAXXEUROPE SERIES 910Y 

.~.r:!~.~ Cia Notional Traded .§.~~t.Y'?!.~t!!-.~ ... "',,", ... , ~,19 .. ~~, Jan-12 ... ".," $'''''''',',,':769:250jioo' 'if 26,758,710,300 44% 

Feb-12 7,244,900,000 15,205,250,000 48% 

Mar-12 6,601,250,000 13,806,250,000 48% 

Apr-12 338,750,000 5,570,925,000 6% 

.-r:~.~l ,. w ..... "." ,,~. ?:?~~.~~,,~.~g!g.Q9. _~ .... ...... ~ .. 1.!~~1.,~.~.~.'.~g.~ 

ITRAXXEUROPE SERIES 16 5Y 

Nbnth cb Notional Traded .~!!:~,~tY9.t~!!!f!: ....... \ ... "" etO % Jan-12 ,,·····$·· .. ,·· .. 2·6·;446;5·0·6:66"0"' '$'"" 206,771,511 ,713 ',r3~i~" 

Feb-12 36,359,500,000 216,991,196,801 17% 

Mar~12 26,075,000,000 199,058,170,509 13% 

Apr-12 25,000,000 13,785,754,578 0"/0 

Total ... " .. ~ __ ,,~~!.~~.~.~Q9!99g __ ~~~ .. ~.~.~.~~g,~'.~~.~\~Q,~ .... ~. 

CDXNA1G.97Y 

tJ.onth , .. "A",.2Jq,,~~~J.~n~~ .. T~~~ .. $tree1 Yalume " .. ,.9,I.t:l.,~" 'j~'~:'1'2 $ 7,091,500,000 $ v·,,·· .. ·s5,·93s·,'34"iCsv

41· 130/;' 

Feb-12 8,387,000,000 48,791,460,000 17% 

Mar·12 2,017,000,000 41,738,540,328 5% 

Apr-12 256,000,000 23,310,200,000 1% 

.. T~.~.(_ ,$, .. ~.!..\!..?1.,.?q9!gg9 .$ 169,776,546169 

CDXNAIG.9 10Y 

'vt:lfIth' 'CIO NotiOnal Trad.ed Street Votume .*Pl0 % Ta'~::i'2~-~~'" "'~'~'-if'-~ia:52a:6oo:O'i),6vc $~'~'-'~'83,o'65~io(),;6'oo" 34%-

Feb-12 20,032,000,000 48,049,133,456 42% 

Mar-12 9,819,500,000 72,016,977,456 14% 

Apr-12 677,000,000 31,722,783,000 2% 

.. !.o.~.! .1 .. . ?~.'P.?~~,~,~.!'\~.9.9.. .~_.. ..~.~.~.l~?'!J.~.?~).~.~.? 

Note: April data extends to April 26, 2012. 

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Given the size of the Firm's portfolio and the nature of the positions, the portfolio is 

sensitive to small changes in credit spreads. At March 31, 2012, the sensitivity to a 1 basis 

point move in credit spreads across the investment grade and high yield spectrum was 

approximately ($84) million, including ($134) million from long risk positions, offset by $50 

million from short risk positions. 

II. JPMorgan Chase Fair Value Measurement Policy 

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 quotations may come from a variety of sources, but emphasis is given to 

executable quotes and actual market transactions (over indicative or similar nonwbinding 

price quotes). In certain circumstances valuation adjustments (such as liquidity adjustments) 

may be necessary to ensure that financial instruments are recorded atfair value. 

Bid - offer spread and pasition size 

As further described in US GAAP Accounting Standards Codification Topic 820 Fair Value 

Measurement (/IASC 820m ), 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 as a practical expedient. 

820-10-35-36C "If an asset or a liability measured at fair value has a bid price and 

an ask price (for example, an input from a dealer market), the price within the 

bid-ask spread that is most representative of fair value in the circumstances shall 

be used to measure fair value regardless of where the input is categorized within 

the fair value hierarchy (that is, levell, 2, or 3). The use of bid prices for asset 

positions and ask prices for liability positions is permitted but is not required." 

820-l0-35~36D "This Topic does not preclude the use of mid-market pricing or 

4 

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other pricing conventions that are used by market participants as a practical 

expedient for fair value measurements within a bid-ask spread," 

Effective Q1 2012, size-based adjustments are explicitly not allowed for cash instruments 

held by a firm. However, US GAAP continues to permit size-based adjustments for 

derivatives portfolios if an election is made to do so. Under its current business and risk 

management strategy, the Firm has not made such a portfolio election for this cia portfolio, 

and so evaluates the value of its positions without specific consideration of their overall size. 

Cut-off and Timing 

US GAAP is not prescriptive regarding market dose and timing of valuation. As an 

operational matter, the Firm allows desks in different regions to mark their books as of the 

dose in that region, and requires that these cut-off practices be applied consistently. 

III. CIO Valuation Process 

Background 

Cia's valuation process reflects how and to whom cia would exit positions by typically 

seeking price quotes from the dealers with whom cia would most frequently transact and 

with whom cia 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. In that 

regard, CIa's valuation process is consistent with that of a non-dealer investor/manager. 

cia necessarily uses judgment to identify the point within the bid-offer spread that best 

represents the level at which cia reasonably believes it could exit its positions, considering 

available broker quotes, market liquidity, recent price volatility and otherfactors. 

As noted below, CIa's evaluation of valuation adjustments has been based on market 

liquidity for the positions, rather than on the absolute size of CIa's positions. In the normal 

course of business, cia will continue to review its valuation practices in light of its current 

risk management and exit strategies to ensure its va!uation practices continue to represent 

Cia's estimate of exit price. 

Front Office Mark Process 

The main source of information for pricing comes from the Bloomberg messages (pricing 

runs distributed by the dealers). Where available the desk collects them for all indices and 

tranches. 

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Then depending on the product and availability of information the following processes are 

followed: 

For index products: 

o "On the run" indices (Le. most recent series, Sy point): as these are the 

most liquid instruments, the front office typically uses the dealer runs. 

o "Off the run" indices: Front office looks at bid·offer spreads, volumes, 

recent price changes and recent transaction data, and the front office mark 

is established at an appropriate price within the bid·offer. 

For tranche products: 

o For liquid tranches: front office computes the best-bid/best·ask using the 

dealers' runs· the tranche is then marked using the mid of this 'best' 

market. 

o For illiquid tranches: front office looks at bid·offer spreads, volumes, recent 

price changes, relevant index prices, and recent transaction data, and the 

front office mark is established at an appropriate price within the bid·offer. 

TIming of Valuation 

CIO's valuation policy, consistent with the Firm's policy, is to value its positions as of the 

close of business in the relevant region. Although the broker quotes CID receives are 

generally consistent with that timing, other data sources may provide data using different 

timing, as follows: 

Source 

Broker quotes 

Markit/Totem - NA indices and tranches 

Markit/Totem - EM EA indices and tranches 

ICE - NA indices 

ICE - EMEA indices 

VCG Independent Process 

Timing 

As received 

New York close 

London close 

30 minutes before New York close 

30 minutes before London dose 

VCG independently price tests the front office marks at each month end and determines 

necessary adjustments to arrive at fair value forthe purposes of the US GAAP books and 

records. The remainder of this section describes this process. 

A. Pricing data sources 

CID VCG obtains prices from third parties as follows: 

Markit{Totem2 - an independent service that provides prices for a wide range of 

products derived from the inputs provided by a number offinanda! institutions. 

2 Markit and Totem are within the same group. Markit provides data the credit derivative indices, while Totem 

provides data for the tranche risk of those indices. 

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Dealer Quotes - Prices from major broker dealers for specific indices and tranches 

of those indices. 

• VCG must approve the sources for all market prices and other parameters as being 

reliable and applicable. 

cia VCG also !ooks to actual prices at which Cia has executed recent transactions tiS an 

additional source of market information. 

The following is a list of the dealers CIa VCG obtains quotes from on a regular basis for 

indices and tranches in which they have a reasonable level of activity: 

Citl 

Deutsche Bank 

Credit Suisse 

HSBC 

• Goldman Sachs 

• JPMorgan (IB) 

Royal Bank of Scotland 

• Barclays 

Morgan Stanley 

BNP Paribas 

Nomura 

BofA/Merrili Lynch 

These dealer quotations are received from a standing solicitation for price estimates for 

index and tranche positions. The number of dealer quotes received in any particular 

month generally ranges from 1~4, and is based primarily on which dealers choose to 

provide quotes that period. 

B. Deriving the best estimate of mid-market price (VCG mid-market price) for price testing 

purposes 

Indices: 

• For the more liquid indices, typically the on the run indices, VCG utilizes Markit as its 

primary source for the CIO VCG mid-market price. VCG will also look to broker 

quotes, but generally finds there to be limited differences to Markit data. 

For the less liquid indices, cia VCG again uses Mark!t data as the primary source of 

independent data. However, given the reduced liquidity of these indices dealer 

quotes sourced by the front office are also used, Differences between the Mark!t 

data and the broker quotes are investigated, for example by reviewing actual levels 

of trading activity. The CIO VCG mid-market price is determined using the 

combination of the Mark!t data, broker quotes and actual trades executed by CIO, 

Tranches: 

• cia VCG uses broker quotes as the primary source of data for determining the CIO 

VCG mid market prices for the tranches positions. ClO VCG also obtains consensus 

prices from Totem from the Investment Bank3 (JPM IB). However, cia VCG uses the 

3 The Investment Bank obtains these as it contributes as a dealer to the Totem consensus prices. 

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broker quotes, with less reliance on TOTEM data, due to the Firm's experience that 

the tranches tend to be less liquid than the indices and for any given position, only 

2¥3 dealers tend to be active in that tranche. Therefore, Cia VCG believes that the 

broker quote process is appropriately focused on the more active dealers for those 

tranches. This emphasis on broker quotes also reflects Cia's likely exit strategy, 

which is more likely to be with specific dealers active in these tranches. Where there 

are significant differences between broker quotes and TOTEM, cia VCG will 

investigate the reasons for such differences, for example, by looking at the levels at 

which Cia has actually executed transactions, to validate the integrity of the broker 

quotes received. 

C. Estimating the range of fair value utilizing price testing thresholds 

Price testing thresholds are commonly used in valuation to account for reasonable 

degrees of V<3riance between valuation data obtained from different sources, 

• These thresholds are generally established to represent normal bid~offer spreads for 

each product, with the goal of ensuring th<3t the final mark used by the Firm is 

within the range of bid~offer spread after applying these thresholds. 

Price testing thresholds may be determined on a v<3riety of bases (e,g., volatility of 

parameter, market depth and liquidity and pricing service spreads). 

• cia VCG is responsible for establishing the price testing thresholds used. 

The tolerance thresholds were consistent from 12/31/11 to 3/31/12. 

D. Determining a book price 

• The cia VCG mid~market price plus/minus the price testing threshold set by cia 

VCG per instrument (the VCG valuation r<3nge) is compared to the front office mark. 

If the front office mark is outside the VCG valuation r<3nge, the position m<3rk is 

adjusted to the outer boundary of the range. Within the VCG v<3lu<3tion range front 

office m<3rks may be used without adjustment. 

Irrespective of threshold levels, any difference between front office mark <3nd the 

mid-market price m<3Y be adjusted, <3t cia VCG's discretion. 

cia VCG has not historically <3djusted front office marks directly to Markit/Totem 

spreads/prices for the less liquid indices and tranches because: 

o Given its level of activity in the market, cia has large amounts of specific 

transaction d<3t<3 that should be considered in determining fair value. 

o cIa h<3S observed that broker quotes are indicative prices th<3t <3re relevant 

to the valuation process, in addition to the consensus prices provided by 

Markit/Totem. 

B<3sed on cia experience, cia believes that the broker quotes 

received better reflect executable prices, and therefore represent 

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important market data that should be given priority where 

available. 

CIO's experience is that not all dealers participating in the Totem 

process are active in the relevant products and that obtaining direct 

dealer quotes from the more active dealers for a particular product 

may better reflect executable prices. 

o Markit/Totem prices are based on quotes by market makers acting in that 

capacity, CIO, like other non·dealer investors/managers, is not a market· 

maker and it does not contribute to the Markit/Totem service. Furthermore, 

in the case of Totem the resulting data is accessible only to market makers 

who contribute to that service. 

o CIO has observed that the business valuation cut·off time may differ from 

the data provided by Markit/Totem. The combination of intra·day price 

moves on the last day of the month and the difference between the time 

when Markit/Totem fixes and the time when CIO closes its books can result 

in pricing differences that while small from a price perspective, could be 

significant for such a large portfolio. 

• As additional analysis, CIO estimated that as of March 31, 2012, the sum total ofthe 

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 

(considering price testing thresholds) and $495 million after adjustment. 

E. Apply necessary valuation adjustments 

• cia applies valuation adjustments as appropriate for positions deemed to be less 

liquid. Generally, any on the run index (typically, the four most recent series) and 

associated tranches have been viewed to be liquid based on market activity, and 

appropriate front office and cIa VCG judgment. In addition, other indices and 

tranches continued to have sufficient market activity to be deemed liquid as of 

March 31, 2012 (for example, ITRAXX Main Series 9 indices and the CDX IG Series 9 

indices). 

As of March 31, cia recorded liquidity valuation adjustments of $188 million for the 

following: 

o High yield· series 11 and prior indices and tranches. 

o Investment grade· series 12 and prior, excluding series 9 index. 

cIa believes that the investment grade Series 9 index has generally 

traded similar to on the run positions because it is viewed as a 

market benchmark by investors. 

• The liquidity adjustments for the series 9 tranches (both high yield and investment 

grade) were recorded as of March 31, 2012 to reflect the decline in market liquidity 

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by the end of the first quarter. The incremental liquidity reserve of $155 million for 

series 9 investment grade tranches was applied for the first time at March 31 as a 

result of this decline in market activity. 

• The liquidity reserve was calculated using Cia's standard liquidity reserve 

methodology and using spread volatility provided by JPM IB, This volatility varies by 

position in the capital structure, and is highest for equity tranches and lowest for 

super senior tranches: "" [CS01) x square root [holding period] x [spread volatility 

o CS01 is the credit spread sensitivity to a 1 bps change in market spreads 

relative to position size 

a Holding period - JPM IB suggested max 120 days was used 

o Spread volatility - provided by JPM IB; varies by position in the capital 

structure, and is highest for equity tranches and lowest for super senior 

tranches, 

• As of March 31 a liquidity valuation adjustment was not recorded for the CDX North 

America Investment Grade and Itraxx Main Series 9 indices as each was viewed to 

be liquid, As noted in Table 2 above, trading volume in the Series 9 index continued 

to be relatively robust, including through April, without Cia activity in the market, 

and the volume of market activity excluding cia has been substantial. 

Details of all adjustments taken to arrive at the fair value for US GAAP books and 

records are included in Appendix A. 

F, Comparison to Industry Practice 

The Firm believes that its valuation practices in cia are consistent with industry 

practices for other non~dealer investors/managers, Cia, like other non~dealer 

investors/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, In the normal course, the Firm evaluates its own business 

and risk management practices, and makes appropriate refinements to reflect its best 

estimates of fair value. 

G. Review of cia 01 pricing information 

• cia analyzed its pricing data as compared to other available market sources and the 

results are included in Appendix B, 

• As of the January, February and March month ends CIO compared its front office 

marks and final US GAAP book price for reasonableness to a combination of the 

Markit/Totem data, broker quotes and actual transaction data around the month 

end date, 

• There was evidence that actual transactions and broker quotes diverged from 

Markit/Totem prices in some cases. 

CIO book marks on individual positions were generally within the bid offer spread. 

10 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

JPM-CIO 0009733 

JPM.cIO-PSI-H 0006739 
697 

Privileged and Confidential 

Attorney Client Work Product 

May 10, 2012 

• As additional analysis, CIO estimated the aggregate difference in the front office 

marks and the CIO VCG mid-market estimates. This difference ($S12 million), less 

the price testing threshold adjustment of $17mm and less the liquidity reserve of 

$188mm, was approximately $307 million as of March 31,2012, compared to the 

gross value of derivative receivables and payables of approximately $8 billion. 

IV. Conclusions 

• CIO believes that its marks as of March 31,2012 represents CIO's estimate of its exit 

price as of that date. 

• In the context of its gross marks (approximately $8 billion of derivative receivables and 

$8 billion of derivative payab!es across ClO's portfolio), intra-day price volatility, and 

ClO's transaction data, CIO believes that it has made reasonable judgments regarding 

the prices within in the bid-offer spread that best represent ClO's exit price. 

• The CIO valuation process is documented and consistently followed period to period. 

Market-based information and actual traded prices serve as the basis for the 

determination of fair value. 

• C10's book value, including the valuation adjustments, at March 31 2012 for the index 

and tranche credit derivatives portfolio is within the range of reasonable fair values for 

such instruments. 

We have shared this memo with PricewaterhouseCoopers; they concur with the conclusions 

reached herein, 

11 

CONFIDENnAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

JPM-CIO 0009734 

JPM-CIO-PSI-H 0006741) 
698 

Appendix A - March 31, 2012 Position Marks 

Privileged and Confidential 

Attorney Client Work Product 

May 10. 2012 

The following table provides the notional amount and fair values of the Firm's positions as of March 31, 

2012, including the following: $17 mm tolerance level adjustments, $33 mm liquidity adjustment, and 

$155 incremental liquidity adjustment. 

(Note: subsequent ClO analysis noted that the required tolerance adjustment should have been $12 million, but the following 

schedule provides detail of the original $17 million estimate.) 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

12 

JPM-CIO 0009735 

JPM.cIO·PSI-H 0006741 
699 

17,!f10.~OO)lO" 

'95.ooo.ooQ 

CONFIDENTIAL TREATMENT REQUESTED BY J.P, MORGAN CHASE & CO, 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

Privileged and Confidential 

Attorney Client Work Product 

May 10, 2012 

13 

JPM..cIO 0009736 

JPM-CIO·PSI·H 0006742 
700 

CONFIDENTIAL lREATMENT REQUESTED BY J.P. MORGAN CHASE & CO, 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

Privileged and Confidential 

Attorney Client Work Product 

May 10, 2012 

14 

JPM.cIO 0009737 

JPM-CIO-PSI-H 0006743 
701 

Appendix B - CIO Price Testing Data 

Privileged and Confidential 

Attorney Client Work Product 

May 10, 2012 

The following tables set out valuation estimates of various sources, as well as the final cia price 

recorded books and records for the most significant positions within the portfolio. The table also 

includes nationals for the positions and whether cia is long or short the risk of the index/tranche (Le. 

whether it has sold or purchased credit protection respectively). 

The following observations were noted: 

For all ~elected positions the front office marks were within the bid offer spread indicated by the 

broker quotes except for the iTraxx Main IDX S09 07V. 

o This was a result of a front office data input error that was identified and adjusted by VCG to 

the outer boundary, in accordance with the VCG price testing protocol. (The value 

difference between the original front office mark and the intended mark was approximately 

$20 million, and the difference between the cia book value and the intended mark was less 

than $1S million). 

C\O VCG spreads/prices correspond to Markit/Totem data for the liquid indices and reflect the 

broker mids for illiquid indices and tranches. 

There are a number of instances where the broker-mid spreads/prices diverge from the 

Markitffotem data. 

• There are a number of instances where the cia transaction data in appendix C show that actual 

traded spreads/prices diverge from Markit/Totem data in similartime periods, For example: iTraxx 

Main lOX Series 16 5 year at February month end, and COX High Yield Series 107 year 10-15% 

tranche atJanuary month-end. 

Average traded prices in the few days surrounding month-end are directionally consistent with the 

point in the bid offer spread in which the positions have been marked by Cia, as shown by Appendix 

C. In general, the front office marks, subject to liquidity adjustments, used for cia books and records 

reflect information derived from numerous data sources available to cia frOnt office, rather than 

relying solely on anyone single factor. For example: 

o Recent transaction data (same-day and recent day actual trades) may in some cases be 

viewed to provide more relevant and reliable information regarding current exit prices (see 

additional observations below). 

o In some cases, differences between cia book values and other market information such as 

Totem/Markit are created because of timing differences between the dose of CIa's books 

and the dose of the Totem/Markit data (see additional observations below). 

In certain cases, cia executed trades on the last day of the month at a price that is different than 

Totem (and in several cases, was between the Totem value and the cia book price). See table 

below for information as of March 31, 2012 (including average traded prices on March 30, 2012): 

15 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

JPM-CIO 0009738 

JPM-CIO-PSI·H 0006744 
702 

Privileged and Confidential 

Attorney Client Work Product 

May 10, 2012 

CDXNAHY 15~25%) SiD 05Y 

CDXNAHY 15·25% S11 05Y 

CDXNAHY lOX S11 07Y 

CDXNAIG 0~3% S09 1 QY 

iTraxx.Main 0~3% S09 10Y 

lTraxx.Main lOX S09 07Y 

iTraxx.Main lOX 509 10Y 

. !~.~~>~ 

92.607 

83.108 

101.250 

63.219 

66.202 

129.000 

149.000 

CfOBooKS 

.... ·······93~·32·6···· 

83.685 

101.866 

62.869 

65.993 

122.657 

144250 

Avg, 

I.r:?~.~~ . 93.125 

83.375 

101.750 

63250 

66.313 

129.000 .. 

149.000 .. 

• The difference between the various data points (FO, Broker prices, and Totem) are relatively 

insignificant on a price basis, when evaluated in context of: 

o Daily price volatility - the following table shows that for most of the tested positions, the 

price difference between the Totem price and the ClO book price is less than the average 

daily price change during recent months, 

A...eraoe daily price cbange 

March price 

dlfference 

oI9t~.!!! .~ .. ~t.9.,~ O"C,<co~,+~!.r::. Feb '''w~!., ,.""."".IIp, CDXIG Wain Series 9 (7Yr) 2.00 2.85 2.00 1.98 2.06 

CDXIG Wain Series 9 (1 OYr) 2.25 2.87 1.73 2.00 2.26 

CDXHY 1 00 Series 11 (7Yr) 0.62 0.35 0.31 0.29 0,29 

CDXHY 1 00 Series 14 (5Yr) 0.25 0.30 0.30 0,28 028 

CDXHY 1 00 Series 15 (5Yr) 0.25 0.30 0.33 0.32 0.33 

iTrax:dv\ain lDXS16 5Y 1.88 3.74 3.22 3.08 4.05 

iTraxx.Main IDXS09 07Y 6.34 4.42 3.29 3.22 4.31 

iTraxx.Main IDXS09 10Y 4.75 4.24 3.17 3.54 4.24 .. " ........ '-_ ..... _._ .. 

o Intraday price volatility- the following table shows three representative series and the 

maximum, minimum and mean prices during the day on March 31, zan. 

"." ...... ~~.?: .,."" ",",,,,,[lJiXL _. ".". m~ClD," .~.~t!.~.!!9.!1 ~.P'!.!!!~!!1J 93.000 90.750 91.910 2.250 2.4%) ·cDx·jG-S~rj;;~··1'8"5"y ''" ... 

COXHY Series 18 5Y 97.188 96.750 96.950 0.438 0.5% 

lTraxx.Main Series 17 5Y 127.625 122.750 125.115 4.875 3.9% 

o Potentia! timing differences - CIO EMEA doses its books at the dose of business in London, 

while some of the comparative market data is as of the dose of business in New York. This 

timing difference may result in differences in reported prices. 

For example, the market price on March 31, 2012 at 4 pm London time for the COX 

IG Series 18 5 year was 92.88, and the market price at 9 pm (NY dose) was 91.25, a 

1.75% difference from the london dose. 

16 

CONFIDENTIAL TREATMENT REQUESTED BY J.P, MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO, 

JPM-CIO 0009739 

JPM-CIO-PSHi 0006745 
703 

<::D;U;;,:;.r,:;ii:;si:·ooa·~y··~·· 

Ct>J<NA.i-IY"HS""S<O07Y 

CCl:l.NAKV1~·25'II. S100l5Y 

CO"-"lA""'5."",",S"00Y 

cox.w.. ..... 3~·,!l1n, s,oes.-

'Q C_ .... 3 .. SOg'~Y 

11 CCXIM.IG=SOIlOTY 

,2 CDxt<AIClIO)(sao,Oy 

,3 ,," __ ~nO·""s;oo,oy 

,4 rr-..""o21·,n(>O<..'II)<I07Y 

15 <Tran.IoIaItoZ,,-WO%,",SHIV 4M33 

Privileged and Confidential 

Attorney Client Work Product 

May 10, ZOIZ 

IlroIoIor (>!]~(.~_ - ~ 

""~:i;'~ !O'..i< ... IIIiI __ 1oI 95.150 ~::~ ... ~l,:.-"'~~~~ ,}!1':':I>o" .. -~ i:t;:';..;; ".1~5 F'r1co. Oig""rpiloo 

96'2S 0Il',0$' .:>OII~ 

"'Ul;l~ 

-, ""'''''rpM. 

G2.GZlI 8U75 6<.1117 ",,~50 ~. 

".~ ·3o!'on S,;;"..olowot.f"WOd 

·1I(IQBQ 

6737~ 61~75 61-l"~ 

,~ ""· ....... """ ..... d 

~5.0IJl ~. 

,~~0IJl ·7016 ~. 

'"~ '7~.331 ·'7117 

- = ....... ~ BOOt<:!I .~''''''Fb~ 

,~'~=:':~:.:::~' "-~9"-.. ~g;~~ "~'7f$Q{j 1II;~:f::.M;;~,~-.. ~500' ~o <~69·v·~·~·~s '·~~~'~-::'~=t=' 

3 CIlXN" ..... ' ... ""%S"HIOY S,,-"1~ PrbI """"'''"0. CD ....... H"' ... ~' ... Sl1 ""y 

CDXliAHYa""O()'O;S1eosY 

" ClIJ<.NAIClE>-3'ltS(X['OV 

" CIlXNAI<IIDXSOIl1m' 

" COXJ;AIGIlIXsm-OY 

" rn ... d ••• ,n ....... ,.,..'OV 

rr"..."..n22_'~{J'[I.S0907>' 

" ,T_022_,0,", 009 '0\' 

" rr.--lOx'"""01Y 

" m_~!OXSOO'1!Y 

~;ii.:Hi"·sOOo.yC!lJ<><"'frl~'S"'S1007r 

COI<.NAHY'';''~''S'Q ""'" 

cDl<.NAKl't5·2S..,S"""Y 

C""-""HY35_'D""'SiD~§,( 

10 COX>iA.LG .. a,,"SOe16V 

" CD"' ...... rolox_n1Y 

'Z ClI;O:NAKlIOl(_'"V 

'3 'n-___ oQ",,,,"""(IV 

,~ rr~o2~·'QQ"'OO9~TY 

,~ ~n,'O",""""il!Y 

'51~nlD;O:SO'01Y 

" m-."'.,mIQXS"",,,,,, ,. m __ lDxS,6G.v 

C='lAKV15·ZS,," S'O ,,"Y 

COXNAH't'i."...,S"O<SY 

COl<I<A .... 3S_'O",.StOOs.-

'Q Cl,lJ<:NAIClE>-S ... _'".,. 

" C""",,",IGI:lX$OOOTY 

,2 CDXNAIClIOXSl!l1,QY 

1a~Q-1I,,"&DIl'nY 

,~ n,...,.-..12·'OO.,.!IO!I07Y 

'5 .. r ............. 22·'OO .. SIlG'!IV 

'6~IOXSOOn7Y 

t7,T~(lXSOO'OV 

au,! 8S75Q 

'05./;:16 100.000 ,0<5.52'1 

,a',o.s~ 

.,760 1ll.1oo 

1i2~O 

GS.7!\(] 

l~Q.noo 1014.250 

. ~ .. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

-lQ70 """" 

~111_~ 

"iI""'poc.o 

5~1Q U"",",I ""''',,,p''''. '''''~ U"",,"I l-.tp""" 

",",0 1Io ..... ,o_' ...... ~ 

_ Pnce/"Ogl>iorprica 

~ """''''g...,.~ 

'"' -, Oigl>orpoeo 

.,. ,,- I""""p<\<' 

~. 

""",,"' -''''''''' ~~7~ ~ .. ,._",.,...d "P'''''''o''"'''pt<<>d ~. So ..... ",,...,.,,,,_ 

- "Pro'" ,'''''',,,"""" 

Sp'.I1.",,, ... ,,,.,...d 

17 

JPM-CIO 0009740 

JPM.{:IO-PSI-H 0006746 
704 

Appendix C - CIO Transaction Data 

The following tables set out the following: 

Privileged and Confidential 

Attorney Client Work Product 

MavlO, 2012 

• 'SIZE (week ending)' ~ The average traded volume for the relevant week. 

• 'AVG PRICE (week ending)' - The average price at which CIO executed its transactions during the 

relevant week. 

For relevant observations, please refer to appendix B. 

COXHNlV1S·2 .... S111l5V 

COXHAHy"",,,,,,,,,,,005Y 

""XHNlYIlXS'~"Y '" COl(>l.oJ<;"' .... sooo:!V : " CO>:N-...c""'",,",OV 

" COXHIUG.,XSOOOrl ,.~ 

" COmA.lCIOXsog1OY ,o.n~ ':: !.)!~~ 1.1:'''' 

" ,~",o""'''''9'0'I' 

" " """" 

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...... 

... ln~·''''''''''''~OrY 

,,,"""''''''''oy - " ,r""" ... iolOxro;Q'Y . " "' ....... 'oOlXSO\llOV ,., ". ,~ 

'.'T'-<"."o"'XS'"""Y ... ".> .... " .... " .. . ~ .. _ ..... - , ....... > ...... ... - ... . ~- ..... ",,0<-. .... _ • 

~, 

" coXH"",,,"";S<lI>,OY moo 

" COXNAJ(C>IOXsogOl'Y 

" CIlXNAJCIOXSIXi,OY ,"M 

" "-",""'2"'OO"S<lOOl'Y 

" IT""""''''~·'''''''SI!''ov 

" '~_"IOX"",,~?V 

" iT_olOXSOOlOY 

" rr_olOXS'.",y ,4T.l' '40.401 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

,. 

': 

., 

.0< ~ •. _ •• ,Y~L ... __ s.!"'" " .... 

" 

,;:: 

'.IS' 

" 

" 

'" 

6,ll19 

18 

JPM-CIO 0009741 

JPM'(:IO·PSI·H 0006747 
705 

MARKET RISK LIMITS 

l,P.Morgan 

BANK PROPRIETARY AND/OR TRADE INFORMATION OCC·SPI·OOj17682 

Permanent Subcommittee on Investigations 

EXHffiIT#37 
706 

A: Market Risk Limits Overview 

Multi-level limit framework 

11 

BANK PROPRIETARY AND/OR TRADE INFORMATION 

'i'MfllIlH,liI 

• ~""'b .. ,gnodw"""",,'a~."'''''I''''' 

"I'po~'" 

_NOo_'UlIIOhoalli",lts.",bO""' ••• _"I"'0ifc 

.Q."ym""""n.,goll""""on", Iom~ 

_D"yo""" .. o'1<ilo",,"'p<><1'''!1toh •• O 

oI'.fe"'OlbuS'"","SI""""<I<!po"""'9"" 

• e.,,""' .. "''''c •••• ''''m"~ 

• R""",,e_w,\hml'ml~'" 

.I.P.Morgan 

OCC-SPJ-OOl17682 
707 

A: Market Risk Limits Control Structure 

1.P.Morgan 

BANK PRQPRJETA.RY AND/OR TRADE fNFORMATION OCC·SPI·OOl17682 
708 

A: Market Risk Governance of Level 1 and 2 Limits and Thresholds 

ImlJal lImrt Approval 

Numberlnplacr. 

• Limil requestor and "orrespo~ojlng - Lim~ requestor and corll'lIpol)dlng • L""Jt ~q""slor and alfreSpondlOg 

Marilel RIsk E.ec"~ve5, plus one Malket Risk E~acu!ive" approve Maf~e! R'$k E~~C1JjlVes agree, r.o 

leye\ ull 10 orgamzatlOn approve; approvaldocumen!ed documenle~approval,equ;r<!d 

approval documented 

• Bl.ls;nessUmtmu;ttlke;"'med\llt~ 

slOlpslOwardreduclnglj$~x~uretc 

bew<llurlhehmd,YnIBnaOM-off 

:~~~;:~:::;O~~:i~: all Grantc", • R"'9or1a<.linFndayRisk""ckaoo 

L'mitfThlesholde~ce$SJmreport,and 

tcaUapproversVl."mai! 

• Appnmmately100 

• BUSiness Umt must take immedj~t<1 

Slepsl" ... ,.r(! reducmg fts .. ~pcaure to. 

bE wlthm Ihe ~m!t "nless a On~..,11 

Approval IS 9ranted by all GranlclS 

aM Gr.onIBesofhmlts 

" ""~-- --- - _ ... -.~.~ ... • Reported In Ffo:!ay Rls~pack and 

UmltfThreshold e~oesslon report, ~n!I 

to.llapl"<>ve,,;v .... marl 

• Al>pro~im~t..ly 27t) 

.NotreqYi~\ot.akeactionlllbring 

ubhzabonw'ThloThoesh(lld,no 

documenledolle-<lffapprtlvals 

required 

- , .. ,~ ., -- --

• R'P<'rtedlni.lmr1JThTtlshold 

ncesskJnrepo!1. 

.0,,,r4,2oo 

----------------------

J.P.Morgan 

BANK PROPRIETARY ANDIOR TRADE fNFORM!l.TION OCC·SP1-OO! 17682 
709 

211.J212GlJ Hh23 .' 

Ln.- re<J1jesiSa¥er.else wneiJll!y we tly ld redueefunnerJheRWAbyttie end ptQl 20J2 . .'. . . '. . . 

~U:~lbtaJkedtOJlil;en ." .. ' . / . .' .. ' ...... ...•... '. .. .' '.' ". . IJ;jshalld~y-tH·i;e iil)5nda)1yetnpt.l~ riymay be~.Thu·s;.noJ,ne j)j fiI1e jcfndon ;;ffice 

today •.. ' ..... . ..... ..... . .... . S~'best t can saY,lsthp{ttie'executiOfIcostror Onwlnifirlg lb~book;fre . 

PIQPoltl0nna1lo \'Ihll\' ju)ie!r wmtiifted ieAOOrn if I remeill.bet well, . . . 

A~jQsted forth" .expiryt· '.' . . .... . . .' .' .. ' 

ArId the qUrati<:in.shPrj:egl.ng thIS gjve" .. 2oDc·3q.0Ji1·pependfn~ orr-the speed.; 

. ;Pram~f1afti(f-Attaj",jaWed( 

.Senr: 12 J1!f1l:!aIY2(J12 lV;:3/i . 

. ,io:'iksfl;:Pruo!/M; Hagau,j>Wlc.kS . Subje.ct; yMhigb .corop.Mi;dtoIB ,.Ne"d ro'IffscLWs. 

IfltereStil).ghbWmlicl1·wediy¢tslrY tM.lfJl!JiU'<>nJ.'ARtetms, .. Howl;.;n ii hilt be 

lh.e r:al:efrir CRM will r,emafIl on:eOHhe.great my~iiesurytil we get r'leepe.nriro fhe.resulf!{oFt . 

fg!l!i\)l~. ....... . .... " ........... ' 

Var;!irCfeaseS;lflot( n:eepseIfingllroteC!ii:rnl~ j1Jl!!n,ipuylng jJrotediim ltiJHiYl't J!n~ DS:llY' . 

IthihkIwillll~ed tDfia~eiri5 numberdai!y,.; so t/j;Uiuni?otbe tr.ade 

r.espor/lfJi;liJforthis.iIJ rite futJiteilcr:ecKQi1meg-r-lluP Y~r Will.JnCi'ease 

stiQsequel1t1yfq I11Y tli¥nVar J:JldQ9i'ian. 

Permanent Subcommittee on Investi ations 

EXHIBIT #38 

CONFIDENTIAL TREATMENT REQUE .. -----------.. J.P. MORGAN CHASE & CO. JPM-CIO-PSI0021879 
710 

Bf1jtlo 

From:. Mart!rl"AitajO, JayjerX 

5<;nr: lSjanUtiTy.20'12 15i~1 ." 

To"lk!;il!Bn;nDMili~fJim! PWiekS' $~Ujet!t:;Pi!y:VI1R lIm[tbrea¢f1 

1*/1I20J'1 . .' /. .'. •...... . / m,~e.f1rrg l'fitlrll]~of1l{W!1ri!iJuction pfa,! 

. 1'rplJj":.Perf'llTltiflr:Andrew X 

setifnS )ti6i!a.ry201215i57 

To: serpico, Gina .' • .' '. .'. . .... / ./.., ee: If<!;ii, Sruno M; Martin~Artajof JavIer X]'folaef/!;; ,Achilles 0; .HarJanJ Patr,[ck S 

Suo jed: Meeting maretfal~ for 11am meeting . {(nportanee: High . . 

i'leif5~ fihd:a.tt;i~"eiJ ~topY"'fthe meetlhgtrratefiW;furBra's3pJi1meetiri9~lth )avi~r,Af;hille$El]iJ'BruiJo, Any:quastions plea)5eilo' not neSit~t~. t!lg 

.I;\;stlfteconfcal' wtthlnafli bIg j"'~uel~ rai~ediirDundi:hec():sti;f' ;tra.d.i.llgtbeb·oo.k.1I0.wn.hlRwA·arul1lre pot.entia:1 til.l"fY. 

: tfpin:!'I(irtTn·AIf?jrjrltiyj~tX .. : Sept: ?J):rilflua.rY20~:ZUtOO., .. ' 

Tv: f/il9"n;:F.atticle;;rJISfii/,1lTY/)Q iii 

SUliject:iW: Biii8eh offit'mvar 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO·PSI 0021880 
711 

Can We please write abolJtthis a quick note> Fast ple .. e .. 

fr6fn,Gb!drniirt; frjln J . 

Sent:2QJal)wiry 201203':08 TiJ: Stephaht Keith; WeJJaIJl:ld'i! 

. F.i-om~Maftin-Artajd, .J~Vr'ifX Sent;.2D January;20121i;QQ 

To;' Hag"nrP!ltrick"S;.lksi/~ .Bruno tir 

SUbjett; ·FW;. 13reachJJffjrf]1Val' 

f~rF.;G.i)i4..i;jiW,.ItitJiJ) . Sent; 20Janua;y;i!D12D3iOS 

Tc'. $t"Poarr, Keith; Wei/an,!, Peter. ..•. pC":_ :Mac!i5.;. Achill~s 9i·Martin-Aftajo; Javier Xi. Kapmtgis, Ev~n 

~l.1bjeCt; Breach p(fiim 

23/1/20]"2. .., ..."... . . '. /. 

TheVw ke;:'ps e)[jl[odes'aod'shows :upaUhe fOp ·Qf;hejir'ffi.;~; 

W~: wi'll· s~rt: tn(~:··oi.rt:jnJ:fje. cotrilri!i payg.5~rprg··-today,. fijff;}s ":et~ilfaii:a5~fi1~ 1 

khDW,. To saytf1e l~iist... . . ..... . . ..... .'. '. .' 

;[ IJeed th.e marginals)" <;ates like {his. The.ma.igi~aIs ;are .. the ,,/feet ~hat.a 

margina/cIJange"n oneinstnJment haS on the Miele rjsknlJmber; !tis different 

ftomtl)econtribqt.i"n of One line or on~pdsition.to the total. Because the 

meiJsure isn.Dn linear; We dilLnCft hayetbe l7)argi11als .filstwe~ 

Frofl)! MaTtin-Arl;ajiJ, JaVierX 

SIi'f!J;.Z3.Januao/2rii:i. 1iids 

~ t~:a~2J}~Mc. .' ..... ' . 

Spbfect:;FW: Aggtegl1ti"CteiJ)tViilR 

pleilser~rt .YDUjje~rfto M(;Jutethe VAR tot tacJi.aTtcrouritif the new VARmijrie/ 

is operational. Want to iJiscassyour limits uhtil we s.oltJ:he problem we currently 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0021881 
712 

th~~v.nlltilctiC<lns back be/oW LOin' 

j will see In a'loC/o more,.ll/ot 5qr~ a(illr aboutth:e 'ih'fpa~tiin tatal VafthoJJgh 

iFjo;;': 'C/iaodtiiJ;safl)e'er eX" 

S~,,!\ift;l Jilnv"ry.'2Q12 16<:'30 .... .... . . '. .... ..•. .' ." To:' rksiI,fJ{IlniJ;M;tJeSarfgU/ls;. f5.ffcj13afaya,[.uis ~Ciprov,t.;Julien p -o(;lstephl!/J,f«!iIJj}~~ei);m¢t.X .' ~ 

SUbjf!.ct:~core. Taatia"II'<lT'2;lrdJaa 

2ijjj/261~ '.' ...... ' . .... .' .. ' ....... .. ' '.' ...•.....• ~JhebQ6!S:s'$):!irt¥ toI<ise money;i:iiJl,!1.1ln:tPnlioJiabi¢ way, • .,J·piepare slides.fot'the 

ISN.):Gme~tIDj 

] sen! slides fottevrewfoAtldfewi'ertyman ana jaVier 

:t will h10Ye ;~oll1e slide~ f9~ tqemeetir-i" iii tfiein<:ltoin9~. n'oi the "nefor 

t-he affehioQI), . . 

. Ff¢m: petr'Yi/1<!Jl,.AIldnrwX 

$ent: 2.41ahuary.2012,Q9;1'1 ..... ...... . ........ '.' .'. . .' .' .. ' .. , 

T9r lkS!~.£jrpnoM;fJrovm<Antt?tIoyMi Uzu~er;Tplga 1; F:olyc!ifonopou!oS, GeQrge' H.;bern¢i:, aodYX 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. J PM-CIO;PSI 0021882 
713 

Ci;;Millfin-:Am)(J!)~vJerX} IMiiritljlsr EVon 

SUbjectr 'l(eekfy;;H1ATppics 26thlaniJaty 21112 

Here is. t!reII1essifge' 

From; Enfield, Ketfh 

;;ept: 26 Ja;nuarY :/01208:00 '.. .... . . .... ........ . To; Ma,ii5/A~lieS' 6; MartJry-Artajoj )Slyier x; P¢.lycf)rorl.ppoUlo~iGeCir9$ I'll 

K;;limtgrs,Evan; chan,tbTIs~.:; Ch~ri~jRE\1SonKI<: St~iJhan(K€ithl [)0091a5, 

JamieP; Iksll, .Brooo M; \Jzuner, T6Jga l;.llr"ClieYi John q grown, Anthony JiI) p'eTn~r~ andY"X1.F1~!1lin-g( Lorraln~e.:M ' . 

C<:.Bates; Folll T; Lee, 

ISMO'mee/ihg, Je1<pTain tne lOiS coini!lgj)ithe'1:i6~k mostly rroU;13eries r 

underperfarmance'ys iliematke!l1illy 

ThenewV at mOd~1 is fs the pTd~ss o( being approyed 1M 1 jlanriol use it"6ffiCially 

yet . 

fromfMaitilJ·)f.r'f:.~jOt~a~iefi, 

S~rlr; 21$:;fa$uary.2(1J;2 IJ);57' . To; l/(silj 13[UIlQMjkaJ1iln., l'atriCk $. ". . .' 

SubjeC1:; FW'.New methodology fJ)rV<li"jiJmp,~ .JMPDF!,TANT 

FYi 

f'it5iir: tiJatfL~cl!rraj6iJ~~jerX s~ntr 26' Jimuai"( .201,'2: 10;!i6' 

TOlGo/qmilnr;Jryii1)I (!,fewdl1~ 

cr:;.T'!ac(ls;!;chflfe, O/WeiraJJiJ, P~~"J" 

'Sul:5jer;t: New mefhOiJofpf/f.torVaf1ump·· 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI 0021883 
714 

JahVarFihafModel.xls 

. . 

(lSi KOJ 

l')J(~) 

'pj~q$E!fet:me ftr0w ,;,;s;Qtras piJSi;ibl~:wfref/1er I hav~ to take;ai;ti~IfQntheold J'n~fhlj(!dt!1fJY ;Vl1r nU!1'Ji;>er,§" fill" I·fjnrJe{$t;irf!i JsMull!. waft ~nif fi!ViJurtMtiew met!1oif6!qgY:l'$(ilta$i/ie¢qr~ bi5ok)s.coni:ei-neiJ·. . .' 

Ali Id9 is !-roake.suret/1at the v"f/J)rthe f,Jcticaf'book r0rD.ins iiifthirrttie limit, 

.Whichitdoesaftfjough -(f)a.a:rlO con})rfrJetion of to.day's rl'stilt.; . 

1 t,,5.teif tOdil:ythe margJ 

2-7/112..012 

Ire<lI!!!!1noJ~vji;!r <in In~!,Ijl~~&iJ) .ttl eC5D~ .beta lii>!!i~f:l:erk~ii .• kttlilj,\! . ... S!llter.nent'I»)e!,d;t(),l:!)vl'r,some.d.e~"uli:r.isk" and thu,sl J)eeillo,s:eU' 

l1)o.r..,., pl"Pfectiol) 9n l.~ Jfl!!! :M.'110 1()b,i!laiTc;:e;tJ"~ ~ite¢j:lonaiity' tif thdiOOk. 

I,here;1;it the llmWin -q;Q1. . . 

Iwilrnee!1"'n"i'rC~iis(; til the CS1111!tryit in yrderta ret/"',;. fuithertIJe flDJJqMls 

.af)d seUb.& bookJ'or'.a"sT)1ootnerJl&L p.ath; 

1'">1) ctJrreri'tf; &nttiJiiJed.by tfti;'/frnifof1iJ!i1 ,Csdr. ifiafpreye1Jf, .• n:.eframiiaYJnij . a' d,ecel}fconve;'<itylf'.sp{eads tlghrenmostly. . ... ' 

This is due to the current e"posUre We have.now ondetaults in US FlY·r We may los~ mO}1ey on de,fauJts nQw because f ci1nn~t;add fiatte 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI 002.1884 
715 

K~it.h 1'Indsbutthatwe.aJlowtheillto benefit ,Of an RWA1:!iat IS below 

thelfreg ~lat"ryfloo:r.·Isuspeq thlsls.why my own RWAis so blgl1 

'. . . 

yes qurt¢ i:"rry~rile.nt;to sion thE! flapt"Jcantell .. ,;being stuck to ;tli~ ;'of 

min: Narfiil~Aitajo.~ Jt,vlerg .~l1t:27Jailll"r:Y2.QJ/!i.1~:04 • Th{Hagan,PatrickS;)ksl/;,BrurroM' 

SUJ;lJ~~t:FW: RIiVjsed f/oIJti;alC.wfft;J y!ed;;fa 

intl;:restiirgspilt 

ftpiir;~ ;f~tihi1r11 j<eii:h .'; 

Se.nt;27JanuarY201213rOl 

TO,~MaI;tin-AftiJflYt.JavierX '. .... . ... , 

!it)bjett: fIV:: RiMS,,,;! floor-calcWmjjr!e rlat" 

JOt.OJ.filOl;2 

x jri~reas",ilie CSOla~dtlfiS.taUSes: worrle$'altho\lgh t~!!'xD7oc5th js >i¢lY 

b .. ~il)lI' , 

" .0 J~~ief at l1bS:7.; •• 

th .. tSOt nasf<'i!c;JitiiifJ:1,"MI1S0wIiJle t1r .. i,ookii;,,,;n!yirr,,rgi~'/lYup in 

.f.(J% C.~or:tlg/fettl(itg , ' 

Jii.th.emeim/;fme th&A0tJk!;fj[/pro~ldli lbJI) protecfiiin.fri fNi'warsttilse for the 

group,on;, ~pread'wfrJerylnf1' 

j Mt~anf"rJ to Iellyou/iaw it j~tik5jike; '1 tediotitJ,y,)sdose tPW/:Jirelfr,,:Podk 

siJQlildbefo pe71eU/;(ilJ wftl1.milnrets. . 

Ilhjnoc 

':lllfOV~ot?;H~nt~ endand'i:hayeti.repprfa 10$.5": ,I hJ9IlUg'hii)ly' 

Inability to rieatlYJli:'eVenttheserilOs.9 foriNards.'to drift':;>gl'lh'lst!ls 

TD]a~lef;ft J~h42 

We have it" ~port'i11osSIn ·tJjeWidelliJifJ'!odf;Y"miJth.,es$l5ecafi.S~ tiTe book1Jas 

a 'long risk. ,bias, 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO·PSI 0021885 
716 

Cbm~." mOlithM(I ·ilflc[fvilfimnotf.e"JJY jirc(efittbe fQrrrlird~prei.i#lrQl)7m¢vlrr!J lip, 

We getdoS,jrbateam d~Yth~ deaHm;.report-unn!lIa~re run';,;';jder,bld'as~ 

quotes ani! tiJfH:Ost ils, 

To trade t/)e[r1 is' ,astir and leiJds to increase 1n nationals. 

We 1i"V~,Mmeeviitence liJat1lUtr;oUnterpilrties 1)8 

l'1i'ssagHoE:vAi:i:\V~erei higirn~hrll1e !i1@.te.ri~:rt.lh!wdoW~· :17/152-... 

ikn~1V thTs. 

NDwise~the.tEp/jl~;'folj;laf1IIdI?eehowdlfferent "ndiliJi#ltN;I;;.cokj .. i~ fhec~~rriflt,etIJP' Nc!f.ttf(ii I ·<115cweF"fh~t,. Md.! 3edhatyril./trp to TeflJ0Yeof!)e 

amP!fjuities herI;. . 

T/I1sttffov;o.e my thDTJg'i'!t'ti;m ~hi?miift!'I; aitthe rnQre so"${heb.OPk.h,,s'jJ 

miited,!fdraWdbWn WIJ1r:hdnrnyvjew S.hOlllr'i <1nly becur?p iii a i'i.l.fJ.offfn.rxJe. J 

gi!¢lis.1."nsye·O''resP.r;!J1#billry b~~imd .. 

Ayah; tOJ~i;iedorMonthen"fBh:Z4 

1$0 the wkoiesi:reet here is ft;,,,;tIJ9aridItri"'rJ .... s'1n:re stbiyali 6>ietth:e book.pan;;, . 

TDjoTty.i~·;.·~~pii:~n~r ••.• i~h~ti· 

iiiecyp(J a;,,,il,,ble'ror~ ca!l? 

f'/i;irii:.Maf<;in-A'rft,Ji!;lariietJf 

Sei:i.~; .30 li!(lI.iary.ZQ12 18;29 

Tb:Iksif,Bruno M 

£;u/?]ectiRe: so th~ whr;iiestl'f!~tM"e.Jsframi(1g andl tried.: .. Sarne,srorY'iiil plier 

the.bookpatts; . 

. - --

'J.,~t'? !>eeptryii]g tWriprro'v i'/ndwsdthen , !!ilaM.i:~;SgQr"g t9be'nf,~deg .orr!:" ~9agL' ' - c -

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI 0021886 
717 

Sent: Mbnd.y, 1anuary,36,.201:t.o6;~fM 

To;' MarfiiJ .. P,r 

'(~,;~;i~~ate!~ 'i'.Qiriinpiff l:;ofe ;;ft,i!itfJI>jik .' 

l;'eckopwe trayeanot;,;.; ~ciM cOrtjil){i.f.ror/; Cpxii;g exiiifs;rrL Thsg~y;s haVeil. 

MJie SKf'll'i ti:ac1'1 onari,d'tllf#YYfil/rJefemiit #:5 j))J,JciJ ,IIi ",ed6 .. 11h1~k J shoald 

tak~ the/J'ilf1f<1stovir to.[fidl; monttr . .1ffave mmt imt It1lt7/ootmove : they haVe 

mav!}d $OmeOr tim.setrqdes ;out .ilt £lOAbUtflNP, CSFB fjnrfB)lRtLAYS gorb'r 'the 

light, It ispointJ,esJi!ri i'l)yvjewto flO fora flghr; We will roil fJoWni1nd recov~nhe 

';21"13 

. 6kthey re?lIy Pf1$hogaln;sf 1l11(pos1tlbn$.hei:eeyeIYWbere, (hefe Is mora Pilir,tp wme i(J fiytoa! altit9.fcoPitoi cori>e~·b"ckj~to .l:iasls;;ndske.wY(ilpesJr;</ir See " borj$C!m~fj{! lieeJlthere sPtei!dsWidfiniiff!d9/,lYHto npt:9()lof)g ti%k 1f!Jrmak~ 

basi$ iitbsWith ;a.iJear1slJ view o'nWeaU name);: t/ete;Wl'fshould'JitopadJ:ljn!l ifM 

tak". MipiJJrrif ~ei250mcomiri~ InJf;9tiiI wmt;imn'ed iUjd,?1iotirer.5{)m!nljy, 

.ilh48'y,,~plalii abjt I1'iO";'Wh~tlse"ean,j .unil~f~tand 

They zjSi'tiri/p;fferef1ii~r h.etweeh>.ifJgie. ii"mee <Jnd indices,usually;sk(gle 

·l!ames trages wiper ttlan indi¢ in .bJJIJis!; rfJ ode.. . 

This.l$~MI1JtiretfrJ;:Ca:se.bh tf).el'dfiit;;ni .spfearfweMV~ ·ii)9~~.ri;k .fixposlJ'm 

siinply.bect!,usewe,have spldpfo~ecliOn pI/the way sIIJce.(astyeqT. 

'fakl" ih",a,se 0(·1(;9 'tpnie' 

JnjG9,bet.d.5f! at 'RADIANahd MSIApreserrcethat have biJttr hlghiJP.fr~nt single 

l1am 

23his~ .. a different subject .. ·apparentiy 

ij~';rY KIMZil'jjiif)!,,9tlie.HYihdexftadinghei:e if> /1'18 Ne~ Yotkan~ he wiJi!irf 

fiki;tokESlwwllel:!JJfJr theJ:;e,i5~QmeQPPQItu/1jty fw./JimJretf!at<cro beit.New 

Yor:~··or r;~ndor· -

ttf)6u!ififl'{lorb.ebe'ciJ)J/dtryttJ fl1ii~wiiJ:J you .whilfi YOQ:amjIJ Ftew)'ori<!/{~h 1lJ fof7'i!;fI'y, ' 

CONFIDENTIAL TREATMENT REQUESTED BY 

J,P. MORGAN CHASE & CO. JPM·CIO·PSI 0021887 
718 

{:~t.me'knrm. if'youcaa flOdSfJme~p~rf!tim.d'oi'~ff)1 "tid he wiii:r;et In "qniac 

.3!tolfziJi.2 ::.QfriCi~If1ti:uitj,ti;jii,,, .ii,"PiJJiJ j~$hOWiii!(rik~tJ4 rtryJb. 

eXpl.,iiitQJifV,iel' 311C1'AclilfliftS'w/iBHs flQfngol) . 

Fw: cotIYPOOkP&/ arawdowN and rn~ih·expOsiJr~$ 

I SMt rlifsti,emo to. B.Cb1lJes ahea!1 of the fsmg m~etJngdam 'tmvejJjng'barkfb 

fondon .. to,/ay; . 

Redacted by the. permanent 

S.~mittee on .Innsdgad9lts 

Th'¢b.p¢k CUffeI1t1Vr;o.pveys:'; $POrjrisk exPQ.~[iti$ Hi I1S hyl!hd ii/gild 4s/< 

£Xp05U,."Jry 7g1n(i)ce;; series .9{ bot!) (:D)(,aniJ1tra)<:X). This exposure balan¢¢$fhe 

jU${[trr;;Jef;;,ulti/$k Ilf thf{I:JPoi> :; We Y/apldIqS!i JTlo)1ey {lOW OM'. iJefault1"llS "1' 

iifici;rnake mOttey if the Jiefa61~Occl1rsjn1'g: worfd, Dflli.Ci1ri sammfrtiZe .tfJe :n.et 

expo!iur~4s ft/fe'[fJJrfkva, 11 PlJlf!sl1 flatWf1lltS iiriffl!.hrta .bffarish·5teepeire.ts :II! #h ...-. . . '.. 

jl/O~/2iJ12 .. u.I.date,; thinlll>'jjei worse a!;lain 

"i<U!~yk1!~pPla)!ii)ggiItnlisiri !tNxx",ow3wilishow uploY'5mal!in the hope we 

canliriJitthepaifJ. '. 

a".fujG9,tnirig5i~,ikinqd:rblffre;'nptth<ifweare;imvMeblJt1Yer;arr:;bPwt.h"t 

w.l:!iI~f17,lt"t lIiitjt Put. OF] te~li~tljj l?Yei. . 

t wi,1 tot Hyarid·wlil keep youitlthe}oop whei11haye a .l1na[ rn1mb~r. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0021888 
719 

:1 (2/201');"", "'~ ,,",ofICo"ut t"ftePNLbr""akd9w~iiind'sta:rtljjv~$"'gil~ri!l 

wli~atwe~'l!do ~ 

Til"Javief ... 22h08.: •. 

We .JJtokedaWIftheP&i perJila~hJlifj <tem( catfy,newtrqc/er ditet:t;o:oglil:'!, 

compressiory, (orwatds,.fWsubilnc{rores) . 

t1)e}ossln dlrei:tlp~aiffy ~m$" frolnlMraiJYlh fft;Tni' i';proVementfnneW trades is due to iIJifighr and sorne<J!ldft;DQal long risk. ill m#fn, 

You'W/llliDtlce 11)·0/05510 lin su/j; wMre we ajSo~ baviJ·ifijrw"r(iffi,cI~ &Miiiga 

gaDa tJpside:fn " 

212/20P'll:Si\l!il.tP)a;ij~r~~i:!up~~i~,~ p"'!i'w~ere t higlililihtlil" 

pote"ti.1 fiirther .ID.ssof 3.01114 Jroinli cu.rrent loss:.o1' .1QI1:!" 

TO~Ja\iler:i2h50 

312/20111; roritCiU W,ltfi Ina .. ~heteictl;ndiis :are teml>V1:dlll'iil{be focus j!q)Ut~h·th" rIsk Jllana gemellt:al)d the ttade·ait.:aci:iVimess at Javlel"s 

requt>st 

Y9r(w{llse;;, tn~ti'fre nVmber()fsrrde;$",Jjttlii!Jh!frfh~nffl,e'ct.ed.l.fhQ~9I]tt/je "presentiltionsMCMhave.some<irrn..xfiun.l mrrr.ml;f!t Q.wJ:hl'!~k~y(01) the/list::? 5/iaei;, 'd!ffiC(J/tio ,liimrrrflltte,' ..".. . . . . . " 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM.cIO-PSI 0021889 
720 

lOn{')"Q~?"tbe"'<lW rwa,'fillut!!~,ar<!Otit for fl!0~thend a ~dther.e 'I,san 'ncrea""., !t..y ,~.,."e~pl~illthatthe,;d"f!>mpres"iontr!,de F.ly~o\ler vers~s 

JGadd$Mthil)iJl~ ii'lg~J";;~e1ot¢c\lP1!:li1 consumpti!>n .. Thatnib.st Of this ,is 

;IIui>;tp R.ESCAP *'.1Ij;J l{OPAi<d,e'f;lliltS 

hello Pitt 

'fJ.eFEr;;"batjs,h~jlj:ienlng her'e'haPpyto hiJVe~il~ntitaii';~ !iata chin 

~ini;e;ef;4p ey~~i:i;iv:~;'aii ,iT MWdrIiWdown""frereis whaH<lid s)fi~e 'tHerr with JiJ!ie~! '" '.' ." . " , " ' 

[ solij;:isi< in 'fiYon, t/Je;fi1f!,;{ifY17 atirlffY15);iAdbbugf)tr;isk inIr;;17 "nr;i itraxx main It.,malntain'lrig QurlO%CSOland 50<r.C$Ol almOst fial toslighiJy flat. 

pLease notice tlJiit the, cf1Jde CS01.f that"a",sDm'es .a1l 

~"l;ti:ZOjl;2;;.·resc;~,~oift"i~Uffjji:!"'lNe:t~k~ahitall~in'in-OU;longs~nll¢ , tl:leni,!r:k!'t:tiill.i"~<!\ler:all In IWamt I'll: ti\J(e;!J19.th"~ h,Mrol!1tjiat." 

;rqt~e Wl);;I~j5M.GCorn";'ltt<!;';anilINA J1rewl:U,SO 

From,"! *~tl, "1?h:!'fJc/f1. 

Sel1f, D Feoroatyizi!.iz JZ;4fl 

TprAr:ewr" Tnq . '. ,". . Subject: Corec~dit b.oDk P&L.dr1YWs overthelasfwe~k.:. 

, ' 

Re~c~p:,lil>.t Wet/i1eijday, AU r announcer! i:he£Vj'e(e PtE!itirin!lapre;pari8a!reiJ . qafirtipttyfprP,,,scap,Tflesyt CD,Sj71pVfld PPfitllJ1 4qpts:to sa ptt!'ilJrJ the 

tnl1r,ketJ:;utlfJ.affe7JertIe yve toston ovc1fno(tri:;k posit!ons(ffY14fo 'hY17Faliif 

,we liJSt011 ow Ipfl9 *k 

To Jjti;ier 17h49 •. ;the problem,; worsen. 

we rept;Jtt"iJ f05s: topa}'.-9l1e' fq 2ompres~itJll of hy' aryd)(ovet '5pre'ads ve·~i.Js it; 

spreadS{elJrope m9sUy b.u VSteD). ' ' 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE 8. CO. JPM..<:IO-PSI0021890 
721 

n:K>nth .eird downw.ard. 

W.¢·/(eepifCkiibo/Je~gli1JJ/6i!fe!;'ivlth~1Jffjijbling •• TodeYthis is iii",us frY'Bgpff:y 

f",;'cb.e group milfked 'i/ownl i?D:ts .".lIt,ot anY·fP'l¢jfi'Nw's or ,inf/,e Ji<ipe:md.ve. 

. - AlsoSomllIiiJe }SPUf;'hif'lIJtlTe jnifex.,pre~J.; W1fJetfnta th~ ,Lohd6n'close; 

eS{Jf'eiafly flnarrrjafspr¢ads. .., 

'heClJ1'iesteJiliedtoff.ttenbuttheSeries J)rblf~ .clJ;jJ)gesm~deSuTetl're fbrwIJrd5 did ndj;,lighfel'1wh}le>ti)e.whole market. wi 

y~iy i[fiere~i:in§,teSS;'iJ'ry...;,#ga!ri Viie.jecptiJa /iJ5Shu6i:his is ;'ealjY.d{;~t;' 1nj1liJ,er 

?fI",fket vielrd!i11Jve: tfJi' 6t¢tds yve!JtJ!{!ta 4,2. fit!; Upfr!.ll)t( lJpJ,Zpti;:oiT tile . daY),pp'iJ !siry tiJe xo¥"; inaex, .VI'l}5 i$sued pcoco::bo/:Jd :thatwas·rWets1lb;;CrJb~ 

~iid li/frerY sold olf ip~n.e wlden!n!:!, Asa. summaiy,fil1s,wlde(teci a loLi/ue't.o 

gre,ece hE!iJd,Htie. #Qd)l;'i;ivefPiitpeffDrm~d i:J{ispiteJhe.gr~ete neai:Jline ,ami OTE;' 

'1~i2J2012 ~*.. .. I~ryto.r~d!i~eRWAandllaTaS much." I can in a bleedIng '. ." .. to Javier llh56 

(,am wor/)ih9DOWlJn'vi;C"'$:essY8r ~na Crfjl, Ie .)nfWa rija'rgl~al$b,,~r;d M:pat'$ 

,.iflOdeT.71>iSi5.i1lefir$t$et.f:,f"~f!Jbe)ji!cafJ I1se,' . 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI 0021891 
722 

·w}jetl:[er' we /:(a.vl<gQ·ridpala.n,,~; 

'~ornb0fji;st!JlI'iet6biJypriJJ;<,r:tfpfj tpi~(;jifi;EfWiI;Mtbig $'(ieil1litii~ss 

fhebfl.rd, 

fiJS!: ~nbM~'Q tmprO(i~J;be';'n.6ie6~%PfOlile 

!'rom: Mqrtr"~ArtaJo),.JaWe.t;ri 

Sent;j,r;' FiliJ(J.Jary,:2G1.2.JJ8f58 

T(Jlik'Sll, 1?rrinojVf· '. . . ...•... .... '. .... , ,'. . ...... . S1i!JjectJB'e::wre 4'e:iiftb!?oI<Pn1ci:6irrtJep(forlh,e jEtIJ I'.bll(11:2 

J;etisf~Ylew;6.n rn.o11tfaVwithPiittoptherrio see wfjai:gei:s.r~poffed;;n {hll" ·actuo/s. .... . 

fn:rr7f;JksiJ; BrurroM. '. . . .... sent; Thqt:S(jaYifeblTJ~iy 1(;, .2J)J2.trq;$i5 Nt 

TP,M,a(tf/}-Artajo, Jail/Ene ;'" .' '. . . / 

$[ibjecti{li.:'cPf;e;cre:dlt:bo,ciI<pnL Fommeht.fuitl1. 

. . 

1.012/2012 : I'Pl8rito,updai.,tirdSMG meeUng'~bo"ttha cbr¢ l>o~1! as 

Pi'lL diift.!<¢eps slrikllj!i . 

TO AridreW pet~Wt11i,h27" 

RE:s~we.;ii:frro.'pI""(Th,lIrscfaY23rd FfilmlafY20:t2 

y~stlfi;v;'sphjejJpdiit;' ftijij;1na!spfesef,tat;bfitb·Wefsmg· 

f;iiUneed t&g~tHel";spm6!iPd~ti!s 'I' 

Fnimf PerfjmiJ!:lFA:m;Jr~w X 

Sent: !i?b. febtu;flly;Z012 wriT TfJ.1~riJ.wl?, Ar!thi/nV/1r1kSi~ BfilM JI1[b~rrieri:anl1r xj.iJzunef, Tillpl1 Ii PQrycl;rof!0P9fJ!g$,Georg~ H .. ' .. ' 

Cr:: Marf:ifJ')..$joi javier X; KaJimtg!s"eVa'i 

$Ubjed;;SM.Weepy T';'PlcS:'Yfyutsd"!y 23rd February ~Ol2 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI0021892 
723 

:1.iI2/.20n r hew presentiltloll ".I stress upon the potentlal,1'h.:t:1.5ee 

cornlhg and,sol'rie features oJ tbe:boo~lo ,U"'<lnsioll all these e\'llh\:$.;ljke 

tbe'bDoklshLillecbtitthe market moifeishot huge wbile the .hit 15 '''ery la.rg~·· . 

te) :Javli!rar.dAifdi;"2:ihSQ 

. . 1i.,re~sfheuP4i1t..a#;;ntation(o/n~ IS'rjG 

1 trfeaip;"~ke3 f1eWPrif~1J;1roi1J ia~(pr!'s Jor Ina.: 

1- theP&Ldrift fnfebfU/lry i5focU~$erJ on forwat:dsa;nds/ipw up!nthe ~~nYf;sr=me.r(i:" block ,of tfJe' booJ{ " 

i"!:he fd~s /9i' Fei:frtJafj jisptl!tuiacm'ii!t/Jre bMkbyClip~pt 40'5Dtn .with bnl~ 

sli9f1t diift!;'qv,eral! ii!.$t;Jb/t>,m,I7:!<e,t 

;i I tJ1gh/;!iF!ted 'thiOri~i~~jiprM!e"T)r1tfjei:iirrYFrof!ie tiiihe bO(j~in ;detpll 

'. C • 

22[2/20:i:Uliifestv'j!,stiiri;;.lhlghll!)htthe potenti.:i:J>litl;lfi>lIowed!llt9 

llll.atcfer ".fill 

TDJ"Vr~r,A!ldV lJ!!i'!:!~r; MdteW.PerfYrnan U\l15 

fl.9.MB) 

2712/20l,2, liidde!s~omesummatycSlides j:hat s6i;w theequjliaient 

maiii -posItionS .lifllle . .bPQIt:ln :siii1fple jo·di.~il form 

:tb:Javi"t,1SIiZ~ 

iareStslld"!'i fort;."fe.credif 

la(fde(fsil(Jei4,ahtJ r>thatheip";/ew" wjJ"i.ffJ~ f;o9k is);' £R5ep4itivii{siid Sfiijtetiic'posJtiQf1[if!j,;'· '.' .. " . 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P, MORGAN CHASE & CO. . JPM·CIO·PSI0021893 
724 

211!2);21!12H nt90tn,!!n!l ~,i!J~~ jjleedillll., lWI1)'pleb'lIthepbsiti,~ri:b}' 

.... ~ifiij "p,,~ox"·7Ei.In: )99'10yr whe(el.tht>u,ghf 'he ph 'Was.;.sfor~inksp 

btyl . . 

*eft~ iie:eJls;i~·"kpiliJnWh·~t'~"pji.ellS:~ii{ii~ J!l'flIel'IlNL jO!~.,.i~ft5.1!;.1~· · 'Jal'ler:too 

, buf/<:t pointS on co.recredffliQOk 

A;,,:rjiJPJj&f.Wifh p;,;Slii'il!q~~vex.I~.y,P6S(;V~(arfywtjaml$an(fWiJq-5pr.c~d · WlfieJJill!1A1VP IlIlS1(JeQn d~f;!!liiw.y!'s-($(mJlari:p 20(J$,2009) , 

;,; tileViEW i~ "liviys liaseif· ori f>Mro .aaiflysi;S rhonli'Y.etlU9RDy:speeifir:ti"me) : 'curfently; we haVe" deedmpFessiory trarie on" to pre'e1!1p~erl;!1~rfln egJiity selloff or iJII.1rtharrblly1nlGsNce, 

3-the FGRE'CASTf 

14~14. T~ AI)~relil{ 'l>o;Ir,yl'l1ani~' wehave~\111r9Vill~~oineiipdat" p~tlfe 'book. 

Fi;?trf!"fiJrtffFAftf!j!l; 'J{jlfif;r X 

i;;'entt.i8 F.<:b.l-;ii5ry ;2Q1213;:42 rf!YS~ep,,;miKejth . " 

CCf]lpfiil,)3tuho:M ..., ...... .' .' ,.' , 

· SIlIJJ§{J:;1:.;'.RE:;;;;JiJ1ti)e.tfc:,CIti!(;!jtcSI@~ (rext·dr~ft) "" 

'/erys(llifiaftbwhl1t7 jUsttbliiBtUnot(}5hare with yoU, Lets9"CAlldy 

l'""ryfnaf/f8rt1[!Q,~ pl,it -onfl "M.e ·aiirlJetstheIJ review ' 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P, MORGAN CHASE & CO. JPM-CIO-PS10021894 
725 

sent: .2.8 Februaty !(.6i:z 13}40 

.1:<1: /,{OJ'I:inWfBjd; Ja . 

2!i/2/20.1.i. MD~tn;md5heiiiini!li1Ii$, •• 

:;ro.JaVit>l' .,.lhighilght ~bll~ta4egl:l\lfd t9I1ot9)teepJhi(PN.Lfiit!!!l!ler • J;<;iIl!'l:!iI22h28 -. . ..' .. . . 

lit';jv~ $.6f.d;'m.r5ottaf;iI!."mbunf:;>~fpro~~8~io-;'·l(rjJi"1{jYr(¥setp '7bfl1~iI<iay>~r ~.5m c;;Q{llmlitlJts .Wif{piJsltiJre .. tiDI j,eYPnathe 25m limit,. Tflls f~r:elf!t¥dto 

month end: prICt!: fiJDYf;;;;fll/it.liIifr .. !i!lJla.dv¢~altJiQlfgh we .a:JiJ/(i!imittbe d~ini!i1e. . .' . . ,. .... .. 

, reckon thecsOl wili/ump to 28m (iBolJ¢; ptotection fofa"p~b!l SPOkln. i;y 

andxovet) from2Sm tlJismOiTiihg. I went lJaCkJn~ide W' .25m Iimittlii5 mo/lJ 

,1/3/2.0n·; .. thedayafter.th-e hit 

T.1i)i~iskg~ysi'!i'jla~"r;' :Oflt~.~D Keitfi;sj:efaqShll4' 

~","'priginal Mess""" -'C'" 

From: Iksil, i3iuno I't 

Serit: Wednesday, F.bruary"29; 2012 10:27 PM 

'(0: MartiwArtaj~r ),lVier X 

Sul;Jje{'.t;. CO(f!.c!r:e.dit.b6.bk upliiim· 

l'i}fNnbJd irtipbrf;;nfafnd'tifit'siJfprotet.iJ(ffi in .;~g lqyr [dosefo?blhilfi {jay or. 3;Smc,pl) MiJijii$wil}PiJWt!ie (:JDl j;i~yqna the. 2Sm1irrrit;. T!Jisis>related.to fi]rjnthend'fjli~e iftov~5 t.fi<ltwereafi ad.yer5~ ilrthpV9bW~",0l1icflim.ltthe,.d 

tbi5lij"rljg'·!>J!?WsiJjitl1"C'~O,1iiriji~.ioriil·.I hiiVe'ta cDmeblit~iI'tl;ijt;asi d<l n<ithalil'·Y!'t'M'e>¢t~si.i)b." . 

t~~eitJ).~nd lilviet13li02 

. 1 reauaedl;75M Usd anitlwi-x 'th1s momio·g. 

YltiS:ishflitofwh~t1S:11eeiJ to .get ii."'Ck1rjfo th~25m lii1)ii,; 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO.PSI0021895 
726 

j.8h(J1 •• ;to. keith ,~;'.d Javier .. ,I came backlnllne .• :",pt '1ulte'unlll'Y 25m 

<:SOl 

Th#:0i1.'lra5.b~f!i1'f~i(ijceiJbji!'l.m~S:dt9diiy.sotfiai:pl!f!;tH,;·csOl·b#tb . . 25,!>m. 

ili~lJght.P~oterllofJ ';'~'mg{iJ (;ahlh) iltrIf xgyr/r {;;iOm).lb9iJ9nt.~~rri~ If! 17 

(Jti017liarid.lJ5 lIy (550.m). '. 

I.bor.Jghtirrthe'spteiJd tightening: Nowthatlt'hasst9PPeri flght¢iung J dO.not 

cha.se !lnf~$S YPllilrfv{se m'e fo do So •. 1. wtfl filliSh larrlfiht/hbpe With 19 aiJdfiy mostly jf th.rallY; te~uiJJe:;. 

t:i.ffietWise 1. wliJii ....... 

:G/3./.2612 '..AS hl~y~acQ;' comes ,ntheio:opn"wtoc"'i! ... p~~uie ·risks . 

betWlfeI!C;iti.'<fni:l tftelll;: j,ei;oi'rt,,~ from::tJ,elBas'jnostofl;he "ther guys ·d!>., .. ' . 

ijel'lyt6javie~·i:;h'2.9 

Itel. Nee<ltD tiilk .to yo:u a/iout;. pf.ese.iJtatio"ot.i:he B'oak :rbASh;ey;Baco" 

fr'pirrl iMaftjii7Al:tfijojJifVier)f .,' ., ...... ,' . 

$~ril:(r(JesdaYl Mfi1!0 0.6, @i2, Wl1? eM 

To!Ji<s17,BipiifYM ........ ' '.. .... . . ' .. ' ..... .....• ... , .. ' 

. :Si.!~J{{Cti fie11dtqti!)k tt>YOIl "b<it:Jt~J;riseritl!.tiiJn f;I(tfie. Pb'dk:'f9 ASf!/ey 15acoH 

.fit:UflCi f 

ir'l'ti& i!.hL~lfrJi~"toaf)dil,'~af!"'f6dar (5.30;'l'iy~p/tifijej tiratw!'!aldsUftine' Wf!JI,lVe.e.d~TQt;rfJd~fmi[1Sftot'TJioo. ',. . .. 

lctalled :liftie;, (,becam fwas on H.,llday) sothaf~ .. p~epares this 

meetlng"' .. 1~1f51 .. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM.CIO·PSI0021896 
727 

j.;'$iieahlm.iOworkQh~3tblngs 

. 1.- fdr tfriJrsdj'lyi .opdat:e0epril oreaJ,ddwii( forWf/;;,dlfiieiJoirqi,neV'i'triiqes, 

/lefffult.et<;,.) /In'HlJepf1U)1!i~iJrY.:th~rt " . ...... ... "./ .. 2-1br monday; lqOIj:,at""ll'ihf, pf??~ritaJ:iS1l1swe fliqWit!f-iWdy toG]mpir~!jeW .... set.or!iifi(jesdes~dbfrfgf1j~·rlsk~ qfcth~J:/CiOk,AlJdJiarfdll1}i~{I ;s'fjou/,(seqdX0tJ l' 

dra!i:"':erpiol1!n order?Q Q.f!{fYR"rte~/;J"~k (' w.h~t:Wgoor:t, :Mt1oC~ mlsp[n!/) 

3",t 

~ni~Olt l:th.5~.:.jmpl>itij')ttbi(tl:Jitte"!ll:he lJi" .. ijhjj., Achlili;!;w;JsJD 

"-'-~9rfgir,ial Me$!Jag£i~'~-­ From: Mattin"ArtajDJ JavidrX 

sent; ThursdaY,Miifch '01:>,20:12 (J5:32PM Tri:Jksil;~rurrot1. . . Subject; f',E; MOf}fjay me~tin!t. 

!(YfomlikeJh~ m~g~n!iil." e'ftlY#~fl~QSr¥ ~rt is: iti1f]ortam.j:wilr~t;Jft;DatYQU f1~ed:to-hf!.parf-otth •. diSf'U5SI0n:, •. lt 'Wilt Dea J0rig .-meetlng i3t9/iM 2 Holite', 'It 

will P.e::(jllly?I;Q~t R,', .' ,.' 

j.iF3,{2fU 2.:~"",pre~i!iritat~Dn (li~t~t';ifJ~!l~" c",!ilpatti\Qi! ~Y"l1ie* Yl'lllll\in!tebo,dl',a-ndits'i$sue$';; Jbmentio;in'thats(; 'farthe .. _, .' 

~decort'If'fessioncasWDrkedbutnOta lot, yet ... theroll wiUtng'giU:tbe 

.deccfri1presslon-and ";iidcfitional'losses on "the bO~~'h.1 st~rt IbSilig stee-pu 

: -.' " ' ... " " . ,', ,,- ,." . " .... ,-" 

·heli(jjfoftoWj;.!,pW/"$:pbiiMfi"f!(,/lifsty.,f!fi!IyPlfl;i~ na.Ve'" seconif look tQtIiJscprf%e~~"fjo.n'tPiSp;iifltlwit!i:AtriJy for fhe lSMG mflj!ti'ng pffli .. ; :23rd Filb'!ZOIZ: . '. ", .' . . . . . ' . 

. ~lfiti~~~1~7~1i~~~l~f~1F:&~~!!~~~W~~$~~:t~fl~~;~:~~~{~~)~;1~fl~~tit~~~1\-:t~~~~~~ 

rtlijl1kil)e511rst~fi,fes {I~;sci:l~ ¥~ijwey ttfelfijC;ic, th~ iJi~~;;lriR~rt:i(;';!a; ai$J!fWtf!.eM!iP.tri.llsi3ild9jves.~dti(/ qf,tbelicaf~pnh"ir!"ves.: This s~ows _ 

quiqk]y hOw the._Ifi2QJ(~Il ift:WaUy ./pse.2QQM andpossil:!Jy ailot:f)e.r ZOtJM while 

being r"J)ge bound; The t;oi)nection wi/:flliist year !JaTn !sreally'a ,Qo/neldence' 

tile ANR (nove: WiiS really .xa,ptional and -the spread maves ,his year-haye "I~rf 

been .eXc. 

·.'15/31!l1ll:2 ,tI>efpll ;;p.i>foa~Msan~ W" 5~a~!letUng fu."r" j/';/.$eL. 

T!)i;l'il~r i/fii4!i 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI 0021897 
728 

711", q:iyrit'jI~f1Ck{n{;;eaf;~$iJfrtW{e'r!.C:Nj<le,lf{i<i prlqi~ai[if (Juh es:riJ7(ate. 

;<ut:i"''' ><iLL '$:end;~sm<ilt$pfeilSJie'e;,tl'etordiiJ!J ',the, ifre:W";.m' of 1;h~ 

diver9'¢I',e' Per, blvd,s., , 

i!J.i {gg,,:rews idjl~,an~th~r JJP 1:o(,/Oj, ,the hYil?ai--ke;f~:t:rugiJL~~ fq keep' 

1;lf€,r¢Lty pgc¢ 'With the ,sp5ee. Res'pf1cW've ,~s now tLr:rj a~ o.pt. " 

,IiPJ'i'iJ~'t. the ef1f1iJ:Ytf'Qij~Iiif$ ,cre fl'Hy :!iffpact~~ n~"',. Yet 'the ~j cinqfces 

'keep perfDr!lfinfi ,weLt, 

"sii)ce ,m.ofli:/iendfae'$p~'t;; NtStqp event i1,ndgree(;e,)iqv~,. ,in {triIXtmd 

f1J1~cag }iaVe:l1!HJJJtay,¥!d 't'hetl' I'~tiv Yer'sl!s1.gl'aUy. Thgt ,{Ii 4bf'$ 

tt,ghter tor ~g17i Spps j'of'main,:':f6, ~1 ~ps, for, "Q~er onI12#C2,S PRs ' 

16" ,fly (it 'Oile ddiistng ipss ;m, rmap:that, :t'5,pd~e5 :0); j)er-~a~!1 .1101' 

iii; l$~'t$i'u, j:1r~t"'), in thlIj: f~gi1fd, .~ .RiieP :t/l:'''19 :til as perfr:it'!rfirtg 

L,t,ke,<tlre;m'aFRet. ,beta adj ust~!1,. 

rHew'hoLe ig9clir";~ijJtijjLd hriyeOufpe'rfiIrf';'e:ddctlidlL,y1¥;;;e i'(;i>~af 1;/;. ifJ"i;fPr:fflqp~i! .i:ff tql:}fai11jiIJI . ./Ij1i;;oQr .~fi, .. Th:i~1.$ r4L1;~t;e{iintl:i<!. {gil 

.:5Yr that h~5t~ghterr'~ ~ebps, /ll!1: rr,ot,tn ~g9 ~eyr'!Mt hq;',tigb):JlI)l?a .. 

L~S:s<'tba)j ].'/;pS' by The guri/:e$ !!II' "eelei've, IiIhat 'i's reaLLy plJzzLilnphere 

IS'ililtt. tM!il><''i4~On$ ·Of[VeJiO(f:/JiJflgt!{fJ.Ttre r:ds:outperforitlance ant! 

in'rfeli~riilf'rpefNrmf111te shti,tiLiX My". 'flght'eneif thfl s/ieii., ' 

We Look 'Qt",h~t j,e~difLd ad th." r211uc;e therJ{fjefep#WhrLenot g~00fl!1 ~lJ .. e pb.s'i:tiims- ·e~.et;:i'.a~Ly 'in i~9. ?'.l:re so~utJo~~ . are ve.r:J! t~~t~d ,1 .-some JiJU1J",9 Y-.age,S,(YUL<lneJP;. SolJte Ny tro<f~s too out the pr'in,cipot lag {;s 

where>",e do:nr!:t Mint t~ Mel. ' 

Jii~iItf!lqj;j9bf~P>ii~. MYinge:~7yran;ii~Y", in r5l'i'!er .to smobth ~tge !?l(t'~flctw~'''f tife baak;, ,This: "iH fie mqy Jtethii. e!lLUripl1 zJott'i]" p@/i 

run(Jf{, ,So J pr"pgrl!.,f"tfPI' tiJi}oytcO/lli', 'So for I;fi~ (lot ~hdW !1P ;'l,h 

th~.ini;lex!1fqrli?f.;:iu;s:t fest'i;nll "aterS •. I1!I(JY nof fwd ~~ze .M t:he 

't:Nidirg cosJ: h h'1,gh, Mt. onll the. bid "$~#ltt the irLl1)¢sf;ihhritre 

.qb}Lity' of th~ dealer.s ·to t~st tfre~r rU.hs,. 

-Best ,:,egdrds 

:Bruno 

.' ;lJlj~Tz.QU~ilrYtjiln;ji> 4e'SI!1'nln:9ii'''$I •• p~n(9de ~Jjriijeboi;k,i~J .' 

doulit we ;~"nexp""t;any Improvj!ment In the ;shjJrt,'tel'JT1 ,," 

T(r,Jaili~r'611ir.Z: 

. Ii:mu~~I1ilI$mghtlhatiY,e shoWd ¢Qirsl1ierlilittfug1l6tMikeW'lI'l!tie's,~)1 tio!liJij;iil9 lOyrand,i~;main,s9 tily": ........ . 

we could [ock6Qcts pvet gi)()d sizeJ thi)JK. . . 

Thisworild mliliitainthccnpside orr default,hriprovethe:<:arry ati4 basiciily ofl'sefl;he . 

~~s!:rwe hav~·n~w .. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0021898 
729 

.... As.1{11emlQnJ)edyeSi~~Y;tlesjlit~!htiraijyinRBdiim.M!}1A..alld SF!, despiteibe.lag 

in theJQ9 Wyrlil)ls&, \lie ~latw \UlSbwelycnaIiged> ". .•• . . '.' ... '.' .' . Inn.o\Vsj(i mea ;;;;zzllngQbst\pMiOi) on ilealer'side it> keep it like that Beca(rse1his 

.C>lnnqtbe1he res~lt:of)l ~ poliling1h,emarket on it~ o>VJjruone; . 

1ji1llJr.a\l~~'1l6t:Perfedtjlf¢Out'S¢bUii( es irr,l')lIFofflrf(j~el'S.f#li~ ira~ches ate Coif~ltiild, 'thatls'" .. " J1iism6neylS9litiillle4 fiqlll 11 rl\l)Vp~~Jntlli" ,'.,' "'" lobkSiimu¢hb¢ftetilpfionJhM 

tr'llap~i!'i~Qrnlt ..he.mdes'Witli the;s~'l' pi any 4¢J(leron:Qutlter])lll1y lP 

b16ck:ltades, 

'rhittra9es,cpuld fie bQok~d6it l>;sta6<WQPt~4iiis fto1i.i()l1l;cil.);hq\lole;;so,:thlSwo~lt! bee.;sytQ.irlarK (;YliliiUJl11\',tea®4 b$\le,hl'te) llgtee), .. 

Thecligt!i4jo/;iTIj¢Pti0!l,,,,ew.otil~ ,;peTa!em'ii!,ht ~so bef~v0rable{Qr1l$lp n;dllce 

sometranchi> lines, 'eJ3P"C'ialJytbe P'"3 )Oyr'Jil'tbat r;:gard. .' 

As ~:su)nrnarY : :Ne$ilti~es 

-adde!lge)'en4eri~y(jlid~~!er§ q4(ilOs .' .• ' ". . .• .. 

• 'C!oWngtadedjlrofllo lfihe b(jok:temains ,B'hij.) risk !>po!dn=tlit: 

.ih;;r).yat:iY:~~" .." .. ., .. " .- _" ' ..... ' .' 

'. ;slighi:ov4Joad "!lPpel1\liO,iiS dil.~ ,oflie sl!lgleiUtiii~ Dt>liJiliJg - W~ may ,h~y~.j<i::i1ll;i:easp'RWA';J)lliejltP\iilss J'Jt$i h~M 

pd§iflV~s .' . . ..... . ......... ..... ...... .... .' ...... ' .' ......, - >'I,e l<:ii:.k J'P.l\!LlnfQrnrbf:cati'Y fotWaiA 'fu~~."ffs"fsjlwcurr.imtiJmealiu11 

loss' ~d~s :npfatl!ot'Jh~ ttlilp~pj)fe;tp ¢'iJilS6fiiefu~rts 1'P~fd~ 'ljj(e1y}i~lps~frduiie.s(J111~re~i(iiu.gJlli:Ze:~P9]i'tiQli!l oji~e;Welitive:tiaqed 

:sii,e&(iu$ltelY .. ' ". '. .•..... ..... ' . .' .... ..... . -'{julie .boohd; very sirnpIYi<l,nark'Md.maintain .. 

. • illQ",.8.!:!s tOPi>yti1€.lf<!dmjtwsl:i>:w j;~n.heb96k;f<irruri off mode 

Thete;ilchmce to rtiake 'jsWhethet th,;~pokshould k'QntuniQtfril9di:., teWelig'l)tly 

filliIlageJtwfth a longri$k 'bias~. we WOlllda!1g"dorl'~L svilngs .and we wQuliljnsj 

prepJu'efordefa111j.t\s1< lQ6.kingJorward. To.be:surejJhis is ll'!e case. aJteildy bUi'jh" 

:ho"kt~ :00.1 in rilh.ofi)n~:lfthe b6oJ('sfiop~in rntr-<;>ff,Jhe ~kewtra"e wotjl;!m .• ke 

sellSe;~usewewould notl'lan·tlluiiwind,a~es~iyely ¥'wedid laSt l'ear; 

t,ct ro~ IiribW·· 

TO~iivler 15'1)3'7 

~ 1>Xl>laljltfie bIlD1i.$ttuCtllre.as IUs 

:we -liayd pJi:iciq : itfdti;!G.Wifrirl' 

JG~f§th~fat;~~sltrne ,&~Jfhe7J1~si'diJjJf;)Hi;I1'; 

CONFIDENTIAL TREATMENT REQUESTED BY. 

J.P. MORGAN CHASE & CO. JPM·CIO-psi 0021899 
730 

!tl1d~ide(J;t"" . ......... ..... .' ,..' .... .' .• ' .. ' 

"1"'dP·i)1de;J;/ffe.I qyrfW;$;;tgJejf(ojir!swli!'f!i!iiJpjfqftiptgWkti!1fS 

" 1[u)j.prl,le.cI!i1.Jjl.1i!J.:3, .. ~ni!fi!tj;I11Ii:J1JiiJ'Mflinl1l1'h 7YMJf!! J{}jq: . blf)l!JJilritfi!}>rotrr~t!oTl,lJl 7jjr ~SS?llprof,cfiiJn iflMt/;et,im}G 

¥tiiii.is'1h~ liitmaifji;WiP';" . • we·.ihoulddo if,. samdcind ill/cad .. , mtheprohIMict.$ thi:~dntr! 

Us fiyislhe lritkim One 

1tf!deidpl,r..... ...... .. ' . ... . ....._ . .' . • ljUYIIjp1rYiO }ryl/15.2j.driif 25;J5 l(dJfCltes tor611JJdV9riaflll .irrr/tfIl'fi-prfJ t~e firii 

de}#u/ts .' .. ' .. 

'1~tll'e.the.iquif;v!t4flCh'flid§lli& ar~ (ifiiiqsi?ielefiiil ..•........ ~ aad.iiomejta{12JieN in.11tl1,1iY:J~ Iff1 DtiJlctIff11i1S1iIileptisoer by 

Iff jfige.8W(1l ilJlitPye/hecar1J!.,rei1f:!CcIf. jiquijiilY" bif fiut aliow JortJ,'ilf}o/llhroil 

4oW1l~1;j;e lurge! isl/!b~ 1nlye, djprotetJiol'! Qnallequilj tr;1nches·,,'.ilfUs{~eikJaf: 

increasfrigb~.ffi7n.ei fbf'.lQ:ngpv§1;iiiQ wil/s:w11¢h;q'neutftilfasJ1jJiihoUlpj(tf!liiilt 

11lote; Nowf~~hes!JTi'{jfileis III b:,~p ilW.!ong1'isUlqs 10 statt .. 

jfr~i~th.e"rjTJ'etneirle a'$iliw.iififlcsize much smaller. 

lfY}th~frrQ1]1em# fhe'!ipsl<!eOlidefa:1ilt;.Someniii1i¢siitis't{l{ pJjlijJrpl!/oifii;riC { _ 

T%f;rphdreallJgJi),ltifi.fik.lhe nfm{lm1f! iJe!alil~is ljJrtiled)1J these seriep(BYi.1 i/nd ml,O)·"'1iere:w~·I!4~~ :th~ dOl!~l18I@.6ij;i1efq~ifs, 'rJie fillttime)"s Wi.1I need iii befoffiltd 

over ()me;li~nc., tli, JQiig;ti{k'i~J9.1ijjIi.Main /jlircks': 

ArlflrlS)i'a~idnoichl!r(g¢inq;erki[~theNOfileoff!Wb(jdkQve)";Ii.t2stofiis/ifi, 

\Vew(1rjl<isjmply:rficktothese tradt.~ Wld ila rtpthing111vre;We.!ia'e[o iJefiJle/he 

,.Gpllma1fiJ¢j!t4I!i'e ill [png diik.ittJJliiJlJensw:ewel!itPe 11 &Y{r/1t Ntty, 

r-5Q1d2~3 biOionmate. if) IG'and Mam!" nnish the bOOk b'ala.ric~ , thel'&L 

,;xpJariatTo(l sh?weda sl)brta~e.ofcarty dyestq m~tiJrjtyexlef)$Ion.NoYi the book 

lil9Ks ba!~o~"'4tll1 t~e'<rjd<>f ~he y"~r, 10Si~9"tlOly "11~in at:.worse . 

Tbei'i.tst~Wli.e\(?<if April cWereo""astjltiiY91,i.ile:t6 the ~~e"saiticlesth,.lj;hoWed t!)e.l1ne'Ofl?\qod, M~y ~e \hatwa~a mis.\al<e:to !e~.tti1:! j:iolik.in. i;uD pffiJght,a~t.hJs 

Jl'lOiJlent, Itslwuld h~.Y~ .bee"<lolje:~a:r!l!'rbqt it'.l"ould haYe·implie~no [()reed 

rectu;::1;;O'o 'jll f!.WA, jb~r"il~e~ Var;·leSS'dlversifie;itlon in$tr!1ss ;'IlYg'.rnore P~ 

p{)te~i:lal dr"""dpwr'ls. . 

CONFIDENTIAL TREATMENT REQUESTED BY 

J,P, MORGAN CHASE & CO. JPM·CIO.PSI0021900 
731 

N1w:all tl]efssueiii ilbQUttlieaya!hJbi!ity <lrlig~l\!lt\l to l\e"p"~h?J;;"9k. wJ~hlJPsl~" 

90 l'&l.wl1et1ctedit.eVeh);s'Q~cw. The bOok !~ P4~ ~oc$l¥p·. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO·PSI0021901 
732 

:ONFIDENTIAL TREATMENT REQUESTED BY 

.P. MORGAN CHASE & CO. 

lksiI, Brune M 

from: 

SlM1t: 

Tu: 

Iksll,a<Ul1oM 

iZtJlarch 2l'l12 02:37 

-Mart:it'rAtfajb,.Javlet'X; Perryman, MdrewX; Grout, JulierfG 

hellO, folloWing -ourlast Phb~~ "ea1l, las1 w.eel<, please halle, a seCOf?d Jook ro Ih!s preSentation! 

fl:mpared.WiItJ Andy ibrthe ISMC3.meellng>of the i3fd reb 2011 

12022300re.Credit:B~ PNLRevlewBrliho 

Update.:-pptzi.o 

I tfiinidh"e-5 'firs\: slitles'lie5cnbe ..... el)l we\lthe boOk, The-Slide:.ll'i!'q'larticula, 

display the nt!tlol"l~ls 1lfl(l ~e5-a due of the '5aI!e.6fth~ moves. This sfJows 

t;ulddy how thebook-t:an actually Iosl!'2t1OM.and p<lS'Slbly ilnotln~T 200M 

while"bemgT,al1ge hollnd. The connection wIth last l{e<!rgain bifEa1ly-a 

toincidence : t'he.AMR mOVe was reaHVb:t-e,:.tiona:i .anD tile S"pread J'llOVe 

fulsyear.have a!soOeen eXceptil:ll'al,ht:rt in v~ry iliff'er.tmt md\le!:. 

In i!tllfmon 1wciultflike to aiM anofhersllde"to tiesc:r1be hOWtl-;e'lG9 traae 

'reqUire- posSiti19 ,C<ipiful 'Spotlb 'a110w lDf:a -q~ICker .and Ql'l'cfDtbef c;:rpital 

reductlotdhefOOls ~ujdbe{Jn Uldianwhe-re1here is aTist that~shcruld 

mtliawTIlef6fdra'pt U,..itrnayltlrity b'ejn2lJ13'o-rMef. 

1n that taSewe'S:hou!d rfght'howbllyprotettion 0'1] lG9D-31yr"ahd YDyr,oand 

Seltprotectlon tfrr7"'lO 7!ir<llid J."Qyrt.~t:'t:hes. 'nils mlgh'tlnr:re<lse 'tD"e F/NA 

lim hand. ntK511TE aoou"tVarand il:re~'.liar,-As1:lme pas!;es1ly, fhe ol:lta 

wi.1lJld jnciea~ ,and rediJce~motthl~ thenet 1000g'eXPOSlJre. 

ThiSWDUld b= fhe belt mde,-we:cclllld do <ls.oflo&ly: trtis,,",UI "\lot irhpatt the 

catty<ltfirst i .instead vii: would "SeU TIll! lmplled kmgtemtspraacl vol<ltmtyl 

but will reduce the pos;tiVeconve.'(jrymthe boo\!:, Yet tnis W11l ff\aKefua 

prom!': of tore Oos"E'tto't:ictlcal. NtIW tactical is'3f;lpfol(:lO to 20 times smaller 

tlratirnfe-"H,rlh"sa "l1"tur..l~ l'&lho"",of2-~M d:.ily.So,lHe 51i,,,:rld.,xpec'!:g 

hlg'het .da~yP&ll)crfse 11] roft''rlfIJP-to-i~OM'wh'lIe: to'tdaylt !s"muchsmane'r 

D\JtoftnarketmtN'esuE':~eaih'the,p.m. 

JPM·CID·PSI0021902 
733 

In b'rdei:t,f< highJlght-dff:ferel-'lt.orile.r of magnltiide~, llliink l.5tio\JkI~dd twO 

o1herSfdes;; , 

-f ... 1;ow.rea1l.Y~~fut~et-lIefwtts.Of1heirWaybilppe~_.-anre.f ~fis 

pdees in 'd'WlTat lSTiot ~ Th!S-wlll "help unde¢t;'ind tlfe$lj(!e3tb;itdetails 

t!re.'defaI;lJt .exPOSiJr~.p~a;k~O'Rt\' 

Z·hbw-1G!T has r't;It>\IE!d \le~ regressiOtlmQd¢!Ir,:-d ~io.Idcom'irig from, 

IG'!5,. rln1,and .Radian 5y't CDS :thii w6tMI h€-Ip e:qliaio !'low aildVlffith-e 16 

moveisso-pet:I.lI[iW'. 

LEt me knoW YourthougnU 

Brurn:.lltS1L 

::::ONFID.ENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO~PSI 0021903 
734 

lnordertoh.rgnfjghtdifferl;ntorder.of-ma.gnlt~des,lthinKl-Sb!ll.lld;ad~lWCl 

'Other'SI1d~5"; 

.l-j,owreaHYU1e.mar~tlljkesdefa\JtU~f.tbelrwiiy'to.aj:lpeal'<lllceiwbat-is 

prkestn vs'Wh<ltisnal 'let}, 'TI'-~ will h€'lp uJ1uer~nd ihe~lli!e3.that-details 

tht' ~etauh:.e~r-e li~i'IkdoWn 

>!-hoW" IGs ~a'sP1o\)e~v.ersus a reg't-es5Ion-rnoal:!lled spT.ead .co~lngfmTii,. 

!GiS, rr{I1, and 'FI.il.l:Him 'SyrCDS :tl11s Wou1dllelp~xp'lall1how<lJ\dw'h\lth'e if; 

moveis-.so'P€dillar. 

:::ONAOENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0021904 
735 

:;ONFIDENTIAl TREATMENT REQUESTED BY 

J.P, MORGAN CHASE & CO. 

llCsiT.Bru:noM 

From: 

.sent: 

To: 

-S\:Iblect.' 

!ks~.BrunoM 

tS.Man:h.2a12'1B:-4S 

Ma'rtin-Artajo,JrMetX 

UpdateonWre 

The di>lergel1ce bit:reases between crude mid pi":ites and 'our 

est"i'Olilt:!=-. 3alieo ~il1. '!iil:'nd a 5!n:iU 5pr-e2rslreirt re«Jrdi-n'g the 

preacktotn of tln! rliver,gl?:r1ce per blocks,. 

~:\~~ '~~rai~~Sp=~i~h~~r~~~~:e~:a;~;;~~~t>-5 fl,jt at 65pfs 1.Ipfr.ont~ The equit,.- tFar)"ch!,!s .a~ t'!Jlly 

'i1llPa-ct~e 0010. Ye't the l1y indices 'k~ep i1etTormirtg well. 

·.sill'e' ;'!lIO!:ith ,:end ... ilespU-e fe5{:tp evim: ann gr-lieai ".xoVk ill 

1traXll: ani:! hy .in 1:<lx ~-ave DIil:l.fitcd3;led 'tlreir "'['.atit! v.lirsus iX 

r:a.1.1y. That 11:5 ;4l?PS :tighter fgr- tgO. S bps fer main S1(,. 21 

bps for 'Xaver "lfld 26-~5 IJp-s f.dt "hy ( 11' -oJ)E! ~~s the: lass in 

N!:5Ga]J Thal: is .pri-ce-s as ;eeJ"t:a'in now"ie 7:SctS in pr-ke,. In 

·'tf:r.:lt regard~ WE kecep t.'H! ig9 1'0 as lll'Monai!lg lW-e the 

J!,.;:'l)'1<~t beta adjusted. 

The loI"ho3.e i:g9 <:-Urve:shOeld hav-e l;I\Jtp~tI arb-raIl)' if' we look at ~he perfOnllam:e .of radlan and JIIhia or sfi. This "is 

reflEcted 3.n t'h~ i~ 5yr 'that .has ti15htetred lltbps) but flct 

in ig9 i~r tna't has tightened less Ulatl "J. bps by tl1~ quOtes 

we '~-eiV~. What is r~,Uy pl:lu.llng 'tJer~ h tlr.rt the 'S"k~ 

quotes h:~ve npt. changedl The cds 'OIrt:p'erforlll'2lnc-e and indtlx 

Und~rperfurllrance shOuld .have tigbtened ~ .sk~. 

~e 1OO~ :;it 'wbc't ~ 'l:o~id .'tI1l 'tlie redUCe- ·:the :rltH~'refi~ 'whi!"e 

.not growl-ng £he fm;It.:I-ons -es'peci<:lUY in ig9. The ;!;blLrtions 

~ ve:r"J lib-.i'ted·~ 5CJ1!1e 1lliI111 S9 trad~ could help,. 'Solie hy 

t,."ji{des :t-cio bllt the pr'irld;Jjal 'h,g +s ~Ere lie -do not ~ant to 

,add. 

JPM·CIO·PS10021905 
736 

Wh<tt ! do +'ii:lit rlt:lW' is" btJying ~-3 'yr .and' ley" ':in ur:der tIJsmooth the ~tinction of the::' boolof" T.lt15 will lie .may· be. t'h:e 

S'o-lutioll j" let 1$11,' Mole r'tJ~ '6ff <, !10 1 p~ar'e' i't for- tl1fi 

Cl.tJttoiile:~ so' .far I did ndt snow rip: iii- ~e itJde)t mark:f:t~ J(1s"t 

testing- Ojate·r:s. I !lay not find size bvt the'. tNd..-f'ng cost: :i:-s 

high:~ not oIlly- tbe' b:iA a~ bu.t tiie almost in~ini.t-e abllr-ty 

of "the de"iller's ttl' "tWis:t 'tfiMr: fUnS'.. ' 

Bruno 

:::ONFIDENTIAL TREATMENT REQUESTED BY 

I.P. MORGAN CHASE & CO. JPM-CIO·PSI0021906 
737 

What I .do "-;ignt tfOlo1 h bUJil"lE ,e~3 7yf' ~ntl ~eyf' In I;\rrler to 

'SlIiOotll the ':eort.4.ncUCfn of the book. Thl~ Kill be fIlay be 'the 

'Sollltloll : let tire book run off. So i P'repa'i"-e it 'for :this 

ollb:::-OOe. Sa -.far 'I diu -not :Shqi.! up il'\ ttte index lIiarket:. )~rt 

:testing 'oIat.er:"i. 1: maY not find slie. bm: the trading tort is 

nigh, not only the ,bid il'lik but ttle a1mo-s-t infIll1.t.e ability 

of The dealers to twist t:hei:r 'rlln"i_ 

Best re-gards 

"BrUno 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PS10oZ19{lr 
738 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

i~l, :arono M" 

Fro!'I'I: 

Sent> 

10: 

"'" Subj8tl: 

h~,_BM1ol;1J16MilIIcll2O'f206:42 

Mar'IlJ'f-Artajo,JavierX 

~t.Julien 6:; Hagan, PatriCk S iradeldeaionccire 

[ t'bbnght thls mght itr.rt: Ym shou)dconshler putting 50me :Sk.ewtrades oTi , 

hoth'ln~lOy'ran'd.ttrruo: tnains'91!rvi": 

~ we.eot\ld lO,tk'6Octs.Qyer:go~'Size 11h1n\. 

l"hlsVJOtild'l!,alritall11:he";upside.of) "debllJt. ImpTovethecaTl'Yill'Id basically 

'-offs'etlne loss WeMvt mm, 

k; I mt!Jijfonne.d ye.sterila~, ile:s~1€ ithlo"'l<ll",1n 'RarlliJll., MBIA:arrd SfI, j:lespit-e 

Un! lai-ln 1:he;~G91civ-rlndexlthl! ·st::ew ha$ fT<Jre"lyclmnged, 

lfsboY.ls-to mea ~1l1illrg ubsUriltlolltll\rli!".i3\ersldeto Kel'lJ1t:fiketflilt". 

Becall:Se ±h'!Sl:aMd'r:be the )E~Df il flFtroldfug 1:tle'mar~E't-'Jn-1ts'O'Wn 

;liolie. 

This ttjlTk.iSnotjrerfetttif COUrse 'DlJflfthe bOot gae5m.~I'l-olf ni-ade"a'S 'I<!'r 

as:tT?!-nthes .. re-tnncemed, il1a1: lsanimerestlng option. This money!5-

omamedfroina doWrrg~dei""the ijqllidity"oi'theportfolia. "Yet, ttlooks-a 

m-uchbetterojilion'thall'COJ!apsrngDID'nyrinding thebaties with lne-street or:a-n'i tlea~er or 'Dl9nterparty'ln ·bluCk'trades. 

The ifa8e!> «Jula be hooked' -on a narfdaldne lmsls frdm onE' ~fl.l;~llotE; 50< 

this woiltdbe easv"to inark i witlunintn~asl!:d 1~()e berel ilgl'ee).. 

1heliq\lldftym-jertlo-n~we would operate migtn"also be favohbh! ior us to 

n<dao;.some trandle!lines,t!speCiaRy the~31Oyr lnthat r-egard. -

f>s.-a-sUmmillirt 

-Negatives 

~.adCled depehC!~ on{!'eale!'s_1:JntJt~ 

- doWiJ£ratledprpfiteffme booYr-en'laifi$<I'tail OslcbOOkln creclt 

-di'i'bra'ti\ies 

·~~niht~rlo<Jd fu ~~r.Monsod~tathe-SirJgie-lill"mt! -oou'kil'lil 

JPM-CIO·PSI0021908 
739 

-'we may.have-to irtctease,NAiothe.pr!Jcess 1'irsthami 

posit'\\ie5 

-~e 1otR"a PNLirlform O:fmryf~rd':tI'I~,ot6-et'tttie!iil:t're!1t 

unrealizecfloss; " ,_ "C 

-dO,es"1l.bf.aJret tlie<iiltfprnfileiii ~rm~.ofdef.j1!l!ti1Tp~ 

-:J:lke+;'. hefpS'US'.redtlCe-50l!l'e'cemaining r<jlj8q1tl5ltian~~ce'Wi!!: 

nave trailed sizes On-;ske'K 

• once: booked, ve1y'sHnplo(to:malid'intl mitbtakl.. 

-allows uno pay the trailing CGru ro ~tfte book fur run'cffmode 

Tharea! choke to make 3wf\etMrr Hie boOk should'be on FUn.off mode, ie 

Wtc ightJ'{ manage' it'wnh.a langr!sk bias :'we WQ~ld allow 'lin P&'Lswmg:s and 

we Would'just'prep-aref-or-defuulti'iSk IOttklrtg fOI"W"ilTtl.lo be5'llFe, tmsis1!ie 

~e aJr.ea&{but th.e book-iS not in run'off'mode. !tthe bC101o; steps 1(lnID-dff~ 

the skewtrade WCllll:\ tnaKne,rlse--beca05.t"WeW.otlld"not piilr'I to ul1W:i>lli 

.aKres$Nelya~we:dld iast.)'f'.af. 

Let me kOoW 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE 5. CO. JPM-CIO·PSI0021909 
740 

-Vle.lT1lly-hil'lli! 10 lncrea:s:e RW'A 'irrthe-process iim"hand 

iJositr,.es 

• we lcitk a PhIL in fOrm bfC3lT'{10l"W<l1d that bfu<itst.'fre current 

tmrea1itedloss 

~1:I0e.J; :not abrthe tail pr,on!e'!n terms~defi!u1ts.tlp$ide 

-likety he-Jps V'S redlJ'ce sQme"rem'ilinlng farge poSitiOn'S onoewe 

h<lVE Wrlel:lsizes on skew 

- once bob~, 'o'eryslmp!yto m'al"k~ ~airrtajn, 

- allows_us tb pa~thetr.ailmg co"m to<5etlhe bC'ojo;'.fOT1'Ilt1t1ft.mMe 

'The' real 'ctrClloa-to\lrtikE!iSwhi!ther.ili~~ok mruJifbeoOl'llurr¢f ffiode.re 

'::~:;:::P~~j!~d~~:~:;~~~~~~~:s':~,~~;e!~ . t;;se -already but tlu!: book-Is liot'il:l run loff mooe, If the bodk1ieps m TlJlFoff, 

The--s1<ewm-oe"VJotildfiiilke.senSe 15etau:aiwe-w5ula nof-pfan to imwiRd 

agresslll'ely aswe dId las{..,~t. 

Letrne.know 

::ONADENTIAL TREATMENT REQUESTED BY 

loP. MORGAN CHASE & CO. JPM-CIQ.PSI0021910 
741 

CONFIOENTlAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE 5< CO, 

Ucs'iI. Bruno "101_ 

'Frt)tn:. 

Sent 

TG:: 

5.ul!Ject: 

1IG!J,BrUnbM 

.~e;~2G1Z"15:31 

MaIlir.4Irt;jn, J<MerX;G.rout,JulienG s1ralegyftir-Gore 

~is"tl1e )argest-ohe 'and !he-rnort:dlfficultone': 

trade-ideas.. •.. 

~'SWil1{lnaex f6:iJ:Oyt ~Tsmgl~:l1am!!s\Vltl1lllltUp11'O~t-skeW1:ra~e'§" 

""buVpl"OtectIon:ln O-~, setiprotettloll:fn7--:l0 itfbo'tll7yt~ 10yr 

- biiv outrlglitFotett\on in 7yr vt,~! ,Pn:ltec:UOh in on"the rim rG 

"Mal" ~$tbe1east.affficulton~ _ W1!~u1ado1he-sariie \Cirrd tittaodo1rlhepr.oOlem is:-ihe"Same 

ilsllYis!he. blc.\ieStprie 

tnrdeldeils~ •. 

;"1fu9 .!l1~H'f ltllwh'15-zS.arid iSO.3Stt.!ndJestoroU<hJWf1.-ind "Sheltei'fram 

'thl!fil'S't.!defutilts , 

_leavf!"t1ie~ulq.'fumdies as ffi~ilrn1mOst 1fel~a 

'-add$Om~'fla~·i.n-H'Yi4frh5'tW1Gand IW11.astlmell<lssesby 

lGtnttleswillimpTolletbediry, TEdLJi:l:!jlqujdj~-a blttut aTlow fora smooth 

TlJIl-down."The taq:et 1s"to be buyer ofprotet"tioll on"aU-equltyU<mchOZS--: thus 

f~"oelatincreasin!!-O'.'ettltnli-, the km!1. pomionwlUswIWT1o ne:tlttal ftist 

Wlthout Ilrtradingmote. Nowthe~5t p:tmie 1$ to keep {hell;!Tlg:ris.tbias1:tl 

met 

Jtrati:"is.th'e"'$.ameTherrre'iisiG'Min--3.5iremb~h'sm.a!kr. 

"''1 "';"~lirabTem"irthe~s.!tJe"oTt<tkfa'uit:Soint fflIin~ iII\!-sl:ill~:b1t ,11tbb'eJrtatk{ txU.:ali6 ~1ot'i).I1fflnttl1e numDef<i'f;det.m'ftsls~MItii!iI ~n 

theseserle"io'( mil"and HY~il)~~We"llalle--ihe-dowmide'(jh noifatit't;s".:The 

JPM-CIO~PSI 0021911 
742 

> ~:"~::'U-'need~ ~e-fundeati~tf~e.. ~~ih!!ldngri5i::in IG lItid 

~II tl)fso-woiifd ~r.ch.aage:ma1:!!~aityt.he"pr.otUe·ofihe-ttoo,~. q;;erttle. resinf 

~ life, we'WQlJtd·~~-ptrstiCk.to,the!:e ~ ~l1d"d~ nl:lthiilgmofE'.". We ";ave. .. tr:J de.finE the: optimal exposute if) }oogrlsk"te!Tll5"td enslJte-1OIe h:We iI deterrt 

carry. 

Bruno 

:::ONFIDENTIAL TREATMENT REQUESTED BY 

J.P'. MORGAN CHASE & CO. JP'M..cIO·P'SI0021912 
743 

'flatten-ersW!lll'1eed tu;be funded o'lE!rlim~ Hence-'fhe1ongrbk ill lG:o<oo 

rJlainblddcs .. ~ 

All'tJikWD.Ula flot Gh"illlge rnilterlaJlythe profile dfthe bQok OW' the:r2st":of 

Jb:~ifE,.'i/ew.ou]a~mpj.j'~to the~ m~es ilF(~<l:lo )1t1"thi~g rnbre:'We have 

-ro "define the.optimirl eXp05u'1'e in 1(!.f.lgrlskiermsto-.enSure"\!ll".e"t."~;(l·de't'Jlt 

CilI1"(. 

Bhmo 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI0021913 
744 

:ONFIDENTlAl TREATMENT REQUESTED BY 

I.P. MORGAN CHASE & CO. 

Iksll, Bruno M 

Jksll,StUncM 

~6.MElr;:h201'2 ~7;.3:4 

MaJtin-Art!J~,Javie:rX 

~DhCor-ePNl 

The'1l'iverEence n"is'~~rea:ted't(i'300 llciw~the reStali.newsis ~ilg: the 1fanineSi!l1i:l f!Ylrldk~:againstj]s. 

j Wb~ Oil th-e 11S9'''''-6s inalnS9 a Irlf: today. Ther.e.[s sonie me. -Not IaTge. 

Btrt'"ifltr:lldI!:2bpsti!thter,!retkon·t~wtll!iesile. 

T.actlcalstaruDelnginiPatteci desp!te't~~dinggalns. Sniafl'tl16ugh, BUt: 

'!he hits ~itmoi allVWhere but'ctie spon !1-fleil to mFTed. 

It bas·been like.>tliis s!t:1t:e the'mrtofthe year .arrolhe.crjrr keips:golng. 1 

rmon we.get to 4OOtrrrfererroe Ve~'st,Jon, 

Bruno 
745 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

" f(Qm! 

<;'"" 

1,0::-

lIci:lI,SrUnoM - !l9 Maretizrt2 't:~ 

Cc: 

'SLibjeet: 

~~~~~X tore1BodK-!If'Ia1YslS"liI1d proposed 91Ja!.egy 

Bookposltl6n 

~ TIiebrl:: has p05itiVe,~,,p&l-Ups'idl!:.on defaul'll aNI pOsitive 

:conmrtyn sprnds gap Widel".1f isrelMwely lliutfil!:f!itealo'naflytiveralll'lt 

tllrrentr)'l<lfketspre<ld'le'v¢fs> 

~T-D obtain-th"is:profile, the book.r.eter..esthe fo'rW'ik'd credlt-sl)read~ 

Wtl'en'(n13tkeuaTe aiught In .!:q'CleueJike,this'One,tRe P&t vOl<ltlfrty C<ln 

~coltle velY '!alEe" ~ ens is wfnIt Js 'happening sinte tlle beginning ofth1s 

yeari~t:Dj( IG9 and Ma1n riRA;'(X.S9"Se'nes."nle ~'i'lmountHd 5-itJ Spslag 

jntht>st!fo11lia-rdsveril.is~e-SO-60Bpsra1ty. 

~ Thetio~1nturred :a-!dS5"tif iOOm-\:lsd I~ m'hyfrolTl KGlDAK d,efault 

~d R&AP "'lmost-certaln tk>f.WIt""::l'hi5Wf!ilk~ss hagebeen corrected now 

'3nd Ctfersdecen"l: ~ide in anvile"~tlrmult)in l-!YlndkeS 

M,ffketbehll:vj~t 

-l'fie..CDl("lG9arid~li1!a'h;:S9 ~:tJiE'~swherelnnex 

tft!.ndrel stifl tr.ll:le., ThlS1swt.e:re'the meet OWli'>-stttrteprotedlO"tJ especialty 

,irrtlte !on:gN'tenorsfur!:i1ip1tal retlef~.mdlJllCettaint:,.abO\itithe 

,1irn'ing-of1:lefal.iltS. ,: 

-$omelarge~ge1tinds-JlaVewmel'5t.~ttadei'whei\!th~,h~ 

pi-i:itel:tion'on:the :se-rks'91Oyr 'indit€fvel"S1lstheSlng1e'~ 

-1rdhe fa1fv;thOSl! series l...met.e tbii! tOO1< is'!onifrlsk arid the'Street 

is s'norfn;,1()'bOl\fe lagged ;consiSten~l¥~ b'ytr<ltling~nd tT)"irig to 'GO'n'ett'tI'fe 

'lag, we could feb1e~ i-:1b:ps hunhen We,m1:':t~gfesistaltt:e eitherWftfl 

,,'1;:tre.,r151d--askwideil'irtg, , ' 

- th~lS Yl'!atl'he' frimche tri'at"i(et depth-nat v.m;$l:o~ij .-Wetiln 'midi; but 

,small :sll:e ed'Cntlme. with .m~ppetfte1rom'rlealedlo load proteditm..:Jn the 

Iongesttenms. 

JPM-CIO·PSf 0021915 
746 

-l:lrUS trr; in.ild'd!ti!=l" tl?-·t!ie-2-itef.illjtti,...reTatEia:ffa"ri:enlflg:~11't1d 

adlleltlletfbydeare'msa'f!rigtliateh'he.twehaye~1lTwerally:-€it&er 

wa~·thecUi'lle-flattti~fs.aJ1d we bll\le"il,SI:~nefol:t. 

. ·asasummary,tbe !:n:lo!i:isa~r,)lisI.'bTe~etandflo1ds.l!.1radethatthe-street wanfi"tp have now ~i~'a protEction IIgllil15t.urtpredictable 

def.'u1:ts. At the -san'leetimEl, they still oWn tlJeir"'t\D"!:I!fautr tra-des'fi't:a;b; 

I<lnyear.so~street·~rtef!lil'tl~steepern;theser\es·9curveS'arn.i 

maintarn the-ioilgesttellOnwfde--than ~hjllg el~. 

PrDpQ5ed.s:tr::il.t~; Jd1fle"P.&t-ffuciuate,~t",.nDtd2fencilng, 

juStirri;iintam~'the:upsfde'Or'LdF:f;fLltb-overtfme. -

-cnX-I<.'i .i!Ild.ITRAJIOCMA!N ~ n4le:t1:f\'H'!X1:',1irrtroi1lhs 

• buY"1J.~Uhe p[oJ:ectico·ln.l}3;1l1fr tG r-e'\l~"-.tbi~1e:( 

3BInJh"J!l'iiih,6blrHnlG) ... ,. 

~bu\\--mmeo.';')t'i7yt terrors{ilrti'l )tIafn~i. bl~ f~!Cif 

~sel! I;lf'crtectkm OVEr timr::"ori~tfenlngsto-!l'Iarnta!n i:ne 

carry{s.-taslh'Main anolGj' 

- COx: US ttY:: mletltre.ne':tlSrffohths 

• ptJt:fl3ttenenOn in HY14"hylS·hY.l6-by~t sffies.whlie weJwn the profection on (he Syr-rtoW" 

-let thE IOlill$ Tn lfi'l~liyl1.serle.s-rlVeaStn('j' ha-..e lost 

afreadY is names ootaf lOO.and !~ok-'Sate; than hl' 14 tc. hy·17 series 

.p &L pllS$itrre r.mge ~ ffie"!oss -IS lfkety to -rangE between 100m ,to room -m31n·reaSOrl is'tf\E-d)):; !G9 .iag:t 1-3.Qps:orloo.isoru) 

':5e:ro~d ~xt;is·ctrX.:H¥-:_I1ie- hlt'isMlOtl1ei"1otrm sl?re~ w1l.hTnth~ 

tnJbche.i1nd index bfd-a5k; Typi~ hl!re,,ou.c3linotteallY trade- !:rutt~e-tnla 

-does~l:h""flge"; 

-tnl('i:l:~ Ma11i.ittm:·,::the,rnr...e rn-Sgs6i:!!p~E'd by"Sbps pu~l:iirig-ttie 

fi?~li,'II:Jr{f~fw6iletfie otbet:tllrVesSi:eeperred 1 bp i..ttf,l!· ta'lIY::Tne.trtt· 

he"\"eJs·go.:1OOrn. 

, . -"thee estlm'abil::f bjd~orfthE book gnSssfy-ain'Ol,mt5 to SOOMl'i!iI-iht 

2o?rnfor fG, .fOOm-forltr;Wo;:-m'iii1'1, zOOm fuf coxwij. 

-COnc1~ioii 

, . ~ tile bool'tha;very-useMfeaf(lres and :shc!l1d be'mauit<l-ined wfth 

its Ili::islde an del-ati!biis miftf( ilS"posslb\e"-¥ , ,-

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

"t~---rra.lit:etJS-li!fty'S!jIal(lJ.oW<ind we,~tOO."¥rs.jD~wltfl J\kek somed QlJ~es.c(i!a'tfligii tontP.f!l~<imi:i:r(g de~e~fhlsj·ilffei:ts'&SJjDtli.ln 

tl'\lrbl!:l-a'S!!: cost.andJ:he ~i!r:k_lp._maQ:tt b«aU5et!ll::strl:'~~~ 

"tne--llltI§'J;erlY' ptotect!a"= ttl cover thefr ~g,iI':1> le"'no.-defaufe'tradesinOs'tt\' 

held inform of ~eperiers -and !ong-~i1n Shcirtterm-e.;uitytranChes, 

, ~t~rels "trap tha:t is btllciirll';:ifweIIJ'tVtthe ~a.rt~i~_""'I;·lr~tw~ 

tish;:irrtreru;frwthe no.tj'D11als fl.llth~-and wea~n-.o:ur-positlor'l wn;ltS. the res.f 

r;lf-me;lJl-ari::et Oile sa.iuti6u· would be to )ettij"e boOlbe re~y long 

risk. yetth'lS ?fouta" nat-be in-a IiquiC! m~-and maVl.ncrease·the P&L·notSe. 

espedal1¥ in correctTon:>'_ 

_ ~tbe-solU5oncprOPds€<l-amoUi'ft!rto be '1ongerriSkBrid fttthe boot e;Kpi!'e.taj"i¥intrthe:.tJpsii:le-DJ;I tlefiltJlt; tthmk·we.own here ;ivl!''1'.g:o.od 

-posffion fon:liIle.tiiatls-~ slgnfficant. This·Wauldlnl(o~5orii~ 

fuet.-tiaOftalW(fj~,JebCitptotectfon !ltrlD1il'Eq(l1tfttal1c'h~!i", /luffldttlU1efS 

11"1 HYJ.ll-17 and S£tl.protectl~tI" on spr~ wdldening,. 

JPM-CIO~PSI 0021916 
747 

~ln lJSHV~ in :a'ddit:lOfl to the 2 defalltts, we face 'a i1atteninrtfelid 

;:J!Nertlzed bYtI~'alers sayiTlglhatlEitheT'We h:Ne-defaolts"tlrwe-rall'1' ~ either 

~ay:s,-the<Uf\'eflattel1iiantl weh:aveOlsteepener'Ort. 

-as.a sl.lITmfali', tlle bixllc~'a, ... ery'VTs1ble pl;fier.antl hOlds a->\taoe 

1h<itthe~t ~trtsf.-O h'ave~nW:le._:a·pro~e~ agajt:lst tlnpredktab!e 

~~fa¢ts. At~ ~frre ltim-e;. _ they.it1if:own'thelr"no default" trac8from 

!ast(e-.K.Sb t'henreet~fn'iitiCallv steepensi:n!!ii!neS9~s;fnc 

~altitaln the Jctngestteoon'Widerthan 'a'nJ't1lilJE ~1.5e. 

prjjP;Q5Biistnit~gy~ .c' -Ut:'l)w;i'&l.'ftoati-a;';~~hile1tcitde:findint. just m-Sinta1nlngt}ie-(Jpiiile 0)\ det..(,I'I!::s overti~ ~ 

-CO"X IG .ahdrrAAXX'M1l.1N; o .... e-rthe n(!1rt 1'8 months 

-bU\rbado:tIte.?Tt>teCtitin lnll-31Oyrtorevet"sethepr.ofile t 3Bin il; main. 6blliin rGl 

- buy SOITre-0--3 in7yrtemirs { 1bln IT'I.lln·2111n in IGj 

-~nprotection ovettime tin widenings'to ma'iflfam the 

cifrry (5"10 BlilM'aln 'ahdfG) 

~(:DXUS~:~~a=~~~;: ~~~~15-lljlf>-hY17'5ei'~blle~~e 'l1ttie Pmt-et:tiimonlhe'5yrtlllw 

~let'l:he Iongs)n 1'lYitl~lt seI'l8liVe'arthe1.11<Ni! 1~ 

j.eaa'iJ8niimesbdtbf100.;inlilOoR);a1~'"rJ}rtm 111 14 'ttl W17,se...'tles 

P&ljlo'ssib1e'nmge~~Jtrss\5likelftn:range betwl!l;>l') 100m ttl3DOtn 

-main ~1iSOt! is the-COX1"G9hg~ l-3tlps-Or'lOO-l51Jml 

-secondlle';'ifisCDXfly::thehitisiloottierioom:spread;lifthitrthe 

tTantM'0nd indexhid-asl(, 'Typical bere,),ml Pllhno't:t~iI!lj1 tr.ItJe butWi! mid 

uoes n'cnthange, 

• 'third ~ Main itTaXl(: '£hi! cUlVe in 59 steepened by5bps. pusbingthe 

iorwatd.b:atk-IJp while tho<! o"ther~:S~lH':ned lbprn1:ht'!'rnl!y. Th~.hit 

l1'ereis8o-100m. 

-tlre'es'tim'ale'dbid-askonth'ebOOk_lgTb~varnollntsto:SOOm .. 1Hri( 

200m hir lG. ioom forltraxx ~in.. 2l.)()m fOrttJX H'i')-

Dmctusioll ' , 

-'the .pOOk1Uis-v~ri'usefu'l feattili-! andsh5illd be -niiti'lbTrrl!d 'With1t51lpslde nn ilefau\ts.aS"rr!m:h-aYPtl'ssillle. 

., 

:::ONFIOENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

. the marketls'Ye1Y.small nowilnd we are trJovlslb!e With likely 

• s.ofDe of oUftrildes creating a'CU~m amoog dMlers: this affet:ts 1.15 bottfin 

.the bid.;n:!tnm-arid thE Mar,CTo_mafketbeCause thestrelrt.'b-wns 

the .1m'l1!; tl!tm protectiof'l to coverthelt legacy, je "'nb rlebut(' trade's. mostly 

held lnfUtm-«,t;t(!eylmmli'lt!t! ~hgJjskjli Sfl"oltl.erm e-quitytralit:lles. 

'.:thetl!~lS]flttlp,tlr.rt-is:bUildliig,:;iTwelmitthe1Y'!ark.:r6~Mal1;et'We 

-osk 1I'lcre-astng1:be m:n;io~I1a1.sfurther<i!fid Weakeli dUJ" .pQ:srumr\ler-iln the~rest 

:oftn!'--tn~i'iffi£ Onesolufibn wool'3 beto)ettlle b"oJ,;be fi!i!I'Ity~OTlg 

fuk. ve'tth1SwoUld ncithe-itl.a li!ftlian\i!i'Ic~tifnll l'M)'increas-elhe:J>&:l rtol~ 

-espetialWhi·mrrect1oos.. 

_ -~e:sclOOo~l'pro¢~-amoI;n'tsm be !o~rrSl(ir~ l&the-book 

6pir.e,-clJfTyirigthe tJPsKle -On default:! thirlKwe 'Own tKire a:yery'gOod 

:position fon !;itetlaatis alSo "5igriffica~ ThkWnllld iflvolve some 

mecml1kal1n!i:liOg,-'!e buy:prn"t-eetlQn:on iorr -eqtltty tratrt'hE's,:put ilatt-ener:<; 

In'H'!' 1-4-11 <lhd"sE!.Lptmedlonrin~jlr<!ad wci'idenitlg. 

JPM·CIO·PSI0021917 
748 

From: Goldman, Irvin J 

Sent: Fri, 04 May 2012 18:14:15 GMT 

To: 

Subject: 

Weiland, Peter <peter.weiland@jpmchase.com>; Tocchio, Samantha X 

<samantha.x.tocchio@jpmorgan.com>; Lee, Elizabeth M <elizabeth.m.lee@jpmorgan.com> 

FW; Information needed 

Importance: High 

----Original Message-----

From: Nase, Angjela X 

Sent: Thursday, May 03, 2012 11:54 AM 

To: Goldman, Irvin J 

Cc: Surtani, Lavine; Lynch, Matthew A; Chen, Ted C; Doyle, Robin A. 

Subject: RE; Information needed 

Importance; High 

Hi Irv, 

Per your request to Matt, please find the CIO excessions attached. Please let us know if you need anything 

else. 

Regards, 

Angjela 

-----Original Message-----

From; Lynch, Matthew A 

Sent: Wednesday, May 02, 2012 9:56 PM 

To: MRM External Reporting 

Cc: Surtani, Lavine 

Subject: Fw: Information needed 

Fyi please see this high priority request from Irv. I committed to getting something to him by mid day 

tomorrow. Given that we have sent several such emails over the last few months with excession summaries 

we should be able to pull this together. 

,'-,- Original Message -----

From: Goldman, Irvin J 

Sent: Wednesday, May 02, 2012 06:44 PM 

To: Lynch, Matthew A 

Cc: Doyle, Robin A. 

Subject; Information needed 

Matt, 

I need a summary for a specific workstream john hogan requested of all CIO excessions, breach's reported 

by mrm from 9/30/2011 to today. This is high priority. Please let me know estimated delivery of request. 

Thanks 

Irv 

Permanent Subcommittee on Investigations 

CONFIDENTIAL TREATMENT REQUESl .. __ E.XHiOiiiii_IB_ I .. T .. #.3 .. 9 __ .... J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000627 
749 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000628 
<....(") '00 'z 3::'T1 

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CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000630 
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CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000631 
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'tIo ·Z ;;:." - 06 CIO. Global_ MTM. FiVe Day Stop loos Adv 41412012 OtherThresftold 00,000,000 8,395,399 

41912012 OtherThresJWkl 00,000,000 ..e1,'273,:1)5.3 1,273,253 

CIO· GIobQI. MTM· On" Oay Stop Loss Ad" 411012012 OO,C:OO,aoo .420,458,051 J6(),458,051 ">1 

CIO .h.t'l. MTM.On!> DayStop LOSSAdv otherThresi>old 70,000,000 347;252,0001 

rnm 31114 CIO _ Global· MTM· Five OayStop loss Ad,.- 41101201t CrtherTllres/1old OO,\XX),OOO ..61,7a3,41$ 1,783,416 

m» 

332.586,0001 Il"'-i CIO-lntl-AgW",!!!9te-OneDay$topLoSl). NY 411012012 OtherThres.hQId 70,000,000 

0;;: CIO _ NA· MTM - FN., Stop Loos Ad ... 4f1OJ2012 Other Thresflold 25,000,000 $,978,461 M78,461 

...... 32110 CIO· Global. Aflgra-gafe - One Day Stop l(tSs Ad" 4/1012012 OUlerThre.mo1d 100,000,000 -405,792,051 

;xl 

m 3:1138 CIO· NA· MTM _ FNe Day Stop l<»s Ad>! 411112012 QtherThreshold 25,000,000 3,621,41-5 

0 CIO -lnt'l- Aggl(ljlate. Twenty Day Stop Loss Adv OtherThreslio!d 70,000,000 -77,700,1100 7,768,000 C 

m 32114 CIO· Global. MTM. FIVe Day Stop Los.'; Mv 4113J2(l12 OtharTr.resf1okl 60,000,000 -68,7el,1B2 8,761,162 " rn 

..... """ CIO. Inri. MTM _ T......,nty Day Stop Loss /v;N 4I1:l!2012 OtherThrasnokl 70,000,000 16,322,000 m " 0 32114 CIO· Global- MTM, Five Day stop Lass. MI 4/16J2012 OtherTllfflshc!d OO,@,OOO -M,711,:':!1!! 38,721,319 as 

CIO_Int'I.Aggle.gat.e·FivoDayS:opLoar;.Adv 4n!'ll2012 OtherThleshokl 70,000,000 M.,978,ooo 23,918,OOO 

32112 CIO . Global. J\Qgregata: - T wmly Day Stop Loss Adv 4f1612012 OlherThreshcld 150,000,000 -178,238,200 2Il,238,289 " 33002 CIO· Int'l· MTM _ Fi>lo O&y Stop Loes Adv -411612012 OthelThreshcld 70,000,000 --98,354,000 2Il,354,000 41 

CIO ·Giobal, MfM· FIVoQay Stop L0S5Adv 4/1712012 OtharThfflhold 60,000,000 ..a4,251,692 24,257.692 " 

32154 cia· lnfl_ AggrBllata· FIVe Day Stop LoS$ Mot 4/1712012 Olhel 70,000,000 -1):2,856,000 12,668,000 18 

""" CIO . 10t1· MTM· Fiv& bay stop Loes Adv 4117/2012 OtherThmshold 70,000,000 .85,152,000 15,152,000 22 

32112 CIO . Global- AI.lgrogate. TW9nty Day Stop Loss Adv 411&2012 Otf1tl,Th<$Sho1d 5,591,346 

""'" C/O· lot'[ - MrM" FNI!' OtIy Stop Lol;" Ad" 4f16J2012 OlilerTIIf/.l$hold 70,000,000 34,012,000 '" 

31154 CIO _ 1nt'1· Agglegate. FIVE'I Day Stop l.OSG MY 4/1812012 QthE'lfThTesnold 70,000,000 -100,470,000 30,470,000 " 

'32114 CiO _ Global- MfM _ FlvE'l Oay Stop LQS!i. Adv 411812Q12 Olt\erThresliold 00,000,000 .100,!;i\J!:I,097 46,609,097 " 32112 CIO· Global. Twenty D-IIyS\Oplm.sAd'I otherThleshold 150,000,000 -20<594,180 54.594,780 '" 

CIO· Global- MfM, Five Oay Stop LossAd'I 41t912Q12 Otilo.rThreshold 00,000,000 .130,961;1'39 0,981.139 ". 

CJO ·111t'1- MTM_ FNeO.ySiopLossAcN 4119J2(l12 Other Thr&Shold 70,000,000 -1211,811,000 56,811.000 "' L "32154 ClO·lot'I-Aggr(OJI"ta.FweDayS'lopl.ossAd¥ 411912012 "1J Other Thffthold 70,000,000 ae,44QOOO '" ;;: 32114 CIO ·Gioba!. MTM_ Fwe Day Stop Loss Adv 4riono12 OtherThrvshold 00,000,000 5O,eoe,34/:l 

h 

;:; a .Global· Aggregate· Twenty OayStop LossAdV 412012012 Other Th,l!Silold 150,000,000 -23:2,211,.:l64 (12,212;264-1 55 

"1J 31154 CIO - Infl·A99'El9"te· Five-Day aop Loss MN 412Or.2012 Othe,Thresflo!d 70,000.000 -125,400,000 5$,400,000 

rn CIQ_lot'l_ MTM. FlveOayStc>pLO!I$Adlt 4I20I2012 OlilerThtes.ho!d 7O,1XiO.OOO -100,71$;000 ± " 

0 CIO· Global· MTM· FIV;; Day Slop Loss Ad" 4/2:312012 OtherTh!e$l'>old 60,000,000 ,570,'001 9,570,691 0 32113 O· Global· MTM _ One Oay Slop.l05$ Adv 4123l2012 OlhllrThresnoki 60,000,000 -1,1511,002 100,191,90'2 16' 0 a;!110 cia· Globa!· - OI'Ie Oay Stop L{JS>I Mv Otha,Threshold 100,000,00) -1S6,5{!2,902 0 32154 CIO -!rrt'I- Aollltl9ate-Fwe Day stop LOSl;.AcW 4r2312012 Othe,Thr/!$Ho\d 70. ,OOJ ,389,000 18,:>89000 " Ol 

'" 3211:2 ClO·Global-Ag\l.eog3b!.Twenty I.pI;;sAdv """''' Otll!!rThrl!$hoi:;l 150,000,000 ·232,21;<,264 82,212,264 .... 
756 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000635 
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From: Martin-Artaje, Javier X <javier.x.martin-artlje@jpmorgan.cem> 

Sent: Thu, 12 Jan 2012 15:42:54 GMT 

To: 

cc: 

Weiland, Peter <peter.weiland@jpmchase.com> 

Iksil, Bruno M <brune.m.iksil@jpmchase.cem>; Hagan, Patrick 5 

<patrlck.s.hagan@jpmorgan.com> 

Subject: RE: JPMC Firmwide VaR - Dally Update - COB 01/09/2012 

No, in terms of VAR . will come back to you with a better explanation .From our point of view We did not have any P/L vol to 

increase the overall VAR so much. Pat's model Is in line with the 70VAR and has a much better explanation for these changes 

. Hopefully we get this approved as we speak. 

in terms of book positioning as I explained the book Is long risk now but has increased the short in HY and reba!anced on the 

rest. This should not have had a great increase in the VAR of our post ions . 

From: Weiland, Peter 

Senh 12 January 201214:45 

To! Martin-Artajo, Javier X 

Subject: Fw: JPMC Rrmwide VaR ~ Daily Update - COB 01/09/2012 

Is this not correct? 

Peter Weiland 

JPMorgan 

__.- Redacted by the Permanent 

Subcommittee on Investigations 

m:+l 0: +1212 ____ 834 5549 r 

From: Stephan, Keith 

Sent: Wednesday, January 11, 2012 07:29 AM 

To: Weiland, Peter 

Subject: RE: JPMC Armw/de VaR • Dally Update· COB 01/09/2012 

This is what! sent to Javier and bruno yest 

From: Stephan, Keith 

Sent! 10 January 2012 17:17 

To! Iks1!, Bruno M; Grout. Julien G 

Cc: Chandna, Sameer X; D'costa, Karolyn K; Lee, Janet X; Kallmtgls, Evan; Martln·Art<:ljo, Javier X 

SUbject: PH: Core Credit Var Summary 06 January 

Below are the major drivers in the increase in VAR since mid December for Credit Tranche portfolios -since 21 December, 

the book var has moved from $76mm to 93mm, nearly +25% increase driven by position changes and through the indus ion of 

mkt data in the last week of 2001 with rally in OTR HY indices. 

The big drivers, are increases in notional of HYOTR short risk in indices +2.6bio not'l, +14MM VAR. Atthe same time the 

increase in index short risk (and long HYlO]v reduction) has driven and increase In the positive benefit in the credit crisis 

stress los5 scenario from 1.1bio to +$1.5bio. 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J ... __ .E.XHiiiiii.ffiiliiiI.T_# .. 4 .. 0 ___ • JPM-CIO-PSI0000093 
759 

In Marginal terms, the $17mm move since Dec 21 is driven by; 

1) Stg 150 $14mm (increased short risk positions across HY14~HY17 by $2.65bn) 

2) 5tg 18US $lmm 

3) Stg 27D $2mm (reduced long risk pes in HY107Y + Price changes"'see details below) 

4) Note; 14EU does have a net increase in X016 pos bV $260mm but increase in MN16 long risk pas by $2.0bn more 

than offsets the var moves from XO. 

Details: 

Main days of big moves in Var. 

Dec19 Var of $70.0mm 

Dec21 Var of $7s.8mm 

Dec22 Var of $78.4mm 

Dec30 Var of $82. 7mm 

. Jan06 Var of $92.9mm 

l}Changes from DecI9 to Dec2l of$5.8mm mainly driven by 5tglSD. Increased Short Risk position by $Ibn across HY14*HY17 

indices. 

2}Changes from Dec2l to Dec22 of $2.6mm mainly driven by 5tglsD: Increased Short Risk position by $600mm in HYls and 

HY17 Indices. 

3 )Changes from Dec30 to JanD6 of $lO.7mm mainly driven by 

Stg 14 EU +1.8mm ~X016 5Y • Increased short risk position by 15Dmm. Spread tightening of 16bps. 

Stg 158 +1.2mm - Price widening of +O.875pts in HYIO 7Y . short risk Index position of .$4.48 and short risk 

position 55nrTrn 35-100 of $3.78 

Stg 270 +2.7mm -shorter risk by $9s0mm across HY9 and HYIO 7Y 

stg lsD +3.3mm -shorter risk by $438mm across HV16 and HY17 - Price improvement across most HY Indices 

(HY15 +O.875pt, HY16 +lpt, HY17 +1.125pt) 

From: Weiland, Peter 

Sent: 11 January 2012 12:26 

To: Stephan, Keith 

Subject: FW: JPMC Firmwide VaR - Dai~ Update - COB 01/09/2012 

fyi 

Peter Weiland 

Tel: +1 2128345549 

Mob: +1 •••• 

From: WeIland, Peter 

Sent: Tuesday, January lOr 2012 9:38 PM 

To; Drew-, Ina 

Cc: Wilmot, John 

Subject: Re: JPMC Rrrnwide VaR - Daily Update - COB 01/09/2012 

Yes, I have details and can give you tomorrow. Short story is that the increase in VaR corresponds to increased credit 

protection on HY. in particular trades executed between Dec. 19 and Jan. 6, 

This has been obviously a Significant increase and I sent Javier an email today to highlight the RWA implications. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO·PSI 0000094 
760 

Pete 

Peter Weiland 

JPMorgan 

0: +1212 834 5549 

m:+l •••••• 

From: Drew, Ina sent: Tuesday, JanualY 10, 2012 07:36 PM 

To: Weiland, Peter 

Cc: Wilmot, John 

-_ ... RtdactNl by the Permanent 

Sulxo-mmittee on Invrstigations 

Subject: Fw: JPMC Firmwide YaR - Daily Update - COB 01{09{2012 

This says do var still S8? can u give me breakdown tomorrow 

From: Market Risk Management - Reporting 

To: Market RIsk Management - Reporting; Dimon, Jamie; Zubrow, Barry L; staley. Jes; Drew, Ina; Rauchenberger, Louis; Lake, 

Marianne; Hogan, John J.j Weiland, Peter; Weisbrod, David A.; Bacon, Ashley; Beck, David J; Braunstein, Douglas; Morzaria, Tushar 

Rj Wilmot, John; Dellosso, Donna; Bisignano, Frank J 

Cc: Doyle, Robin A.i Waring, Mickj Market Risk Reporting; Sreckovic, Steven; McCaffrey, Lauren Ai Tocchio, Samantha Xi 

Chiavenato, Ricardo S.; Chen, Dan 

sent: Tue Jan 10 19:32:44 2012 

Subject: JPMC Flrmwide YaR - Daily Update - COB 01/09/2012 

Firmwide 95% 100 VaR 

The Firm's 95% 100 VaR as of cob 01/09/2012 is $123 mm Dr 98% of the $12Smm limit, an increase of $Smm from the 

prior day's revised VaR. 

The increase in the Firm's VaR is primarily driven by IB Ii •••••••••••••••••• 

CIO is $88mm Ivs. $95mm limit), RF5 

100 Externallv DiscloSed VaR 

The below table shows the 95% 100 VaR for the current quarter compared with the prior quarter and the corresponding 

quarter of prior year. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000095 
761 

cid:imageOOLpng@OlCCCFCD.54D062DO 

P1ease c"l'lnt~ct tt'le MRM External Regorting te1lm with any questions. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM·CIO·PSI 0000096 
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$mml Spot Ava Spot Ava Spot Ava 

IB VnR by risk type: 

;;:: 

0 Fixed-incQme 49 49 49 56 55 49 

.a 

Dl :::I 

Foreign exchange 15 15 19 12 11 11 

Equities 24 19 19 19 22 29 

110 

0 

? 

Commodities & other 23 23 22 20 10 13 

Diversification benefrt to 18 trading VaR (57) (52) (55l (50) (37) (38) 

IB Trading VaR 54 54 54 57 61 64 

ePG 35 39 42 39 28 26 

Diversification benefit to IB trading & ePG VaR (16) (17) (20) (21) (7) (7) 

TotallBtradlng & C;PG VaR 13 76 7y 75 82- 83 

Mortgage Production and VaR 15 15 16 74 1& 1G 

Chief Investment omce (CIIl) VaR: 88 68 77 69 55 GO 

Diversification benefit to. total other VaR (7) (9) (10) (30) (13) (14) 

Tot.1 other VaR 96 93 63 113 60; 62 

Diversification benefit to total lB and other VaR (46) (53) (46) (39) (56) (57) 

TotallB and otherVaR 123 116 113 149 86 88 

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From: Goldman, Irvin J <irvin.j.goldman@jpmchase.com> 

Sent: Fri, 20 Jan 2012 13:08:35 GMT 

To: Wilmot, John <JOHN.WILMOT@jpmorgan.com> 

subject: FW: Breach of linm var 

m 

----Original Message--

From: Stephan, Ke~h 

Sent:, Friday, January 20, 201207:01 AM Eastem Standard l1me 

To: Goldman, Irvin J; Weiland, Peter 

Cc: Martin-Artajo, Javier X; Macris, Achilles 0; Kai!mtgis, Evan 

Subject: FW: Breach of linm var 

IN & Pete 

Below please find details of the VaR limit breach. The VaR increase is driven by Core Credit (tranche) in EM EA. The VaR has 

increased steadily since the end of December as positions in CDx..HY on-thE-run indices have been added to the portfolio to 

balance the book, which has: been taken !ongerrisk since the expiry of CDX.HY.113Y positions which matured 21 Dec Z011. 

Key Points: 

1. The increasE in VaR is largely attributed to increased short risk positions in CDX,HY indices -which we have discussed 

wi the desk and which were added spedfk:ally to reduce the outright long CSOl profile of the book (as we are 

additionally over the MtM CSOllimit and actively reducing this risk to move within the $5MM CSOl thres.hold) 

2. We are reviewing the details of the current VaR number and actively working with the desk to reduce'the QJrrent VaR 

based on current marginals, while continuing to address the CSOl as above; N.B. the action taken thus far has further 

contributed to the Positive Stress benefit in the Credit Crisis {Large F!atteniTlg Sell-off} for this portfolio which has 

increased from +$l.4bio to +$1.6bio from 17~19 Jan. 

3. W~ are in late stages of model approval for fun revaluation which will have the effect reducing the standalone VaR for 

Core Credit from circa $96MM to approx. $70MM - impact analysls on the marginal contribution to the Firm is ongoing 

an d wI!! be distributed later today. 

I expect that we will resolve through active r1sk management the breach of VaR limit using current method over the next two 

trading sessions, depending on liquidity. 

Furthermorer I betievethat the process of model approval is nearing completion and that this will be implemented rn the next 

1~2wks in production. 

My recommendation therefore is that we do not address, nor upsize the limit for CIO - but that we continue to work in 

partnership with the desk to manage to the current $95mm Ilmit over the ne}Ct two to three trading sessions - and that w.e 

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. My team and j are disaggregating strategy level ~argina' VaR (reported 

daily) to the level of position I instrument level marginal VaR to provide the desk with precise list of actions that can be taken 

to most effectively reduce VaR while maintaining balance of other risk measures. This will be complete by mid-afternoon 

Confidential Treatment Requested By 

JPMORGAN CHASE & CO. Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J .. ____________ EXHmIT#41 ... 

JPM-C10 0000141 

JPM-CIO-PSI 0000141 
764 

London time today. 

Evolution of Current VaR using production model: 

. cid:imageOOl.png@OlCCD767.766510CO 

The details of the drivers of the VaR increases, using current model for measurement are as follows: 

JqnIg tpJqn19 (from $94?mm to $986mmJ -+$3.8mm mOll(' 

1) +4mm from Stg 150 - Increased HY14 - HYIG short risk position by $l.075bn 

/gnll tq IgnZ8 fum 1918mm tg $24 Zmm' .f$;mm mqve' 

1) +Zmm from Stg 18US -Increased IG17 SY short rIsk position by $2.25bn 

2) +Imm from Stg 14EU -Increased !traxx MN16 long risk positIon by $78Smm 

Jan15 tp Janl?!from $9§mm tD $1<1 Bmw) -1$4mmJ move 

1) -4mm from Stg 150 : Reduced HY17lndex short risk position by $13bn 

JqnQ6tgJpn16{from $93mmtp $%romJ_+?3mm move1) +3mm from Stg 150 

Increase in HY Index short risk positions of $l.lbn (HYl4$300mm. HY15 $250mm, HYlS $4SOmm, HYl7 $sOmm) 

z) +-2mmfromStg 18US 

Increase in IG9 lOY Index .long risk by $6.7bn 

Increase in IG17 5V s,",ort risk position by $3.0bn provides diversification 

3) +lmm from Stg 14EU 

Decrease in MN9 SY Index long risk position by $7.2Sbr\ 

Decrease in MN Outright Index short pos1tions provIde c:Uverstfrcation {SlS-S16 S/10Y - net decrease of 

$77Smm 

4) -3mm from worst day rolloffs (5 th, 19th and 29th days) 

Dec2t to .tanD6ifmm 576mm to $93mml-+$l7mm move' 

1) Stg 150 $14mm (increased short risk positions across HY14~HY17 by $2.6500) 

2)stg lBUS $lmm 

3) Stg 270 $2mrn (reduced long' riskpos in HYi0 7Y + PrIce tightening in recent weeks meant that th1s position 

delfvered positive offset on worst days 

4) Note: 14EU does have a net increase in X016 pos by $26Omm but increase in MN1610ng risk pos by S2.Obn more 

Confidential Treafment Requested By 

JPMORGAN CHASE & CO. 

Confidential Treatment Requested by J.P. Morgan' & Co. 

JPM--CIO 0000142 

JPM-CIO-PSI 0000142 
765 

than offsets the var moves from XO. 

From: Goldman, Irvin J 

Sent: 20 January 2012 03:08 To: Stephan, Keithi Weiland, PetEr 

Cc: Macis, Achilles 0i Martin~Artajo, Javier Xi Kalimtgis, Evan 

Subject: Breach of firm var 

All, 

This is the third consecutive breach notice ( below) that has gone to Jamie and OC members. We need to get Ina 

spedfic answers to the cause of the breach, how it will be resolved and by when. She requested the answers todayFriday and would like Achilles and Javier to vet! the international credit explanations. 

Irv 

Firmwide 95% 10Q VaR 

__ = Redacted by the Permanent 

Subcommittee on In,'estigations 

· The Finn's 95% 10Q VaR as of cob 0111812012 has increased by $5mm from the prior day'sVaR to $138mm and 

has breached the $1 25mm Finn VaR limit for the third consecutive day. 

· ClO's 95% 10Q VaR as of cob 01/1812012 has increased by $7mm from the prior day's VaR to $]02mm and has' 

breached the $95mm CIO VaR limit for the third consecutive day. 

· The increase in the Finn's VaR is primarily driven by an overall reduction in dlversification benefit across the Fh-m 

and position changes in eIO and MSR. 

· Each LOB's contribution to 

I OQ Externally Disclosed VaR 

The below table shows the 95% lOQ VaR for the cunent quarter compared with the prior quarter and the 

corresponding quarter of prior year. 

Please contact the MRM External Reporting team with any questions. 

Confidential Treatment Requested By 

JPMORGAN CHASE & CO, 

Confidential Treatment Requested by J.P. Morgan & Co. 

JPM-CIO 0000143 

JPM-CIO-PSIOOOOl43 
766 

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Confidential Treatment Requested by J.P. Morgan & Co. 

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Confidential Treabnent Requested by J.P. Morgan & Co. JPM-CIO-PSI0000145 
768 

From: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

Sent! Mon, 23 Jan 2012 09:58:33 GMT 

To: Hagan, Patrick 5 <patrick.s.hagan@jpmorgan.com> 

Subject: CIO VaR 

FYI. Dual pJan ._ .. as discussed keep the pressure on our friends in Model Validation and QR , 

From: Hogan, John ). 

Sent: 20 January 201223:15 

To: Goldman, Irvin J 

Cc Drew, Ina; Macris, Achilles 0 

SUbject: Re: 00 VaR 

OK thx lrv. Good weekend! 

From: Goldman, Irvin] 

To: Hogan, John J. 

Cc: Drew, Ina; Macns, Achilles 0 

Sent: Frl Jan 20 17:27:092.012 

Subject: 00 VaR 

John, 

Achilles and I have reviewed the CIO limit breach for the past four days. CIO has been managing a dual 

process of Increasing overall credit spread protection while managing Basel III RWA targets. The actlon 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 +$1.4blo to +$1.6blo and created higher VaR resulting in the breach period. 

Two important remedies are being taking to reduce VAR and have Cia get well within its limits while continuing to manage for 

Basel III RWA. 

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 the 

January .. 

The estimated impact of the new VaH model based 00 Ian 18 data wI!! be a ClQ VAB red!!ctjoo 

10 the traoche book by 44% to 57mm with CIO being well under its oyerall limits 

Irv 

Irvin Goldm:l.Jll J.P.Morgan j Chkflnvestment Office! 270 f>arkAve.1 'jf Td: -o.} Jl2 1[;4 2331 l@ irvin i eoldman@inrnciJaseCQm 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J.P 1. __ .E.XH ... I.B.I.T .. #.4.2 ___ • JPM-CIO-PSI0000151 
769 

From: Hogan, John J. <John.J.Hogan@jpmorgan.com> 

Sent: Sat, 28 Jan 2012 16:19:28 GMT 

To: Bacon, Ashley <Ashley.Bacon@jpmorgan.com>; Goldman, Irvin J 

<irvin.j.goldman@jpmchase.com> 

Subject: Re: ao VaR heads up and update 

Thx and can you guys compare notes on any methodology dffference btwn IS and CIO and let me know wnat you find? Thx, John 

From: Bacon, Ashley To: Hogan, John J.i Goldman, Irvin J 

Sent: saUan 28 11:15:)22012 

SUbject: Re: 00 VaR heads up and update 

If this change is what I think it is (full reva! credit p&! calculation for the shocks derived from the VaR days, instead of 

sensitivities times shocks), then the IB is already on the new methodology so no change for us. 

! will confirm, and let you know if not, 

From: Hogan, John J. 

Sent: Saturday, January 28, 2012 03:43 PM 

To: Goldman, Irvin J; Baconj Ashley 

Subject: Re: 00 VaR heads up and update 

Is this change in methodology applicable to IB's VaR as weI!, What was the primary change that we made? Thx, John 

From: Goldman, Irvin J 

To: Hogan, John J.; Drew, Ina Sent: Fri Jan 27 13:35:40 2012 Subject: 00 VaR heads up and update 

From: Stephan, Keith 

Sent: Friday, Janua'Y 27, 2012 1:30 PM 

To: Goldman, Irvin J; Weiland, Peter CC! Kanmtgis, Evan; Martin-Artajo, Javier X; Mao-Is, Achilles 0; Lee, Janet X; OIandna, Sameer X 

Subject! Update on *old/current methodology VaR* Increase for COB 27 Jan Importance: High 

~:mw:mW~lffi:o~~m~atl?oT!i.~m~~~]~lrqrn.;·193'Jnr.~ FinalVaR vectors globally 

have not been processed yet for COB 26Jan, however 00 is over its temporary limit, and could cause the Firm todothe 

same, As such I wanted to communicate this toyou to ensure we are al! on the same page about what is happening. 

The ·old methodology'$: currently in production: VaR has increased by +$3mm, to$107.6mm driven by increase in CDX IG S9 

lOY index long risk (+1.8bio notional}. This is consistent wi the VaR increases ofthe last several days, under the old 

methodology, wherein the VaR increases approx lmm per billion of notional in IG91Dy. I estimate this will put 00 Global 

over its temporary $110mm limit and probably closer to $115mm-note: not ali vectors globally are loaded yet for the 26 Jan 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J.F 1. __ .E.XH ... I.B.I.T ... #.4.3 ___ • JPM-CI0-PSI0000177 
770 

cob -so I'm estimating here. This means that the forma! notification of limit excess will be generated and distributed toyou 

for approval. 

Importantly, for the same COB 26 January, the -new J full revaluation methodology· shows VaR decreased ($13MM) from 

70.8mm to 69,5mm. I estimate that this would make cia global VAR closer to $76MM IrS. the currently reported number 

>$llS, 

We have completed all technology changes to support the daily production of the VaR under new methodology beginning 

from Monday. 

Thanks and please let me know if you have any questions. 

Keith 

Keith Stephan Chief Investment Office 

JPMDrgan Chase 

100 Wood Street, London, EC2.V 7AN 

Tel B': +44(0)2073258812 

Mob tI': +44(0)759592 1539 

Email 181: keith stgpbap@jpmprgan COm 

Confidential Treatment Requested by J,P. Morgan & Co. JPM-CIO-PSI 0000178 
771 

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Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO·PSI0000179 
772 

From: Dev, Ashish K <ashlsh.k.dev@jpmchase.com> 

Sent: Man, 30 Jan 2012 16:50:13 GMT 

To: Weiland, Peter <peter.weiland@jpmchase.com> 

CC: Rajesh, Govindan X <govindan.rajesh@jpmci1ase.com> 

Subject: RE: draft of the MRG review of the HVAR methodology for the CIO core credit books 

Pele - ! talked "to Rajesh and we agree that the new VaR is a clear improvement over the production version. 

Please go ahead with the implementation of the new HVaR methodology for the CIO credit books. Best regards! 

Ashish. 

From: Weiland, Peter 

Sent: Monday, January 30, 2012 11:40 AM 

TD: [.lev, Ashlsh K 

Cc: Rajesh, GcMndan X; Stephan, Keith; Goldman, Irvin J; Lee, Janet X; Otandna, Sameer X 

Subject: RE: draft of the MRG review of the HVAR metOOdoIogy for the aOrore credit books 

I just sat with Rajesh to discuss. Ashish we tried to call you but I guess you were away from your desk. 

We are going to proceed with the new VaR vector. Rajesh will endeavorta distribute a new version of the approval 

document, but he has gotten some comfort from tile data that he received from Pat this morning that Numerix and West End 

agree. 

In any event the new VaR is a clear improvement o'olerthe production ve15ion, which helps to make us comfortable with the 

decision. 

Best, 

Pete 

Peter Weiland 

Tel: +1 212 834 5549 

Mob:+l_ 

From: DeY, Ashlsh K 

Sent: Mortday, January 30, 1012 10:43 AM 

To: Weiland, Peter Cc: RajeSh, Gavindan X 

__ Redacted by the Permanent 

SubcommiHec OR Investigations 

Subject: RE: draft: of the MRG review of the HVAR methodology for the ao £Dre credit books 

Pete - I bef/eve you have been looking for me. I am sorry I had a 8:30AM meeting outside the office which went on 

past the 10AM end. I did not get a chance to talk to Rajesheither. But my view is that If January tests look aU right. 

we should go ahead and implement the new model even before the MRG review is completed. Regards! Ashish. 

From: Weiland, Perer 

Sent: Monday, January 30, 2012 7:40 AM 

To: Dev, Ashish K 

SUbject: FW: draft of the MRG review of the HVAR methodology for the 00 core credit books 

Hi Ashish -

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J 1. __ •E•XH ... IB-.I.T ... #.4.4 ___ • JPM-CIO-PSI0000187 
773 

Do you have any thoughts on this matter? I don't know how materia! the requested testing note is to the validity of the VaR, 

but if possible we would like to move forward with the new VaR, which is a signiflcant improvement on the production 

version. 

f have reminded Pat of the urgency of producing the testing note . 

. Please let me know if we can proceed with this important upgrade. 

Thanks: 

Pete 

Peter Weiland 

Tel: +1 212 834 5549 

Mob: +1 ••••• 

From: Rajesh, Govindan X 

Sent: Friday, January 17, 201110:59 AM 

To: Weiland, Peter. Dev. Ashlsh K 

- - Redacted by the Permanent 

SubcommittN on Invatigatloas 

Subjec.t RE: draft of the MRG review of the HVAR methodotogy for the 00 core credit books 

Pete, 

1 guess this is a question for Ashlsh. 

Ashlsh, 

We've circulated a draft of the review, but it will take another couj:lle of days to publish, since we are waiting for one 

additional testing note from Pat. Do you think It Is 01( for ao t080 live today? 

Rajesh 

From: Weiland, Peter 

Sent: Friday, January 27, 2012 10:48 AM 

To: Rajesh, Govindan X 

Subject! Re: draft of the MRG review of the HVAR methodology fOr the 00 core credit books. 

Can we start using today? 

Peter Weiland 

JPMorgan 

0: +1 212 8345549 m;+1_ •• _ 

From: Rajesh, Govilldan X 

Sent! Friday, January 27, 1012 09:39 AM 

To: Stephan, Keittli Pirjol, Oan 

Cc: Weiland. Peter; Hagan, Patrick 5 

__ .., Redacted by the Permanent 

Subcommittee on In"estig_tioRs 

SUbJect: RE: draft: of the MRG review of the HVAR methodology for the 00 core credit books 

1'5: we're stlll waiting for the testing note shoWIng that the pricer used for VaR matches the Numerix model. Of course, we'l! 

update the review to make it clear that an inwdepth review of that will be done separately. 

Rajesh 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000188 
774 

From: Rajesh, Govinllan X 

Sent: Friday, January 27, 2012 9:38 AM 

To: stephan, Keith: Pirjol, Dan 

Cc: Weilalld. Peter: Hagan, Patrick S; Martin~Artajo, Javier X; 5hen, DIarIes; Bangia, Anil K; Chtlstary, .Jean~Francois A; Scott, Brian 

GO 

Subject:. RE: draft of the MRG rev'ev rI the HVAR methodology for the 00 core credit books 

Thanks Keith. The last 3 were actually recommendations, not action plans, but it Is good to have committed timelines on 

them. 

Regarding the second AP, could you confirm that for illiquid series with material exposures, you will use the Credit Hybrids 

risk mapping tool tomap them tothe on-the~runs? 

Thanks. 

Rajesh 

From: Stephan, KeIth 

Senh Friday, January 27, 2012 9:19 AM 

To: Pirjol, Dan; Ra}esh, Govindan X 

Cc::: Weiland, Peter; Hagan, Pabidc. 5; Martin~Artajo, Javier X; SIlen, Olartes; Bangia, Anil It; Onistory, Jean-Francois Ai Scott, Brian 

GO 

Subject: PH: draft of the MRG review or the HVAR methodology for the 00 CDre O'edit books 

Importance: High 

Hi Dan and Rajesh 

Please can you review the below action plan responses which I hope will satisfy final approval of the model? Importantly, I 

anticipate that point one (automation I industrialization) will be delivered by Monday a.m. as the team are well ahead (If 

schedule - thls wor~ has been happening in the background through the testing phase. I've tried to put reasonable estimates 

around each of the points below - and given the priority of this initiative, I would suggest that each wll! be completed with 

dedicated focus, and I would envision that we will deliver more quickly than the (worst-case) tlme6nes I've provided below. 

Happy to discuss if you need further information. 

Thank> 

Keith 

o QperQljonai tid: 1ne VaR computation is currently done ofT spreadsheets using a manllal process. Thus 

it is error prone, and not easily scalable. 

o ACTION PLAN: <;10 should upgrade the: infrastructure to enable the VaR calculation to be automated, 

and less subject to operational erro~.ltem Owner: Patrick Hagaq~ Completion Date: TBD 

The MRM coverage team, technology and QR resoun::es have kierrtifled an implementation plan, and wU! be working through 

the weekend of 29 Jan 2012 to complete automation required to run the VaR simulation daily, and to store results and vectors 

in a database. The MRM coverage team has agreed and StA (servjce~level agreement) with the analytics team to produce the 

vector by 10hOO GMT daily, to provide time to anal)'5e results andto ensure quality control before upload to MaRRS. 

Estimated completion: Tuesday 31 January 2012. (Owner:Samir Patel, Patrick Hagan) 

Confidential Treatment Requested by J.P. Morgan & Co. JPM·CIO·PSI0000189 
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o ACDON PLAN: CIO should establish a process to monitor the size ofttle positions with exposure to the 

illiquid time series, and if the exposures are material should risk map the JXlsitions to on-the-run time 

series. Item Owner: Patrick Hag.aD~ Completion Date: TBD 

The MRM coverage team, and QR resouiU'S ha...e agreed an action plan to 1) define 'illiquid instruments' and 2) to monItor 

size of exposures to il\iquid instruments 00 the basis of CS01 and Corr1% ~nsltivies. Where exposures roil!iquld instruments 

exceed agreed thresholds, Instruments will be mapped to 'on-the-run (correlation) series' instruments' time-series (currently 

ITX.MN 59, CDX.!G 59, and CDX.HY 59) consistent with market convention, and the 16 Credit Hybrids business. Estimated 

completion: Friday 24 February lOU. (Owner: Julien Grout, Sameer Chanda) 

o ACITON PLAN: CIO should re-examine tbe data quaJity and explore alternative data sources. For days 

with large discrepancies between dealer marks and IB marks. the integrity of the data used for HV AR 

calculation should be verified. 

The MRM coverage team, and QR resources will compare market data time-series history vs. DataQuery, and dealer-mali<:s. 

this process has been conducted previously, and wi!! be re-visited to ensure the integrity of time~series.. Given illiquidity of 

certain instrumentation, and especially in cases where 00 maintains positions in instruments where IB Credit Hybrids may 

not, we have found irregular patterns in DataQuery data, and aml":nded our market data /time-series to reflect Dealer mid 

marks. An action plan to perform periodic review of time-series vs. DataQuery and dealer-marks has been agreed, to ensure 

on~going continuity oftime-series hi:'itory. The team will conduct a regul<u, Ix monthly review of time·series, attended by 

FrontOffice, MRM coverage, and QR resources to discuss discrepancies. Discrepancies which cannot be resolved will be 

escalated tothe ao Valuation Control Group for independent verification of prices / spreads. Further, in CMes IIIIhere tlme~ 

series have been overridden by committee or by Valuation Control Group, the team will put forward an action plan to ensure 

adequate control, record·keeping and audit tra~ for time-series amendments which deviate from DataQuery. Estimated 

completion: Friday 2lI February 2012. (Owner: Keith Stephan, Junen Grout) 

o ACDON PLAN: For the purpose of capital calculation at firm·wide Jevel, the 00 risk measures 

including VaR will bve to aggregated with the risk metrics of the IB portfolio.For consistency the 

VaR methodologies used by the two gTOUps must be reasonably similar. We recommend that CIO 

investigates using absolute daily changes for the base correlations,. similar to the methodology adopted 

in lB. 

The MRM coverage team, and QR resources will compare the current re!atlve shifts in base correlation vs. the absolute shifts. 

This is a medium-term action plan target, and given estimated work-load may require a number weeks to complete. An action 

plan to review the results will be agreed between MRM coverage, QR resources and Front Office. 1l"te findings: of that study 

will be published to Model Review Group, and will form the basis 01 furtherdisclfssion, related to course of action, 

practicability, and resoQableness of a move toward absolute base correlatton shifts. If it is determined at the conclusion of 

the study, that a move to absolute correlatton shifts is required, a further action plan will be- established to commence the 

project to make this variation in computation and market dat'fcollection. Estimated completion: Friday 17 Apri12012, 

(Owner: Patrick Hagan, Keith Stephan, Julien Grout) 

From: Pirjol, Dan 

Sent: 2S January 2012 19:33 

To: Hagan .. Pabic:k S; Weiland, Peter; Stephan, Keith; Bangla, Ani! K; Bessin, Jean~Frencois X 

CC ""jest., """"dan X; $hen, a..rles; Scott, Brlan GO SUbjat draft of !he MRG review of the HVAR methodology for the 00 core tn'dit books 

All, 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000190 
776 

please find attached a first draft of the MRG review of the HVAR methodology forthe 00 core credit books. Please send me 

your comments and suggestions by the end of the 

day Friday.lan.27. 

Pat, please let me know if you agree with the formulation of the action plans, and wl1at are your suggested completion dates, 

Best regards. 

Dan 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO·PSI 0000191 
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From: 

Sent: 

Martin-Artajo, Javier X <javier.x.martin-artajo@jprnorgan.com> 

Wed, 18 Apr 2012 21:51:26 GMT 

To: Hagan, Patrick S <patrick.s.hagan@jpmorgan.com> 

S"~lect: Fw: CIO VaR , 

What happened here? 

From: Stephan, Keith 

Sent: Wednesday, Aprt11S, 2012 08:03 PM 

To: Macris, Achilles 0; Martin-Artajo, Javier X 

Cc; Weiland, Peter 

SUbJect: FW: aD VaR 

FYI ~we discovered an issue related to the VAR market data used in the calculation which we need to discuss, This means 

our reported standalone var for the five business days in the period 10-16th April was understated by apprx $lOmm, This 

increases our marginal contribution to the Firm by $3.5mm, The unfortunate part is the firm is running dose to its limit (CIO 

is within it's limit as it stands) and this will put the firm over. Which is something Pete is going to explain to trv, Ashley, et 

al. as it will require approval lone-off limit extension I or permanent var limit increase for th~ Firm. 

The market data used by Pat / $amir in the methodology for revaluation of the VAR_W.~~_lLqU!!dusiy.,g of the major moves of 

10 april that caused the realized pnl of -39Smm. We have corrected this - and I'm investigating how / why this happened. 

StandaloneSynlheticCrsditVaR 10/0412012 11I04I2012 12I04I2012 1:'!i0412012 1611)412012 17/0412012 

HVaR·95UploodeC 55.840,396 55,058,312 55,180,605 58,812,234 59,120,859 64.145,238 

Ii' 15ReswtudbyQR 55,598,296 66,502,483 64,193.746 68,404,469 68,853,160 

Va".J1I'I' 10,757,898 11,444,171 9,013,141 9,592,235 9,732,501 

Thanks 

Keith 

From: Stephani Keith 

Sent: IS Aprtl2012 18:02 

To: Weiland, Peter 

Cc: Man, George KB 

Subject: FW: aD VaR 

Hi Pete - we have been going through the market data related to the realized pnl of 10 april (-$395mm) as this was not 

properly reflected in our market data environment for the VaR historical simulation. We have corrected the simulated pnl 

for the 10th April to be consistent with the mkt moves that drove the Pnl on that date. The restated P&L vector for cob 10~ 

Apr was included in today's cob 17-Apr VaR submission. 

This loss increased Synthetic Credit I cia Var by $Smm and marginal VaR contribution to Firm by $3.7mm assuming all VaR 

feeds are now in the latest snapshot. 

~~ .. O!cture (Device Independent 8ltmsp) I 

Permanent Subcommittee 00 Iovesti ations 

Confidential Treatment Requested by ... __ .E.XH ... I.B.I.T ... #.4.5 ___ • JPM-CIO-PSI 0001205 
778 

_ - Redlcted by the Permanent 

SubaJmmittee OR InvestigadOlll 

From: Hagan, Patrick S 

Sent: Thu, 22 Dec 2011 13:39:05 GMT 

To: Grout, Julien G <julien.g.grout@jpmchase.com> 

Subject: FW: RWA - Tranche Book 

-~--OrigjnaJ Message--

From: Drew, Ina 

Sent: Thursday, December 22, 2011 1:06 PM 

To: Martin-Artajo, Javier X~ Wilmot, John 

Cc: Macris, Achilles 0; macris@ !ksil, Bruno M; Hagan, Patrick S 

Subject: RE: RWA - Tranche Book 

Can you break out the cost again please of each 

13 bil 

1 bil hg 

1 bi1 clomtm 

---Original Mes.s..age---

From: Martin-Artajo, Javier X 

Sent: Thursday, December 22, 2011 8:00 AM 

To: Drew, Ina; Wilmot, John 

Cc: Macris, Achilles 0; macris@ ; Iksil. Bruno M; Hagan, Patrick S 

Subject: RE: RWA • Tranche Book 

eLO, and Tranche, MTM SAA _ HG Mandate AFS SAA_ 

Will come back with total cost under normal trading and 90 days window. 

--Original Me.ssage----

From; Drew, Ina 

Sent: 22 December 2011 12:49 

To: Manin-Artajo, JavierX; Wilmot" John 

Cc: Macris, Achilles 0; macris@ 

Subject: Re: RWA - Tranche Book 

Iksi1, Bruno M; Hagan, Patrick S 

Tota! cost including hg and clo. (All in trading not saa. correct?) 

---- Original Message -----

From: Martin-Artajo, Javier X 

To: Drew, Ina; Wilmot, John 

Cc: Macris, Achilles 0; macris@! ••••• Iksil.BrunoM;Hagan,PatrickS 

Sent: Thu Dec 22 07:46:36 2011 

Subject: RWA - Tranche Book 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by • .. __ .E .. XH •• IB .. IT_#.4.6 ___ .. JPM·CIO·PSI 0000032 
779 

Ina/John 

We are in a position to reduce 15 BIn by end of QI by: 

• Reducing Trancbe Book 13 BIn 

• Reducing CLO Book I BIn (as per the CLO conversation) 

· Reducing HG Book I BIn (as per our HG Bank conversation) 

Tranche Book 

Under normal circumstances the Credit Derivatives Book will reduce three months of duration, 

expire the March rolls, improve both the Capital CRM and V ARJStress numbers, and will 

require some further reductions and optimization in the actual position ratios. 

The estimates of reductions will be : 

Model reduction QR CRM ( acknoledged already) 5 (Pat estimate) 

Model reduction QR V AR 0.5 (Pat estimate) 

Model Reduction QR Stress 1.5 cPat estimate) 

Reduction for duration shortening 1 Actual 

Book Optimization 3 Estimate 

Book Reduction 2 Trading reduction 

TOTAL 13 Billion RWA end QI 2012 

The actual cost for these reductions will probably lower than 100 MM if the Book Reduction 

needed and is limited to reducing the Book after all the previous changes in three Strategies (See 

attachment if needed) . 

This does not include the challenging but benefit of getting the actual diversification value that 

currently QR is not asigning to CIO and will be part of our effort to convince QRlRisklCFO of 

the merits of this benefit. We will need to plan for a New York deep dive coordination with Risk 

Management, Finance and QR for end of January/Beginning of February . 

Regards 

Javier 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000033 
780 

---Original Message-----

From: Drew. Ina 

Sent: 22 December 201 1 00:55 

To: Martin-Artajo, Javier X; macris@! ••••• 

Cc: Wilmot, John 

Subject: Rwa 

_ _ Redacted by the Perma~eDt. 

Subcommittee on Investigations 

We are running an additional rwa reduction scenario. Can u send John and I a scenario whereby 

the tranche book and other trading assets are reduced by an incremental 15 bit· in the first 

quarter? Not a stress scenario, so assuming norma1 (whatever that is now - not year end) 

liquidity. PIs list by trading strategy, ie: credit tranche, other trading positions1 with cost estimate 

- (background: trying to work with cear submission for finn that is acceptable for an increased 

buyback plan). Need in early ny morningConfidential Treatment Requested by J.P. Morgan & Co. JPM·CIO·PSI 0000034 
781 

From: Weiland, Peter <peter.weiland@jpmchase.com> 

sent: Fri, 02 Mar 2012 21:31:43 GMT 

To: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

Goldman, Irvin J <irvin.j.goldman@jpmchase.com>; Enfield, Keith 

CC: <Keith.Enfield@jpmorgan.com>; Stephan, Keith <keith.stephan@jpmorgan.com>; Hagan, 

Patrick 5 <patrick.s.hagan@jpmorgan.com>; Wilmot, John <JOHN.WILMOT@jpmorgan.com> 

Subject: Fw: cra CRM results 

javier~ 

We got some CRM numbers and they look like garbage as far as I can tell, 2-3)( whatwe saw before. They came from the 

technology guy running the process, so probably QR has not even reviewed the results. 

Obviously a lot of work to be done here. 

Pete 

Peter Weiland 

JPMorgan 

0: +1212 834 5549 

m:+l •••• 

from: Weiland, Peter Sent: Frlday, Manil 02, 2012 03:50 PM 

To: Krug, Kevin 

Cc: Bangia; AnI! K; Kabia, Amy A; Enfield, Keith 

Subject: RE: 00 CRM results 

Thanks Ke .... in. We wi!! definitely need to look carefully into these numbers. 

These results, if I understand them, suggest that there are scenarios where the CIO tranche book could lose $68 in one year. 

That would be very difficult for us to imagine given our own analysis of the portfo[io. 

Pete 

PeterWelland 

Tel: +1212 834 5549 

Mob:-tl •••• 

From: Krugl Kevin 

Sent: Friday, March 02, 2012 3:44 PM 

To: Wen and, Peter 

Cc: Bangia, Anil K; Kabia, Amy Ai Enfield, Keith 

SUbject: 00 CRM results 

Hi Pete, 

--,. Reciac-ted by the Permanent 

Subcommittee 00 InvestigatiODl 

Sorry forthe late response, but I wanted to be able to provide some additional information with the numbers, which took 

some time to gather. As you can see your CRM numbers have increased significantly with the new hierarchy runs, it looks like 

there was already a trend upward that the new numbers are consistent with, although I'm sure that's not the right way to 

look. at it. OR is investigating the drivers of the change and will provide further information as it becomes available. The tables 

below show the product counts for the 18th of Jan (last day of old hierarchy) and the 22nd of Feb (last completed rUn with the 

new hierarchy). There were also 4 positions rejected due to missing c:cy's on 1/18 and 6 positions rejected on 2/22 due to 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by EXHmIT #47 .... _1IIIIIIII--1IIIIIIII-..... JPM-CIO·PSI 0000338 
782 

missing spread curves. These positions can be seen by fittering on the last column of the attached file. You should at least 

make sure that we have all of your posltions. 

Regards, 

Kevin 

CiOCRM 

('MM) 

Dale 

Jan 4th 

Jan111h 

Jan 18th 

Jan251h 

Feb 1st 

Feb8lh 

Feb15Lh 

Feb 2200 

Old Hierarchy 

1,966 

2,344 

3,154 

Count of PCM Product 

Jal'l18,2012 

XJCFADX/EUR INDX 

CRD 

Count of PCM Product 

Feb 22, 2012 

Synthetic Credit 

CDS 

New Hierarchy 

NfA 

5.732 

Needs Re~run 

Nee<:IsRe--run 

6,:)01 

CDSINDEX TRANCHE Grand Total 

19160 7758 26927 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000339 
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From: Vigneron, Olivier X <olivieLx.vigneron@jpmorgan.com> 

Sent: Wed, 07 Mar 2012 17:08:15 GMT 

To: Venkatakrishnan, CS <cs.venkatakrishnan@jpmorgan.com> 

Subject: RE: New CRM numbers . 

great thanks 

From: Venkatakrishnan, CS 

Sent: 07 March 2012 16:57 

To: Vlgneron, Olivier X 

Subject: RE: New CRM numbers ... 

I will ask if you and! can see him on Friday. Venkat 

From: Vigneron, Olivier X 

Sent: 07 March 2012 16:56 

To: Venkataknshnan, CS; Christory, Jean-Francois A 

Subject: RE: New CRM numbers ... 

I know of him but have not yet met him". 

From: Venkatakrlshnan, CS 

Sent: 07 March 2012 16:48 

To: Vigneron, Olivier X; Christory, Jean-Francois A 

Subject: RE: New CRM numbers ... 

Ashley has invited Javier to my meeting with him. I will tell him that this is a priority and mention you, Olivier. Do you 

know Javier? 

From: Vigneron, Olivier X 

Sent: 07 March 2012 16:47 

To: Venkatakrishnan, CS; Christory, Jean-Francois A 

Subject: RE: New CRM numbers ... 

meeting this guy is one of my top priority on CIO side. I need to sharpen my tools before hand but I am comfortable to 

face tiim ... 

From: Venkatakrishnan, CS 

Sent: 07 March 2012 16:35 

To: Christory, Jean-Francois A 

Cc: Vigneron, Olivier X 

Subject: FW: New CRM numbers ... 

I am cc'ing the firepower ;-) 

We obviously need to address his issues. Has the model been discussed with him? Has he raised this with us before? Or 

is that an example of "institutional inertia'" also? i-) 

Permanent Subcommittee on Investigations 

CONFIDENTIAL TREATMENT REQUES' .. __ E.XHoiiiioI. ffi• I

•T .. .. # 4;,,;8 __ .... 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI0036342 
784 

From: Christo!)', Jean~Francois A 

Sent: 07 March 2012 16:19 

To; Venkatakrishnan, CS 

Subject: FW: New CRM numbers ... 

FYI. Historically we have not replied to this type of e-mal!s and worked our way through Pete Weiland tln the risk side to 

get comfortable with the positions. We can obviously decide to change the strategy now jf we are going to have more 

firepower on the frontlines, 

JF 

From: Hagan, Patrick 5 

Sent: Wednesday, Manch 07, 201211:12 AM 

To: Martin-Artajo, Javier X; Weiland, Peter; Iksil, Bruno M; Grout, Julien G 

Cc: Bangia, Ani! K; Christory, Jean-Francois A; Stephan, Keith; Broder, Bruce 

Subject: New CRM numbers ... 

The CRM represents the worst loss over a 12m horizon at the 99.9% confidence level. With their new model, OR is 

reporting that we have a stand alone CRM of roughly 6bn. This is radically higher than the worst loss we see at the same 

confidence level; the loss we see is far below 2bn. 

The worst case scenario as identified by OR at the 1 in a 1000 level is 

COX HY spreads widen by a factor of 2.02 

COX IG spreads widen by a factor of 2.37 

Itraxx MN spreads widen by a factor of 3.46 

There are also 3HY defaults, 2 IG defaults, and 41traxx defaults 

Using a top down, full repricing approach, we calculate the 12 month loss in this case as between 2.54bn and 2.78bn, 

depending on various assumptions about the full scenario. Note that OR does not construct the full 12m profit/loss 

under each scenario; instead OR "re-centers" the results. This neglects carry, a key feature of our books. Also, even 

though our book benefits from defaults, by subtracting the mean outcome from the P/L, their calculation gives us event 

risk to defaults. This is why we prefer our approach. 

We see the bad scenarios generated by OR as being much much rarer than indicated in their model. For example, in our 

model, the probability of the spreads widening as in the OR scenario is much less than 1 part in 1000. Under our model, 

the OR scenario is at 

3.76 standard deviations (probability: 0.000084) if we do not indude mean reversion in our modeJ 

4.93 standard deviations (probability: 0.000000416) if we do include mean reversion in oU( model 

Moreover, including the probabities of realizing the defaults indicated in the OR scenario would greatly lower these 

probabilities further. 

Suppose we construct the scenario by going in the same direction as the OR scenario, but stopping at the 0.001 

probability leve!. If we did not model mean reversion, this would yield the scenario 

COX HY spreads widen by a factor of 1.79, and there are 3 HY defaults 

COX!G spreads widen by a factor of 2.05, and there are 2!G defaults 

Itral<X MN spreads widen by a factor of 2.79, and there are 41traxx defaults 

This scenario would result in a 12month loss of around 1.28bn. 

Moreover, if we model mean reversion, then going in the same direction as the OR scenario, but stopping at the 0.001 

probability level would yield the scenario 

COX HY spreads widen by a facttl( of 1.57, and there are 3 HY defaults 

COX IG spreads widen by a factor of 1.73/ and there are 2 IG defaults 

Itraxx MN spreads widen by a factor of 2.20, and there are 4 !traxx defaults 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. J PM-CIO-PSI 0036343 
785 

This is not a particularly bad s.cenario for us, with the damage caused by the Itraxx widening being offset by positive 

default payments and CDX widening. It yields a 12m !oss of 0,14bn. 

Examination of the path by path data provided by QR makes it appear that QR is using a Gaussian copula model, or some 

variant. This is dis.trubing, The Gaussian copula model, along with the popular variants, has been thoroughly discredited. 

Reasons cited are: 

• it has no physical or economic basis or justification, 

ojO it is mathematically inconsistent, 

ojO it is not arbitrage free, 

• it is a static mode!, neglecting the dominant risk of the credit markets, 

• it has failed in practice, being commonly cited a one of the proximate causes of hundreds of billions USD losses in the 

industry. 

Let us be dear here: Using the Gaussian copula model for hedging and trading purposes, requires fidelity between the 

model and the market place for relatively small market moves. The Gaussian copula model failed at this task. Hoping 

that the model is somehow valid for extrapolating down to the 0.001 level risks is madness. The only conceivable excuse 

for it is institutional inertia. 

Patrick S. Hagan 

Chief Investment Office, 

J.P. Morgan 

100 Wood Street 

london EC2V 7AN 

United Kingdom 

+44 (0)20 7777 1563 

patrick.s.hagan@jpmorgan.com 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM·CIO·PSI 0036344 
786 

From: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

Sent: Thu, 08 Mar 2012 12:10:08 GMT 

To: 

CC: 

Drew, Ina <InaDreW@jpmorgan.com>; Macris, Achilles 0 

<achilles.o.macriS@jpmorgan.com> 

Goldman, hvin J <irvin.j.goldman@jpmchase.com>; Weiland, Peter 

<peter. weiland@jpmchase.com> 

Subject: RE: CIO CRM results 

Ina, 

I have a full presentation to explain the issues at SAA today. 

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 t"e CRM and we also disagree wIth them on this. More work In 

progress until we can understand how to improve the number but the if the result of an increase Is due to an 

increase in the long index but n'ot on thetranches this makes no sense since this is not part of the CRM measure 

and once we reconcile the portfolio this should be Yery'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 dueto VAR and Str~VAR. {We are getting positive results here in line with expectations}. 

r~ards 

Drew, Ina 

Sent: 08 March 2012 00:29 

To: Macris, Achilles 0; Martin-Artajo, Javier X 

CC! Goldman, IMn J; Weilandt Peter 

SUbject: Fw: CIa CRM results 

Not ~nsjst8nt with your take. Let's discuss thurs. 

From: Venkatakrtshnan, CS 

To: Drew, Ina; Hogan, John J.i Bacon, Ashley; Goldman, Irvin Ji Wellandj Peter 

Sent: Wed Mar 0719:12:25 2012 

Subject: Fw: CIa CRM results 

There are two related issues. The first is the $3bn increase in CRM RWA between Jan and Feb, from S3.1bn 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. 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 mode!s, though, we believe that the$3bn increase in RWA is entirely explained by a S33bn 

notional increase in short protection (long risk) in your portfolio between Jan and Feb. see table below. 

Peter Weiland and your mid-office confirm this $33bn notionaf increase in long index risk. Further we both agree 

that this pOSition change results in a change of about $150mm {a decrease) in lOOA,CSW. Per our models, a 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.P. EXHffiIT#49 JPM-CIO-PSI 0000371 
787 

roughly 10% capital charge ($3bn) on this $33bn inCl"ease in risk is reasonable. 

Also. to be dear, there has been no model change on our end; the change in RWA for tranches has hardly 

changed over the month. 

I understand that we need 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 posltions. 

I will call you tomorrow from London to follow up, but you can reach me at 917.-

Thanks, 

Venlcat 

From: Bangia# Anll K 

Sent: Wednesday, March 07, 2012 06:35 PM 

To: Venkatakrishnan, CS 

Subject: 00 CRM resuits 

5tandaloneCRM 

(,OM) 

Jan18UJ F.b22nd 

AMCIOPosllions 3154 630' 

IndeIlCDS:AUPo6llforte 2,043 6.224 

Inde!t CDS: Carranon Posltlons 65, 646 

IMeIt cos: A.oIIotI' Positions- 4.031 

IndlE!ll CDS: New Posltion!!; 9~19 

!ndexTmnclle:All POs/tlOO5 2,814 2,816 

Indax Tranche: common PO!!II.ions 1,972 2,174 

IndexTl'llncile:RoQcIfPosillons- 1,484 

Indell Tranche: New Positiona t l416 

Net Not/onBl(SMM) 

JIIII1&t/r Feb2:lrJd 

1j1i,091 

88618 

_ ... Rtdaded by the Perman.ent 

Subeommittee on Investigations 

Posftioncount 

p"""",, Jan18rh Fob_ 

tncroa .. 25.291 269:< 

1B,833 19,1f 

15617 1561 

1,016 

33,527 3l3.o! 

a,445 7,7f. 

7,3304 7,J~ 

1,111 

" ~ indUCes 421 Dummy PCMT~tlte.lwere removed Irom PCM Ie@({ (4 COSf.227lndeXCOS/190Tl1nches) 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO·PSI 0000372 
788 

From: 

Sent: 

Hagan, Patrick S <patrick.s.hagan@jpmorgan.com> 

Wed, 21 Mar 201212:10:40 GMT 

To: 

Goldman, Irvin J <irvinj.goldman@jpmchase.com>; Stephan, Keith <keith.stephan@jpmorgan.com>; 

Venkatakrishnan, CS <cs.venkatakrishnan@jpmorgan.com>; Christory, lean-Francois A <jeanfrancois.christory@jpmorgan.com>; Bangia, Anil K <anil.k.bangia@jpmorgan.com>;Broder, Bruce 

<bruce.broder@jpmorgan.com>;Enfield, Keith <Keith.Enfield@jpmorgan.com> 

cc: Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com>; Weiland, Peter 

<peter.weiland@jpmchase.com>;Pat Hagan <pathagan1954@yahoo.com> 

Subject: Optimizing regulatory capital 

To optimize the fjrm~wjde capital charge, I believe we should optimize the split between the tranche and index books. 

The bank as a whole may be leaving $6.3bn on the table, much of which may be recoverable. 

Here is the situaton: 

total 

Alternative CRM floor: $41.7bn 

Model CRM: $35.4bn 

Effective CRM $41.7bn 

IRC 

IB 

$28.3 

$18.3 

$28.3 

CIO 

$13.4 

$15.6 

$13.5 

$18.75 

Note that the effective CRM is currently controlled by the Alternative CRM floor. We should be able to move some 

directional trades out of the index book (to lower the IRC charge), and into the tranch book. This should increase the 

model CRM, but not the alternative CRM. Intuitively, the optimum split would have the Model CRM and Floor CRM 

nearly equal. 

J think QR is in a unique position to perform this optimization. Here's what I think can be done. 

a) the split between the index book (subject to IRe) and the tranch 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; 

b) If X our suggested index~on!y portfolio that is split off the combined book, then the theoretical split would be 

New tranch + hedge book'" Old combined book ~ aX, 

New index book'" aX, 

where "a" would be 100% if we'd guessed the correct amount of directional hedges to remove from the combined book. 

But the idea would be for QR to find the value of "a" which results in the minimum post·diversification captial charge for 

the bank as a whole. With the capabilities shown to me by QRt I believe that they can accomplish this quite readily. The 

idea would be for them to do the optimization every week when they calculate the charges. (Who gets the savings is a 

different discussion.) QR may have the capacity to put this in place by quarter end. 

c) Our book has four main axes. The eventual aim would be to provide QR with four index~only portfolios U, V, X, Yand 

create the theoretical portfolios: 

New tranch + hedge book::: Old combined book· aU - bV· eX - dY 

New index book::: aU T bV + cX + dY 

Each week when QR calculates the firm's regulatory capital, they would have the additional task of determining the 

optimum coefficients a, b, c, and d which results in the minimum RWA for IRC + CRM. The other components of 

regulatory capital, historical Var and stress Var, aren't affected by the split, so this would be the optimal capital charge. 

Permanent Subcommittee on Investigations 

EXHffiIT#50 

CONFIDENTIAL TREATMENT REQUESTI ... ---------.. JPM-CIO-PSI 0011025 
789 

The new rules have too many arbitrary factors of three for the regulatory capital to rationally reflect our risks. 1 don't 

think we should treat this as 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. 

Patrick S. Hagan 

Chief Investment Office, 

J.P. Morgan 

100 Wood Street 

London EC2V 7AN 

United Kingdom 

+44 (0)20 7777 1563 

patricks.hagan@jpmorgan.com 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PSI0011026 
790 

EXCERPTS FROM 

TRANSCRIPT OF AUDIO RECORDING PRODUCED 

TO THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Date: March 21, 2012 Telephone Call 

Parties: Anil Bangia, Patrick Hagan 

Bates Number: JPM-CIO-PSI-A 0000089 

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 lTV that this is ... 

Mr. Bangia: Yeah, yeah, I wouldn't put this you know in .... 

Permanent Subcommittee on Inyestigations 

EXHIBIT #51a 
791 

EXCERPTS FROM 

TRANSCRIPT OF AUDIO RECORDING PRODUCED 

TO THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Date: March 21, 2012 Telephone Call 

Parties: Patrick Hagan, Anil Bangia 

Bates Number: JPM-CIO-PSI-A 0000090 

Mr. Hagan: Hi Anil, this is Pat. 

Mr. Bangia: Hi Pat. 

Mr. Hagan: Urn, you know that email that I should not have sent? 

Mr. Bangia: Urn 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. 

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. 

Permanent Subcommittee on Investigations 

EXHIBIT #51b 
792 

Mr. Bangia: Yeah, yeah, it's not clear. 

2 
793 

EXCERPTS FROM 

TRANSCRIPT OF AUDIO RECORDING PRODUCED 

TO THE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Date: 

Parties: 

Bates Number: 

March 21, 2012 Telephone Call 

Peter Weiland, Patrick Hagan 

JPM-CIO-PSI-A 0000091 

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: OK, so, I don't know, Irv just carne 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, allocationMr. Hagan: Okay, so nothing about allocation, I understandMr. 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. 

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. 

Permanent Subcommittee on Investigations 

EXHIBIT #51c 
794 

From: 

Sent: 

Wilmot, John <JOHN.wILMOT@jpmorgan.com> 

Tue, 03 Apr 2.012 11:45:2.4 GMT 

To: Drew, Ina <Ina.Drew@jpmorgan.com> 

Subject: RE: 

Here is my general reactIon to this and to the document circulated last night: 

1. 1 don't get the sense of clarlty that we know what is driving the RWA (economic fisk versus VaR, stress VaR, CRM and IRe) or 

the p&J - or more importantly that either wiU be manageable going forward 

2. We are a significant player in a market that is less liquid, hence any attempt to manage p&l or capital away from an "as is" 

approach will either result in p&1 dislocation or RWA constraints (a la 4Q11/1012.) 

3, We haven't made the case of how this book runs off and whether risk can be managed effectively within a fixed maturity, is 

that we can de-risk without creating continual tail risk further out past tranche maturities. This plane wi!! never land. 

4. We also haven't made the case of what it costs to significantly decrease the size of the book (in my mind the only certain way 

to reduce RWA) 

I profess to probably being the least knowledgeable about this book amongst the senjor team, so that leads me to be skeptical when we aren't 

directly answering questions. I think we have moved beyond the commercial utilization ofthis book in some jump·to~default capacity as it 

exhibits neither acceptable risk/return profiles nor market liquidity characteristics to justify capitaL 

John C. Wilmot I Chief Investment Office 1 john.wilmot@jpmorgan.com! Work: (2I2) 834-5452 I Cell: ••••• 

~~---Original Message----

From: Drew, Ina 

Sent: Tuesday, April 03, 2012 6:52 AM 

To: Wilmot, John 

--= Redacted by the Permanent Subcommittee on InvestigatiOM 

Subject: Fw: 

Read before the meeting 

----- Original Message ----

From: Macris, AchHies a Sent: Tuesday, Apr!! 03, 2012 06:27 AM 

To: Drew, Ina 

Subject: RE: 

OK - maybe to follow-up the "background" that I send to John when WE asked him for Olivier's help? 

The situation is as follows: 

-Javier and team believe that the book is currently balanced for risk and P+L 

- Clearly maintaining this "neutrality" wi!! be resulting in higher RWA than we originally anticipated. 

- Olivier is now in our office and he is 100% involved with the RWA projections of our book and ways to bringing it lower, Nevertheless, I don't 

believe that we will able to be precise in our RWA targeting as there are stU! severa! moving pieces in methodology etc. The best we can do for 

the next week(s\ is to operate with RWA ranges as opposed to exact targets, 

- Javier believes that retaining the existing book "as is" wi!! generate no less than $750m in P+L until the end of the year and dearly much more 

if we experience defaults and the value reversal on !G forwards. 

- Unfortunately, the above "as is" approach wi!! likely result in a minimum of $4Sb RWA at the end of the year and likely in a $46-52b range. 

-If we can't allocate these levels of RWA, and we must reduce it, then the pace ofthe reduction would be very relevant for the P+L. In order to 

maintain, risk neutrality in the book, we will need to be reducing the liquid on the run IG, paralle! to reducing the short HY. The luck of liquidity 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J . .. __ .E .. XH ... IB .. IT,;.;#.5.2 ___ .. JPM-CIO-PSI0000497 
795 

in HY, would likely delay the pace of fG liquidation and thus RWA reduction. Projecting a 50% reduction of the lG/HY by the end of the year, wHl 

be reducing RWA to the mid $30s. An orderly reduction wi!! preserve over?O% of the P+L of the "as IS" scenario above. Specifically, this 

approach would retain the jump to default but it will realll~ less curry than the over $2m daily, as of now, 

My recommendation is the gradual reduction to a $35b RWA target by year~end, ! realize that this is higher than what we have aU hoped for. I 

am very concerned by over~acting in the market relative to our size and poor liquidity. We really need to minimize our market involvement and 

focus our activity to certain RWA reduction plans (pre-priced by Olivier) while utilizing liquidity in an orderly way. 

Best, 

Achilles 

-----Origina! Message----

From: Drew, Ina 

Sent: 03 April 2012 00:39 

To: Macr1s, Achilles 0 

Subject: 

After we finish our review tomorrow, I will need you to prepare a short summary for hogan and jamie. We can talk about how to best present 

the gameplan. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000498 
796 

From~ Iksil, Bruno M <bruno.m,iksil@jpmchase.com> 

Sent: Mon, 30 Jan 2012 21:02:17 GMT 

To: Martln-Altajo, Javier X <javler.x.martln-artajo@jpmorgan.com> 

Subject: there is more loss coming in core credit book 

I-reckon we have another saM coming from CDX IG9 exposure. The guys have a huge skew trade on and they wi!! defend it as 

much as we do. I think! should take the pain fast over to next month. ! have tried but it wi!! ot move: they have moved some 

of those trades out at BOA but BNP, CSFB and BARCLAYS go for the fight. It is pointless in my view to go for a fight. We will roll 

down and recover the loss. But i hi;lve to let it go. The day when either we have a panic or names like Radian, MBIA recover, 

the position wi!! be at profit because the forwards will collapse. Now !just grow the exposure and the (SOl moves up. 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by EXHIBIT #53 JPM-CIO-PSI 0001225 
797 

From: Goldman, Irvin J 

Sent: Tue, 14 Feb 201201:22:17 GMT 

To: Drew, Ina <lna.DreW@jpmorgan.com> 

Subject: Re: Csbpv limit- please read 

yes to alL 

- Original Message--

From: Drew, Ina 

To: Goldman, Irvin J 

Sent: Mon Peb 13 20:21:04 2012 

Subject: Re: Csbpv limit- please read 

I have no memory of this limit. In any case it need to be recast with other limits. Its old and outdated 

-....- Original Message--

From: Goldman, Irvin J 

To: Drew, Ina 

Sent: Mon Feb 13 20:18:38 2012 

Subject: Csbpv limit- please read 

Ina, 

I will review thoroughly tomorrow as pete emailed me tonight. Not sure why it did not come up before. 

Wanted togiveyou heads up. 

I copied below from his email: 

We have a global credit csbpv limit. It was set up at the initiation of the credit book, Unfortunately we 

have been breaching for most of the year. Lavine!s team is going to send oot a notification fjust within 

CIO) probably tomorrow. 

the big portfolio changes they made in the tranche book in Dec/Jan. caused the increase. 

We will need a one offlimit increase. 

Confidential Treatm~nt Requested by JPMORGAN CHASE & CO. 

CONFIDENTIAL TREATMENT REQUESTED BY J Perma ent Subcommittee on Investi ations 

EXHIBIT #54 

JPM-CIO 01)03769 

JPM-CIO-pst-H 0002936 
798 

- = Redar1ed by the Pt'rmanent 

From: Keith Stephan <keith.stephan@jpmorgan.com> Subeommitfee on Innstigatlons 

Sent: Fri, 17 Feb 201214:11:26 GMT 

To: BRUNO IKSIL <BIKSIL2@ . BRUNO IKSIL <bruno.m.iksil@jpmorgan.com> 

Subject: FW: CIO Global Credit spread BPV limit breach- COB 02/09/2012 

Bruno· can you read the below draft and let me know if you agree Iw the points ~ think we need to get Javier on 

board wI this before we send out formal limit request. 

From: Stephan, Keith 

Sent: 16 February 2012 17:09 

To: Weiland, Peter 

Cc: Lee, Janet X; Chandna, Sameer X 

Subject: RE: CIO Global Credit spread BPV limit breach- COB 02/0912012 

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 csbpvsensitivities of all the credit products, unadjusted for correlations. As IG 

and HY 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 aHlimits and most likely will remove the csbpv limit to be replaced with a 

set of credit-spread-widening (CS\V) limits to better reflect the risk of the portfolio in material market moves. 

Until the new limits are implemented we will propose a one-off to the csbpv, up to $20mm, as we fInd that the 

stress and esw measures are more appropriate indicators of the risk of the portfolio. 

As you can see below - the CSBPV measure vs. 10% CSW shows that the book has been reasonably balanced 

despite the headline bpv looking much 10nger. This is not the case in the 50% CSW measure, as the parallel 

relative shifts of SOpe have the effect of steepening the already upward sloping credit curves, hence makes 

losses look higher when compared with the lOpe measure. This can be seen clearly in comparison of the 50% 

CSW measure vs. the Large Flattening Selloff / Credit Crisis scenario P&L, which simulates more realistic (i.e. 

flattening) curve dynamics in the large (circa 50%) selloff. The book, in this case, benefits, given that in 

CDX.IG, long fOfW"ard risk is achieved via flattener positions, i.e. the stress loss for the IG strategies in the large 

flattening seHoff is -1 OOmm vs. -Ibn in the 50% parallel move. 

50% vsLFS: 

ITX XO +0.5 vs +0.65 Diff$+0.15bn 

ITX MN -lB vs -1.3B Diff$-O.3bn 

CDXHY +IAB vs +1.8B Diff$+OAbn 

CDX IG -lB vs -O.lB Diff$+lbn 

[cid:image002. png@01CCECCD.B94IA680] 

50% parallel shock vs. Large Flattening Selloff: 

.... Permanent ----- Subcommittee on I vesti tions .. 

EXHffiIT#55 

CONFIDENTIAL TREATMENT REQUESl JPM-CIO-PSI0001823 
799 

[cid:image003.png@0ICCECCD.B94IA680] 

50% vsLFS: 

ITX XO +0.5 vs +0.65 Diff$+0.15bn 

ITX MN -IB vs -UB Diff$-O.3bn 

CDX HY +lAB vs +1.8B Diff$+OAbn 

CDXIG-IB vs -0. IE Diff$+lbn 

From: Weiland, Peter 

Sent: 15 February 2012 23:39 

To: Stephan, Keith 

Cc: Lee, Janet X 

Subject: FW: CIO Global Credit spread BPV limit breach- COB 02/09/20]2 

How about this? Maybe you can edit and add your graphs if you think it would help. 

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 cfall the credit products, unadjusted for correlations. As IG 

and HY 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 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. 

Pete __ := Redaded by the Permanent 

Subcommittee on InvestigJlloom 

Peter Weiland 

Mob: Tel: +] ___ 212 8345549 _ 

From: Hassan, Syed S 

Sent: Wednesday, February ]5,20123:51 PM 

To: Hassan, Syed S; Lee, Janet X; Stephan, Keith; D'costa, Karolyn K; Xiong, Bo 

Cc: MRM CIO NA; MRM External Reporting; Weiland, Peter 

Subject: RE: CIO Global Credit spread BPV limit breach- COB 02/09/2012 

Hi Janet & Keith 

Can you please advise on the below request? Weld like to get the notification out as the excession has been 

ongoing for a while now. Thanks. 

Regards, 

CONFIDENTIAL TREATMENT REQUESTED BY J,P. MORGAN CHASE & CO, JPM-CIO-PSI 0001824 
800 

HassanFrom: Hassan, Syed S 

Sent: Monday, February 13, 20122:37 PM 

To: Lee, Janet X; Stephan, Keith; D'costa, Karolyn K; Xiong, Bo 

Cc: MRM CIO NA; MRM External Reporting 

Subject: CIO Global Credit spread BPV limit breach- COB 02/09/2012 

Hi Janet & Keith, 

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? Ifso, please also provide some commentary 

surrounding the breaches? Thanks. 

[cid:imageOO l.png@0ICCECCC.BD8IDDBOj 

Regards, 

Syed Hassan I Market Risk Management & Reporting I ChiefInvestment Office I J.P. Morgan I 2nd floor, 277 

Park Avenue, NY 1212.270.25621 Syed.S.Hassan@J.PMorgan.com. 

This email is confidential and subject to important disclaimers and 

conditions including on offers for the purchase or sale of 

securities, accuracy and completeness of information, viruses, 

confidentiality, legal privilege, and legal entity disclaimers, 

available at http://www.jpmorgan.comlpages/disclosuresiemail. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P, MORGAN CHASE & CO. JPM·CIO.PSI0001825 

802 

From: Veni<atakrishnan, CS <cs.veni<atakrishnan@jpmorgan.com> 

Sent: Mon,02 Apr 2012 21:53:53 GMT 

To: Hogan, John J. <JohnJ.Hogan@jpmorgan.com>; Goldman, Irvin J 

<1r'vin.j.goldman@Jpmchase.com>; Bacon, Ashley <Ashley.Bacon@jpmorgan.com> 

CCl Vigneron, Olivier X <olivier.x.vigneron@jpmorgan.com> 

Subject: FW: CIO DAY 1 

John/Ashlev/lrv: Below is an update from Olhller. One source of 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. We are pursuing the impact and further modeling of this. Venkat 

From: VigI'lef'Qll, ~r X 

Sent: MondaVi Aprll 02, 2012 3:15 PM 

To: Venkatakrlshnan, CS 

Subject: 00 DAY 1 

HI Venkat, 

Main lakgaways' 

Bookcomprises index trades only (tranches+ plain Indices). All modelling done on the index spread, single names are 

aS5umeq homogeneous and homogeneous pool model is then used to pricetranches and generate index delta. 

Historical regression also gJves them a beta adjusted delta for HY vs IG. 

Key takeaway 1: approximation around the dJ.spersion of single names a key source of discrepancies when submitting 

portfolio to large single name shod~s (as does IRqCRM). More work to quantify impact of this approximation. 

Key takeaway 2: we need to load the book on iii "bottom up'" single name modelling approach that can give sIngle 

name default exposures, as well as a CSW computation that is comparable to the Credtt Trading ~esk for example. 

Action points' 

• To discuss modelling merIts of CJO and tts feedback on our IRe spread modelling with the model research group (wlll 

start with Matthias A. who has been involved by Anil). 

To model in Lynx (tool developed by credtt trading team) the ClO portfolio, Preliminary dummy trades loaded. Tool is 

ring fenced (i.e. only I will have access). Howeverl will check with Javier before loading the real notlonals tomorrQw 

that he is fine lor me to go ahead with this. 

On my CSW estimate sent yesterday for March 7th posnion, 1 missed the Xaver trades, here is the updated estimate when 

including them: 

Estimated All Tranches: 

Estimated COX indices: 

Estimated ITRX indices: 

Estimated HY COX: 

Estimated FinSub + Xover. 

-45mCSW 

-35OmCSW 

-28OmCSW 

+400mC5W 

+150mCSW 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by, " __ oiE.XHiiiii.IBiiiiiiiI.T_#.5.6 ___ .. JPM-CIO-PSI 0000449 
803 

Total: -125m CSW long (March 7''') 

Face notional by maturity buckets and tG/HY split. 

25bnshortln 1YIG 

15bn short In 2Y HY, 

17bn short 5Y HY 

135bn long in 5Y IG 

Olivier 

From: Venkatakrishnan, CS Sent: 30 March 2012 22;30 

To: Vigneron, Olivier X 

Subject: FW; 00 10% CSW 

Please see below and Jet's make sure we speak. daily on thIs! Merci, Venkat 

From: Hogan, John J. 

Sent: Friday, March 30, 2012 5:28 PM 

To: Venkatakrishnan, CS . 

SUbject: RE; 00 10% CSW 

OK thanks Venkat-keep me posted please 

From: Venkatakrishnan, c:s Sent: Friday, March 30, 2012 5:27 PM 

To: Hogan, John J. 

SUbject: 00 10% CSW 

John: OO's 10% CSW by my groop'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 lot¥oCSVY Is for their book. But I spo.ke to Ashley and we agree that 10%CSW has been trending up for 00, by either their model or ours. Once Olivier spends time In the 

portfolio, we should get a better idea; I also sense from speakIng With Javier that 00 are worried that they may now have to shed 

tranche risk in a tight market. I don't know how real this worry is but I wanted to make you aware. I wlU get a dally download from Olivier and keep you and Ashley posted (Ashley Is out next week). I may myself go to London mid-week. Venkat 

Please see the CSW10 results for original Cia portfolio and the split portfolio for March 21st, 

Corp Portfolio 

COB 1()..Jan~12 1B~Jan-12 25-Jan-12 31-Jan·12 28~Feb-12 21.Mar-12 

CSW10 (MM) ·7.2 13.7 80,S 62.2 150,1 245.2 

Corp Cl0 Index Combined 

Portfolio Portfolio Portfolio 

CSW10 (MM) 245.2 252.8 -7.6 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000450 
804 

This following is. based on the latest split I received from Patrick Hagan this mornmg. 

Corp CIO lode)( Combined 

Portfolio Portfolio PortfoHo 

CSW1D (MM) 245.2 213.5 31.7 

From: Huang, Yuan X 

Sent: Friday, Marth 30, 2012 10:02 AM To; Venkatakrtshnari, CS 

Cc: ]a, Keith 

SUbject: fIN: Mar~21 risk report for 00 and benchmark indices 

We have the CSW10 results for a few days (see row Z4 "Spread-:-l0PcntUp"). Jfthe date you are interested is. not included (ex,. 

Mar-7th). we can generate the results in about half an hour. 

Regards, 

Yuan 

From: Jia, Keith Sent: Thursday, March"Z9, 201Z 11:46 AM 

To: Huang, Yuan X 

Cc Bangia, Anil K 

Subject: RE: Mar-21 rtsk report for eiO and benchmark indices 

6-day risk report. 

From: Huang, Yuan X 

Sent: Wednesday, Ma.-ch 2B, 2012 2:56 PM To:)Ja, Keith 

Cc: Bangia, Ani! K SUbject: "'ar-21 risk report for 00 and benchmark indices 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0000451 
805 

From: Weiland, Peter <peter.weiland@jpmchase.com> 

Sent: Mon, 07 May 2012 15:32:57 GMT 

To: Drew, Ina <Ina.Drew@jpmorgan.com> 

CC: Goldman, Irvin J <irvin.j.goldman@jpmchase.com> 

Subject: CSBPV History 

Hi InaIrv said you need some background on the CSBPV limit history. I creat-ed the attached slide for your (eference (this has n<'lt 

gone to anyone else}. 

I also attach the limit memo from Brian Roseboro back in 2008 in case you need it, 

I'm not sure what else you may need -I will be at the phone if there are other spedfic data that wduld help. 

Pete 

Peter WC1lnnd I J.P.Morgan! Chidfln"estment Office 1270 Park Ave< I a Tel: +1112 83~ 5.549!V Cell: ~I •••••• 

peter wciland@U]2ID<rriM OOID 

_ ~ Redacted by the Permanent 

SubcommiUee: on Investigations 

Permanent Subcommittee on Investigations 

CONFIDENTIAL TREATMENT REQUEST • __ .. EiiiXHiiiiiiiiiiiIB_IT_# .. 57 __ ~ 

J.P. MORGAN CHASE & CO. 

JPM-CIO-PSI-H 0000810 
'-0 

3:." 

Glz 

of! 

:1:-1 

",-I 

03: 

, -I 

m 

en 

m 

'-

"C 

3: 

h 

en 

:£ 

g 

8 

CIO Global Credit CSBPV Limits 

CIO Global Credit CS6PV Umlt has been In place sin"" 2007 

·Composed of both synthetic credit and c8.sh credit (mostly collateralized sec\Jrities) 

·Net sum of CSBJJVs for all credit underlylngs ,-----------------------

'Spatquarterly history of Global Credit CSBPV exposure at right 

CSBPV in 2012 

-Early in 2012 net CSBPV increased dramatically as IG positions 

were added and offset between HYand IG grew 

-Given that a beta adjusted credit spread .. neutral position induding 

HY and lG requires S-6x as much IG as HY, decision was taken at 

that time that the CSBPV limit should be changed to account better 

for the increased activity 

"Written notification of limit breach from MRM Reporting included 

the following commentary: "Current measurement of raw CSBPV is 

not normalized for the level of spreads, nor does It capture 

convexity as represented in CSW10 (and Stress loss) measures, Full 

limit review is underway for the CIO husiness, and a proposal is 

expected to address. this issue." 

-The limit usage was calcula1;ed correctly; the issue was simply that 

we decided that given the mix of underlyings it would be better to 

look at the sensitivities in a more granular way. 

-New limits for SynthetiC Credit were implemented according to 

underlying index as of May 1 

CSBPV 

10'.,.---------------

0> 

-

-2</ 

-30 

-

-51} -tiD> 1--_______________

[1,<",,-, .# .# [1,# n,<f'''' A"';> n,"'{> cf' ...... [1,0

.,\.J ",{Jo .,\"'\' .,\"''\? ",,,,' .,\"'\< .. <I .,\.J ",\.:s. 

10,ooopoo-

(10,000,000) 

,20,000,0001 

........ 

"-'\ 

"'" '30.000,000) "\ 140,O(JO,OOO) 

150,000,0(0) 

(60.DOO,ooO) 

[/0.000,000) L ______________

d'\<'" o,!""'''' if';-' 'II ... ...", -.;+ •. pt;; -.; -..: 

-UmH 

Confidential Privileged Attorney Client Work Product 
807 

From: Berg, Jaymin 

<Crumlish, Fred>;<Fursa, Thomas>;<Kirk, Mike>;<Hohl, James>;<Wong, EJwyn>;<Kamath, Jairam>; 

<Monroe, Christophep;<Tornese, Ooug>;<McLaughlin, Doug> • 

To: 

~ent; 

Subject: 

Financial 

1131/20126:17:33 PM 

CIO Quarterty Meeting 

CIO finished 4th qu~rter with $78Smm of revenues. 

o MTM gains tota.!ed $330mm of which $2S0mm of the gains originated from the credit tranche portfolio. 

The CIO was short credit, and a bankruptcy by AMR caused a large gain in COSs, 

Securities losses totaled $14mm forthe quarter primarily driven by losses on EMEA government 

guaranteed debt. 

Investments 

Growth in the international SAA book is due to building out the team in EMEA and opportunistic 

purchases. It's expected to see more growth in the international portfolio going forward. 

CIO is investing less in rates products and focusing on more credit products dueto low interest rates and 

MBS prepayment concerns from govemment programs (Le. HARP 2). 

The rates products most attractive to the CIO are munis because oftheir longer duration. 

SAA had a negative DOE in 2011 but is expected to move to a pOSitive DOE by the end of2012. 

Management's view of investments is changing to a Structural Book and an MTM Book, although the 

Structural Book will incluge bank pf ~nd CDS that are MTM accounting. 

The MTM Book!s decreasingin size in 2012. It's expected that RWA will decrease from $70B to $40B. 

The Structural Book RWA is expected to be flatish year over yei3r. 

MSR 

The 3Qand 4Qhedging volatility wasaltributed to anticipated changes to the MSR model. The MSR 

asset continued to have a longer average !ife than the old model could account for. The MSR mode! has now been 

updated and hedging returns normalized. 

Jaymin T. Berg U.S. O .. pariment of thG TrGilSllty 

orne .. of the Comptroller Df the CUrlency 

L"'gt1 BllnkSUf"'rvision- C!lplai Marbts 

TaI:(212)a99--139'5\F<I:c::P01}43:1-6183 

__ - Rtdatted hy the Perma~c:llt 

Suboommittte on In\'ntiptJoDJ 

This message Is lnt~dlldfor desi;Jrrated recipl!;nts only. ,you ha'{!! raceiw-aths message in error. peaSE! ""tiT'yth", sonderlmmediatEly llrd c:e1e1P-:he or}glr~1 and all 

cop-l\>s. federaj law ptohlblls lhedisclOSllleorc.t!wruse of this !!1Iorm;rtlct"l. . 

Permanent Subcommittee on Investi ations 

~~~~TARY AND/OR TRADESEOO· ... __ E.XH .... I.B .. IT_# .. 5 .. 8 __ .. OCC-SPI-00004695 
808 

From: 

To: 

Sent: 

Subject: 

Fursa, Thomas 

<Hohl, J.ames> 

4/13/20123:55:30 PM 

Re: CIO deck 

Tbnnks. Icorudn't rerrenber the guys'Ilalre 

-- Original 11essage -~-~. 

From: Hobl, Jan::es 

Sen: Friday, April n, 201111;53 AM 

To:Fursa. ThJrrns 

Subject: RE: 00 deck 

Just e-mailed tle guy who sent the reponbefure getting this. 1fl don't rear backfromhim, I'll e-mail Ed. 

--Origiml MeSSIlge---

From: Fursa. Th:Irras 

Sed: Friday, AprillJ, 201211.51 AM 

To: Hobl, Jam:s 

Subject: Re: 00 deck 

If tJ'-'1t'S ftc last one - elm :you e-lmil Ed Kasti for the latest? 

---" Original Message ---- From: HoM, Ja..nes 

Sect: Friday, April 13, 2012 11:31 AM 

To; Fursil, TIXHKlS 

Subj cct RE: 00 deck 

'le lalest 01r. Ihal I gol was JallllaJ)'. rll creek '\VISDM 

,,-Original Message---

From Fursa.. Thorms 

Sen: Friday~ April 13, 2012 11.31 AM 

To: Hobl, JalTeS 

Subject: 00 deck 

Janes - haye you still been gettillg the CIO deck? 1 don't recall seeing it lately. Can you creck WISDM to see what th:: last ore is? 

Thm\c;. 

Tom 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION 

Permanent Subcommittee on Investi ations 

EXHIDIT#59 OCC-00004720 
809 

From: 

To: 

CC: 

:;ent: 

Subject: 

Attachments: 

Sabatini, Joseph 

lacuccl(Regulator}, Anna; Crumfish (Regulator), Fred X; Di!Jon(Regulator), Donald 

V'vilmot, John 

4/16/20122:54:36 PM 

FW: materials for Fed/DCc/FDIC call. at noon today 

synthetic credit book_Fed_DCC-pdtzip 

This time INith the attachment ! 

From: Wil,rnot, John 

Sent: Monday, April 16, 2012 10:44 AM 

To: Sabatini, Joseph 

Subject: materials for Fed(CX::C;FDIC call at noon today 

Joe - here are the materials for the noon call today on the 'Synthetic Credit Book John 

John C. Wilmot! Chief inVelitmer'lt Offi(:e 1 + john.wilmot® jpmorgan.com ! (Work: (212) 814-5452 I (Cen: •••• 

__ "'" Redacted by the Penn anent 

Subcommittee on Investigations 

Permanent Subcommittee on Investi ations 

~~~::TARY ANDIORTRADE SECRE 11-__________ EXHIBIT #60 01 OCC-SPI-00009712 
Synthetic Credit Book Review 

Thiglnfonnation Is confidential or proprietary and conslitutes confidential supervisory information and confidential commeraal!nfollTlatlon, Disclosure or distribution of the 

oonfidenliat information to any person without the prior written consent of JPMorgan is prohibited, My examiner to whom JPMorgan has furnished this corifidentia! 

information may disclose the cohfidential information to any other employees of the Federal Reserve or ace who have a need to know the confidential information or ae 

permitted by law, 

JPMORGAN CHASE &CO. 

BANK PROPRIETARY ANDIOR TRADE SECRET INFORMATION OCC·SP
Core Credit Book 

III Objective since inception (2007) has been to manage a profile that would protect against a significant 

downturn in credit, offsetting natural credit exposures in CIO and the firm 

II The strategy can be divided Into four main components 

III Investment grade 

- US (CDX.IG) 

- Europe (iTraxx Main) 

a High Yield 

US (CDX.HY) 

- Europe (iTraxx XO) 

.. On a very generalized basis, the combined strategies provIde the following risk profile 

III Short HY risk (long protection) against long IG risk (long risk) 

II Short short-duration IG risk (long protection until YE12) against long long-duration IG risk (ie a credit 

curve flattener) 

III The IG9 Series includes 5 fallen angel names included in the HY index 

III Radian 

II MBIA 

III Sprint 

/I RR Donnelly 

III iStar FinanCial 

2 JPMORGAN CHASE & Co. 

BANK PROPRIETARY AJ'IDIOR TRADE SECRET rnFORMATION OCC-S
Rebalancing Activity 

Market Back-drop 

II Nov 29 AMR bankruptcy filing earlier than expected 

II First European announcement of L TRO on December 8th 2011 

iii COX High Yield series 11 matured December 20th 2011 

iii January 18 Kodak files for bankruptcy; rumored for weeks ahead 

Risk Management Activity 

.. CIO decides to reduce the HY protection which was providing stress loss protection for both credit spread widening 

and systematic risk 

II Post AMR default, HY index exhibits limited liquidity, exacerbated by expectations of Kodak evant 

III Difficult to hedge the book with HY indexes that matched the underlying risk of the protection 

til Best available hedge was to use the IG 9 index that had the special feature of being both an instrument with 

liquidity of IG but with a HY component that allowed a hedge for 11 good part of the HY position 

II After analyzing the economics of the hedge and the behavior of VaR and stress VaR, CIO increased the IG 9 long 

forward position 

JPMORGAN OI-lASE &00. 

BANK PROPRlETARY AND/OR TRADE SECRET INFORMATION OCC-SP
Synthetic Credit Summary: Notional Exposure 

BANK PROPRIETARY AND/OR TRADE SECRET INFORMATION 

rr-' J : 

.. 

= a 

if 

o ... a .. 

a Jig, 

g !if 

, -'" 

f 

III Gross externaj (to CIO, including IS) 

notional is $836bio long risk vs. $678bio 

short risk across all index and tranche 

products 

III External index notional faces 

Intercontinental Exchange (ICE) is net 

$96.7blo,97% of total net external index 

exposure 

" Tranche products are not eligible for ICE 

cleating and are bilateral counterparty 

exposures 

JPMORGAN CHASE&CO. 

OCC-SP
Synthetic Credit Summary: Maturity Profile 

.. 7 

65 W51 -'Pi' -111'.47S 1t,-493 ..... 

-'-"" ...... "" '" ''"'' ."". .:7 .. 1:o'Ct " _1111 ->.>" "1,4044 -..... ',"" '-'" "'" 

1:1103 ....f1i2fi2 1,157 _1714 33263 " .. _21,l 

,--

",(1'" .., _1 m 

OOXLalX , 

em", 1& • .. ... _1] .- -3 IIIWOl_ " .. '" _11.1 .., -= ilflWOtM . '" " m , IIJWO( ...... "'" _16 IIJWO( ...... -1 """" ... 

Grltl'ldT(lI"t 

II Top table shows gross nationals across indices and tranches by. underlying index family (simply adds nationals of indices and 

tranches) 

" Boltom table shows the 10% credit spread widening (P/L $MMs) to 10% widening of credit spreads 

.. Largest short risk exposures in investment grade mature in Oec-12 for COX.IG,9 and Jun-13foriTraxx 89 

II Largest short risk exposures in high yield are concentrated in Oec-15 to Jun-16 for COX,HY and Oec-16 for iTraxx.Crossover 

II One particular item to note is the iTraxx Main 20Jun13 which appears long given positive notional, but which is in fact short, as 

reflected in 10%csw, as a result of equity tranche protection which is a significant part of the position 

'" 

.... 

"" -Z1 

-, 

JPMORGAN CHASE &Co. 

BANK PROPRIETARY ANDIOR TRADE SECRET INFORMATION OCC-SP
Synthetic Credit Summary: Risk Summary 

is Total Synthetic Credit VaR 59.2mm 

10 10% Credit Spread Widening 

II The position. beta-adjusted has net directionality of -$163MM in 10% parallel move in spreads 

" This is equivalent of $34.5bio of long risk in 5y IG equivalents 

" Relative value Risk Exposures 

II IG9 5/105 curve position $46MM/bps 01 risk if curve steepens 1bps 

" ITX9 5/1 Os curve position $19MM/bps if curve steepens 1bps 

II IG vs. HY $27mm/bps of risk if IG underperlorms HY by 1bps II xa VS. ITX $34mm/bps 01 risk if ITX underperforms XaVER by 1bps 

Illdex CS01 eS01 CSW 10% }1y vs 10 Steepen01 (mmUSD) 

CDXHY 8.51 42.55 478,40 Mar 2012 CDXLCDX 0.09 0.45 1.40 Feb 2012 

COXIG -a5.12 -453.12 ·27,24 45.08 Jan 2012 

}.";." " Dec 2011 Nov 2011 

ITraxx MN -22.06 -22,06 -344.04 -34,26 0cl2011 rr""", )<D '.00 12.24 178.20 

ITraxx Artsub "'.56 -2.24 w;;!3.05 

ITtaxx Rnsen ..,.03 -D.13 -0.73 

Sep2011 

Aug 2011 

Jul2011 ..,.02 "'.02 "'.44 Jun2011 

EUI!?pe " -34,,26 ·19,07 

-4,31 -163,39 

May 2011 

Apr 2011 

Mar 2011 

Feb 2011 

Jan 2011 

CredIt Cnsls Synthetic 

Stress Va. 

434 59 

1,552 50 1,294 82 

1,446 BO 1.3M 00 

1,165 65 

002 54 

3lJ2 51 

!l69 27 

7!l5 

195 " 40 

278 55 

59 

148 63 

246 ffl 

SynthetiC Synthetic 

CSW10% CS9PV 

(163) (46) 

(127) (31) 

(1 .... ) (15) 

91 0) 

... (1) 

27 (1) 

(29) 2 

(97) (2) (69) (2) (46) 1 

(128) (4) (107) 1') 

(115) (4) 

(Ta) (4) 

(100) (5) 

-

6 JPMORGAN CHASE&CO. 

BANK PROPRIETARY ANDIOR TRADE SECRET INFORMATION OCC-S
Synthetic Credit Summary: Exposure to COX IG 9 Curve 

" On a simple basis, curve could 

steepen by 20 bps more (on historical 

basis) 

" Loss approx $1 billion 

" With hedges currently in place, we 

could steepen by 10bps approx 

" Loss approx $550mm 

III Bottom graph shows the behaviour of 

the slope of IG 9 1 yr versus IG 9 5 

Yr that we have in our portfolio 

.. This shows the relationship between 

the slope of our position in the index 

versus the actual hedge that we have 

" Bounding the relationship is the 5 Yr 

short that we have on the run five 

year IG and the short that we have in 

the HYOTR 

BANK PROPRlETARY AND/OR TRADE SECRET INFORMATION 

.. 

60 

<OJ 

2lJ 

Ii i-m 

;::..., 

ii 

...... 

,. 

"10 

-T1J) 

iii 

! 

00 

c := S&. a .. a .. 

liB: liof 

;g .... to 

i 

i 

g"-

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l 

--"",-

JPMORGAN CHASE&CO. 

OCC·SP
Single Name Risk & Forward Jump to Default Risk 

Table 1: default profile tOday and post December 2012 

# of names Average P&L Max P&L # of names Average Max Gain 

Portfolio # of Names with default given Default given with Gain given given 

loss risk ($mm) Default default Default Default. ($mm) gain ($mm) ($mm) 

T alai po rt1iJli 0 loday 588 

Total po rtl06 a post Dec 

2012 585 228 -336 -716 357 133 600 

IG 9 only today 121 0 0 121 146 417 

IG9 posl Dec 2012 121 121 -572 -716 0 

orrthe-run 

IG9 Hedge option 5 IG18 covers 89 names out of 121 

postDec2Q12 HY18 cO\e'" 13 out 01 the remaining 32 names unhedged with iG18 

iii Today there is considerable default protection coming IG9 tranches. 

.. Across the 121 nameS in IG9, the Jump-To-Delauitat Market Recovery goes from a current gain 01 +146m on average per name to a loss of572m por name post December 2012. 

.. This is because of the roll-off 01 two forms 01 protection: on 20lh Dec 2012 

III The first is the 32bn of short-dated Index protection, 

.. Importantly, the second is the roll-off of nearly $4bn long protection on IG9 equity tranches. The equity tranche gives protection 

at an approximate ratio of30 to 1, so the $4bn of equity lr'anche protection is equivalent 10 $120bn of Index protectlon.in terms of 

pure risk. 

• Post 20th December 2012, we would be able to partially hedge this exposure with the currenlon-the-run index but the overlap is 89 narnes out 

ofthe 121 in 1GB. 

II On the 32 remaining nameS we have a loss of $500mm on average per name that would need to be hedged by other means 

(HY on the run index, single name CDS, index tranches etc) 

JPMORGANOHASE &00. 

BANK PROPRlETAR Y AND/OR TRADE SECRET INFORMATION OCC-SP
Single Name Risk - Default Protection in Current Portfolio 

a Current portfolio provides Jump-To-Default protoction on 

526 names 

" The Average gain given default is +$133MM, with the max 

+$600MM 

II The Top 20 names positive Jump-To-Default at Market 

Recovery are shown in the table to the right; these are 

driven primarily by JTD protection afforded by iTraxx 0-3% 

equity tranches 

II Across the 121 names In IG9, the at 

MarKet Recovery displays current gain of +146m 

Potential Top Default Protection Exposures - CUrrent Portlolio 

COMPANY NAME 

GAsNAWRAL sot;, SA. 

GDF SUEZ 

EDP ENERGIAS DE PORWGAL, SA 

PORWGAL TELECOM INTERNATIONAL FINANCE av, PEUGEOT SA LAFARGE RENAULT 

THYSSENKRUPP AG 

DIXONS RETAIL PLC 

HELLENIC TELECOMMUNICATOINS 

CLARIANTAG 

DEUTSCHE POST AG 

ARCELORMITIAL 

FINMECCANICA S,P,A, 

BANCO ESPIRlTO SANm, SA 

DEUTSCHE LUFlHANSA AKllENGELSELLSCHAFT 

GKN HOLDINGS PLC 

BANCA MONTE DEI PASCHI 01 SIENA S,P .S,· 

BANCO BlLBAOVIZCAy A ARGENTARIA, . SOCIEDAbANONIMA 

BANCO SANTANDER, SA . . . . 

"tI 

" "I a 

.. 

= 

a " 

'" c 

<:r' 

:>:1 n 0 II> a "'" .. a 

ali> "'" " 0 ..., = 

= 

.... 

< = 

(JQ 

g. 

a 

9 JPMORGAN CHASE & Co. 

BANK PROPRIETARY ANDfOR TRADE SECRET INFORMATION OCC-S
Single Name Risk - Default Risk and Default Protection Post December 2012 

III Post expiry of CDX.IG.9 O.7Sy instruments, across the 121 names in IG9, the Jump-To-Default at Market 

Recovery goes from a current gain of +146m on average per name to a loss of -572m per name post December 

2012 as shown in the table 

• Among other names, the portfolio retains its pro-default characteristics, as before 

Potential Top Default EXposure Post December 2012 

riG NAMES JlDj 

BAXTER INTERNATIONAL INC '. 

BRISTOL-MYERS SQUIBB COMPANY 

CAPITAL ONE BANK (USA) NA 

CENTEXCORPORATION COMCASTCABLECOMMUNICATIONS, LLC 

DUKE ENERGY CAROLINAS, LLC 

EMBARQ CORPORATION" 

GOODRICH CoRPORATION 

HONEYWELL INTERNATIONAL INC 

INGERSOLL-RAND COMPANY INTERNATIONAL BUSINESS MACHINES CORP 

INTERVAL ACQUISITION CORP 

MCDONALDS CORPORATION 

MCKESSON CORPORATION 

MEADWESlVACOCORPORA TION 

RJO TINTO ALCAN INC 

ROHM AND HAAS COMPANY 

THE WALT DiSNEY COMPANY 

WELLS FARGO & COMPANY 

WYETHLLC 

.... 

::I " [ '" 

g' " ::c 

o " S c. 

S 

[ 

" ttl 

::I o "" 

a: 

::; 

o 

1; 

Top Default Protection Exposures - Current Portfolio 

COMPANY NAME 

GAs NATURAL SDG, SA 

GDF SUEZ 

EDP - ENERGIAS DE PORTUGAL, S.A. 

PORTUGAL TELECOM INTERNATIONAL FINANCE B,V. 

PEUGEOT SA .'. ,... 

U'lFARGE RENAULT 

THYSSENKRUPP AG 

DIXONS RETAIL PLC 

HELLENIC TELECOMMUNICA TOINS 

CU'lRIANT AG 

DEUTSCHE POST AG 

ARCELORMITTAL. 

FINMECCANICA S.P.A. 

BANCO ESPIRITC SANTO, S.A. 

DEUTSCHE LUFTHANSA AKTIENGELSELLSCHAFT 

GKN HOLDINGS PLC 

BANCA MONTE DEI PASCHI DI SIENA S.P .S. 

BANCO BILBAO VIZCAYA ARGENTARIA, SOCIEDAD ANONiMA 

BANCO SANTANDER, SA . ..... ,. . 

.... 

§ 

[ 

'" 

g' " ::c a 8-

s 

;-c. 

g ttl 

§ "" 

.... 

" f5.. 

::t. 

o 

a 

10 

JPMORGAN CHASE & CO. 

BANK PROPRlETARY AND/OR TRADE SECRET INFORMATION OCC-S
Synthetic Credit Summary: Portfolio Effects in Adverse Scenario 

rJ Stress Loss Protectio n 

II In an environment of significant credit deterioration and the occurrence hard default events or perception of imminent defaults, the 

portfolio provides stress loss protection 

.. This is due to the spread convexity of the portfolio to major market dislocation, during which curves may reprice significantly, 

flattening as hedgors rush to buy protection in short dated indices 

II In addition to the 'static' default profile shown in preceding slides, we simulate the portfolio behaviour (see scenario 1 0 below) by 

widening credit spreads by average 75%, and through flattening Curves (for reference, above depicts -50bps curve flattening in IG.9 

O.75y /S.75y curve, a move which is extrapolated throughout the portfolio 

\I In this case we envision the portfOliO would produce substantial protection, Circa $1 ,725MM driven by HY shorts and natteriing of 

investment grade curves 

11 JPMORGAN CHASE &CO. 

BANK PROPRIETARY AND/OR TRADE SECRET INFORMATION OCC-S
Synthetic Credit Summary: Risk & P/L Scenarios 

01 Reafised P&L -$580, driven by losses in short. risk: HY (670MM), vs. +128MM in CDX.!G, and -30MM in iTraxx 

• The [G component has been the maIn P&L driver of underperformarce In 01, as !G.9 forward long risk positions did not deliver anticipated PlUflts given steepenIng of the 

curve, Current book is overall risk balanced, gi¥en the oro6s-marketlong/short and hag. positive carry of $2MMlday. while retaining upside 01"1 defaults 

Q2 P&L these scenarios do not include 10 April P&'L, which would accrete back Into each $()enarfo +$400MM. If re..callbrated for todays market moves 

III -$25CMM (New Financial Crisis) impUes an average spread widen!ng of +25%, driven by bankS/financials undergoing sUess. In this Gase, the portfolio P&L is driven by: 

+251JMM cany 

-100MM given relative uroerpenormance of IG vs, HY (compression, Jed by bankslfinancials widening) 

- -$300MM due to 'duration extension' as we project that the short-dated short risk duration in IG will contract as Bxpiry approaches 

• .$100MM due to spread widening, not offset in this case by curve flattening (we assume here that curves rernain 43bps steep in IG equivalents) 

5 .$150MM (Status Quo) in ,this case we assume that market levels am our.res 'freeze' at current levels; In this scenario CIO would delta hedge around vol.atmtythroughout 

the quarter 

+200MM carry 

-$300MM due to 'duration extension' as we project that the short-dated short risk duration in IG will contract ae expiry approaches 

·$50MM due to Iong.dated tranche underperformance as observed in 01 

+$:350MM (Central S;:;enario) in this case hull steepening of IG curves (+4bps), mOfe than offset by outpenormance of IG.9 curve vs. on the run 

+170MM carry 

·$280MM due to 'duration extension' as we project that the short·da.ted short risk duration in IG will contract as expiry approaches 

+$110MM due to redly in cfeditspreDds-15% +$200MM due to relativeoutperformance of JG 9 curve VS. on the run tG curves (wh!le counter-intuitive, the effect of IG.9 w, on the fl,J'\ IG oomplexis 

driver of performance) 

+$150MM due to janf:HJated equity tranche outperformance 

In the section "10% Optimistic" the convexity otthe portfolio in a highly positive or a highly negative market oulcome is demonstrated. 

+$702MM in the event of -20% tightening of spreads, decompression of HY 'IS. IG credit, and JG,9 forward outperformance (rolling down the curv-e) 

$1, 126 of QE" refers to a scenario of strel'll growth Jed by U.S., spreads avg. ·soak tighter 

+1,725MM in "Many means wave of defaults among widest spread names (incl. MBIA, Radian, iStar) curve flattening, and +75% spread widenIng, driven 

by performance of HY shorts, IG flatteners and long protection positions in the portfolio 

In the section ""10% Extreme" it;s estimated that the book would range -$355MM to ·$650MM, 

-$355MM in the event of bear steepening of curves, spreads wider by avg +10% 

·$650MMin the event of bull steepening of curves, spreads tighter by avg -25%, driven by underperformance of 1G,9 (forwards do not roll down curve in rally} 

12 JPMORGAN CHASE & CO. 

BANK PROPRlETAR Y ANDIOR TRADE SECRET INFORMATION OCC.SP
822 

From: 

To: 

CC; 

'em: 

SUbject: 

HiJamesBellando, John W <john.w.beJlando@jpmorgan.com> 

<I-iohl, James> 

<Fursa, Thomas> 

4/16/20123:26:41 PM 

RE: Cia January 2012 valuation memo and metrlcs 

! trust you are well, With regards to CSBPVyou are correct, 

Thanks, 

John 

From: james.hohl@occ,treas.gov 

Sent; Monday, April 16, 2012 10:46 AM 

To: Bellando, John W 

Cc: thomas.fursa@occ.treas.gov 

Subject: RE: CIO January 2012 valuation memo and metrics 

Thanksvery much. I do have orie qUick question. For the credit derivatives risk measure (CSBPV), lid assume that 

stands for credit spread basis point value and that the exposure is to a 1 bpv widening of credit spreads. Please let 

me know whether that's correct orif it's something else. Thanks again, James 

From: Be!!ando, John W [mslilto:john w.beflando@jomoruan com] 

S.ent: Friday, April 13, 2012 5.58 PM 

To: Hohl, James 

~ubject: RE: ao January 2012 valuation memo and metrics 

Hi JamesApologies for not distributing the February valuation work. I just sent the February and March reports. 

Please let me know if you have any questions. 

Thanks, 

John 

From: james,hohl@og:.treas,qov 

Sent: Friday, April 13, 201211:49 AM 

To: Bellando, John W 

Subject: RE: 00 January Z012 valuation memo and metrics 

HI, I don't think that I received a report since this one, have they been distributed? Thanks, James 

From: Bellando, John W [maUto-john w bel1ando@jpm~] 

Sent: Monday, February 13, 2012 1.13 PM 

To: Fursa, Thomas; Hohlt James; McManus, William K; Hawkins, Kimberly A 

Cc: m $,oau!@us owe com; 'kristen.brown@us,pwc.com'; 'phlllp.j.grealy@us.pwc.rom'; 'philip,t,mijares@us,pwc.com'; Kastl! 

Edward R; Alexander, David M; Burke, Alethea X 

Subject: FW: aD January 2012 valuation memo and metrics 

PIs find attached our January valuation summary memo and results. 

Thanks, 

Permanent Subcommittee on Investi ations 

=~~:'TARY ANDIOR TRADE SECRE ... __ E.XHiOiiii.IB-.IT .... #.6.1 __ .. OCC-0000473 j 
823 

John 

From: Bellando, John W 

<;ent: Monday, February 13, 20121:07 PM 

:0: Wilmot, John; Alexander, David M; Weiner, Pamela; GiC!vannetti, Alison C; Lee, Colvis 

CC: Kastl, Edward R; Shuja, Amlr, Bjamason, Davidi Hughes, Jason LDN; Uu, Dorris X; Laskis, Adam; Burke, Alethea X 

Subjoct 00 January 2012 valuation memo and me~cs 

, AIIAttached are two files for your review of the January 2012 CIO independent valuation results: 

1} Globa! summary levelVCG memo-January 2012 Valuation Summary 

2} Global valuation summary with price testing results and coverage metrics ~ Global Valuation Summary Metrics 

January 2012 

Please let me know if you have any questions. 

Thanks, 

John 

This email is confidential and subject to important disclaimers and conditidns including on offers for the purchase or 

sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity 

disclaimers, available at http://\1v~.jpmorgan.com!pagesidisclosures/emai1. 

This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or 

...;ale of securities, accuracy and completeness ofinfurmation, viruses, confidentiality, legal privilege, and legal entity 

disclaimers, available at http://wv.rw.jpmorgan.com/pagesldisdosures/email. 

This email is'confidential and subject to important disclaimers and conditions including on offers for the purchase or 

sale ofse~urities, accuracy and completeness ofinforrnation, viruses, confidentiality, legaJ privilege, and legal entity 

disclaimers, available at http://www.jpmorgnn.com/pagesldisclosuresJemail. 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION 

OCC;-00004 736 
824 

From: 

To: 

Sent: 

iubject: 

Hi James, 

WIlmot, John 

Hohl (Regulator), James X 

41171201212:24:59 PM 

RE: Quick quesUons pp 4 and 5 of yesterday's presentation 

Your notes and understanding are correct. Pages 4 aOO 5 reflect the entire synthetic credit portfolio, long (long credit 

risk) and short (short credit risk - ie long credit protection). 

With respect to thE:' grand total net position, the portfolio is measured as lo~ credit risk under a 10% credit spread 

vvidening scenario. As you'll note on 6, this is equivalent to $34.5bn of long risk in 5y IG equivalents. Having said that, 

the portfolio as we describe it on page 2 has two general positions (short HY risk vs long IG risk and an IG clEVe 

flattener). These risk exposures are a!so outlined on page 6 and give you a sense of the sensitivity to relative spreads 

and curve, So while directionaUy (to a csw scenario) the portfolio positions are long risk there are 2nd and 3rd order 

sensitivities that need to be considered. 

Having said all of toat I believe there is a modest long credit risk sensitivity to the portfolio now. 

Let me know if you have any fLJ1her questions. 

Regards, 

John 

John C. WlJm.at ! Chid In"estm~nt Office 1 + iohn,wilmot:l>jpmorgan.c:om ! (Work: (112) 634·5452 I (Cd!: •••• 

~rom: Hohl (Regulator), James X 

ent: Tuesday, April 17, 2012 7:48 AM 

fo: Wilmot, John 

__ = Rtdacted by the- Permanent 

Subcommittee on Investigations 

Subject: Quick questions pp 4 and 5 of yesterday's presentation 

Hi John, 

I wanted to check my understanding of the synthetic credit summaries on pp 4 & 5, and ask a follow-up 

question. I wrote down during the meeting that the tables reflect credit risk positions long or short, so 

that the CDS positions would be the opposite, e.g. looking at the top of p 4, the $836.1 long gross 

external trades results from CIO selling $636.1 notional CDSs and the $-678.8 short arises from CIO 

purchasing CDSs. I believe that the chart on p 5 is similarly constructed. I also wrote down that the 

chart on p 5 reflects the entire synthetic credit portfolio. Can you please let me know if I've 

misunderstood any of this. 

My follow-up question is from the grand total net position on p 5 and my understanding of the tables 

outlined above. Does CIO management view the $-163 million as basically flat or is the synthetic credit 

portfolio going to be taking on additional credit risk? 

Thanks, James 

Per-manept Subcommittee on Investigations 

~~~~i:TARY M'DIDR TRADE SECR 1. __ E .. XH .. ID_I.T_#6iii2 ___ • DCC-SP!-00023815 
825 

To: 

From: ~ 

~~~W<lterh9UseSwtt 

Subject.: 

~~~H9h!J:;me:!:;~~MonroeChristopher' 

JPM 

~~ 

CIO /IG9 ~whaJe" trade 

Date: TU~i'ly,Aprll17,2D124:33:00PM 

On Monday 4/16 ace and FRB examiners met with Ina Drew and several members of CIO staff and 

risk management to discuss the JPM synthetic credit book in view of recent press reporting. This 

message provides a summary of our discussion, followed by a more the detailed summary. It 

focuses specifical!y on recent changes to the synthetic credit book. 

lPM's CIO has been using a synthetic credit (credit derivative) portfolio since 20D7. It was 

initially set up to provide income to mitigate other significant credit losses that would 

surface under a broad credit stress scenario. Since it wasn't possible to tailor a specific 

hedge to the JPM balance sheet as a whole, this portfolio was constructed. As the 

investment portfolio grew in 2007~2009, the synthetic credit portfolio was used to hedge 

stress and jump to default exposures in that portfolio as we!!. 

CIO's credit derivative position was managed to provide around $1 billion to $1.5 billion 

income in credit stress scenarios against firm wide losses of $S bHlion to $8 billion. 

• In late 2D11, in view ofa change in perception in the state of the economy, Cia managers 

decided to reduce high~yield (HY) credit protectioni however, after the AMR bankruptcy 

and with Kodak expected to file for bankruptcy, the markets for CtO's HY indices weren't 

liquid enough to use them to unwind CIO's position. 

The IG 9 index, which is much more liquid than HY indices, includes five "fallen angels" that 

allowed it to be used to reduce a "'good part" ofCIO's HYposition, so it was used to reduce 

the HY protection. 

• The IG 9 market is not ilhquid as it trades. around $10 blilion daily and spread changes for 

this index are in Hne with peer indices. The lG 9 curve has steepened in a move of around 

6.5 standard deviations, and there has been strong buylng of deferred contracts, implying 

that the buyers are certain that there will be no defaults in the next 9 months and nearly 

certain that there wi!! be defaults next year. In view of events, however, jPM is conducting 

a "post mortem" of the IG 9 situation and its impact and share results with OCC and when 

completed. 

The CIO began using credit derivatives around 2007 as part of its mandateto mana.ge structural 

balance sheet posItions. 00 onty uses credit derivatives on indices, notspe-cific names. Initially 

cia bought protection (shorted risk) on mortgages, using ASX. and high yield tndices to mitigate. 

some of the firm's balance sheet credit exposure. At this time Cia investments. were highly 

concentrated in Agency pa-ss~through mortgage securities, and the structural credit risk was in the 

lines of business. 

Permanent Subcnmmittee on Investi ations 

~~~::TARY ANDtoR TRADE SECRET 1. __ E•XH ... I.B .. IT ... #.. 6.3 __ ... OCC-00012521 
826 

Through the financial crisis deposit inflows combined with lower loan demand to leave the firm 

with significantBxcess funds. As part of its mandate to invest, when appropriate, in high credtt 

quality, liquId investments, the 00 began purchasing low credit risk, top ofthe capita! structure 

securities to use the excess funds. While high quality, these investment securi!ies have more credit 

risk than the U.S. Agency pass~~hroughs that continued t.o be held, so that structural credit risk in 

the investment'portfolio increased along with portfolio growth. 

Throughoutthis th~ CIO continued using index credit default swaps (CDSs) to mitigate some of the 

structural credit risk in the investment portf<llio and the lines of business other than the 

investment bank, which manages its own credit risk exposure. While there are liquid markets for 

many credit derivative indices, the markets are not def::P enough to fully hedge a mutt!~trmion 

dollar balance sheet. ClO's credit derivative position was managed to provide around $1 billion to 

$1.5 billion income in credit stress scenarios against firmwide losses o'f $5 billion to $8 hjllion. 

CIO managers decided to reduce the high yield credit derivative protection around Thanksgiving 

last year. After the AMR bankruptcy filing on November 29, 2011, the firm profited from its credit 

derivative positions as anticipated, but high yield index derivatives had limited m~uidity as demand 

increased, CIO managers thought that it wouldn't be possible to reduce the hig~ yield credit 

derivative position by using the indices that created it; the best available hedge product was the IG 

9 Index, which has good liquidity as an investment grade index and a high yield component as five 

ofthe index companies are "fallen angels" i.e., companies that have fallen below investment grade 

since the index originated. This'was the reason that JPMCB began selling IG 9 CDSs; going tong IG 9 

credit risk (selling CDSs) would neutralize some ofthe short high yield credft risk position (long 

CDS,). 

JPM provided the CIO notional CDS exposures as requested, along with a summary of the synthetIc 

credit portfolio maturfty profile and results of a 10% credit spread widening (CSW). The CIO CDS 

portfolio includes exposure to JPMC's IS along with third parties. The third-party counterparties 

are all major banks or broker/dealers. The stress results show that the CDS portfolio net exposure 

cannot be judged by looking at notional exposures alone. An example given is the ITroxx Main 

20Jun13 position; the notional exposure is $28 billion long risk suggesting a loss if credit spreads 

widen, but the 1CfloCSW shows a profit of $68 million because of equity tranche protection that is 

part ofthe position. 

The synthetic credit portfolio position now provides around $434 million income in the credit crisis 

stress scenario. Very generally, the portfolio risk profile is short high~yjeld risk against long 

investment grade risk and short short-duration (to yearend 2012) investment grade risk against 

long long-duration investment grade risk, Le. a credit curve flattener. The portfolio VaR was $59.2 

million on April 5th. The portfolio is reported in Cit? positions and subject to all oftheJPMC 

market risk management systems. 

Through the indices used, the portfolio provides credit protection on SBB names. lil1 ofthem are 

from the IG 9 index, which currently gives an average $146 million jumpto default at market 

recovery gain per name. This position 'is stable untll December 20? 2012 when $32 billion of shnrtdated protection rolls off along with $4 billion of protection on IG 9 equity tranches, and the 

BAA'K PROPRlETARY AND/OR TRADE SECRET 

INFORMATION OCC-00012522 
827 

average Jump to default at market recovery becomes a loss of $572 million per name. Beforethat 

happens, CIO managers feel they have time to adjust the portfolio to compensate without roiling 

the IG 9 market. 

In addttion to indusion in the firm-wide stress scenarios, cIa managers routinely run other stress 

scenarios to assess portfolio performance in a variety of circumstances. The synthetic credit 

portfolio IS seen to provide stress loss protection in an environment of significant credit 

deterioration with defaults or perception of imminent defaults. 

00 managers have been surprtsed thatthe IG 9 market has been so willing totake on'and sell so 

much protection, regardless ofwhatJPMC did. The market is not iIIiquiq as the lG 9 trades around 

$10 billion daily. The spread changes for this index are in line with peer indices. Many market 

participants have been strong buyers of deferred contracts, implying that they had complete 

.certainty there would be no defaults in the next 9 months and near certainty that next year there 

will be defaults. The IG 9 curve has steepened in a move of several standard deviations. cia 

managers said that the curve steepening move was around 6.5 standard deviations from the 

mean. A review of the lG 9 situation is being done, and it will be shared with the ace and Fed 

when completed. 

Attenl;iees: 

JPM: CIO attendees: Ina Drew Chief Investment Officer, John Wilmot cIa CFO, Achilles Macris CIO 

Managing Director EMEA (telephone), Javier Artajo CIa Managing Director EMEA (telephone), hv 

Goldman Market Risk Management Managing Director, Pete Weiland Market Risk Management 

Managing Director, Keith Stephan Market Risk Management Executive Director EMEA (telephone), 

Greg Baer Managing Director Associate General Counsel, Joe Sabatini Managing Director Head 

Supervisory Relationship 

OCC attendees: Fred Crumlish, James Hohlt Mike Kirk 

Fed attendees: Anna Jacucd, two others 

**. If you have received tbismess:age in error, pletlSe delete the original and all copies, and notify the sender 

immediately, Federa11aw prohibits the disclosure or other use of this: information. $>10+ 

BANK PROPRlETARY ANDIOR TRADE SECRET INFORMATION OCC-00012523 
828 

From: 

To: 

Sent: 

iubject: 

Wilmot, John 

Regu!ator\), James X <Hohl \> 

4119120129:15:16 PM 

RE: cia EMR? 

Yes, we ,jill produce it but we don't include in the Treasury EMR. It is separate. I apologize for you guys being left 

off. I l'ill get my learn to rectify that and send you the montHies ytd. 

John c. Wtlmot I Chief Inves"trnentOffio;e 1 + j(lhn..wilmot@jpmorSolIn.(;om ! {Wor/<; (212) 83+5452\ (Cell: •••• 

From: Hohl (Regulator), James X 

Sent: Thursday, April 19, 2012 3:21 PM 

To: Wll.mot/ John 

Subject: 00 EMR? 

Hi John, 

__ "" Redacted by Ihe f"errnMH n' 

Subcommittee on In' 1',1 

Does the GIO still produce an EMR? It wasn't included in the January Treasury EMR, Which is Where I used to see it 

I'm looking for the balance sheet information that was in it. Thanks, 

James 

Permanent Subrommittee on Investigations 

=,~~::TARY ANDIOR TRADE SE .. __ E.XH .._IB-.IT ... #.. 6 .. 4 __ .... OCC-00004723 
829 

From: 

To: 

cc: 

Sent: 

~ubject: 

Weiland, Peter 

Regulator\), James X <Hoh! \> 

<V\JTImot, John::>;<Goldman, If\'in J> 

4/19/201210:24:01 PM 

RE: Info on VaR, CSBPV, and stress status ard limits 

I talked to someone in reporting. The excessions email was incorrect. 

We are in the midst of implementing stress limits that include SAA. The old limits were $SOOmm for MTM and 

$800mm for Aggregate excluding SM. The numbers 1 gave you below are the new usages fuly inclusive of SM wth 

the new limits as approved by Hogan et al. It may be that the official reports for AprilS still showed the old limits. Just 

to summarize, the new ones are: 

CIQ MTM usage $1.538 against limit of $1.08 

CIQ Aggregate usage $12.678 against Ilmtt of $15.08 

Pete 

Peter Weiland 

Tel: + 1 .21

111i

2.8.34.5.54

111i

9. Mob: + 

From: l-tohl (Regulator), Jame.s X 

Sent: Thursday, April 19, 20122:51 PM 

To: Weiland, Peter 

Subject RE: Info on VaR, CSEPV, and stress status and limits 

Pete, 

__ = Redaded by the Permanent 

Submmmittee on Investigations 

he attached 4/17 excessiDn report \VaS the source of the comm'ent. It seems to smw CIO aggregate stress of $ 

18,454 milllon in the Level 11ab to me also, l.JlIess we're not reading it correctly. I've also included ,the report that we 

have for 4/5 because the way I read it in the Level 1 tab, CIO exceeds both aggregate. and MTM stress limits of $800 

million and $500 miUion respectively. Please let me know whether we're reading the reports correctly. 

Thanks, James 

From: Weiland, Peter 

Sent: Thursday, April 19, 2012 1:51 PM 

To: Hohl (Regulator), James X 

Cc; Wilmot! John; Goldman, Irvin J 

Subject: RE; Info on VaR, CSEPV, and stress status and limits 

Hi JamesHappy to help. 

1. The Morday-Tuesday dally Increase in the tll111's VaR was due primarily to an iraease In the CIQ VaR. This 

\/VCIS not due to any new trades, but rather to market data. In fact, in revielJ.Jlng some of the marKet data from 

the last week we found that some of the volatility from April 10 was absent In the market data and we fixed It. 

2. The aggregate stress comment is not correct. As of AprilS, CIO is over its MTM stress limit, at $1.538 vs, 

limit of $1.08. Aggregate stress usage Is $12.67B vs.limit of $158 (""thin limit). With respect to CSOllimlt, It 

is COfTect that we have been in excess for some time. This is a limit under review, as it currently aggregates 

CS01s from various lElderlylngs (e.g., IG and Hy) that sholJd not be added. We have chosen not to adjust the 

limit until we implement the new methodology. We are worklng on a new set of Hmlts for synttletlc credit am 

the cUTent CS01 wiD be replaced by something more sensible and granular. 

Permanent Subcommittee on Investigations 

BANK PROPRIETARY AND/OR TRADE SE EXHIBIT #65 illFORhlAnON ...................... .OCC-SP!-00022340 
830 

Best, 

Pete 

Peter Weiland 

Tel: +1 212834 5549 

Mob:+ ••••• ~ 

From: Hohl (Regulator), James X 

Sent: Thursday, April 19, 201211:07 AM 

To: Weiland, Peter 

_ - Redact~ by the Prrmanent 

Subtommitter on InnstigatioDS 

Subject: Info an VaR/ CSBPV, and stress status and limits 

Hi Pete, 

Would you have any color around some observations about the CIO VaR, CSBPVand stress results? 

received the following from another examiner this morning. Thanks, James 

The increase in the Firm's VaR is primarlly driven by CIO Synthetic Credit portfolio. 

CIO aggregate stress loss is over 23'% of its $158 limit. Also, MtM cs bpv limtt is in excession by 1Q74% and has been in 

excesslon for 71 days. 

BANK PROPRIETARY AND/OR TRADE SECRET ]}1FORMATION OCC-SPI-00022341 
831 

From: 

To: 

Sent: 

.iubject: 

Kamath, Jairam. 

Batista, Geralynn 

4123120125;51;25 PM " - = Rtdacted by tht Permanent 

Subeommittee OIIIDVfttigJltion\ 

RE: Week:ly Market Summary period endirg 4/13 

Sorry, j missed 'lour email last week, ! also saw the final version Fred sent out. Looks good. 

ja i ra m. ka math@occ.treas.gov 

Tel; BB; ___ 212-899-1386 _ 

Fax; 301-433-6238 

This message is intended for designated recipientS only. If you have received this message in er'ror, please delete 

the orfginal and al! copies and notify the sender immediately. Federal law prohibits the disclosure or other use of 

this information. 

From: Batista, Geratynn 

Sent: ThuT>day, April 19, 20121:15 PM 

To: Kamath, Jairam 

Cc: Swank, Toddi Fursa, Thomas 

Subject: Weekly Market Summary period ending 4/13 

Hi Jairam, 

Do you mind taking a quick peek at this to confirm that it properly reflects the changes to the stress testing 

framework? 

Th.anks, 

Geralynn 

Stress losses increased attributable to additional portfolios added as a resultof FSI (see details below); 18 VaR 

unchanged; trailing S~day trading revenue is moderate at $398mm. 

STRESS RESULTS (COB 4/6/12) 

Change Current 

Current loss/Galn 

Prior week loss/Gain 

Limit 

Scenario 

Firm MTM Bad Case 

~~~~TARY AND/OR TRADE SE .. __ EiiiX.H..,IB .. IT ... #.66 __ ..... OCC-SPI-00023057 
832 

lim Aggregate Bad Case 

IB MTM Bad Case 

ClO MTM 

RFS MTM 

-$667mm 

-$l.Sbn 

-$B60mm 

-Sl.Obn 

onCrisfs 

--,.. Red.ned by the Pennanent 

Subtommlttee on Investiga!i"rt 

The AFS portfolio has been added to the C\O Aggregate stre"ss test, resulting in a dramatic rise In stress 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION 

OCC-SP!-OO0230S8 
833 

los:ses (see chart 1 below). However, the indusion ofthe sizable AFS portfolio represents a discontinuity in the 

Aggregate Bad Case time series as previously displayed on the graphs. To adjust for this change, the CIa Aggregate 

loss estimate is subtracted from the series and shown on the "Adjusted" chart (see chart 2 below). 100% of C!O 

'ggregate losses are assumed to come from the AFS portfolio for simplicity (note that prior week's Cia Aggregate 

lOSS contribution to Aggregate Bad Case losses was immaterial). 

OtherportfoUos, •••••••••••••••••••••••••••• 

o 

o 

The CIO MTM limit increased from $O.5bn to $l.Obn 

The Cl0 Aggregate limit increased from $O,Sbn to $1s.0on 

Chart 1 

«OLE Object: Picture (Device Independent Bitmap»> 

Chart 2 

«OLE Object: Picture {Device Independent Bitmap»> 

I VAR (4/6 - 4/13) 

]\IIEETlNG MINUTES (4118) 

Fol1ow-U p Items 

Review Fred's email (4/17) for to-do's while he is out 

__ = Redacted by the Permanent 

Subcommittee on Investigation! 

Send Fred a !ist of impediments to having "strong" risk management in the areas of interest rate risk, 

price risk, and liquidity 

Summary Bullets 

General 

Sal!yvisited to review the Supervisory Strategy overthe pa~t two days. She pointed out that regarding 

Heightened Expectations, the definition of "strong risk management" is to be considered atthe dedicated risk 

management line, not the lines of business 

T~e Whale Trade issue is considered dosed--emai! went outto Senior Management yesterday 

Derivatives/Rates/Equities 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION 

OCC-SPI-00023059 
834 

Redacted By The 

Permanent Subcommittee 

on Investigations 

OCC-SPI-00023060 
835 

From: 

To: 

cc: 

Sent: 

Subject: 

Attachments; 

Batista, Geralynn 

<Crt.UTllish, Fred>;<Monroe, Christopher>;<Kirk, Mike>;<SWank, Todd>;<l-bhl, James>;<8anks, 

George>;<Kamath, Jairam>;<Wong, EIw),n>;<Tornese, Doug>;<Fursa, Thornas>;<McLatghlin, 

Doug>;<Vourvoulias, Andrea>;<Glassmall, Adam>;<Mark, Aaron> 

<Waterhouse, Scott>;<Jacobi, Gene>;<Atkins, Glenn>;<BaUsta, Geralynn> 

4/25120128:10:07 PM 

Weekly Market .Surrmary period ending 4/20 

ATTACHOOO.emi 

Stress loss~s increased marginally following last week1s dramatic jump due to the inclusion of more portfolios 

into FSI (see I.ast week's email attached below for more details); IB VaR is up from 8Smm to 87mm; trailing 5~day 

trading revenue is moderate at$378mm. 

STRESS RESULTS (COB 4/13/12) 

Change CUrrent 

Current Loss/Gain 

Prior week loss/Gain 

Limit 

Scenario 

Firm MTM Bad Case 

Firm Aggregate Bad Case 

18 MTM Bad Case 

BANK PROPRIETARY AND/OR TRADE Sl [::]2~22~~::J 1NFOR-1I1ATION 

-_... Ralacted by tbe Permanent 

Subcommittee on Inn!lltigDtiOft! 

OCC·SPI·00023753 
836 

CIOMTM 

$97mm 

-$1.4bn 

-$l.Sbn 

-$l.Obn 

Oil Crisis 

RFSMTM 

The increase in Firm Aggregate los5 was driven by CIO's elevated utilization primarily due to a !arge sell off in equities 

Forthe second consecutive week, C!O is breaching its $l,Qbn stress limit with a utilfzation of $1.43bn in the 00 Crisis scenario 

Chart! 

« ... » 

Chart 2 

« ... » 

BANK PROPRIETARY AND/OR TRADE SECRET INFORMATION OCC-SPI-00023754 
837 

Firm VOIR is$144.9mm up from $134mm WOW due to CIO VaR increase. After breaching the limit multiple 

times last week, the limit was raised to $145mm 

ANK PROPRIETARY AND/OR TRADE SECRET lFORMATION OCC-SPI-00023755 
838 

From: 

To: 

Sent: 

~ubject: 

CrumUsh, Fred 

Hohl, James; Kamath, Jairam 

5/6/20129:03:05 PM 

Rs: CIO Synthetic Position 

Just got ba<:k from chlle and saw this. Also didn1tsee any emails or weekly summary comments since! went on leave .. 

-ape 

oce 

202-439-3938 

This message is "Intended for designated recipients only. If you have received this message in error, please delete the 

original and all copies, and notify the sender immediately. Federal law prohibits the disc.!osure or other use ofthis 

information. 

from: Waterhouse, Scott 

Sent: Friday, May 04, 2012 12:03 PM 

To: Crumlish, Fred; Hohl, James 

Subject: CIO Synthetic Position 

Doug Braunstein and John Hogan called to provide an update on the cIa position. They mentioned that if we 

have been watching the position reports and P&Ls, we would have seen that they have been taking some 

significant MTM losses over the past few weeks. These losses are on posJtions established some time ago. Current 

losses are approximately $1,6 bl!!ion. Dougsald that over time, the bank has taken 'a couple billion' in gain as an 

offset to this position. 

But at this point, the remaining position is too large and the bank is trying to reduce risk. John said that the long 

position is sensitive to a 10% widening in the amount of $900MM. This is hedged with a short position in high 

yields that has a 10% sensitivity of$650MM, giving a net risk to credit spread widening of $250MM. The bank is 

taking actions now to further reduce the exposure. 

Doug said that the ClO wHl also close out some bond positions to take approximately $1 B in gains to offset this 

loss. 

John said that Ashley Bacon, in his new role as global overseer of market risk, is introducing new risk measures and 

limits for the cIa. 

The bank will publish its Q on Thursday, and Doug expects that they will make some comment in the document. 

Doug wants to ~ave a meeting on Wednesday to discuss the history of the position, its performance, and 'glide 

path' to further reduce the risk. He ex.pects that the position will be down substantially by the time we get 

together. This meetingwHl be with the Fed. Fred ~-you and James should be prepared to attend. let's talk 

Monday about this. 

Scott 

Permanent Subcommittee on Investi ations 

~~~~TARY ANDIOR TRADESECRI .. __ .E.XH-.m_I.T-.#6 .. 8 ___ • OCC-SPJ·00021853 
839 

From: 

To: 

CC; 

Sent: 

Subject: 

Attachments: 

Crumlish, Fred 

Waterhouse, Scott 

Kamaltl, Jairam; Kirk., Mik.e; Hohl, James 

5/7/20126:57:01 PM 

CIO information for Wednesday 

FSI Limit Change FAQ,docX; R~700596-Cl0_~_7-ppLDRF 

Scott ~ I have been catching up and going through email from the team, and am sendi~ you a couple of background 

documents relevant to Wednesday. I believe you have the handout and notes from our meeting with Ina Drew, but I 

can resend them as vvell. 

CIO went to the DRPC in March (see attached wisdm line), but there wasn't a lot of discussion of the synthetic book. 

JPM would acknowledge that what they do may be problematic from a Volker perspective, depending onthe way the 

rues are 'Mitten. (Note especialty the wording of the mandate) However, they strongly believe that VJhat they do should 

be exempt from Volker. I haven't found their pitch to DC or others particularly compelling however, since \"/hen before 

DC policy they tend to speak in generalities or use the word ~hedge" too much when VJhat they do is more accurately 

described as active risk mgmt. 

Also attached is a JPM document summarizing some recent limit changes. (We have a monthly meeting vvith market 

risk reporting INhere changes to FS! and other matters related to limits reporting and approval are discussed). We have 

the email where Ho~n approved the new finnwide stress limit. 

FYI The follow up from our meeting INith Ina Drew was to come back and provide us 'N'ith the results of their "post 

mortem" on the '\vhale" issue and the changes that were going to be put in place. On the first call (the one that 

proceeded the larger meeting with Ina) Hogan also referred to this. I'd expect they would cover some of this durirg the 

meeting Wednesday 

1M HO on balance closirg the book down makes sense given that it was built in light of the crisis. So it's reason for 

existing isn't as compelling as it once was. Bank could use simpler ways of hedging OCI. 

I asked the team to go into the FSI grids to get the main drivers of the stress loss rrumbers (ie, vvhich factors contribute 

the most materia! share). 

AI~o given Cia's role, we haven't historically gotten daily P&L from them as we do the IS given the nature of its 

operations. However I asked James 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 dally P&L in a 

fonn such as they provide to (say) Ina Drew. Bank will likely Object to this, but it VY'iU help LIS better to ansvver "Volker" 

related questions intemally. James is also pursuing logic of limit charges vvith RM in CIO, 

BANK PROPRlETARY A-mJ/OR TRADE SECRl 

INFORMATION 

Permanent Subcommittee on Investigations 

EXHIBIT #69 OCC-SPI-OOO 13 73 7 
840 

From: 

To: 

Sent: 

;ubject: 

Thanks Fred, 

Kirk, Mike 

<Crumlish, Fred>;<Hohl. James> 

5/10/20122:05:39 PM 

RE: My opinion on yesterday's meeting, 

Wanted to get some ideas down on paper before I forget the details, and to serve as a roadmap in the future. 

Working on sO.many different things all of which wi!1 take place over longtime periods ... so wanted to write down 

the thought,. 

j'm certain James has more details and ideas. 

Regards, 

Mike 

From: Crumlish, Fred 

Sent: Thursday, May 10, 20129:58 AM 

To: Kirk/ Mikej Hohl, James 

Subject: RE: My opinion on yesterdais meeting. 

See bold. 

~ ape 

*** !f you have received this message in error, please delete the original and an copies, and notify the sender immediately. 

Federal law prohibits the disclosure or other use of this information. *** 

From: Kirk, Mike 

Sent: Thursday, May 10, 20129:22 AM 

To: Crumlish, Fred; Hohl, James 

Subject: My opinion on yesterday's meeting. 

Fred, 

James and I were chatting electronically about the recent 00 events, and I wanted to share my opinions as food for thought 

recognizing that these are only opinions as all the facts are not in, and I dont know for sure what has happened and what is 

the correct cour~ of action. 

It's not dear to me that the synthetic credit hedging strategy failed, as it worl<:ed quite well for some time (and perhaps until 

very recently), and then began to lose effectiveness and they didn't realize this until they tried to reduce part of it. I think it's 

possible bank processes failed, not the micro strategy of the synthetic credit hedge. 

Agree -It wasn't the basic strategy; it was the specific trades done to adjust the position that failedi this seems to 

have eliminated all the benefit accrued so far. So the problem was the selection of the strategy to make the 

change 

I admire Risk for standfng up and taking blame for inadequate limits, but that's only part of the problem. No one will ever 

l(now prospectively how issues may arise; that's why there's multiple forms of controls. Issues sometimes manifest 

lemse\ves thru risk, other times thru models and assumptions, others thru valuation, and others thru combinations offactors 

(likely in this case). 

Permanent Subcommittee on Investigations 

=~~~TARY AND/OR TRADESECF .. __ ... E XiiiH.I.B.I.T ... #7 .. 0 ... __ • OCC·00005302 
841 

Agree - Also CIO probably needs to focus more on the short term time horizon as well as the longer holding 

periods {Recalllna''S comments}. 

"lany processes probably may need to be enhanced and management may want to rethink their strategy approval processes 

; note the MRJI.. in 2010 attempts to get at this). I think all the senior managers, including Jaime Dimon, who approved this 

strategy sMoulder the blame. I think Ina Drew considelS herself to be a rea! money manager; she is not. She is a more like a 

ALM manager. The 00 function is in a bank. A real money manager produces returns monthly (sometimes more frequently) 

to investors who can withdraw at any time. This instills a certain amount of dIscipline in risk/return vs. liquidity. They know 

that any investment they make may need to be liquidated in short order, therefore they need to be consdous of their slze, 

size of trades, and market abiJity to absorb their investments when they need to exrt (1 realize they have liqlIidity lines of 

credit to assist with this, but this provides for orderly liquidation, it does not provide fur long term unwinds with large market 

risk exposure), Ina doesn't have that type of discipline forced upon her blc bank liabilities are not correlated strongly to her 

retum, and she doesn't have the risk that investors may withdraw funds ifthey are unhappy wfth her investment selections. 

Agree- Cl0 needs a more balanced perspective 

In reality Ina Drew is a hybrid, and should manager her functionLbuSiness as a hybrid. Items that are marked to market 

probably should have the same processes as IB, as at the end of the day JPMC has limited appetite for P&l vol. Also,l1mits 

tend at JPMC to be set once there are material exposures. In this case, because of the size of JPMC's balance sheet, they 

would likely set the limlts very larg'e anyway. Moreover, there are so many pennutations on how to reduce with derivs 

(Indices, tranches etc) that the limit system would have to have been extremely comprehensive, and it is unlikely they would 

have set it up that way (particularly if they didn't have the exposures yet) even if they did think of notional limits. So, I think 

that traders would have found other means to exit other than unwinding what they had. If reserves provided proper 

incentives to unwind vs. find less costly altemative the situation may have been better. 

Once the hank finishes their investigations etc, we can also spend more time pulling this apart. CIO was on the 

schedule for October 

"lore robust reserving for concentrations and liquidity may likely have resulted in traders rolling out of existing HY trades 

arlier before they became qffthe run \ndices, as there may have been an incentive to hotd more actively and deeply traded 

Indices rather than holding onto an older index as liquidity fell, and JPMC's concentration relative to market size increased. If 

the bank was not able to roll Into another more liquid HY Index that was a suitable hedge, this would have been an indication 

that the strategy may be breaking down, or that correlations have changed and holdings should be changed to match 

available credit hedges. It may not ever be known what happened, but somewhere in between initiating the position and the 

point where the bank decided to reduce the HY hedge the market's willingness/ability to absorb JPMC's size changed, and that 

should (1 believe) be reflected in their pal thru reserves (call it concentration or liquidity) and this would have provided the 

incentives to the bank. to reduce exposures before It became a multibillion dollar issue. This is allDther way of saying that 

there was no process in place to reevaluate the strategy as long as it was in place in working in terms of current P&L so they 

wouldn't know they were driving on a road wl1ere the bridge was out until they got there. The reserving process, sensitive to 

changes in concentrations and liquidity, are the road Signs warning of danger ahead. Limit structures do not provide this 

warning untn you get to the end of the road. 

I wasn't satisfied with the comments made about valuation process and thresholds yesterdaYI and so we have 

some followup here. I am not sure they got the point, probably because of that utime horizon" comment. In 

addition to reserve, there were likely prohlems with the thresholds themselves. So this is another fotlowup. 

(Valuation was One of the things Hogan said they are looking at] 

In the case of this micro strategy) one can look at the market and make a case that the reason why they could not exit the HY 

CDS were not due to AMR, EK, lTRO, but due to a pronounced change in market perceptions of risk. as one could one could 

sell IG instead. "What does that tell you'? (To quote a former trading mentor of mine.) 1 think that tells you (and with 

hindsight it's clear) that the market has changed materially, and no longer holds historical relationships true; therefore the 

JPMC traders use of historical relationships (correlations) was in error, because forward correlations were now materially 

different and likely to remain that way (as JPMCs later analysis agreed). Market's seemingly insatiable appetite to take the 

other side of JPMC's trades possibly indicated that the IMPUED market price of this correlation has collapsed .. something that 

eventually became realized in the losses at JPMC • 

. gree and when evaluating strategy's perhaps traders should have looked at more scenarios. We will see what they 

cfid. 

BANK PROPRlETARY AND/OR TRADE SECRET 

INFORMATION 

OCC-00005303 
842 

While having more granular limits would have certainly helped, the limits alone would not provide the proper incentive for 

traders to unwind the trades they have vs enter new ones and adding complexity. For as long as it is less costly to the 

traders P&L to enter new risks vs dosing old ones, new risks will be added, This is a Simple Jaw of trading that will always 

hold true, With complex products traders can always find a way to reduce a type of exposure by adding a new one. The 

sue is when relationships assumed between the risks break down (cOITelations) the whole strategy implodes and multiple 

l!liquid risks need to be unwound instead of one. And unwinding this is more complex that it seems because lifting one leg 

without the closing the other exposes new risks again, and it is extremely difficult to find the other side to multiple !egged 

complex risks strategies; In other words it's unlikely that you wlll find someone who will want both legs of your complex hedge 

at a time when it's moving so much against you (or at any time for that matter because the other side ofcomp!ex hedging 

strategies do not 'naturally exist"). 

Processes for new strategy should have induded stresses to that strategy. But would they have stressed to extent market is 

currently dislocated? Probably not, b/c they would have based upon historical spreads and corre!atj~ns whldl are now no 

longer relevant and the moves to current level would have been considered beyond extreme. I think this is a similar issue as 

the hybrids books .. JPMC may not stress the complex risks enough. By putting the complex illiquid pnoducts thru the typical 

stress scenarios the bank is effectively ignoring the illiquidity because the standard scenarios assume an exit and rebalance 

whid1 may not be feasible. The normal stress processes do not assume events happen multiple times, and do rmt go 

extremely deep into tails. 

Agree j-am cur/ousto see what they did, though 

I have no concems generally with the overarching strategy of the 00 fundlon and what they were attempting to do. I think, 

however, that processes may need to be strengthened. I understand the bank is looking at aU processes right now; but, I 

think we should consider steering them tulA'ards changes in valuation policies and processes for marl< to market items, 

initiating a new strategy review process that is documented and signed off by all control functions (sort of like a NBIA), and a 

review of stress processes for complex products and strategies (something I think the bank fell short of with respect to 

hybrids). Prospective strategies should be run thru the complex stress scenarios as part of the NBIA look a-like process. 

Agree 

Just thinking on paper, not saying that any of this is fact, or the solution. 

R.egards, 

Mike 

Mike Kirk 

Capital Markets Examiner 

Large Bank Supervision 

Phone: 212 899-1383 

Fax: 301 433-9209 

This message is intended for d~!grio.ted recipients only. If you hQve received this message in error, 

pleQse delete the original and all copies and notify tire sender immediately. Federalltlw prchibifs the 

disclosure or Dther lJ$e of this infDrlnofion. 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION 

OCC·OOOOl304 
843 

From: Waterhouse, Scott 

To: 

Sent: 

,ubject: 

<Brosnan, Mike>;<BelshElw, Sally;> 

5/11/20122:58:22 PM 

RE: J.P.Morgan Gllase 

Just FYI- we did an examination of the cia at the eOO of 2010 and have a follow-up planned soon. We had some 

concems about overall governance and transparency of the activities. We received a lot of pustback from the bank, 

Ina Drew in particular, regarding our comments. In fact, Ina called Crunfish ....men he was in London and ~sternly" 

discussed our conclusions vvith him for 45 minutes. BasicaHy she said that investment decisions are made v.tith the 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. At the conclusion of the exam, vve issued the fofioVving MRA 

• Management should update and amend investment policies to clearty define the processes used to manage the 

investment portfolio as weI! as document current portfolio objectives and investment parameters. 

The risk management framework for the investment portfolios (StrategiC Asset AJlocation and Tactical Asset AJlocation) is not 

well documented. \l\lhile overall risk controls and communication appear 10 be sound, the absence of a documented 

methodology wfLh clear records of decisions and other approvals makes it difficult to determine whetner portfolio risk 

management and control are governed according to senior managemerrt and DRPC expectations. Discussions witn 

managers and a review of audit work enabled us to clarify how investment decisions are made and what parameters and 

limits exist around investment activities. Nevertheless, it is our expec1aUcm that the following minimums be formally 

documented: 

• INhiIe trades, portfolio decisions and market analysis focus on maintaining an agreed upon duration of equity (DOE), there 

is no report that summarizes support forthe agreed upon DOE Senior ALGQ receives only tne DOE synopSis page, ard 

documentation leading up to decisions andlor minutes of tnose discussions should be kept 

Guidance articulating overall portfolio objectives or exposure targets and asset parameters is not used, VVlllle we 

recognize the need for maintaining f1e>:ibilrty in portfolio management, practices and decisions should be documented. 

Reporting and analysis on below-investment-grade and nonrated (NR) securities should be documented better to ensure 

ongoing compliance witn Dec Bulletin 2004·25. 

It just goes to show that it is difficutt to al'ways be smarter than the market HLmHity IS good. 

From: Brosnan, Mike 

sent: Foday, May 11, 2012 10:35 AM 

To: ~e!snaw I Sa IIYi Watemouse, Scott Subject: Fw: J.P.Morgan Cnase 

Redacted by the 

Permanent Subcommittee on Investigations 

Permanent Subcommittee on Investi ations 

BANK PROPRIETARY AND/OR TRADE SECRl 1-__________ EXHIBIT #71 .. 

INFORMATION 

OCC-OOOOI746 
844 

From: 

To! 

~ent: 

tlbject: 

Regu1atort), James X <Hohl \> 

<Wilmot, John> 

5/141201211:24:14 AM 

RE: CIO P&L reporting 

Hi Jom, If there's a daily P&L distribution like those that we get from the IB, can you add either me or my boss Fred 

Crum~sh to it as soon as possible. Thanks, James 

From: Wilmot, John 

Sent: Wednesday, May 09, 2012 6:20 PM 

To: Hohl (Regulator), James X 

Subject: RE: 00 pal reporting 

Jim - sorry for the delay. I am working on this request. 

John C. Wilmet 1 Ctrieflnves1:rnef1tOffjce·1 + johl'l.wllmot@jpmonun,com ! (Work: {lU} 814-5452 ! (Cell:_ 

From: Hohl (Regulator), James X 

Sent: Monday, May 07, 201211:5B AM 

To: WlImot, John 

__ = Redaded by the Permanent 

Subcommiuee on Investigations 

Subject: ao P&L reporting 

Hi John, 

We'd like to get the synthetic credit P&L for the past five weeks broken out on at least a weekly basis. If 

you've got regular reports that show this, just forwarding them would be best. Also, we are on the 

~istribution for daily P&Ls from the lB. If CIO MTM positions are also distributed daily, we'd like to get the 

eporting on the same basis. I am on the distribution for the daily MSR PIL Estimate. 

Thanks, James 

Permanent Subcommittee on Investigations 

~~~~TARY AND/OR TRADE SECR EXHIBIT #72 ... __________ • OCC-00004759 
845 

From: 

To: 

Sent: 

>ubject: 

Crumlish, Fred 

<\iVatemouse, Scott> 

5115120125:24:26 PM 

FIN: 

Exactly. Let's see what the "lessons learned;' says ... 

ape 

*- If you have received this message in error, please delete the original and aU copies, and notify the sender immediately. 

Federal law prohibits the disclosure or other use of this information. **" 

From: Wong, Elwyn 

Sent: Tuesday, May 15, 2012 1:17 PM 

To: Kirk, Mike; Crum!ish, Fred; Fursa, Thomas; Hohl, James 

Subject: RE: 

Good point. Does not add up. Collateral dispute of $700 mil versus a double digit reserves amount? 

From: Khi<r Mike 

Sent: Tuesday, May 15, 2012 1:14 PM 

To: Wong, Elwyn 

Subject: RE: 

c.lst looked at it and can't find what I would think is the whole book, .wondering are there items they weren't price 

testing? 

Wondering how could they have a large collateral dispute and with these reports showing pricing this tight (16MM 

adjustment only) 

15 the syntheTIC portfolio completely covered by this report? It's not dear to me. 

From: Wong, Elwyn 

Sent: Tuesday, May 15, 2012 11:18 AM 

To: KIrk, Mike 

Subject 

Talked to Tom. There is March CIO VCG report in W!SDM under FVP/CIO. The Powerpoint mentioned increase by a 

small amount of reserves for CDS butwe didn't find total amount in Spreadsheet. I will look more closely too. 

cia VCG reports to CIa Controller notto Jean Francois Bessin obviously. 

Permanent Subcommittee on Investigations 

BA.'lK PROPRIETARY AND/OR TRADE SECRE ... _ .. E_X;;;H_I_B .. IT .... #7.3 __ .. 

INFORMATION 

OCC-SPI-00009335 
846 

From: 

To: 

Sent: 

Subject: 

ReguJator\), James X <Hohl \> 

ReguJatarl), Fred X <Crumr~h I> 

5/17120127:36:43 PM 

Not Getting CIO daily P&L after only one day 

FYI -I got one CIO daily P&L distribution and then didn't yesterday, I inquired about it this morning, but haven't heard 

back. 

From: Hohl (Regulator), James X 

Sent: Thursday, May 17,20128:09 AM 

To: Rlzaj, Admand X 

Subject: RE: 00 Performance SUmmary· 05/15/2012 

Hi, I received the daily report below on Tuesday. but didn't receive it on Wednesday. Was there a problem 'With the 

report last night? Thanks, James 

From: Rizaj, Admand X 

Sent: Tuesday, May 15, 2012 8:23 PM 

To: CIO Daily Performance Summary 

Subject: 00 Performance Summary· 05/15/2012 

Admand Rizaj I JPMC·CIO.financ:e j admand.x,dzai@jpmornan,com J I (2U) 834·9677 

BANK PROPRIETARY AND/OR TRADE SECREl 

INFOR.\1ATION 

Permanent Subcommittee on Investigations 

EXHIBIT #74 OCC-00004540 
847 
848 

From: 

To: 

Sent: 

;ubject: 

Attachments: 

Kirk, Mike 

Wong, Elwyn 

5{16/201211:26:0B AM 

RE: CIO caM with Mike Brosnan 

image001.png; imageOO2.png 

Agreed too, That's the problem with using historical data and assuming mean reversion. It win VI/Ork a lot of times, but 

one has to be mindful of paradigm shlfts and the LTRO is a paradigm shift for the markets in the short run. Issue is 

JPM hever stressed components of the trades beyond historical (I thnk), Had they looked at the components of the 

risks ffild stressed them to say 4-5-6 sds they would have the impacts of low probabiflty events. Atthough my guess is 

they woLdd have ignored that too! Arrogance drove this bus. 

From: Wong, Elwyn 

Sent: ThUisday, May 17,20127:56 PM 

To: Kirk, Mike 

Subject: Re: 00 call wlth Mike Brosnan 

That's not worth the paper it is vvritten on. You ttink they can convince my cleaning lady? A doUar on each cell of the 

mattrix is worth the same 

From: Kirk, Mike 

Sent: Thursday, May 17, 2012 05:20 PM 

To: Wong, Elwyn 

Subject: RE: CIO cal! with Mike Brosnan 

That's the point! 

-he relationship obviously didn't hold, and I would be if we plotted the graph today the locations would be far from the 

..liagonal. .. and ! be if we had access to the data that the red portion is moving up and farther to the right with each 

passing day in April 

From: Wong, Bwyn 

Sent: ThulSday, May 17, 2012 5:58 PM 

To: Kirk, Mike; Crumlish, Fred; Hohl, James 

Cc: Waterhouse, Scott 

Subject: RE: 00 can with Mike Brosnan 

I was not at the April 16 meeting. But let me venture to guess......mat it is trying to say. 

Permanent Subcommittee on Investigations 

~:~~TARY AND/OR TRADE SECRE .. __ .E .. X.H.I.B.I.T_#.76 ___ .. OCC-SPI-00021628 
849 

'" 

... 

,. 

-too 

-120 

Redacted 

by 

Permanent Subcommittee 

on Investi ations 

.1G951::lD 

• FdIo-Aid 

The y~axis is rolling 10 yr cds - rolling 5 yr cds. They had a few Bloomberg graphs showing how this roUed spread 

from being NEGATIVE in 2008 and 2009 Gust like Greece and italy) towards more normatization when it eventually 

returned to being positively sloped. 

The x-axis is the Hedge Index Composite. 1 venture to guess this is the aggregate hedge that think they need to put Of\ 

related to the aggregate number on the extreme IO'N2f right hand side, the $158 .498 mil. They have a whole matrix of 

longs and shorts and that's the composite. As fear resided and rolling 10 Yf minus rolling 5 yf retLmed to positive, they 

an reduce their total hedge. As Mike said, the REDS are which they are at now·-- so their hedge is not that 

unreasonable, IF THE HEDGE AMOUNT DID HAVE THIS RELATIONSHIP TO THE SLOPE of Syr to 10yr CDS 

The sentence which is somewhat perplexing is "the relationship is bounded by the off-the-run HY shorts and the 

on-the-run fG shorts. Meaning that this is their core hedge? 

---

""'IV ""'" ..... ... ... ''"' .. , ~ ...". ...... ~ "''''-

""'" ~'''' 1~ -"'" .. ~ ->1«' -n!fi!!O -1t,47!I ... .., t~,.. ...... ~ .. ~ -.. :.; 1~'" c:> 1jJS Zl 

~- .. -""" -.. -- ->.210 -~ ... -..... ...... .... ..,.. "" ""'""'""'" 1>'l'IIX"" ., ~Tc>taI " 4S2~2 "'''' .,," ·1774 '.7£6: ~:a,(m ." .... '2 " 

<U 

The \Yhole scenario thing about corrvexity is talking their book/advertizing - in a panic situation. people wi!! run to put 

protection in the short end and rot the long end. So the curve FLATTENS again like in 2007. In other vvords. their 

hedge has analytical underpinning. Not orly are they reducing their short risk hedge prudently according to the slope of 

the 5yr-10yr, as plotted on Bloomberg, the Rattenerwould have been a safe bet because in case they were reducing 

their hedge too fast and the economy tanked against, the built in flattener would be there to help_ 

BANK PROPRIETARY AND/OR TRADE SECRET 

INFORMATION 

OCC-SPI-00021629 
850 

From: Kirk, Mike 

Sent: Thursday, May 17, 2012 4:51 PM 

To: Crumlish, fred; Hohl, James; Wong, 8wyn 

~: Waterhouse, Scott 

;ubject: RE: CIO caU with Mike Brosnan 

Fred, 

Happy to join you in your calis Vvith Mike B. 

In respect to YOlE questions, in the order asked: 

The graph on page 7 shows the slippage of their portfolio' compared to the hedge, The closerto the diagonal 

the more dosely the hedge tracks the portfolio. The red hIghlighted area is recent period they were discussing 

Vl'here hedges were breaking dovvn, and markets were not moving according to their modeled projections 

based upon historical correlations, 

To make the chart you would need two items. A targeted portfolio and a hedge portfolio, We could ask for 

this chart of the strategy prior to re working the hedge position to remove part of the hedge (Vvt1y we were told 

they decided to sell lG with fallen angels). This request may be instructive and could settle the issue of Vv1lether 

the original portfolio was an effective hedge. pal for previous 4 years, hO'N8ver, was fairly reasonable, so 

that wolJd tend to support the banks statement that the hedge worked well for years. It went astray I'tlen they 

reduced the hedge. 

I think Matt Zames would likely have a different view of the choice of strategy Vvith hindsight being a benefit 

Position realty went bad as shown in MarchfApril, question is did the London desk continue selling in IG in April 

'Nith the ClJ("Ve steepeniOf:! and spreads widening and basis (to theoretical) trading rich. This is something we do 

not at this time know, 

You can give Mike B my cen phone number. 

Please note Elvvyn and James wUl likely have quality information to add so you may want to wai1 to hear from them 

'efore passing along, 

Regards, 

Mike 

From: Crumlish, Fred 

Sent: Thursday, May 17, 2012 4:22 PM 

To: Kirk, Mikej Hohl, Jamesi Wong, Elwyn 

Cc: Waterhouse, Scott 

Subject: 00 call with Mike Brosnan 

Scott and I spoke to Mike Brosnan today about Vv'hat we VYere doing now an:! going forward on the CID book. We will 

likely have a cal! v...ith him frequently, a~, particularly w,th respect to the intricacies of the position, v...iU need to include 

you. 

A couple of things specific to the pre-April 16 Interactions and some of the em ails that are circulating: 

1 told Mike B that the Joe Sabatini emails Vvith selected position information were sent by the ban1<. after initial 

OCC anci FRS enquiries. We corcluded that this information was pretty much useless, as it did not tell us what 

\Vas happening risk wis,e. We also talked about a couple of those other emails, but 1 emphasiz.ed that the 

culmination was getting a meeting 'Nith Ina Drew and company on April 16. 

Wrth respect to the April meeting, Mike B, is going through the "synthetic a-edit deck" and he had a few 

technical questions, not aU of which I was able to fully answer since I didn't recall or had been focusing on other 

issues anc:l didn't think of those questions. With respect to this presentation: 

o Mikeard James: Please have a look at your notes for page 7 as I wasn't fully able to explain the graph 

on the bottom. Also if you have details on the scenario description on page 11, we Sh:llJd pass that 

along. 

o It would be nice at some point if we mud get a chart such as that on page 5 "'before" the position was 

put on. Maybe INS 'Nill request it, maybe not Let's see if we need it after going through 'f'fCW reporting 

BANK PROPRIETARY AND/OR TRA.DE SECRET 

INFORMATION 

OCC-SPI-00021630 
851 

o More to tI1e point, I told Mike that tI1e bank would likely mt stard behird (aside from a statement that it 

was the best they knew at the time) this analysis at this point, as the position turned out to be far more 

problematic than presented and so the description of risk was missing. 

o Mike Kirk- as usual, don't be suprised if Mike just calls you sometime. 

! to!d Mike that next Monday we will be goirl'J oyer c!JTent risk reporting and positions in more detail, as the 

reporting is evolving. He might want to speak W'ith us shortly after. I'd expect to have Mike and E~n to help 

speak to technical details etc. 

So, keep your notes current. AI! em ails get circulated 'v\Iidely, and of course generate questions. 

- ape *- If you rove (e\:eiYed this rn!ssage in error. please delete the original an::! all copies. am ootifY tI:e semer irmrediately. Federal law 

prohibilS tlx disclosure or otkr use of this iufor.rn:rtiou *** 

BAl\'K PROPRlETARY A.,'ID/OR TRADE SECRET 

!l\'FOR.\1A110N OCC-SPI-00021631 
852 

From: 

To: 

Sent: 

3ubject: 

Kamath, Jairam 

<Crumlish, Fred>;<Furs8, Thomas>;<VVong, Elwyn> 

5/21/20123;20;02 PM 

RE: cio var change 

Here are a few comments from the days precedlrg the synthetic credit VaR model change that became effective 

1127112. Note the reduction of CIO VaR by 44% to $57mm. 

COB 1123/12 

The stand alone VaR for each'LOB are as foUows: H3 is $72mm ('ItS. $120mm ninit), CIO is $103mm (vs. $10Smm limit), RFS is 

$12mm (vs. $9Smm limit), TSS is $9mm (vs. $25mm lim~), Private Equity is $9mm (no limit set given immateriality), and AM is 

$02mm (no limit set gMn immateriality). 

;oCIO 95% VaR has become elevated as cia balances credit protection and management of its Basel In RWA. In so 

doing, cia 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 Rattening Sell-off) for this portfolio which has increased from 

+$1.4bn to +$1.6bn) 'Nhile increasing VaR during the breach period. 

Action has been taken to reduce the VaR and will continue. In addition, cia has developed an improved VaR model for 

synthetic credit and has been working with MRG 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 cia VaR by 44% to $S7mm. 

COB 1124/12 

cia continues to manage the synthetic credit portfolio balancing credit protection and Basel III RWA. The new VaR 

model for cia was approved today by MRG and is expected to be impiemented'priorto month-end. 

iairam.kamath@occ.treas.qaY 

Te\: 2.1.2,-8,9jll-.1,3j8~6!1 BB: l!! Fax: 301-433-6238 

-_ "" Red.dtd by the Pe ...... nent 

Subcommhtee OR Invtltigarioas 

This message is interded for designated recipients only. If you have received this message in error, please delete the 

original and all copies and notify the sender immediately. Federal law prohibits the disclosure or other use of this 

information. 

From: Crumlish, Fred 

Sent: Monday, May 21/ 2012 10;54 AM 

To: Fursa, Thomas; Wong, E1vryn; Kamath( Jairam 

Subject: cia var change 

During the model control exam or elsewnere, did you specifically discuss the CIO VaR change. If so, let me know what 

and how. We can discuss. If it's a vvorkpaper comment or meeting note, you can send me the lInk 

-ape 

.*+ Tfyou13\'e rec-eived Oris nrsSage merror. please delete the original and all copies, am notifY the sender iIJ:w:r;diatel)". Federa11aw 

prohibits!l:e disclosure OT olher use oflbis infomauon. ••• 

Permanent Subcommittee on Investigations 

~~~~::TARY AND/OR TRADE SECR] .. __ .. E.XH ..;IB;I.T ... #.;,7.;,7 __ .... OCC-SPI-000219J2 
853 

From: 

To: 

Sent: 

ubject: 

Waterhouse, Scott 

Brosnan, Mike; Belshaw, Sally 

6129/2012 8:07:30 PM 

PN: 2nd Wilmer Hale Call 

Interesting commentary. This is the SEC questioning of WilmerHa!e. 

From: Kirk, Mike 

Sent: Friday, June 29, 20129:06 AM 

To: Wong, Elwyn; Waterhouse, Scott; Crumlish, Fred 

Cc: Hohl, James; Patrn, OHip; Banks, George 

Subject: RE: 2nd Wilmer Hale Call 

Yes, a huge percentage at that point in history. 

From: Wong, Elwyn 

Sent: Friday, June 29, 20129:01 AM 

To: KirkJ Mike; Waterhouse, Scott; Crumlish, Fred 

Cc: Hohlr James; Patro, DHip; Banks, George 

Subject: Re: 2nd Wilmer Hale Cali 

That was my immediate reaction as weH. Win be inter~sting to see what more they have to say in the 3rd cat! focusing 

on valuation. But more importantly, the few hundred million divergence was SLpposed to have been reflected in the 

PnL on the last day of March. Then in April there was another 700 mil collateral dispute? I mean, DISPUTE - thet is a 

percentage of the mark to market! 

-~om: Kirk, Mike 

~nt: Friday, June 29, 2012 07:38 AM 

To: Wong, Elwyn; Waterhouse, SCOtt; Crumlish, Fred 

Cc: Hohl, James; Patrol Dilip; Banks, George 

Subject: RE: 2nd Wilmer Hale Call 

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 and then paid out the near $400MM amount 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 left puzzled over how a collateral dispute could be resolved by 

agreeing to the counterparties marks, without admitting your Own marks were incorrect The 4th bullet 

point below is consistent WITh a collateral dispute that is resolved by agreeing to counter parties levels, 

and more consistent with a common sense \liew of likely drivers of the same, 

From: Wong, 8wyn 

Sent: Thursday, June 28, 20126:17 PM 

To: Waterhouse, Scott; Crumlish, Fred; Kirk, Mike 

Cc: Hohlt Jamesj Patro, Dilip; Banks, George 

Subject: 2nd Wilmer !:iale Call 

Jilmer Hale made Part 2 of their presentation today in terms of their findings. They have yet 

to finish interviewing JPM employees in London. Materials were handed out to our DC 

Permanent Subcommittee on Investigations 

BANK PROPRIETARY AND/OR TRADE INFORMA1 EXHmIT#78 OCC-SP[-00071386 
854 

people. Tom Dowd and Kevin Lee were 2 names I recognize. 

There will be a third presentation specifically on trader marks and VCG. It is currently 

~heduled for next Tuesday but Wilmer Hale is asking for more time possibly until week after 

July 4th as they are still interviewing Lodon employees. 

Today Wilmer Hale focused on who knew what and when they knew. 

Traders: 

Perplexingly, traders seem to have formulated their RWA reduction strategy based 

on their own method of calculating RWA outside of that calculated by Risk 

Management/Finance (unsure how exactly the latter calculates it but it did to a large extent 

involve Westend and unsure why IG vs HY would reduce RWA at all). While there was not 

much disagreement between traders and Risk on the large reduction in VaR upon the 

implementation of Westend, there were lengthy debates on why RWA should increase upon 

the rollout of the Westend. The disagreement led to Venkat and Olivier's involvement in the 

first place (separate and distinct from Hogan parachuting them in by April 2ih). Macris was 

unsuccessful in convincing Venkat that traders RWA methodology was correct and Risk 

Management's was wrong. 

Traders had debated splitting tranches and their delta hedges into one'book to 

calculate Comprehensive Risk Measure (CRM) and the pure index positions into another 

"~ok to calculate Incremental Risk Capital (IRC) 

Macris and Drew made no mentioning of increase in RWA (according to Risk 

Management's calculation) in February CIO ERM attended by Dimon and Braunstein 

Wilmer Hale has already begun using the term "hiding losses". A junior trader Julian 

Grout was responsible for FO daily marks. He kept a record of the difference between 

"crude-mids" (taking market prices without taking specific consideration of circumstances and 

size and who it was from) and CIO marks. It was $1 OOmii in Jan 2012 and had grown to 

$JOOmil in Mar. That record was last dated 03/15/2012. Real market marks were trued by 

end of Mar and the large loss on 313112012 was due to that one reason. For example, a 

realized loss was $12 mil on a day in March when the crude-mid divergence was $600 mil. 

On another day, it was $18 mil loss when the divergence was $300 mil. 

Bruno Iksil mused on divergence reaching $1 bil by the end of March but if CIO held 

out it would not lose a single penny. On a Friday, he said he didn't want to come back on 

Monday. 

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. 

Traders gave much smaller loss estimates under different scenarios repeatedly 

_uring rehearsals for the earnings call and inquiries triggered by the Bloomberg London 

Whale article just prior to that. 80% chance of Q210sses between $150 mil and $250 mil but 

BANK PROPRIETARY AND/OR TRADElNFORMATION OCC·SPI·00071386 
855 

possible large drawdown intra-quarter. 

A lot of emails between Bruno and Javier not less from them to Macris 

When Ina met with traders to further discuss why the results of Risk Management's 

RWA calculations were so different from the traders, they did not include positions put on 

from 3/7 to 3/20 (we now know they doubled down around this time) 

Other senior hires within cia made incidental suggestions, Head of NA cia trading 

suggested using IRS swap spread to hedge credit spread widening, John Wilmott suggested 

using OCI to fund some unwinds, Wilmott also suggested closing the book entirely 

Dimon and Braunstein 

Nothing new on this front as I have written on this extensively in the last email. In a 

nutshell, they only began asking for details around the Bloomberg news break and during the 

run-up to the 4/13/2012 earnings call. Macris told Braunstein the majority of the positions 

were taken in Jan and Feb but we now know the doubling down in March, Dimon, Braunstein 

and Hogan believed Ina and Macris well into April for at least another week after 4/13/2012 

earnings call. That was when more Significant losses began to show, 

Risk Reporting 

For the 4/13 earnings supplement, neither levine Surtani and Matt Lynch frorn Risk 

'eporting nor Goldman/Weiland knew they should be disclosing VaR model change even 

, enough SEC guidelines said they should, They even consulted Ashley Bacon, After 

Goldman/Weiland sign-off, since only average VaR was reported, no one had picked up on 

the sudden decrease in VaR caused by the new model. 

Only when 1 OQ was about to be filed and more people were involved such as PCW 

and Controllers were they then made aware of the need for disclosure, 

The part on why they had to re-instate old model with a much large VaR is now 

familiar to us 

BANK PROPRIETARY AND/OR TRADE INFORMATION OCC·SPI·00071386 
856 

From: Market Risk Management - Reporting <marketriskmanagement-reporting@jpmorgan,com> 

Sent: Fri, 20 Jan 2012 23:10:24 GMT 

Market Risk Management - Reporting <marketriskmanagement-reporting@jpmorgan.com>; Dimon, Jamie 

<jamie.dim"on@jpmchase.com>; Hogan, John J. <John.J.Hogan@jpmorgan.com>;Zubrow, Barry L 

<barry.l.zubrow@jpmchase,com>;Staley, Jes <jes.staley@jpmorgan.com>; Drew, Ina 

<lna.Drew@jpmorgan.com>; Rauchenberger, louis <Iouis.rauchenberger@jpmorgan.com>; Lake, Marianne 

To: <Marianne.Lake@jpmorgan.com>;Weiland, Peter <peter.weiland@jpmchase.com>;Weisbrod, David A. 

<David.A.Weisbrod@jpmchase.com>;Bacon, Ashley <Ashley.Bacon@jpmorgan.com>;Beck, David J 

<david.j.beck@jpmchase.com>;Braunstein, Douglas <Dougtas.Braunstein@jpmorgan.com>; Morzaria, Tushar R 

<tushar.r.morzaria@jpmorgan.com>;Wilmot, John <JOHN.WILMOT@jpmorgan.com>;Dellosso,Donna 

<Donna.De!iosso@jpmorgan.com>; Bisignano, FrankJ <frank.j.bisignano@jpmchase.com> 

Doyle, Robin A. <Robin.A.Doyle@chase.com>;Waring, Mick <Mick,Waring@jpmorgan.com>;MarketRisk 

Reporting <Market_Risk_Reporting@jpmchase.com>;Sreckovic, Steven <steven.sreckovic@jpmorgan.com>; 

CC: McCaffrey, lauren A <lauren.a.mccaffrey@jpmorgan.com>;Tocchio,Samantha X 

<samantha.x.tocchio@jpmorgan.com>;Chiavenato, Ricardo S, <ricardo.s.chiavenato@jpmorgan.com>;Chen, 

Dan <Dan.Chen@jpmorgan.com>;Goldman, Irvin J <irvin.j.goldman@jpmchase.com> 

Subject: JPMC Firmwide VaR - Daily Update - COB D1/19/2012 

Firmwide 9S% 100 VaR 

The Firm's 95% 10Q VaR as of cob 01/19/2012 has decreased by $9mm from the prior day's VaR to $129mm and 

continues to breach the $125mm Firm VaR limit for the fourth consecutive day. 

ClO's 95% 10Q VaR* as of cob 01/19/2012 has decreased by $2.Smm from the prior day's VaR to $100mm and 

continues to breach the $95mm cia VaR limit for the fourth consecutive day. 

• The decrease in the Firm's VaR is primarily driven by an overall increase in diversification benefit across the Firm 

and position changes in CIO and MSR. 

Each LOB's contribution to the Firm's 

*0095% VaR has become elevated as Cia balances credit protection and management of its Basel Ul RWA. In so 

doing, cia 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 Se!l~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, Cl0 has developed an improved VaR model 

for synthetic credit and has been working with MRG 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. 

100 Externally Disclosed VaR Permanent Subcommittee on Investigations 

EXHIBIT #79a 

CONFIDENTIAL TREATMENT REQUES' JPM-CIO-PSI 0002457 
857 

JI'rom: 

Sent: 

To: 

cc: 

MR.\;[ Reporting <mrm.reporting@jpmchase.com> 

Fri, 20 Jan 2012 23:10:53 GMT 

Dimon, Jamie <jamie.dimon@jpmchase.com>; Hogan, John 1. <John.J.Hogan@jpmorgan.com>; 

Zubrow, Barry L <barry.l.zubrow@jpmchase.com> 

Staley, Jes <jes.staley@jpmorgan.com>;Drew, Ina <InaDrew@jpmorgan.com>; Doyle, Robin A. 

<Robin.ADoyle@chase.com>; Weiland, Peter <peter.weiland@jpmchase.com>; Bacon, Ashley 

<Ashley.Bacon@jpmorgan.com>; Waring, Mick <Mick.Waring@jpmorgan.com>;Lochtefeld, 

Thomas A <thomas.a.iochtefeld@jpmorgan.com>; Surtani, Lavine <Lavine.Surtani@jpmchase.com>; 

Tocchio, Samantha X <samantha.x.tocchio@jpmorgan.com>; Goldman, Irvin J 

<irvin.j.goldman@jpmchase.com>; Gondell, Sarah N <sarah n.gondell@jpmorgan.com>; Sreekovic, 

Steven <steven.sreckoYic@jpmorgan.com>; McCaffrey, L~uren A 

<lauren.a.mccaffrey@jpmorgan.com>; MlUv1 Business Reporting 

<MRM _Business _ Reporting@jpmchase.com>; rvtRlvf Reporting <mrm.reporting@jpmchase.com>; 

Intraspect - LIMITS <Intraspect_-_LIMITS@restricted.chase.com> 

Subject: JPMC 95% 10Q VaR - Limit Excession Notification (COB 1119112) 

The Firm's 95% lOQ VaR breached its $125mm 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 ofits Basel III RWA. In 

so doing, CIO has increa~ed 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-oft) for this portfolio which has 

increased from +$I.4bn to +$I.6bn) while increasing VaR during the breach period. 

Action has been taken to reduce the VaR and will continue. In addition, ClO has developed an improved VaR 

model for synthetic credit and has been working with MRG to gain approval, which is expected to be 

implemented by the end of January. 

The impact ofthe new VaR model based on Jan. 18 data will be a reduction ofCIO VaR by 44% to $57mm. 

Blackberry friendly: 

$mm 

COB VaR Limit 

1/19/2012129.2 125.0 

1/18/2012138.0125.0 

1/1712012132.9125.0 

1/1612012126.5125.0 

CONFIDENTIAL TREATMENT REQUEST 

Permanent Subcommittee on Investigations 

EXHIBIT #79b 

JPM-CIO-PSI0001890 
858 

From: 

Sent: 

To: 

CC: 

Subject: 

MRM Reporting <mrm.reporting@jpmchase.com> 

Mon, 23 Jan 2012 20:30:50 GMT 

Dimon, Jamie <jamie.dimon@jpmchase.com>;Hogan, John J. <John.J.Hogan@jpmorgan.com> 

Drew, Ina <Ina.Drew@jpmorgan,com>; Staley, les <jes.staley@jpmorgan.com>; Weiland, Peter 

<peter.weiland@jpmchase.com>; Bacon, Ashley <Ashley.Bacon@jpmorgan.com>; Waring, 

Mick <Mick.Waring@jpmorgan.com>; Doyle, Robin A <Robin.ADoyle@chase.com>; 

Bisignano, Frank. 1 <frank.j.bisignano@jpmchase,com>; Tocchio, Samantha X 

<samantha.x.tocchio@jpmorgan.com>; Lochtefeld, Thomas A 

<thomas.a.lochtefeld@jpmorgan.com>; GREEN, IAN <ian.green@jpmorgan.com>; Gondell, 

Sarah N <sarah.n.gondell@jpmorgan.com>; M&\1 Firmwide Reporting 

<MRM]irmwide_Reporting@jpmorgan.com>; Intraspect - LIMITS <Jntraspect_-

_ LIMITS@restricted.chase.com> 

APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval 

Importance: High 

This email is to request your approval to implement the tempon'lry increase of the Firm's 95% 10Q VaR limit from 

$125mm to $140mm, expiring on January 31',\ 2012. There is a pending approval for a new model forthe cIa Inti Credit 

Tranche book, If the new modei is approved and implemented prior to January 31", the Firm's 95% 10Q VaR limit will 

revert back to the original $125mm level. 

C!O 95% VaR has become elevated as cia balances credit protection and management of its Baselll! 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 +$l.4bn to 

+$1.6bn) while increasing VaR during the breach period. 

Action has been taken to reduce the VaR and will continue. In addition, cIa has developed an improved VaR model for 

synthetic credit and has been working with MRG 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 wi!! be a reduction of cia VaR by 44% to $57mm. 

Below are estimated VaR levels for COB 1/18/12 using the new Credit Tranche model. 

COB 1118/12 CURRENT 

FIRM 

NEW MODEL 

FIRl\1 

CURRENT 

CIO 

NEW MODEL 

CIO 

95% ]OQ 

VaR $137,961,471 $98,456,554 $]02,385,406 $57,183,430 

Proposed Change to the Firm's 95% lOQ VaR: 

LOB Limit Type: Levell 

JPMC 95% 10Q VaR 

Current Limit 

$125mm 

Proposed Temporary Limit 

$140mm 

If more information is required, please let us know and we will arran e to rovide further details. 

Permanent Subcommittee on Investigations 

EXHIBIT #79c 

CONFIDENTIAL TREATMENT REQUES JPM.CIO·PSI0004660 
859 

Blackberry friendly: 

Temporary increase of the JPMC 9S% lOQ VaR Limit from $125mm to $140mm. 

Upon receipt of your approval, the above limit change will be entered into Market Risk Systems with a sta.rt date of 

January 20, 2012. 

If you approve of the limit change, please reply to all with your approval. 

Thank you. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM·CIO·PSJ 0004661 
860 

From: Dimon, Jamie <jamie,dimon@jpmchase,com> 

Sent: Mon, 23 Jan 201223:13:18 GMT 

'To: Hogan, John J, <JohnJ,Hogan@jpmorgan.com>; MRM Reporting 

<mrm.reporting@jpmchase.com> 

Drew, Ina <Ina.Drew@jpmorgan.com>; Staley, Jes <jes.staley@jpmorgan.com>; Weiland, Peter 

<peter.weiland@jpmchase.com>; Bacon, Ashley <Ashley.Bacon@jpmorgan.com>; Waring, Mick 

<Mick.Waring@jpm .com>; Doyle, Robin A. <Robin.A.Doyle@chase.com>; Bisignano, Frank 

J <frank.j.bisignano chase.com>; Tocchio, Samantha X 

cc: <samantha.x.tocchi organ.com>; Lochtefeld, Thomas A 

<thomas,a.lochtefeld@jpmorgan.com>; GREEN, IAN <ian.green@jpmorgan.com>; Gondell, 

Sarah N <sarah.n.gondeil@jpmorgan.com>; MRM Firmwide Reporting 

<MRMJirmwide_Reporting@jpmorgan.com>; Intraspect - LIMITS <Intraspect_-

_LIMITS@restricted.chase.com> 

Subject: Re: APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval 

I approve. 

From: Hogan, John J. 

To: MRM Reporting; Dimon, Jamie 

Cc: Drew, InCl; Staley, Jes; Weiland, Peter; Bacon, Ashley; Waring, Nick; Doyle/ Robin A.; Bisignano, Frank J; Tocchlo, Samantha X; 

Lochtefeld, Thomas A; GREEN, IAN; Gondell, Sarah N; MRM Firmwide Reporting; Intraspect - LIMITS 

Sent: Mon Jan 2317:44:412012 

Subject: RE: APPROVAL NEEDED: JPMC 9S% 10Q VaR One'Off Limit Approval 

1 approve. 

From: MRM Reporting 

Sent: Monday, January 23, 2012 3;31 PM 

To: Dimon, Jamie; Hogan, John J. 

Cc: Drew, Ina; Staley} Jes; Weiland, Peter; Bacon, Ashley; Waring, Mkk; Doyle, Robin A.; Bisignano/ Frank J; Tocdlio, samantha X; 

Lochtefeld, Thomas A; GREEN, IAN; Gondell, Sarah N; MRM Rrmwide Reporting; Intraspeet - UMITS 

Subject: APPROVAL NEEDED: JPMC 95% lOQ VaR One-Off Limit Approval 

Importance: High 

This email is to request your approval to implement the temporary increase of the Firm's 95% 10Q VaR limit from 

$12Smm to $140mm, expiring on January 31'" 2012, There is a pending approval for a new model for the CIO Inti 

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 $12Smm level. 

CIO 95% VaR has become elevated as CIO balances credit protection and management of its Basel til RWA. In so 

doing, Cl0 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 to gain approval, which is expected to be implemented by the 

end of January, 

Permanent Subcommittee on Investigations 

EXHIBIT #79d 

Confidential Treatment Requested by J . .. --... - ... - ... -----.. JPM-CIO-PSI0001337 
861 

The impact of the new VaR model based on Jan. 18 data will be a reduction of cia VaR by 44% to $57mm. 

Below are estimated VaR levels for COB 1/18/12 using the new Credit Tranche model. 

COB 1/18/12 CURRENT FIRM NEW MODEL FIRM CURRENT CIO NEW MODEL CIO 

95% 100 VaR $137,961,471 $98,456,554 $102,385,406 $57,183,430 

Proposed Change to the Firm's 95% 100 VaR: 

LOB Limit Type: Levell Current Limit Proposed Temporary Limit 

JPMC 95% 100 VaR $125mm $140mm 

If more information is required, please let us know and we will arrange to provide further details. 

Blackberry friendly: 

Temporary increase of the JPMC 95% 100 VaR Limit from $125mm to $140mm. 

Upon receipt of your approval, the above limit change will be entered Into Market Risk Systems with a start date of 

January 20, 2012. 

If you approve of the limit change, please reply to all with your approval. 

Thank you. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001338 
862 

From: Market Risk Management· Reporting"::=marketriskmanage'!lent-r~porting@j~~organ,cof!1> 

="5=.n='=: ==CT=ue, 24 Jan 2012 00:05;59 GMT 

To: 

cc: 

Market Risk Management· Reporting <marketrlskmanagement-reporting@jpmorgan.com>; Dimon, Jamie 

<jamie.dlmon@jpmchase,com>;Hogan, JohnJ. <.IohnJ.Hogan@jpmorgan.com>;Zubrow, Barry L 

<barry.l.zubrow@jpmchase.com>;5taley, Jes <jes,staley@jpmorgan.com>; Drew, Ina 

<lna.Drew@jpmorgan.com>;Goldman, Irvin J <irvin.j.goldman@jpmchase.com>;Weiland, Peter 

<peter.weiland@jpmchase.com>;Weisbrod, David A. <David.A.Weisbrod@jpmchase.com>; Bacon, Ashley 

<-Ashley.Bacon@jpmorgan.com>;Beck, David j <david.j.beck@jpmchase.com>; Braunstein, Douglas 

<Douglas.Braunstein@jpmorgan.com>; Morzaria, Tushar R <tushar.r.morzaria@jpmorgan.com>;Wilmot,John 

<..IOHN.WllMOT@jpmorgan.com>;Dellosso, Donna <Donna.Dellosso@jpmor'gan.com>;Bisignano,Frank) 

<frank.j.bisignano@jpmchase.com>; Rauchenberger, Louis <Iouis.rauchenberger@jpmorgan,com>; Lake, 

Marianne <Marianne.Lake@jpmorgan.com> 

Doyle, Robin A. <Robin.A.Doy!e@chase.com>;Waring, Mick <Mick.Waring@jpmorgan.com>;MarketRisk 

Reporting <Market_Rfsk_Reporting@jpmchase.cam>;GREEN, IAN <ian.green@jpmorgan.com>; McCaffrey, 

Lauren A <!auren.a.mccaffrey@jpmorgan.com>;Tocchia,Samantha X <samantha.x.tocchio@jpmorgan.com>i 

Chiavenato, Ricardo S. <ricardo.s.chiavenato@jpmargan.com>;Chen, Dan <Dan.Chen@jpmorgan.com> 

Subject: JPMC Firmwide VaR· Daily Update - COB 01/20/2012 

Firmwide 95% 100 VaR 

_ "" Redacted by the Permanent 

Subcommittee on Invotigatioru 

The Firm's 95% 10Q VaR as of cob 01/20/2012 is $131mm of the $140mm limit, an increase of $3mm from the 

prior day's revised VaR. 

• CIa's 95% lOQ VaRII< as of cob 01/20/2012 is $l00mm of the $lD5mm limit, materially unchanged from the prior 

day's VaR. 

,. Each LOB's contribution to the Firm's $131mm VaR 

*00 95% VaR has become elevated as Cl0 balances credit protection and management of its Basel !II RWA. In so 

doing, cia 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 5ell~off) for this portfolio which has increaseq 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 additionl cia has developed an improved VaR model 

for synthetic credit and has been working with MRG 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. 

100 Externally Disclosed VaR 

The below table shows the 95% lOQ VaR for the current quarter compared with the prior quarter and the corresponding 

quarter of prior year. 

Permanent Subcommittee on Investigations 

EXHIBIT #7ge 

r.nllll::InFNTIAI TRFATMF'NT REOUESl JPM-CIO-PSI0003346 
863 

-"~~--~RiSk .. M.<ill.:ggg!Re!!t:.....Rgpo--ItiDJL~~~I~--'!laQ~r~k~.Qrg~_~_~" __ 

Sent: Tue, 24 Jan 2012 23:31:28 GMT 

To: 

ce: 

Mark.et Risk Management~ Reporting <marketriskmanagement~reporting@jpmorgan.com>; Dimon, Jamie 

<jamie.dimon@jpmchase,com>; Hogan, John J. <John.J.Hogan@jpmorgan.com>;Zubrow, Barry l 

<barry,l.zubrow@jpmchase.com>;Staley, Jes <jes.staley@jpmorgan.com>; Drew, Ina 

<fna.Drew@jpmorgan.com>;Goldman,irvin J <irvin.j.goldman@jpmchase.com>; W~iland, Peter 

<peter.weiland@jpmchase.com>;Weisbrod,David A.. <DavidAWeisbrod@jpmchase.com>;Bacon,Ashley 

<Ashley.Bacon@jpmorgan.com>; Beck, David J <david.j,beck@jpmchase.com>; Braunstein, Douglas 

<Doug!as.Braunstein@jpmorgan.com>; Morzaria, Tushar R <tushar.r.morzarii3@jpmorgan.com>;Wilmot,'John 

<JOHN.WllMOT@jpmorgan.com>;Dellosso, Donna <Donna.Dellosso@jpmorgi3n.com>;Bisignano, FrankJ 

<frank.j.bisignano@jpmchase.com>; Rauchenberger, Louis <louis.rauchenberger@Jpmorgan.rom>; Lake, 

Marianne <Marianne.Lake@jpmorgan,com> 

Doyle, Robin A. <Robin.A..Doyle@chase.com>;Waring, Mick <Mick.Waring@jpmorgan.com>;GREEN, IA.N 

<ian.green@jpmorgan.com>; McCaffrey, Lauren A <!auren.a.mccaffrey@jpmorgan,com>;Tocchio,SamanthaX 

<si3mantha.x,tocchio@jpmorgan.com>; Chiavenato, Ricardo S. <ricardo.s.chiavenato@jpmorgan.com>;Chen, 

Dan <Dan,Chen@jpmorgan.com>; Market Risk Reporting <Market_Risk_Reporting@jpmchase.com> 

Subject: JPMC Firmwide VaR ~ Daily Update - COB 01/23/2012 

1-= S.h ...... ;"" •• 1 •• ",;g." . Redacted by th' p"manent;::: I Firmwide 95% loa VaR 

The Firm's 95% 10Q VaR i3S of cob D1/23/2D12 is $134mm of the $14Omm limit, an increase of $3mm from the 

prior day's VaR. 

ClO's 95% 10Q VaR'" as of cob 01/23/2012 is $103m m of the $105mm limit, an increase of $3mm from the prior 

day's VaR. 

Each LOB's contribution to the Firm's $134mm VaR 

••• ICIOI ;s $103mm (vs. $105mm 

~CIO 95% VaR has become elevated as CIO balances credit protection and mani3gement of its Basel III RWA. In so 

doing, CiO ~as 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 

+$lAbn to +$1.6bn) while increasing VaR during the breach peridd. 

Action has been taken to reduce the VaR and will continue. In addition, CIO has developed i3n improved VaR model 

for synthetic credit and has been working with MRG 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 wi!! be a reduction of CIO VaR by 44-% to $57mm. 

loa Externally Disclosed VOIR 

The below table shows the 95% 10Q VaR for the current quarter compared with the prior quarter and the corresponding 

quarter of prior year. 

Permanent Subcommittee Gn Investigations 

EXHIBIT #79f 

CONFIDENTIAL TREATMENT REQUEST JPM-CIO-PSI0003715 
864 

r-om: Hogan, John J. <John.J.Hogan@jpmorgan.com> 

lit: Sat, 28 Jan 2012 16:18:23 GMT 

.0: Dimon, Jamie <jamie.dimon@jpmchase.com> 

Subject: Fw: JPMC Rrmwide VaR - Daily Update - COB 01/26/2012 

----------------------------------------------

This should be the last day of iirmwide VaR breach. A CIO model change 1s planned to go in this we~k-end. New VaR 

methodology approved (and now the same methodology as IB) reduces standalone Credit VaR by approx $30 mia. John 

From: Market Risk Management - Reporting 

To: Market Risk Management - Reporting; Dimon! Jamiei Hogan, John J.; Zubrow, Bany Li Staley, Jes; Drew, Ina; Gdldman, Irvin J; 

Weiland, Peter; Weisbr~r David A.; Bacon, Ashley; Beck, David Ji Braunstein, Douglas; Morzaria, Tushar R; Wilmot.- John; De!!osso, 

Donna; Bisignano, Frank Ji Rauchenberger, louis; Lake, Marianne 

Cc: Doyle, Robin A.; Waring, Mick; Market Risk Reporting; GREEN, IAN; McCaffrey, Lauren Ai Tocchio, Samantha Xi Ollavenato, 

Ricardo S.; Chen, Dan . 

Sent: Fri Jan 27 18:16;352012 

Subject: JPMC Firmwide VaR - Daily Update - COB 01/26/2012 

Firmwide 95% 100 VaR 

--"" Redaded by the Permanent 

Subtommittee on Investigations 

The Firm's 95% 10Q VaR as of cob 01/26/2012 has increased by $8mm from the prior day's VaR to $161mm and has 

breached the $140mm Firm VaR limit forthe third consecutive day. 

Cia's 95% 10Q VaR* as of cob 01/26/2012 has increased by $8mm from the prior day's VaR to $120mm and has 

breached the $110mm Cl0 VaR limit forthe third consecutive day. 

The increase in the Firm's VaR is primarily driven by an ol/erall reduction in diversification benefit across the Firm and 

position changes in cia. 

Each LOB's contribution tothe Firm's $161mm VaR (as shown by marginal VaR) are: IB .......... .

(vs. $10Smm limit), 

* C10 continues to manage the synthetic credit portfollo balancing credit protection and Basel III RWA. The new VaR model for 

CIO was approved by MRG and is expected to be implemented prior to month-end. 

lOO Externally Disclosed VaR 

The below table shows the 95% 10Q VaR for the current quarter compared with the prior quarter and the corresponding 

quarter of prior year. 

CGnfIdantia.lTraottmerrtR:equestedby 

JP/lliORIiAN t:AASE & co. 

CONFIDENnAL TREATIilENTREQUESTED BY J. 

EXHIDIT#79 

JPM-CIO-PSI-H 0001675 
865 

Sent: Mon, 30 Jan 2012 23:53:05 GMT 

:0: Weiland, Peter <peter.weiland@ipmchase.com> 

Subject: Re: JPMC Firmwide VaR • Daily Update· COB 01/27/2012 

Just got it. 

From: Weilan~, Peter 

To: Goldman, Irvin J 

Sent; Mon Jan 30 18;52;302012 

Subject; FW; JPMC Rrmwide VaR· Daily Update· CD8 01/27/2012 

This is the email you want. 

Peter Weiland 

Tel; +1212 8345549 

Mob:-tl •••• 1 

From: Market Risk Management - Reporting 

Sent: Monday, January 30, 20126:49 PM 

_:I Redacted by the Permao.e-nt. 

Subconnnittce on InvestigatloftJ 

To: Market Risk Management - Reporting; Dimon, Jamie; Hogan, John J.; Zubrow, Barry L; Staley, Jes; Drew, Ina; Goldman, Irvin J; 

Weiland, Peter; Weisbrod, David A.; Bacon, Ashley; Beck., David J; Braunstein, Douglas; Morzaria, Tushar R; Wilmot, John; DeUosso, 

Donna; Bisignanor Frank J; ,Rauchenberger, Louis; Lake, Marianne 

Cc: Doyle, Robin A.; Waring, Mkk; Market Risk Reporting; GREEN! IAN; McCaffrey, L..auren A; Tocchio, Samantha X; Chiavenatof 

Ricardo S.; Chen, Dan 

, 'ubject; JPMC Rrmwide VaR· Daily Update· COB 01/27/2012 

Firmwide 95% 100 VaR 

The Firm's 95% lOQ VaR as of cob 01/27/2012 is $108mm of the $12Smm limit, a decrease of $53mm from the prior 

day's .revised VaR, driven by cia (implementation of newly approved VaR model for synthetic credit). 

• Each LOB's contribution to the Firm's $108mm VaR (as shown by marginal VaR) are:!B "1II!I •• I111!~ •••• " mVaR, primarily driven by ClO Synthetic 

Equity 

lQO Externally Disclosed VaR 

The below table shows the 95% lOQ VaR for the current quarter compared with the prior quarter and the corresponding 

quarter of prior year, 

Permanent Subcommittee on Investigations 

EXHIDIT#79h 

Confidential Treatment Requested by J.P. N ... ------------. JPM-CIO·PSI0001339 
866 

From: Wilmot, John <JOHN.WlLMOT@jpmorgan.com> 

Sent: The, 28 Feb 2012 23:48:50 GMT 

To: Enfield, Keith <Keith.Enfield@jpmorgan.com>; Weiner, Pamela <pamel •. weiner@jpmorgao.com> 

Subject: FW: eIO Business Review Materials 

FYI 

John C. Wilmot I Chief Investment Offit;e I @jQhn.wt!rnot®jpmorgan.com I a Work: {Z12} 834»5452 I a cell: ••••• 

From: Wilmot, John 

Sent: Tuesday, February 28, 2012 6:32 PM 

To: Dimon, Jamie; Braunstein, Douglas; Zubrowt Barry L; Drew, Ina; Hogan, John J.; Macrisr Achilles 0; Tset Irene Y; 

Goldman, Irvin J 

Cc: Warren, Shannon 5; Gunselman, Gregg B; Jain, Manish; Will, Kathleen; Alvelo, Alexandra X; Peterson, Ruth J; Serpico, 

Gina; Beamon-FonteneUe, Margaret; Adam; Phillipa C; Gonzalez, Jeanette; RIDs, Martha I; O'Donnell, Julie 

Subject: aD Business Review Materials ' 

Attached please find the CIO Business Review materials for our discussion tomorrow, February 29th at 2:00pm. 

John 

John c. 'r'tilmQt ! Chief Investment Office I @ ionn.wilmot@jpmof!an.com I a Work: (Z12) 834-5452 ! a Cen: •••• 

Permanent Subcommittee on Invedigations 

EXHIDIT#80 

CONFIDENTIAL TREATMENT REQUEST 

_ ... Redacted b)· the Permanent 

Subtommittee o-n Investigations 

JPM-CIO-PSIDDD194D 
867 

CIG February 2012 Business Review 

[INTERNAL DISCUSSION} JPMORGA" CHASE & Co. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO~PSI 0001941 
868 

Business Review agenda - CIO 

February agenda (1 % hrs) 

~sc~s~n;~p~s; ~ ;. ; ; ; ;;;;;eI~.;;;-:~· ii -~ Rag~'--~~i~=i 1, Re"';ewofcurrentagenda Drew 1-4. [20rninsJ 

(I) Discussion poinls 

2. Fm<lnciai Summary Wilmot 5-7 [Smins] 

3. aOBu:sinessStruc:ture Di"ewM'ilmot ",0 [Smlnsj 

(i)G.er.iew '" (ii) RWAForecasl 10 

4. 8AA Porfulio Analytlcs GoldmanlMacrisfTsa 11-16 [20minsJ 

(i) o..eNew 11 

(ii) RWA Efficient Portfolio 12-13 

(iii) Altemati>e PortfoHos 14 

00 E[;onomil; Impact Analysis 15 

(v) OCI and PV Sensjti\lity 16 

5. Risk Goldman 17·18 {10minsj 

6. Reif'r',estmelll AcU\lity MacrisfTse 19-30 [20minsj 

(i) 3011·1012 Purmases 19-25 

(iI) What we are looking at buying 2<>29 

7. FX capital Hedging MaGris 30 [5mins} 

8. Other Corpornte Acti"';ties DmwM'ilmot 31-32 [5mlns] 

!INTERNAL DISCUSSION] 

:ONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CD. 

Business Review scorecard 

Other~eActl"Ues 

Control EJ1'oironment 

Mmerial changes to MissiOll CritlcB\ 

AppendIX - SPAR AnalyUr:s 

31-32 

33 

34 

'5-43 

.J1'MORGAN CHASE &CO. 

JPM-CID-PSI0001942 
869 

CIO Business Structure - Mandate and Approach 

• Optimize and protect the Firm's balance sheet from potential losses, and create and preserve economic value over 

the longer-tenn 

~ .. J¥l ti~· ""-_ g -

[INTERNAL DISCUSSION] JPMORGAN eHASE 82eo. 

~ONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIQ·PSI0001949 
870 

CIO Business Structure (continued) 

• Volcker Rule permils risk-mitigating hedging activity, so the prohibition on prop trading does no! apply 10 the ·purchase or sale of a 

covered financial position" by a bankmg entity thaI is madEl 'In connectlon with and related 10 individlJal.or aggregated" positions 

• As proposed, however, the Rule may adversely affElctcertain ALM activities. CtO is selectrvely reduc:ing certain MIMJTraoing Account 

activiliesand calibratlng "under-60 day" actMties across lhedNfsion 

• Further alignment of activities within VolGker Rule framework has resulted in the c:onsoiidation of Strategic and Tactical Asset Allocation 

portfolios. CID has completed transitiol1 from legacy 'SM & T AA" to consolidated flnancials, risk management and portfolio structlJre. 

· le: oynami LOSing as ... L.s MIM Overlay is for non-AFS eligible transactions and for 

• C!O is resizing the credit book as a I,edge for fat-tall risk 

.... ""'M ..... _ 

."",=~ ...... -.,.-, 

.~"""""""..""..,.""," 

......-......... TM' 

{INTERNAL DISCUSSION] 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

';""'"~~<Bl""'I~_ 

.;::*~=~ 

:..,,:,;:""\¥!~~:.t::rr,l 

_c,.~~ 

• __ II>fd>o"odlI ......... nIl 

·Tho"",,,_, ""'l'''-~ .. ~ 

E1"'~;ot.'1 

JPMORGA~ CHASE & CO. 

JPM-CIO.PSI0001950 
871 

RWA Forecast 

• RWA trends reflect C!G structure 

__ "'" Redacted by the Permanent 

Subcommittee on Investigations 

• 2012 trend will reflec! continued reduction to MTM Over1ay offset by contlnued rotatiDfllnto higher RWA rates and credit 

within SAA 

Redaded by the 

Permanent Subcommittee on Investigations 

{!NTERNAl DISCUSSION} 10 JPMORGAc'l CHASE & Co. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PSI0001951 
872 

CIO Summary Risk Metrics 

flNTERNAL D1SCUSS'lONj 17 

~ONFIDENT!AL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

,., Redacted by the Permanent 

- Subcommittee on lft'¥Cstigations 

llO,OOO.ooo 

"""oo.~~ 100.000<000. 

ao)lOO,ooo 

SO,DOO,DOIl 

40,000,000 

~o,ooo.ooo 

.JPMORGAN CHASE & CO. 

JPM-C!O-PS! 0001958 
873 

CIO Markel Risk Summary 

llNTERNAl DISCUSSION} nMORGAK CHASE &Co. 

CONFIDENTIAL TREATMENT REQUESTED BY J_P. MORGAN CHASE & co. JPM-CIO-PSI0001959 
874 

CIO Reinvestment Activity - 3Q11 through YTD12 

[INTERNAL DISCUSSION) 19 .J1'MORGAN CHASE &Co. 

CONROENTlAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & co. JPM·CIO·PSI0001960 
875 

CIO Reinvestment Activity - 3Q11 through YTD12 

I !INTERNAL DISCUSSION) 20 JPMORGA.c'1 CHASE &Co. 

:ONFlDENTII\L TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-PS( 0001961 
876 

CIO International Core Credit: Tail Risk Book 

Tail Riskttedge 

Capital 

• This is a Tail Risk Book that had under Basel I an RWA cost of US$5Dln and from 2007~2D11 has generated US$Z.4bln 

totalretum 

• Under Basel 2.5, Risk Weighted Assets are estimated 10 increase 5-8x (methodology still in development); this would 

increase the RWA of the core credit book to US$36b!n however, CIO is currently working to reduce this to US$20bln for 

year end 2012 

• Despite effectiveness Dfthe Tail Risk Book hedging C'..redit portfolio, the change in regulatory capital regime is likely to force 

a re-size I run-off of synthetic portfolio in order to maintain RWA targets for the Firm 

• cia Gontinues to coordinate with IB Risk to improve the applicable RWA and capital levels 

[INTERNAL DISCUSS10N) " JPMORGAN CHASE &CO. 

:ONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CD. JPM-CIO-PSI0001963 
877 

N 

<=> 

N 

I 

U 

a:. 

<t 

:;: 

OJ 

u 

:E 

o 

..... 

c: 

OJ 

E 

..... 

VI 

~ C 

~ ~ E 'Qj~~ ._ a ~ 

.<:: U.5_ '" 1: 

§ 

bJl 

'""' 0 

::E 

p.; 

>-i 

EXHIBIT #81 " 3 1 " A J B d A 11 J J ~ 1 S ........... iiiiiiiiiii ___ _ 

:!l 

=> :!l 

=> 

=> 

.... 

'" 

=- 6 

~ ..., =-
Mandate and Approach 

KEY MANDATE: Optimize and protect the Firm's balance sheet from potential losses, and create and preserve economic 

value over the longer-Ierm. 

J.P.MQrga

JPM-CIO-PSI0015
Overview 

2 

BUsiness Structure 

'" Manage the portfolio with TRR 

mindset, delivering on 

II Financial returns vs budget 

'" RWAlimits 

'" Risk adjusted returns (OCI and 

liability marked) 

'" Allocation of$153bn in RWAand 

$6.9bn in capital against AFS and 

MTM activities 

II AFS investment portfolio 

$110bn in RWA 

'" MTM activities $43bn in RWA 

.. Reallocation trend of RWA from 

MTMto AFS 

'" 430 people worldwide 

Governance Structure 

'" Expanded Management Committee 

• Operating issues 

• Investment Committee 

.. ALM and Investl)1ent portfOlio 

review, a~alytics and asset 

allocation 

'" CIO Risk Committee 

II Management of aggregate 

market, credit, reputation and 

operational ri~k5 

J.P.Morga

JPM-CIO-PSI0015
CIO Risk Summary - COB March 6, 2012 

IilIl 

.. 1 

FX CapItal Hedgmg __ .r. 

Redacted by the 

Permanent Subcommittee on Investigations I 

OEP FX Hedging Summary 

Redacted by the 

Permanent Subcommittee on Investigations, 

Redacted by the 

lmanent Subcommittee on Investigations I .... 

Up5O%; 

Redacted by the i 

Subcommittee on Investigations I 

U:Hi!5tr.tteglc (25.4) 8.9 (3IU) 1,.418.1 gI),l 48.6 48.3 

Core Tactical OJ SA 1.3 

SynlhetlcTata! 25.3 

2[).6 81,8 50.4 

17.5!' - 'UM IL _________________________ __ 

JPM-CIO-PSI0015

3 
Volcker 

Proposed Vofcker Rule ' 

Any trade subject to Mar1<et Risk Capital Rules is deemed de 

facto prop trading 

Trades held for less than 60 days duration are presumptively 

prop trading 

Hedge must be "reasonably correlated" to the risk being 

hedged: but the preamble to the Rule states the hedge is only 

permissible when it is "established slightly before'" the banking 

entity becomes exposed to the underlying risk 

- , ,:CIO lliey( , 

A transaction that is legitimately risk hedging is not prop trading 

because of the application of accounting and capital rules 

MTM positions that are true risk mitigation transactions might 

benefit from short term price movements but are not prop 

trading 

Purpose of stress tests is to inform the banking entity about 

risks to which it may become exposed, and based upon that 

information it is prudent for the banking entity to 

mitigating actions. Use crisis as an example of anticipatory 

hedging 

.. ALM-Volcker comment letter was submitted to the Clearing House and SIFMA for 

industry submission 

.. Included as part of JPM comment letter on Volcker Rule specific examples of actions 

taken during the crisis that need clarification under the Rule as written 

.. Held meetings with Fed and acc in late January. Scheduling meetings with the FDIC 

and CFTC 

B J.P.Morgan 

JPM-CIO-PSI0015
882 

From: mcmanus_william@jpmorgan.com 

Sent: Fri, 30 Mar 201222:12:22 GMT 

To: JOHN.WII.,MOT@jpmorgan.com;peter.weiiand@jprnchase.com 

Ina.Drev.>@jpmorgan.com; achilles.o.macris@jpmorgan.com; anthony.m.bfO'wn@jprnorgan.com; 

javier.x.martin-artajo@jpmorgan.com; bruno.m.iksil@jpmchase.com; phi1.1ewis@jpmorgan.cqm; 

irvinJgoldman@jpmchase.com; david.bjarnason@chase.com; Ashley.Bacon@jpmorgan.com; 

steinat_zinke@jpmorgan.com; John.J.Hogan@jprnorgan.com;hema.s.coombes@jpmchase.com: 

alison.c.giovannetti@jpmorgan_com; kastJ_ edward@jprnorgan.com; paul t bates@jprnchase.com; 

CC: Jason.LDHHughes@jpmorgan.com; keith.stephan@jpmorgan.com;KeithEn,.l1.eld@jpmorgancom; 

rory.h.oneill@jpmchase.com; Douglas-Braunstein@jpmorgan.com; warreo_shannon@jpmorgan.com; 

jean-francois bessin@jpmorgancom; DanieJ.Pinto@jpmorgan.com; frankj.pearn@jpmorgancom; 

graham j.meadows@jpmorgan.com; hatzopoulos _ alexander@jpmorgan.com; 

mcmanus_ william@jpmorgan.com; Paul A.Ricci@chase.com;jom.x.rose@ipmorgan.com: 

john.r.buttarazzi@jpmchase.com; andrew.c.challen@jpmchase.com; spencer.x:.john@jpmorgan.com; 

avis.b.rodriguez@us.pwc.com;lauren_m.tyler@jpmorgan.com 

Subject: Audit Report: EMEA CIO Credit - Market Risk lind Valuation Prllctices (Rating: Needs Improvement) 

I~ 

Audit Department Report 

Report Number: G-IU003 

Audit Rating: Needs Improvement 

Report Date: March 30, 2012 

Audit Type: Audit 

Prior Report Number: 0-10/003 

PriorReportD/ltI'::February26,ZOlO 

Prior&portR..ating::Sansfactory 

EMEA CIO Credit - Market Risk and Valuation Practices 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. 

Permanent Subcommittee on Investigations 

EXHIBIT #82 

JPM-CIO·PSI 0009289 
883 

Prior Audit Typce: Audil 

Business Overview and Context 

The CIO EMEA credit portfolia is made up of 'Investment' and 'Core Credit' portfajios. The Investment portfolio consIsts af Asset Backed Securities (ASS), 

Co!1aleraiised Loan Obligations (ClOs), Mortgage Backed Securities (MBS) and Rates products (Corporate & Government Booos) and had e.\otal notional of 

approximately $157 blllion as of 12131111, S140bn within the strategiC asset allocation (SAA) book and $17bn in the taclical asset allocation (fAA) book. The Cara 

Credl! portfo.lio primarily consists of derivative positions such as the CDS indices and tranches and had a total notional value of approximately $50 billion as of 

12131/11, 

The Market Risk: team IS an independent control funcUo.n wJthin the cia wtlOse primary responsibilities are identifying, defining and monitoring appropriate 

measurement techniques to. ClJntro.l market risk:, using info.rmation provided by the JPMorgan risk infrastructure. cia Valuation Control Group (VCG) is also. an 

indepeooent control functio.n within the CiO responsible for price testing aoo fair value adjustments. 

Audit Scope 

The audit scope focused on risk and controls specifically relating to: 

Market Risk induding the risk limits and sensitivities, VAR methOdology and stress testing; 

Monthly valuation aoo reserve processes including independent price testing and provisioning; 

The completeness of posttions inclUded in the market risk and financial valuation pro.cesses 

Key Findings 

The controls supporting the EMEA CIO Credit market risk management and valuation practices are being rated 'Needs Improvement' due 10 the fOllowing: 

CIO VCG Practices 

CIO utilise a number of risk and valuation models which have no.t been subjec:l to review by the Mooei Risk Group. If./hile there may be instances where the use of 

unapproved models is acceptable for a pn:!defined perio.d o.f lime, no reserves are currently taKen to account for positive P!l on unappro.ved models USEd for 

valuation purposes 0.e. Swaptions· Unapproved Model". Posltive PIL $18m). 

In addition, Audit no.ted deficiencies in the EMEPI. CIO VCG practices including the absence o.f II fo.rmally applied price sourcing hierarchy, insufficient consideration 

o.f Po.tentially appliCBble fair value adjustments (e.g. concentration reserves fo.r significant credit indices positions) and the lack of formally do.CUmented/consistently 

applied prica testing thresholds. There is also a lack of transparency and quantitative assessment of the considerable judgment used to price test the ClO boo.K 

given the inherentvaluatio.n uncertaintyWlththepositions. 

Market Risk 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE So CO. JPM-CIO·PSI 0009290 
884 

Stress Testing· There is no documented stress testing me'!hodology to outline key testing components (e.g. computational method and shock factom 

used) Of assess limitations such as off-line risk. measurement, missing risk factors and curves. As a result, Audit was unable to fully assess the stress 

testing framework. and rulated scenario outputs 

Market Risk. Management Practices- The SAA book. ($1408n Notional as at 12131) does not currently feed the firm wide mar'K,,! risk limits and thresholds 

framework and relevant SAA stress tesl.lng results are not measured against corresponding limits. etO also does not expliciUy measure the portfolio 

sensitivity to certain potentially appliC<lb!e risk measures. 

Mar'Ket Risk. Models - EMEA CIO is eyrrently using unappruved models in the calculation of risk. 0ncluding VaR) and associated risk measurement 

methodologies have not been appropriately documented and lor catalogued. 

VaR Data Controls 

VVhUe Audit found no specific examples of incem~ete or Inaccurate data, the control process around the offline VaR calculation n·eeds to be enhanced to ensure 

completeness and accural:)' of Credit trade data used in the offline calculation of VaR. 

RootCWI.$e 

Root Cduse: Poorly documented CIO VCG pracJ.jces and failure io comply with firmwlde risk. management standards. 

~atus 

lanagement agrees with the reported issues and is implementing corrective actions. 

Business Details 

Level 1: OlldInvestme:nlOffi.ce 

Business Executive: Ina Drew 

L:"el1; CIO 

Business Executive:; Achille!> 0 MIens. John Wilma\., Phil Lewis. In"in J Goldman 

Location: United Kingdom, EMEA 

Business Executive:: Adrilles 0 Macris 

Audit Details 

Managemeut Te:un Member. Hatzopoulos, Alexander X 

Audit Manager. John R Buttarazzi 

AuditorJ.n Charge: Alldn:w CChallen 

::;:ONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM·CIO·PSI 0009291 
885 

-'" Red.Ued by the Penaanent Submmmittee 00 10valipHofti 

Detailed Findings and Manaccment Action Plans 

rnue! em VCG Practfcell 

Audit testing identffied several deficiencies alld inconsistencies in EMEA CIO VCG practices alld methodologies. SpecfficaUy: 

CIO is not currently defeCTing positive P&l generated from unapproved valuation models. Speclfically, several unapproved models (Primus Sabre, AUI3 

Option, Offline TDR, Prime Whole loan, CMSX, Bond) are currently being used for valuation purposes without any corresponding reserves. Per VCG, 

associated 2011 P&l was predominantly limited to Swaptions totalHng $1Bm. 

C10 VCG lacks a fOmlafly documented price sourcing hlernrchy to govern the consistent use and appropriate application of independent prices for prlce 

testing purposes. Audit also noted that in price testing high grade corporate bonds, CIO VCG inappropriately utilises an indicative report sent by JPM 

Assel Management (JPMAM), basod on their incorrect understanding that such prices were validated by JPMAM's price testing fundion. utilising 

Bloomberg prices, Audit estimated a price testing increase of $58m at 12i31f11. Separately, emel1ling marKet bonds are being price tested at mid levels, 

which is inconslstent with the front office marking at bid and resulled in an Audit esllmated price testing decrease of $SOm. 

There is no evidence of C!O VCG review to ensure the ongoing validity of thresholds applied to corporate, EM, govemmem and government guaranteed 

bond price testing. Further, while the formally documel1!ed band price testing threshold is +1· 1.5 price points (wtlich would resull in minimal required 

adjustments) dlfferenlthresholds are actually applied by EMEA VCG without sufficient transparency or evidence. AI year-end, AudH's independen1 bond 

price testing using dynamic thresl'lolds resulted in all esUmaied $110m net !ncrease. In addition, threshOlds used to determine which price testing 

differences require adjustment are not clearly defined for CreDit Indices. 

Concentration FVA was not calculated Of applled for credit indices to account for the significant market positions. While the subsequently calculated 

concentration FVA of $13m would nat have resulted in a required adjustment based Of\ the CIO policy (which only requires taking the larger ofthe 

should be reassessed. 

RoOot Cause: il1sufflcient assessmentfformalisallan of certain price testing methodologies and poony documented CIO VCG prectices. 

Actioui"lan 

CIO will review current methodoiogyto ensure -consjstenG)' In application and appropriate practices are utilised. Specfficall~, CIO VCG will: 

Implement and evidence enhanced oversIght of positive P&.l being generated from unapproved and disapproved models, with reserves as necessary. 

Delirle and implement a price sourcing hiera[t;hy to ensure a consistent and appropriate price sourcing and testing approach. 

Ensure price testing is pertormed consistently with front office marking pollcy. 

Document the ratiOnale for current Bond price testing thresholds and reassess as necessary; cfeany define price testing thresholds for ASS and CDS, 

Improve evidence of the monthly VCG ASS price testirl9 process in order to enable re-perfonnance. ' 

Reoonskler the appropriateness of \he existing credrt Indices price testing policy to ensure concentration is sufficiently incorpor.rted. 

Target"Da1e!July 31.:W12 

luue Owner. Jason LDN Hngh!!:!; 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM..cID~PSI 0009292 
886 

Issue: Market rusk MaDagement and Sfrejs Testing Pnu:ti~ 

--"" Redacted by the Permanent 

Subt:ommittee on Investigations 

Audit noted the following with regards to the mar1<..et risk management framewor\(, which is currently subject to a comprehensive reassessment by the CIO; 

There is no stress testing methodology ooCllmenmtion in place to outline key testing components (e,g. computatioflal method and shock. factors used for 

each asset class) or assess limitations sllch as offline risk measurement, miSSing risk factors and curves. Therefore Audit was unable 10 fully assess the 

validity of the stresstesling framewor1l. and scenario oLStputs. 

The SM book ($140bn No\lona! as aI12131) does not currently feed the firm wide maltet ~Sk limits and thresholds framework.1Nhllethere is SM 

portfolio stress teslillg and risk measurement of non statistical measures (e.g. eS01 and CSVV). these exposures are not measured against correSponding 

limits. In the colltexi of a large sell off scenario, the stress loss for AFS Credit is estimated to be $2.600. 

CIQ does not expliclUy measure the portfolio sensitivity to certain potentially applicable risk meaS!.lres such as bond/CDS basis, index basis and 

prepayment risk to facilitate sufficient consideration of corresponding risk management and controls. 

The Single Name Position Risk (SNPR) issuer exposure is misstated for the trading portfolio as it does not Incorporate a disaggregation of the credit index 

tranche exposure at issuer level. 

Root Cause: Maitet risk management practices have not been recently assessed Of updated. 

ActionP!1I1l 

1. Comprehensive stress testillg methodology documentation wi!! be pruduced and specifically jnclude shock fadors (Including FSI alignment) and an 

assessment of aU risk factors. (Target Date: July31,2012) 

2. CIQ is currently undertaklng e comprehensive review of the risK measurement and limits frame'NOit across aU asset classes to assess potentially required 

enhancements Including wflether additional ris'k factors are required for indusion. (Target Dale: July 31, 2012) 

3. cia is in the process of implementing new functionality to enable the disaggregation of the credit index tranche for SNPR risk measuremem purposes. 

(Target Date: Sep!ember30, 2012) 4·liiiiiiiiiiiiiiiiiiiii _________ _ 

Target Date: July 31, 2012 

l-isue Owner: Keith Stephan 

;ONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CIO-P510009293 
887 

bsue.: Market Rid>. MIJdds 

CIO is currently uSing unapproved models in the r;a1CI..I!ation of risk (lntJuding VaR) BOO associated risk measurement methodologies have not been appropriately 

documented ana/or [;8ta!ogued. Specifically: 

CIO specific amendments to approved 18 VaR methodologies have nul been dOClJmented orsubmittecl to MRG for review. Unapproved amendments 

pertain to the production ofP&Lvec!:ors and the use of proxies. 

CIO generate non statistical risk measures used for risk. management, stress and VaR measurement via the internally developed West End analytics 

model, Vw'hjeh has rwt been submitted to MRG for review. 

DocumentatIOn for all product sensitivity Inputs used in CIO VaR models was not maintained in the Global Model Database (GMD), as required. 

The CIO Quantitetive Research (OR) mode! inventory is incomplete. For example, the application ofVaR and sensitivity models to specific product types is 

not included 

Root Cause: Model documentation forVaR and non stati.stical models was not appropriately maintained and submitted to MRG for review. 

AcfionPIII.[\ 

1. CIO wiU document aU amendments to the approved VaR model ana submit to MRG for review. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-C10~PSI 0009294 
888 

2 cia w!!l documentlhe West End Anatytjcs engine and submit to MRG for review, 

3. The QR mode! inventory and GMD wi!! be updated as appropriate. 

Ta.rget Date: JlDle30, 2012 

l>isue Owner. Keith Stepball 

ruOe: VaR Data C<mtrols 

While Audit found no specific examples of incomplete or insCCtJrate data, ths control process around the offline VaR calculation needs to be enhanced to ensure 

completeness and accuracy of Credit trade data used in the offline calculation of VaR for tile Credit. Sectors. Specffic.ally. 

For Symhetic Credit, controls require enhancement to ensure the completeness and accuracy of trade poSitions used in the maJilBl: risk VaR model, which 

are sourced from Primus via a stored procedure. 

For Secured Credit, controls require enhancement to ensure the completeness and accuracy of tho sensitivity data (CS01) used in Ihe mar1o:et risk. VaR 

model and sourced from the trader maintained blotter (which is used as the ~ntral source of position and risk information for VaR reporting), 

In addition, no SOX testing was being performed on these manual processes, which require designation as key SOX controls, 

Root Cause: A Jack of clear handshakes for ensuring the completeness and accuracy of VaR feeds In ths off-line process. 

i.clionPlan 

1. CIO MO will implement daily controls to ensure the completelless and accuracy of data used ill the off-line ca!culatlon ofVAR. 

2. Following successful implementation of the above, Middle Offic:e manager to deem control as a SOX key Control and test as necessary going forward. 

Target Dare: May 31, 2012 

Issue Owller. Hewa S Coombes 

Issue: VCG reporting 

Audit noted the following With regards to VCG reporting to senior management: 

Pre- and post- price tasting threshold results are not being reported. 

There is no histOrical analysis or trending of key valuation matric:s with only the current month being reported. 

High grade bond price testing results that were reported \0 senior management varied from the underlying ca!culation mes by $11m due to a manual 

reporting error. However, this issue did nat reS!.lIt in.a financial slatement impact. 

Root Cause: Insufficient focus on ensuring the appropriateness of VCG reportIng to senior management. 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM..cIO-PSI 0009295 
889 

ActiouPl1Ul 

VCG will enhance their reporting to senior management to provid,e trarlsparency and analysis. 

Target Date: June 30, 2012 

ilsue OwnI'J'; Jason LDN Hu,ghes 

Issue: Manila! Erron within Price Testing and FV A Proce!.l" 

COntrols over spreadsheets used for price testing purposes are not appropriately designed, resulting in several manual errolS totalling $13m, $1.4m of which had a 

financial statement impact. The S1.4m error ($31 m reponed versus $32.4m actual) was prim<'lrily the result of several off*the·run credit indices being excluded. 

Other Brrors noted include VCG using an incorrect benchmark. for 37 mthe bonds tested and EURfGBP high grade corporate bond positlons not being converted 

into USD before aggregation for reporting purposes. 

Root Cause: Controls over spreadsheets used for price testing purposes are not appropriately designed. 

Action Plan 

CIO VCG wit! implement sufficient spreadsheet control and governance processes in the VCG process to sufficien'Uy minimise the risk of manual errolS. 

Targel.Date;July31,2012 

ilsue Owner,: Jason LDN Hughes 

Not to be distributed without priQr permission from Audit. 

-End ReportCONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM.cIO-PSI 0009296 
890 

~rom: Drevv, Ina <lna.Dri3v@jpmorgan.com> 

';e:nt: Thu, 05 Apr 2012 21:05:18 GMT 

cc: 

macris@btinternet.com 

Wilmot, John <JOHN.Wll.MOT@jpmorgan:com>; Goldman, Irvin J <irvin.j.goldman@jpmmase.com> 

Subject: Fw: Jamie's fine with this. 

-----_._-------

From: Drew, Ina 

Sent; Thursday, April OS, 2012 01:53 PM 

To: EvangeGsti, Joseph; Zubrow, Barry L 

Subject: Re: Jamie's f~ with thls... 

Point two. As.$e1s and liabilities 

We do !'lot disclose Lio earningS ~ part of corporate 

From; Evangelisti, Joseph 

sent: Thur5daYf AprIl OS, 2D12 0'l.:45 PM 

To: Drew, Ina; ZUbrow, Barry L 

Subj~: Jamie's flOe with this. 

m: Dimon. Jamie , , 

,:,.ent Thursday, April 05, 20124:45 PM 

To: Evangetistit Joseph 

Subject: Re: Revised: WSJ/Bloomberg 00 storiES 

ok 

From: Evangelisti, Joseph 

Sent; Thursday, April 05, 2012 04:41 PM 

To: Drew, Ina; Dimon, Jamie; Hogan, John J.; Scher, Peter l; Zubrow; Barry l; Staley, Jes; Cutler, Stephen M; Ramn, Neila; 

Braunstein, Douglas; Wilmot. John 

Subject: Revised: WSJ/Bioomberg 00 Stories 

Here are some revised points based on your(;omments. The WSJ's deadline is in 10 minutes. Thanks, Joe 

The C~ief lnve~trnent Office is responslble for managing and hedging the firm's foreign exchange, interest rate and 

other structural risks. 

CIa is focused on managing the- !ong~term structuralliabilltles of the firm and is not focused on shorHerm profits. 

Our CIO activities hedge structural risks and invest to bring the company's as.set and liabilities into better alignment. 

Our eta results are disclosed in our Quarterly earnings reports.. 

~. We cooperate doselywlth our regulators" who are aware of our hedging activities. 

Permanent Subcommittee on Investigations 

EXHIDIT#83 

Confidential Treatment Requested by J.P, .. ------------1 JPM-CIO-PSI 0000543 
891 

Background: Not correct to attribute gains to a single trader. Membe15 of the 00 take long-term hedging positions in 

the context of our ~verallliquidity'/'TlCInagement structure. 

Background: $200 billion vastly overstated. $600 million in gains overstated. 

• Won't comment on a specific people. 

From: Evangelistl, Joseph 

Sent: Thursday, April 05; 2012 4:0& PM 

To: Drew, Ina; Braunstein, Douglas; Hogan, John.).; Staley, Jes; Scher, Peter L 

Cc: Dimon, Jamie; Youngwood, Sarah M 

Subject: ViJSJ/Bloomberg 00 stories 

The Wan Street Journal and Bloomberg are working on prominent stories about Bruno Ihit a managing dlrector in our Chief 

Investment Office in London. 

They are saying that lks.iI currently has more than $200 bHlion in pcisit~ns in credlt trading products and has mad,eJPM more 

than $600 million in profits over the past two years. They said his current CDS posltions on the lG9 Inde,; are roiling the 

market and that some of his positions may resuttin losses. 

More generally, the WSJ and Bloomberg are saying that JPMorgan basica!1y has a large proprietary tra'ding shop hidden In its 

CIa, .and that many analy:!its are unfamiliar with specifics around its activities. They also say that with increased capital rules 

'the upcoming Voicker Rule, thE:Se activities. could come under pressure. 

I'd lik.e us to hit hard the points that the Cia's activitieS are for hedging purposes. and'that the'regulators. are fully aware of Our 

activitiES. rd like to give them the follOwing on the record; 

• The Chief Investment Office is. responsible for managir'l& and hedging the finn's liquidity, foreign exchange, interest 

rate and other structural risks, 

Gains in the 00 offset and hedge losses in other parts of the firm. 

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 fram-ework. Hedging gains 

refleoed in our flnanaal5tatements. represent one s.ide of a transaction that is hedging a Joss in one of our 

main busines.ses, 

We cooperate closely with OUr regulators# and they arefu1!y aware of our hedging activities. 

BaCkground: Not correct to attribute gains to a sjngle trader. Members of the aOtalie long-term hedging positions in 

the context of our overall liquidity management structure. 

Background: $200 bur IOn vanly o1.'erstated. $600 million in gains overstated. 

• Won't comment on a spec:mc people. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM..cIO-PSl 0000544 
892 

From: Drew, Ina <JnaDrew@jpmorgan.com> 

Sent: Thu, 05 Apr 2012 21 :58:38 GMT 

To: 

Dimon~ Jamie <;jamie.dimon@jpmchase.com>; Zubrow. Barry L <barry.J.zubrow@jpmchase.com>; Staley, Jes <jes.staley@jpmorgan.com>;Cutler,Stephen 

M <stephen.m.cutler@jpmo'l!an.com>;Maclin, Todd <TODD.MACLIN@chase.com>; 

Braunstein, Douglas <Douglas.Braunstein@jpmorgan.ccm>;Erdoes,MaryE . 

<mary.erdoes@jpmOlllan.com>; Smith, Gordon <gordon.smith@chase.com>;Petno,Dougl ... 

B. <Dougl .... B.Petno@jpmorgmt.com>; Bisignano, Frank J 

<frank.j .bisignll!lo@jpmchase.com>; Hognn, 10hn J. <John.J.Hogan@jprnorgan,com>; 

Cavanagh, Mike <mike.cavanagh@jprnchase.com> 

Subject: CIO 

I want to update the operating committee on what is going on with the c~edit derivatives book in CIO 

especlaJly given ~ wsj article which win come ~ tomorrow. . 

One of the activities in cia is a creditderlvatives book which was built under Achilles in London at the 

time of the merger. The book has been eJ<tremely profital>le forthe company (circa 2.5 billion) over the 

last several years. Going into tne crisis.. we used the instrumentation to hedge mortgage risk and credit 

widening. Recently. in Decem~er~ the book outperl'mmed as it 'waS positiOMed in for "jump" risk or 

default risk throughout the summer as a relatively inexpensive hedge for fallout from weak markets 

during the european crisis. The fourth quaner400 million gain was the resu1t of the unexpected 

american airlines default. 

Post December as the macro scenario was upgraded.and our investment activities turned pro risk. the 

book was moved into a long position. The· specific derivative index that was utilized has not penonned 

for a number ofreasons.ln addition the poshion was not sized or managed very well Hedge funds that 

have the other. side are actively and aggressively battling and are using the situation 8S a forum to attack 

us on the basis ofviolating the Volcker rule 

Having said that,. we !Tlade mistakes here which I am in the process; ofworking through. The drawdO"M1 

thus far has been 500 mil dolJars but nets to 350 mil since there are other non derivative positions; in the 

same credit book. The earnings afthe company were not affected in the first quarter since we realized 

gains out of the 8.5 billion ofvwue built up in the securities book. 

John Hogan and his team have been very helpful. I ~ted my partnOl1! to be aware of the situation Imd I 

will answer any specific questions at DC monday. 

Have a good holiday. 

Permanent Subcommittee on Investi ations 

Confidential Treatment Requested by J.P. M EXHIBIT #84a JPM·CIO·PSI 0000539 
893 

From: 

Sent: 

Drew, Ina <InaDrew@jpmorgan.com> 

Wed, 02 May 201213:34:09 GMT 

To: Drew, Ina <Ina.Drew@jpmorgan.eom> 

Subject: 

LEADING INTO THE CRISIS AND ECONOMIC DOWNTURN: 

IN DISCUSSION WITH JD. CIO DECIDES TO BUY CREDIT PROTECTION. USING 

INSTRUMENTATION ON THE SYNTHETIC CREDIT DERIVIATIVES MARKET, 

PRINCIPALLY IN THE HIGH YIELD SPACE 

WHICH LEFT US SHORT RISK OR LONG PROTECTION IN WHICH CASE THE POSITION 

WOULD PROFIT AS HIGH YIELD COMPANIES DEFAULTED. AS TIME PROGRESSED AND 

THE FILINGS OCCURRED, THIS POSITION WAS BALANCED TO A MODERATE EXTENT 

WITH INVESTMENT GRADE LONG RISK POSITIONS. 

OVER THE LAST 5 YEARS, THE POSITIONS MADE APPROXIMATELY 2.3 BILLION 

DOLLARS, WERE REASONABLY STABLE WITH PREDICTABLE P L ALTHOUGH THERE 

WERE A COUPLE OF PERIODS OF DISTORTIONS MAINLY CENTERED AROUND 

SYSTEMATIC MARKET EVENTS INCLUDING LEHMAN AND AIG. 

IN NOVEMBER OF 2011 THE POSITION WAS QUITE STABLE AND IN BOUNDS FROM ALL 

PERSPECTIVES. 

WHAT HAPPENED? 

FOUR THINGS HAPPENED AROUND THE MONTH OF DECEMBER TO Cl;iANGE MY 

THINKING ON THE NEED FOR A PRO DEFAULT BIASED HEDGE. 

1. THE COMPANY WAS STARTING TO DO THE MATH AROUND THE BASLE III RWA 

RULES. THE SAME BOOK THAT WAS DRAWING20 OF CAPITAL UNDER SASLE I 

(THE REGIME THAT WAS IN PLACE DURING THE ENTIRE TIME OF THE HEDGE 

CONSTRUCTION) WAS GOING TO NEED APPROXIMATELY 60 BIL OR THREE 

TIMES THE CAPITAL TO SUPPORT 

2. WE HAD A BIG PAY DAY. AMERICAN AIRLINES FILED EARLY AND WE OWNED IN 

THE HIGH YIELD HEDGE, A SIGNIFICANT OPTION ON THAT OUTCOME. WE 

RECORDED $450 MILLION OF GAINS. ALTHOUGH THIS WAS A POSITIVE EVENT 

FOR THE BOOK, THE HIGH YIELD MARKETS WERE RIOLED AND DISLOCATED 

FOR THIS AND OTHER TECHNICAL REASONS. 

3. THE LTRO IN EUROPE WAS ANNOUNCED ON DECEMBER aTH PROVIDING 

STRONG SUPPORT FOR THE CREDIT UNIVERSE. 

4. THE ECONOMY, PARTICULARLY IN THE UNITED STATES WAS LOOKING MUCH 

BETTER FROM ALL MACROECONOMIC STATISTICS AND WAS FURTHER FUELED 

BY THE LARGE SCALE EUROPEAN LlLQUIDITY INJECTION. WE HAVE A PRO 

RISK THEMATIC THROUGH THE INVESTMENT BOOKS. 

BOTTOM LINE: FOR ALL OF THE REASONS CITED, WE MADE A DECISION TO REDUCE 

THE SIZE OF THE HIGH YIELD SHORT. 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J,P ... __ E.X_H.I.B.I.T_#.84 .. b ... __ • JPM-CIO-PSI0001212 
894 

THE TRADERS WERE DETERMINING HOW BEST TO REDUCE THE SHORT IN THE HIGH 

YIELD MARKET GIVEN THE DESCRIBED LACK OF LIQLIUIDITY IN THE HIGH YIELD 

MARKET. A DIRECT REDUCTIONOF THE EXPLICIT POSiTION WAS DEEMED NOT 

POSSIBLE AND ENORMOUSLY EXPENSIVE. 

THE DESK THEN TURNED TO THE NEXT BEST PROXY WHICH IS CALLED THE IG9 

INDEX. IT IS AN OLD INDEX FROM 2007. COMPOSED OF 125 EQUALLLY WEIGHTED 

NAMES. WHICH MADE SENSE GIVEN THAT THE INDEX HAD 5 NAMES INCLUDING 

RADIAN, MBIA, ISTAR AND SPRINT OR COMMONALITY IN SINGLE NAMES THAT WOULD 

DIRECTLY OFFSET THE HIGH YIELD POSITION. THIS CHOICE WAS VIEWED AS HAVING 

AMPLE LlQLUIDITY AND A GOOD PROXY TO REDUCE THE SHORT. 

LIMIT 

THE CONSTRAINING OPERATING LIMIT IN PLACE WAS VAR AND THE VAR HAD BEEN A 

GOOD PREDICTOR OF THE RISK. IN FACT, AS POSITIONS WERE ADDED THE VAR WAS 

COMING DOWN WHICH WAS ALSO A KEY DRIVER OF THE INTENDED CAPITAL 

REDUCTION. 

THE DESK ADDED A VERY LARGE INVESTMENT GRADE POSITION TO TRY TO KEEP UP 

WITH THE REBALANCING THAT BELIEVED WAS NECESSARY AS THE HIGH YIELD 

MARKET WAS RISING IN PRICE, 

WHAT WENT WRONG? 

THIS IS WHERE AND HOW THE MAJOR PROBLEMS STARTED. 

FIRST WE DID NOT HAVE LIMITS CONSTRAINING THE NOMINAL AMOUNTS OF 

POSITIONS THAT WOULD CLEARLY HAVE FLAGGED THE PURCHASES AS TOO LARGE 

AND CONCENTRATED FOR THE UNDERLYING LIQUIDITY OF THE MARKET DESPITE 

THE FACT THAT THE RISK EQUIVALENT OF THE PURCHASES WERE WITHIN LIMIT, 

THE MODEL GOT IT WRONG. ALL THE THEORETICAL UNDERPINNINGS OF VALUATION 

HAVE BROKEN DOWN AND THE VOLATILITY HAS BROKEN ALL HISTORICAL AND 

WORSE CASE BANDS. 

THERE WAS NO ELEVATION OF THE SIZE OF THE POSITION CHANGE OR A 

DISCUSSION AROUND THE MAGNITUDE OF NEW LONG RISK BEING ADDED TO 

EFFECTVELY CLOSE DOWN OR BALANCE THE SHORT HIGH YIELD POSITION. 

THE RESULT 

THE RESULT IS A VERY LARGE, CONCENTRATED POSITION WHICH RETAINS ITS PRO 

DEFAULT PROPERTIES UNTIL THE END OF THE YEAR, IE STILL SHORT THE HIGH YIELD 

MARKET. 

HOWEVER THE OVERALL BOOK IS LONG AGGREGATE CREDIT PRINCIPALLY IN 

INVESTMENT GRADE IN EUROPE AND THE UNITED STATES. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM·CIO-PSI0001213 
895 

THE STRESS LOSS HAS FLIPPED FROM A POSITIVE RESULT TO A NEGTIVE RESULT 

SHOULD THERE BE A SEVERE SHOCK OR DOWNTURN. 

WHAT ARE WE DOING? 

THE FIRM WITH SIGNIFICANT HELP FROM THE INVESTMENT BANK AND THE RISK 

MANAGEMENT ORGANIZATION IS FRAMING A RISK REDUCTION PLAN THAT IT HAS 

STARTED TO GENTLY IMPLEMENT. THIS WILL TAKE AT LEAST THREE MONTH. WE 

ARE UNABLE TO PREDICT THE SIGNIFICANT P L VOLATILITY THAT MAY ARISE AS A 

CONSEQUENCE. 

I HAD STARTED REDUCING THE ALLOCATION TO INVESTMENT GRADE CREDIT IN THE 

INVESTMENT PORTOLIO IN THE FIRST QUARTER AND AM ACCELERATING THOSE 

SALES TO MONETIZE SOME OF THE 9 BIL OF GAINS WE HAVE HARVESTED FROM 

THOSE CASH INVESTMENTS. WE CONSIDER THOSE SALES TO BE BOTHI GOOD 

ECONOMIC SALES AND ALSO THE RIGHT THING TO DO TO BRING DOWN THE FIRMS 

EXPOSURE TO CREDIT, ALBEIT TOP OF THE CAPITAL STRUCTURE, WHILE THE RISK 

REDUCTION PLAN FOR THE EXCESS PSOTION IN THE CREDIT DERIVATIVES BOOK IS 

BEING UNWOUD. 

WE ARE WORKING THROUGH THE 100 DISCLOSURE AND DOUG AND JAMIE ARE 

WEIGHING THE RISK REWARD TO THE COMMUNICATION PLAN AROUNDA PRESS 

RELEASE AND ANAYST MEETRING AND THE POTENTIAL IMPACT ON THE MARKET AND 

OUR ABILITY TO REDUCE THIS POSITION. 

WHAT WENT WRONG: 

Confidential Treatment Requested by J.P. Morgan & Co. JPM·CIO·PSI0001214 
896 

From: Macris, Achilles 0 <achilles.o.macris@jpmorgan.ccm> 

Sent: Sun, 08 Apr 2.012 23:14:32. GMT 

'0: Drew, Ina <Ina.Drew@jpmorgan.ccm> 

Braunstein, Douglas <C1ouglas.S:raIJnstein@ljplnorg2In 

CC: <jamie.dimon@jpmchase.com>; Hogan, )~~:c~is@ ••• I.ijj:lm()rg:3n.CDJn>; Goldman, 

Irvin] <irvin.j.goldman@jpmchase.com>; IT 

Subject: Synthetic Credit Summary 

Hi Ina, 

- = Redacted by tbe Pennaneot 

SubtommittH on lovestigatiollS 

Fo!lowing up from our earlier call, here is a summary of our synthetic credit actlvity, results and outlook for Q2. 

Year~to-date the synthetic book is -$S2SMM. Offsets in other credit positions limit the Ql los5 to -$3S0MM, while 

the Ql CIa Int'! financial income was +$B30MM including the synthetic book. The Ql TRR (including OCI delta) is 

$3.2blo year to date. 

The synthetic credit book, as a dedicated hedge to our credit longs, continues to be short HY. In Q4, we decided 

to neutralize the risk profile of this book for two reasons: a) the large realized gaIns around the AMR events, and 

b) given our large investment program In cash credit securities and related view. 

Our attempt to neutralize the book has been unsuccessful. We ended up losing a predictable -S7SMM on HY 

shorts, however the IG hedge delivered only +SOMM. Although investment grade performed very wen in Ql and 

the· relationship between HY and IG also worked in our favour, two idiosyncratic factors rendered our hedge 

ineffective: 

1. Our longs, IG.9 and ITX.9 forwards, are in the off~the-run curves which steepened +Z4bps. 

Excess liquidity and the pro-risk environment drove carry traders to the front-end. 

2. Our longs underperformed the on~the-run indices as they contain specific high-risk names in 

the old series (CDX.IG.9 contains Radian, MBIAr Countrywide, IlFC, iStar Financial, RR Donnelly; jTraxx.59 

contains Hellenic Telecom, Banco Espirlto Santo, Portugal Te!ecom, Dixons, Elec. de Portugal). 

The reason, however that we have chosen these IG proxies is because these are the very names that we are short 

in HY instruments. 

Therefore, although thus far unsuccessful, these IG proxies best neutralize and balance our synthetic books to 

event' risk. This has been reflected in the VaR and Stress VaR. Overall, we still remain short these names with a 

pro-default jump risk profile. 

Th~ book is overall risk balanced, given the cross-market long/short and has positive carry of $2MM/day, while 

retaining upside on defaults (see graph below). 

For Ana! Q2 we estimate a P&L range of.-1SOMM to +2S0MM. Intra-quarter pal could exceed this range, but not 

significantly, 

The above estimate does not Include P&L on default events, which Is significant!y positive, as shown in graphs 

below. 

It is my impression that the recent market attention to our IG,9 actlvities maybe due to the market's incorrect 

perception that we are outright long IG.9 index with a related default risk profile. We are not, 

I think It would be much more likely that the significant market shorts in IG.9 lOY will need to be covered. Many 

dealers hold significant shorts in IG.9 against legacy COO portfo!1os, and as hedges to illiquid single-name 

inventory. 

Related to IG.9, the most rewarding, shillt::.terrn. catalyst for CIO would be an MBlA related default event and 

Permanent Subt:ommittee on Investigations 

ConfidentiarTreatment Requested by J.: .. __ .;;; EXHIBIT _________ #85 • JPM-CIO-PSI 0001588 
897 

subsequent curve flattening. Alternatively, a settlement or positIve case outcome for MBIA would be bullish and 

would support a rally in the forwards. Our P&L profile in thls case would be in the above range of ~150 to 

+250MM, and more carry dependent. Unfortunately this scenario would tle up augmented RWA further forward. 

Best, 

Achilles 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001589 
898 

From: Drew, Ina <Ina.DreW@jpmorgan.com> 

Sent: Man, 09 Apr 2012 22:39:52 GMT 

fo: Serpico, Gina <Gina.5erpico@jpmorgan.com> 

Subject: Fw: Deliverables for meeting tomorrow 

Print 

-------.------------------

From: Wilmott John 

Sent: Monday, April 09, 2012 06:38 PM 

To: Drew, Ina; Maois, Achilles 0; macri5@ ••••• ~Martin-Artajof Javier X 

Cc: Goldman, Irvin J 

Subject: RE: Delive~abtes for meeting tomorrow 

.A couple offollow-UP5 separately from a conversation I had with Doug late this afternoon: 

Profile of maturity of the Index and Tranche positions (driven by the discussion on the handout Appendix: Position 

COX lG position changes since June 2011 allocated to lG9 forward trade) 

Doug had the question of why we just didn't reduce the HYposltion to reduce our risk rather than going long the IG 9 

{we discussed carry (le associated p&l) but he makes the relevant point that from an RWA perspective this might be 

less economic) 

Lastly, Doug wanted some history relative to current positions (longs and shorts) and what were the relative indIcative 

credit spreads at entry against current spreads 

My follow-up question from this morning's discussion: 

On the Appendix page referenced above: Can you explain to me the trend in risk trend hlghllghted in the far right 

column "Net COx!~ index position on "Syr" bucket""? It went from -14.4bn in Feb to -O.96bn in Mar to +12.1bn in 

April. Old the $8bn in IGS.75yr exposure add between Mar and Apr solely drive the $13bn addition to the Net CDx IG 

position? 

! think for reference purposes we also need to consider any statements around market volumes and days to 

liquidation carefully especially as it relates to p&l impact 

John C. Wilmot I Chiefinvestment Office I @john.wilmot@jpmorgan.com I 'it' Work: (212) 834-5452 ! w cell: ••••• 

From: Drew, Ina 

Sent: Mdnday, April 09, 2012 5:42 PM 

~~~ ~~!~~~~~~ J~\~~~;,@~].ohln ••• IMartin-ArtajD' Javier X 

Subject: Deliverables for meeting tomorrow 

-lndexlTranches - Gross Notionals, nets - itemized for central clearing or counterparty risk 

= Redacted by the Permanent 

Subcol!lmittee on Investigations 

Table with spreads and VIEWS on spread moves with p /1 associated. This is for Jamie and Doug. 

It is an extension of the tab!eyou provided that shows spread moves monthly. 

Redacted - Non~Pubhc SUP\!f\ l~OI) In1ormatlOllRcdactcd ~ Non-Pubhc SUPCI\ lSOt") Information 

"st of questions that we MAYor may not use for specific discussion with the GR (HlIl) 

Permanent Subcommittee on lnvesti ations 

EXHIBIT #86 Confidential Treatment Requested by J.F .. ---_iiiiii _______ rI JPM-CIO-PSI0001646 
899 

We can review all and start a process for follow up things we need to address for risk management etc. 

John/lrv - anything to add. 

tease make sure ALL e mails are distributed to me John and Irv. We will vet together with you tomorrow and then send out 

as appropriate. 

ACHILLES - your other follow up was with Daniel on FSA** 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001647 
900 

From: Hogan, John J. <JohnJ.Hogan@jpmorgan.com> 

!-nt: Wed, 11 Apr 2012 11:18:29 GMT 

CC: 

Staley, Jes <jes.staley@jpmorgan.com>; Zinke, Steinar X .:::steinar.zinke@jpmorgan.com> 

Braunstein, Douglas <Doug!as.Braunstein@jpmorgan.com>; Djmon, Jamie 

<jamie,dimon@jpmchase.com> 

Subject: Fw: Credit risk limits 

This is the governance used in the IB to control what is currently going on in 00. We (obviously) need to 

implement this in ao as soon as possible. John 

----- Original Message -----

From: GREEN, lAN Sent: Wednesday, AprilU, 2012 06:53 AM To: Bacon, Ashley; Goldman, Irvin J 

Cc: Hogan, John J. 

Subject: RE: 8edit risk limits 

CH uses a small number of limits (attached) and a significant reliance on the Structural Risk Measure (SRM 

- also attached) as the principal business limits. Directional limits tend to be small as the book is managed to be: broadty neutral to spreads & correlation. All tranches and index trades are decomposed into Single 

Name positions and managed against spread-based limits and thru SNPR. We also rely heavily on the Stress Testing framework running 20 spread scenarios and 6 basis scenarios daily. An example Stress page for CH 

is attached_ 

ere is a also a significant reliance placed on the risk MIS and periodic reviews of the gross portfolio risks 

forums like the IRBC .. I can send additional commentary on these if required. 

Thanks 

Jan 

-----OriginclJ Message-----

From: Bacon, Ashley 

Sent: 11 Apnl 2012 00:14 

To: Goldman, lrvin Ji GREEN, IAN LC: Hogan, John J. 

Subject: Re: Credit risk limits 

Ian, could you please send Irv the structure of CH limits and thresholds (and the SRM). 

Thanks 

----- Original Message ----- From: Goldman, Irvin J Sent: Tuesday, April 10, 2012 05:57 PM To: Bacon, Ashley Cc: Hogan, John J. Subject: Credit risk limits 

~~ . 

. 0 you tell me what IB risk limits and measures we use for credit hybridS outside of var, stress + cs 10 

widening. 

Confidential Treatment Requested By 

JPMORGAN CHASE & CO. Permanent Subcommittee on Investi alions 

EXHIBIT #87 

Confidential Treatment Requested by J.f 1.------------. JPM-CIO 0001139 

JPM-CIO-PSI 0001086 
901 

From: 

mt: 

Martin-Artajo, Javier X <javier.x.martin-artajo@jpmorgan.com> 

Wed, 11 Apr 2012 14:59:13 GMT 

.0: Drew, Ina <Ina.Drew@jpmorgan.com> 

CC: Macris, Achilles 0 <achilles.o.macris@jpmorgan.com> 

Subject: RE: Single names CDS basis relative to IG 9 CDS - URGENT update 

Ina, 

the market is quiet today. To early to tell but so far about flat P/L. The tension has stopped now, The bank's 

communications yesterday are starting to work,! hope that it keeps this way tomorrow. 

regards 

from: Drew, Ina 

Sent: 11 April 2012 15:53 

To: Martin-Artajo, Javier X 

Subject: RE: Single names CDS basis relative to IG 9 CDS - URGENT update 

How is [t going? Any market color today? 

. om: Martin-Artajo, Javier X 

Sent: Wednesday, April 11, 2012 10:52 AM 

To: Staley, Jes 

Cc: Drew, Ina; Braunstein, Douglas; Hogan, John J.; Macris, Achilles 0 

Subj~ct: FW: Single names CDS basis relative to IG 9 CDS - URGENT update 

Jes. 

further to your last question on the single names versus index! hope that this clarifies your question. 

best regards 

Javier 

From: Martin-Artajo, Javier X 

Sent: 11 Aprtl 2012 1S:31 

To: Drew, Ina 

Cc: Macris, Achilles 0 

Subject: Single names CDS basis relative to IG 9 CDS - URGENT update 

Ina I 

regarding the relationship of a CDS index versus its components that is not an exposure that we have in the book. But I it is 

likely to affect our book given that it is not driving the dynamics of our curve position. The demand for single names in the 

.... st has not affected the index position if you look at the graph below. The basis to theoretical has been somewhere around20 bps at the beginning of the year (Orange line) and the CDX lG 9 10 Yr (S.7S maturity I je our long in !G 9 5 Yr as we caU 

;;;;'6~:~I:.~~;;:Il...md by Permanent Subcommittee on Investigations Ji'NI-CIOOOO2U1 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. EXHmIT #88 JPM-CIO-PSI-H 0002340 
902 

Redacted By The 

Permanent Subcommittee 

on Investigations 
903 

From: 

Sent: 

Drew, rna <Ina..Drew@jpmorgan.com> 

Wed, II Apr 2012 00:16:29 GMT 

To: 

Dimon, Jamie <jarnie.dimon@jpmchase.com>;Braunstein,Dougias 

<Douglas.Braunstein@jpmorgan.com>;Hogan,John J. <John.1.Hogan@jpmorgan.com>;Zubrow, 

Barry L <barryJ.zubrow@jpmchase.com>; StaJey, Jes <jes.staley@jpmorgan.com> 

cc: Goldman, Irvin J <bvin.j.goJdman@jpmchase.com>; Wilmot, John 

<JOI-IN",WILMOT@jpmorgan.com>; Macris. AchiIles 0 <achiUes.o.macris@jpmargan.com> 

Subject: FW: updated . 

ALL; Pieas~ see attached 2nd quarter scenarios for the Credit Book: with descriptions. 

We can review all assumptions and answer questions on the 8:30am call. We are working on Jamie's request 

for 

Correlation of the credit book -against tile portfolio and will also h<lve those numbers at 8:30am. 

Confidential Treatment Requested By 

JPMORGAN CHASE & CO. Permanent Subcommittee on Investigations 

Confidential EXHIBIT #89 Treatment Requested by J.P . .. ___ iiiiiiiiii ______ ... 

JPM-CIO 0001124 

JPM-CIO-PSI0001077 
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Synthetic Credit Summary 

01 Roalised P&l-$SeO, driven by IOMes in soon nsk HY (57OMM), " .... +126MM in COKIG, and -30MM in rTf'B:<)c 

Note regarliiny 

Eatlmata of 10 

1 Today'.s P&lesl

$395MMrepres

mcrvll 6,5>< Wlre

ofSSOMM. 

OffthQl'\m\G.9

sleepermdavg 

orYTD movei. a

widened avg +1

1< The IG component has beel1 \l1a main P&L dnver 01 undefperformarce in Qt. as lG.9 fOMard Ion9 fisk posl1iollS did not deliver i':tr!lk;lpa\Bd profits give

eul"Vt!. Current book 1$ overall risk !:tekl!'l«<d, given the cn:l!;s·marJo:e! long/sllor\ and has poSi\lve cal'l'Y of $2MMlday, While te\amlng up$lde on defaullS 

Q2 PI!.L E.stlmales .1he90. scenarios do notinc:luda 10 April P&l, which would aCCflllo back Inlo each scenario +1400MM, If flj.caHbmtedfor todey's market m

.$250MM (Naw fimmeial Crisls)impHEI's an average sprea[j VII!Jening 01 +:25%, timen by banksllinanciaJs undetgoing stress. In this casa, the pOlllolio 

_ +250MMearty 

.1()OMM g;"1I0 rell:llive underperlOlmance of IG HY (complessio'J. led by bankslfinallclals wi[jeniflg) 

_ .S300MM c!uelo'oornlionexlenSlon'aswaplOjc.cllhallhe.shorl·dsledl\horlnskdurali0l11nlG .... lllconlractaseXplryapproeches 

_ --$10()j\olf,\ due 10 sPl1:1ild widening. not offset in 1his case bYGUrve f1allening (wo aS1Iome here that remain 43bps in iG equival

.$150MM (Slahis Quo) in II1,s case we that marill'lleveis and curves 1fetlZO' at levels; in scenario CIO would della hedge Ilrauod 

Ihequar1er 

+200MMt:<Iffy 

_ .ij30QMM due to 'duration eden$ior'l· as we prOjecl Iha! the sllor\<[jaled shod risk durallon;n IG \'ii!l cOf1lract /:1$ exp,ry approaches 

.$50MMoueletong-dalsdlrancheunderper1otmanceasobservedlnQl 

(Cenlral Scen<lrioj in thi&Clllle bull of IG curves (+4bps). mera than olfsa1 by ou!penoflllancll oflG_9 clII'Ve vs, on\ha run 

_ +170MMOiII11' 

.$2BOMM due to 'duralion !!;.;\crulon' as we- propacl Ihallhe short-daled short risk dllrnlion III IG will OOOlI,,,c\ as expiry approaches 

+$110MMdu6\orallYll'lcro(\llspre!l(ls·t5% +S200MM due 10 reia1!V6QlJlperioffnilt1Ce of IG 9 cUlVe va. on Ihe run IG cllrves {wlli)" counter-intu!tlVe, Ihe "compression" effect 0110.,9 vs. 

compi..:lxlsdfl\lei'oIpenormance) 

_ +-.$150MM due 10 iong.(jalec! equllylrancheou!perlormanca 

in lhe section "10% OpHmlslic' the corwexlly of lila porHoUo if! a highfy p05Wve 0{ a highly negalive ITI'I'rel outcome is 

_ +$10210'11.01 in lhe even! [lJ ·20% lightening of spread:;, decompression of HY Vl!. IG <::rer.!il. and IG.9 !or.'mnl QU\periom!ance (raftIng down Ihe 

_ $1,126 'Errct of QE" relers 10 II 0{ slrong growth illd by U.S" avg. ·50% lighter 

_ +i.725MM in "Many Delauhs" means wave 01 defau!!s among spread names (incl. MBIA. Radian, is\<Ir)curva naUeolllg, an<j +75o/e s

driven by ponormano;;eof HY shorts, IG flatteners end lon9 plolecUon p()sitions in the portlolio 

In the sor.tion "j 0% it is eMlmated Ihat lhe book would range .£::J55MM \0 ·$650MM. 

.$3$5MM in the event of bear s\oopenmll of cur.-es. spreads widel by avg ,. 10% 

-$65OMM in the evenloj builsleepan;ng of elJ(ves, spraads 11ghlel by avg -25%, driven by underperf'lflllllflCU 01]G,9 {forwards do not roll [j
905 

From: 

Sent: 

To: 

cc: 

Wilmot, John <JOHN.WILMOT@jpmorgan.com> 

Wee, 11 Apr 2012 18:59:00 GMT 

Dimon, Jamie <jamie.dimon@jpmchase.com> 

Braunstein, Douglas <Douglas.Braunstein@jpmorgan.com>; Hogan, John J. 

<John.J.Hogan@jpmorgan.com>; Zubrow, Barry L <barry.l.zubrow@jpmchase.com>; Drew, Ina 

<Ina.Drew@jpmorgan.com>; Staley, Jes <jes.staley@jpmorgan.com>; Goldman, Irvin J 

<irvin.j.goldman@jpmchase.com> 

Subject: synthetic credit infonmation 

Jamie, 

Attached please find a presentation Or) the synthetic credit book that was reviewed this afternoon with Doug, Jes, Ina, Barry 

and John. It covers the relevant data requestdrom the past severa! days. 

John 

John C. Wilmot! Chief Investment Office I @john.wilmot@jPmorgan.c:om I 'il' Work: (212) 834-5452 t 'ii' cell: •••• l 

- = Redacted by tbe Permanent 

Subcommittee on Investigations 

Permanent Subcommittee on Investigations 

EXHIBIT #90 

Confidential Treatment Requested by J.P ... -----------.. JPM-CIO-PSI 0001701 
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Synthetic Credit Summary: Notional Exposure 

• Gross exillmai {to CIO, Including 18) n"'kmalls $e36blo 

tOIlQ'rlskvs.$679bioshortrlskaGl"ossaUlrrdel<!lodtrarn;i1e 

products 

EKI"rnallndaxnotlonalfacas 

(!CE}lBnet$96,7bio,97%oflotaIMleJdernallndex 

II Tranche prodLlcts are not ellglble for ICE dearing and are 

bUalmalcounlerpartyexposurea 

I:l GDX.lO.9 rv.:ol posllTon ror Cia I:!l $S:l2bJo, which Is 

apprmdmalely 10-15 dayll of 100% oftmdlr>gV(llume 

ITX.9 nal posl!lon for cia la $3Sblo, Which Is IlpJJrllxlmalllly 

1J-12 daysuf 100% tradJng vulume 

" For on lha rnn posiliona Ihe numbelS are much smeUef, 

renglng lrum 0.25 (0 2 days volume In lG and HY. 

respectively, 

confidential Traatment ReQue.sted By 

JPMORGAN CHASE & CO. 

8lim.:;;.; 'on, Short Gr:HSeXt;rnal trades 836.1 -678.3' 

... 

--

... _-------

• Index 

- lndex 

-tranche 

NotlonalfoutshJlldlng Wlth'l!xternai:'coiIl'lteipartfes'". " 

-Index 

tranche 

:.- '210,S'; 

162.2 -160.8 

48.6 -36.9 

'},', " 

250.1 -153.4 

253.1 

.J.P.Morga

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Synthetic Credit Summary: Maturity Profile 

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I: 80ttom Iab!e soows 10% elBoil spread wjdanitlg per malurU), bucket 

largest short risk Il)(pilllures in investment grade mature In 060-\2 forCOX.tO.S and Jun-13for ITra'(X 39 

" Larg!r.ll short rlskeJ:1l0suresln high yield ara conc('l[1!rated In Dec-15 10 JIln-16 for CDKHY and D8&-16 for 

Confidential Treatment Requestod By 

JPMORGAN CHASE & CO. 

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Synthetic Credit Summary: Risk & PfL Scenarios 

Tola! SynttJollc Credit yaR S9.2mm 

• 10% Crlldll Spread Wldanlng 

I> rhe pos!tlon,bala-adJul\IBd has nel dlwcUongllty of-$163MM In 10% pa ra!ielrnovlliI1l1llfsadll 

<II. Thls-!. !!9utvalsntof$3<1.5blo of long risk In 5yIG egulyaliintl 

1'1 Relatlv13valueRlekExpcsures 

IG va.. HY $27mtnlbp$ of risk If lG urlderperforms HY by 1bps 

lG95110!;c!)rveposlt\on$46MM!bpsofnskifcur.'cS\eepena1bps 

XO vs. rrx $34mm/bp!l of r18k If ITX underpflrlotms xaVER by lbps 

1'1 

CDXHY 

COX lCDX 

CDXIG 

ITAAXX MN 

ITRAXXXO 

ITRAXXFINSUB 

!TRAXX F!NSEN 

SOVXWE 

S""th.lI, Totat 

Conffdentlal Treatment RequEl$ted By 

JPMORGAN CHASE 8. CO. 

8,510,886 2,285,664,595 

90,741 1,399,630 6,726,105 

·35,121,719 -453,123.526 -2,144,460,027 

·22,056,110 ·344,040,211 -1,771,8139,467 

3,060,7:24 176,197,413 819,366,090 

-560,652 -23,044,526 -107,358,380 

·31,240 -727,797 -3.496.997 

·19,909 437,811 -2,115.454 

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Synthetic Credit Summary: Exposure __________ _ 

u Ona.slmp1e besls, curve could 5!eeprm by 20 bps 

more (on hisloricslbasls) 

• lossapprox$1blHkm 

Il Wllh hedges c.urrenUyln place, we could sleapen 

by10bpsepprox 

• Lossapprox$550mm 

11! Bot!om bahavloufoflha ,Io>ffl of 

IG9 1yr versus lG 95 Yr Ihal we have In our 

book;. Tl1lashOWTlthe relallonshlpbelwean(ne 

sloP'S of oor poslUon In Iha lndeJ< Ihe actusl 

hadgathetwah'lV9 bolldlng-!ha (!.Ilatlonahlpthlitla 

ihe5YrshorllhaiwehavaoniheNnfiveyeerlG 

and the short Ihal we have In the HY OTR since 

Jan 2006 raUo Is 65 % end 15% as per our 

book. 

Confidential Treatment Requested By 

Jf'MORGAN CHASE & CO. 

........

J.P.Morga

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Single Name Risk & FOlWard Jump to Oefault Risk 

Table 1: default profile today and post December 201Z 

#ofnarne:s Average P&L Mali. P&L fI. ofnama9 Average MoxOain 

Portfolio #ofN<Iomes with default gIven Default given with Gain given given 

10s.8 risk ($mm) Dafault default Default Default ($mm) gain ($mm) ($mm) 

Total portfolio today 566 62 ·67 -205 520 133 600 

Total portfpliQ post Dec 

2012 505 228 -336 -716 357 133 600 

IG9 only 10day 121 0 0 121 "6 417 

IG9 post Dec 2012 121 121 -572 -716 0 0 

on-the-run 

IG9 Hedge IGi8 COWlf'S as names out 0(121 

post Dec 2012 HY1B COWl'S 13 out of the remaInIng 32 unhedged with IG16 

TodaylherelsronslderablsdefsullfJro\ecUor\C!lrnlnllfrum IG9tr9nchell. 

" Across the 121 names In lGs, the Jump'To-O(lfau\t III Merket Recovery goes from a cprrsnt gllirl of +14fim on 8velllge per name 10 a loss of -57Zm per nama post December 

1012, 

(\ This 'S beC<lu:lB 0ltl19 IOU-ofl' of two lorlTlllO 01 prol()c!lon: 

Tho first Is the 31bn of short..\Jaledptotectlonon 1QlhDooZ012. 

l'l The second (and this Is ImPortant) 1$lho roil-oH of noarly $41m lanll protechon on lOS equity lranches. The equity tranche gives protectlon at an approxima

fetlo of 30 to 1,sothe $4bn of e'1UUylranche pmtectlon IS equiVaienl to 

'1\ Post 20lh DeC<lmoer 2012, W6 WIluld bu able to partially hedge this exposure wllh the current on·the-fl.ln Irtdex but the overlap 15 69 flames olll of Ihe 121 In IG9. 

On \he 32 remaining we have a Jump·to-Deb.luU toos 01 $fiOomm on average name '\hal would need to be hadylld t;y other rneaO!l tHY on the fUrl Indux, slnglu m.lh

COS,tndeX\rarlct)9l>e!c) 

Confidential Treatment Requested By 

JPMORGAN CHASE 50 GO. 

J.P.Morgan 

JP
911 

Redacted By 

~ Permanent Snbcommittee on Investigations 

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Synthetic Credit Summary: Risk & P/L Scenmios 

Nota regarding P&L Est!mme 0110 April 2012 

Today's P&Lesllmele of· 

$395MMrapresenl$o 

move 6_Sx IOUrron[VaR95 

Q1$60MM 

Off the run IO,<;l curves bee

aleepenedevu+lbps(30% 

ofYTDmave). and spreillls 

wldenedav9+10bps 

01 Realised P&l-$S80. drtven by Klsses irl short risk HY (670MM), 'IS. +128MM in CDX.!G, and -JOMM in lTran: 

The 10 C'Omponafl' has been the main P3L driver 01 underperfmmance in Q1, as iG.9/olWard long risk posili<Jns did 001 deliver anticipated profits g ...... n sieefl"nln

curve. Current bOOK fa overall risk balanced, given Ihe cross_market longlshort arn! has pos!Uve carry oj $2MMlday. while retaining upside on dafauUs 

Q2 P&L EeUmab!$ • thll&1I scenarios dQ !l<lt 111 April P&L, which would accr(lt(l back Into .ellch scenario +$400MM, If ro-ellllbraled for today's .. t move .. 

-$250MM (Naw Financial Crisis) Impf!es an average spread wltienll'lg of +25%, driVen by bankslftnanclals undergoing slress. In this ClIS(l, Ih(l portfolio P&L is driv

+Z50MMcarry 

·100MM given relatiVe underper10rmance of IG 'is. HY (compression, lad by I'I1dening) 

-$300MM duelo'durat!on ex1.enslon' as we proJect thai the short-dalad II hortriskdutllllonlnIG""'Ucontraclese)(piryepprollches 

due to spread widenIng, not offset In !hIs case by <;UNe flattening (we lISSlIme here that CUNes ramsln 43bps steep In IG equrvalen-ts) 

-$150MM (Status Quo) In this case we. 6!lsUme lhal merket levels and o;tJIVes 'ffll(!Ze.' at current levels; In this scenarIo cia would delta hedge around vofatillty \hr

the quarter 

+200MMCIlrlj' • 

-$300MM due 10 'durtlUon exlenslon' as we proJect that the short-<iated short rI!ilI: duration irl to will con\taI;t es expiry approaches 

450MM due to long-daled tranche underperformanca as observed in 01 

, +$350MM (Central Scenario) In 1)115 case bull sleepenlng of IG curves (+4bps), more than offset by outperfol11lance of IG.9 curve vs. on Ihe run 

+17m'..1Mcany 

_$2BOMM dLJe \0 'duration e){\an.sion' as we project Ihat tho short-<;laled short risk duration irl 10 will cOIltracl as a;<viry approacl1as 

+$110MMdue 10 rally in Cfeditspmeds-15% 

+$20DMM due 10 relallve oulperformaoc.!l of tG 9 curve lIS. on the run IG CUlVes (while counter-il1tul!lve, lh.e 'compresslon" errect of lG,9 vs. on the run I

complex is drtvarof perlorrnanr,;e) 

+$15QMMduetolofl\l-datedequlrylrnnchaO\ltperformarrce 

In the sedlon "10% apUmlstlc"jhe <;onvs)(ity of tile portfolio In a highly posl!lve or a hlgilly negat!vo market outcome Is demonstrated. 

+$10ZMM In Ihe event 01 -20% tightening of spreads, decompression of HY va, 10 cmdlt, end lG.9 forward oUlperformence (rolling down the curve) 51,126 'End ofQE' mfers to a scenaliIJ of strong growth led by U.S., spreads avg. -50% tighter +1,725MM In "Many Defaults' means wave of default!; amo<llJ wideslSplead names (Inc!. MBIA, Radian, IStar) curve nattenll'fg, 2nd +75% spread widen

drtven by perfOfm'lnCe of HY $horts, IG flatteners and long protecUon positions In the portfolio 

In the .section "10% Extrome"n Is esifmElted thaI Ihe book would lange ·S355MM to ·S65{JMM. 

-5355MMlnfheeventofbearsteepenlngofcurves,spleadswlderbyavg+10% 

Confidential Treatment Requested By 

JPMORGAN CHASE & CO. 

-S850MM In th ... event of bull steepening of curves, spilleds tighter by BVg -25%, driven by underperfonnaJ1<;<1 of lG.\! (fo......ards do nol roll down curve If1 

,l.P.Morga

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Appendix: CDX.IG.9 Market Impact 

Cl0trn;rlla$I'J<ilheCDX.!G,95,75Y1l)(posureby$36hlo(!urlngJ!l11UatyartOFotlfuary 

1:1 Cotnparedtc on Iha IUh equlvalent$pread moves this does f1o\ appear \0 halle <1lslorled rl'.3rketprk:es 

'III ·Sk ....... " or lOlls)';. to Uleo basis haa been mllSn reverting t tnoyjrtg less negeUve sine\! stali of year (organga line on OalaQuery Qrilph) 

M11l 

Redacted By The 

Permanent Subcommittee 

on Investigations 

Confldent!al Treatment Reqouted By 

JPMORGAN CHASE & CO, 

.l.P.Morga

JP
914 

From: Drew, Ina <1na.Drew@jpmorgan.com> 

&nt: Thu, 12 Apr 2012 15:19:17 GMT 

Dimon, Jamie.<j~ie.dimon@jpmchase.com>~ Braunstein, DO'q,glas 

To: <DougIas.Braunstein@jpmo.rgan.com>; Hogan, John J. <JohnJ.Hogan@jpmorgaD.com>~ Zubrow, 

Barry L <barryJ.zubrow@jpmchase.com>; Staley~ Jes <jes.stalex@jpmorgan.com> 

Wilmif, John <JOHN.WILMOT@jpmorgan.com>;Youngwood,SarnhM 

CC: <sarah.m.youngwood@jpmorgan.com>;:Evangelistl, Joseph <joseph.evangelisti@jpmchase.com>; . 

Goldman, Irvln J <irvin.j.goJdman@jpmchase.com> 

SUbject: FW: Synthetic Credit Materials 

Attac.hed please find the three documents we discussed: 

Core Credit Executive Summ<lry 

Synthetic Credit Q+A 

Mar-ket Structur-e Dverview 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by EXHIBIT #91 J.P. 1. ____________ 1 

JPM-CIO-PSI 0001100 
915 

Below is an explanation from a strategic point of view the CDnstruction, executioll" risk 

proflle and the extreme P/l outlook. for ~he synthetic credit book or Core Credit Book . 

The construction of the credit derivatives book: the Core Credit Book as we call it 

internally was desIgned since its inception to benefit i!0m market downside risk" with a 

profile that would offertRe firm the best risk/reward for that downside protection. 

At the beginnlng of 2007 we started a program that bought ABX and TABX protection an the 

subprime tlnd since July 2008 We started a program that WQuid benefit from large defaults 

on High Yield names as the Risk I Reward for Raving curve fiatenners was a very good way to 

get thIs protection for the company. The book has kept its profile of pro-defau!t risk for High 

Yield until the end. of 2011. 

'The execution of the High Yield Bookfrom inception in 2007 WtlS based on buying 

protection on the on·the-run serie5 and tram:hes ofthis series and balancing the book with 

alder series as the High Yield market tends to have wider names tls. times passes since it 

collects the most traded names and wi!! include the large fallen angels too. So J thiS makes 

sense to do if we believe that we have a bad economy in front of us but has to be baJanced 

to adjust for large spread moves and needs to ofuet with some positive carry to make the 

book with the smallest negati .... e carry that we think is. appropriate. 

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 tl1e tranche market to offset the 

directionalITy of the High Yield Book if this was more efficient than using intra· High Yield 

hedging" 

From an execution point of view the Book from the beginning of 2011 was a pivotal year 

since we started to rea!ize that the RiskJ Reward that this book offered started to have a 

Risk / Reward that was not as compeUng as it had been in the past and started to r~d!Jce the 

book nationals and size until June 2011 when we increased the High Yield Book once again 

as the events affurope and us started to gather momentum. 

The p/L OutlOQk for the Core Book: could be describe~ as balanced in terms of directionality 

{ without a short bias Beta adjusted) and with large default protectlon for all of 2.012 of the 

top 12 High 'field riskiest names in HY and a posItive carry of 2: MM!dil'Y . 

1n order to explain the P/loutlook for Q2/Q3/Q4 2012 I would like- to describe the book in 

.a more detail group of trades to better understand the risks that the .book wrrently has. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001101 
916 

The Core Credit BDok has two main Books: the Inves-tme.nt Grade Bock and the H!&h Yield 

8ook. 

The Investment Grade Book ( IG Book) has two strategies one for Europe (TTraxx Block 1 and one for the US {IG CDX Block) 

The Hlgh Yield Book has just one strategy called HY Block. 

The IG COX Block would best be described as a long risk IG 9 CDX position and a or;hort of 

equivalent size in IG On the run CDX ( OrR) and an extra block of long risk OTR. The 

European ITraxx position would be described in the same way as long Series 9 and short the 

OTR. This position has poslti'lle carry of4 MM usn !day. Thevway that we are positioned to 

go long risk in the !G 9 position is. by gOing long risk .the 3Yr and 5 Yr maturities and being 

short the 1 year maturity to be neutral default risk, positive Grry and with a long beta risk 

to the 5 riskier names that are part of thE short HY position that we have in the HY Book. 

The HY Book would best be described as- an on the run HY OTR short risk( that includes all 

the riSKY names ( Rescap,TXU,Radian,MBIA,IStar) and a long risk HYlO!HY 11 (Older series 

of cnx High Yield) that do not include thes.e names. This is how we get protection for riskier 

names and has a negative carry of 2] MM/Day 

These two books are also rebalanced relative to each other to redlJte the overall VAR and 

sVAR of the whole book with what we would describe as an -Net e)(tra delta IG/HY on the 

run indexes only. This position wDuld be best described as long IG OTR vs short HY OTR. 

This position i~ 0.5 MM usn carryfday. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001102 
917 

The main exposures of these blocks are : 

16 

FOfW3fdvs OTR 

S9Pvro 

5yriG OTR eq 

FOIW;:ud VS OTR 

lG9fwd 

IQOTR 

HYOTR 

HYO"th. run 

KY10-11 

Net IT 1lAXX"i',1ain OTR Net CDX 1 G OTR 

SI=artJan Book 

20,497,375DDD 

·18.£613,380,556 

54,651,951,114 

·53,463,8.00;i. 2G 

Start Jan Book 

~8,555 A29 S27 

14,405,Wip~ 

S1:artJan Sook 

-4,116,619.4d4 

-21 ,So--S ;Xn:212 

CUfient Book 

38 ~11 p25,DOO 

~33 793 {;97 ,222 

94 ,540 p40,003 

-92 ;485/108,&39 

Current Book 

-1',I05Ml,l~6 

1 e p99 ,1 00,082 

Current Book 

11,495,447,222 

3249;;09,790 

The scenario that is most critica! for CIO { large adverse scef1ario} happens to be the one 

that we e.xperienced yesterday {10th April) which is a bellr steepener of the IG Block both in 

the US and Europe and the rest of our positions remaining stable _ This scenario is the. 

one that caused us almost af! of the 1055 sinc~ Feb 2012 • I do believe that this position will 

either mean revert becouse of the enh<!nced c<!rry that has also increased from yesterdays 

move of the 16 block or though a default or series of defaults in the most critical names 

MB1A, Radian, ISTAR , Sprint, and MGIC in the next year _ The magnitude of the move over 

the weekend for this curve to steepen, I.e, our short in the front did not wid~n but the Syr 

IG widened relative to our OTR by 7 bps, This is unprecedented for a day on a "mark: to 

market and it mu!d still go wider on its own but the part of our book that sholiid be 

protecting us from most ofthis widening is the HY short position OTR that contains these 

names too and should have mitIgated around 70% of this move. It did not materialize. So 

this goes agains aU economic sense, is due to the marks that we are expe1iendng on our. 

large US IG Block that has caught the attention of the media. It could still go wider and we 

could face and adcfitional 1055 ifthe same behaviour persists but at some point that we have 

already gone beyond the flY buck~t should hedged our exposure. I believe that this mark to 

marked loss is going to mean revert for those reasons. 

It might take some time but ( am very confident that this outcome: will be materialized in the 

coming months. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0001103 
918 

How do derivative instruments and the "synthetic credit" activ1ty fit in 

with the overall CID activity? 

The ChlefInvestment"Office has utlllzed the "synthetic credit portfollo," whlch 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. The related credit derivative instruments offer an 

efficient means to establish protection against adverse credit scenarios and 

"stress events", 

This activity is among the key toois utilized by CIO to manage and hedge stress 

loss risks, The synthetic credit portfolio has benefited the Firmr especially in 

times of credit market dislocation, sudden spread wJ.dening and in the occurrence 

of defaultsl which is typicatly a catalyst for credit spread widening sceo?lrlos. 

In Q3 and Q4'l1, ero began to reduce the net stress loss risk profile of the 

hedges, as more positive macroeconomjc data in the US and an improving 

situation in Europe post LTRO merited a reduction to the stress loss protection of 

the "synthetic credit portfolio." The book/ as a dedicated hedge; continues to be 

balanced, and to protect our portfulio from stress events, 

HO!Ive you met"Bruno Iksif? 

Yes - I've met BrlJno In person. (Specifically on 29 March 2010 in a meeting at 

100 Wood Street in Lonon). I am in regular contact with the team in CIO. 

In your view, could this trading filn afoul of Vokker under a narrow 

d~finitkm (~r -e .... en a bro.~d one)? 

As Barry Zubrow pointed out in our comments to the Regulators in february, the 

language In Vo1cker is unclear as It pertains to anticipatory hedging needs on the 

ALM side. The condition for the hedging exception appears to have been drafted 

WIth trading desks in mind, where both sides of a hedge are marked to market. It 

is,a poor fit with ALM. 

What is the P+ L impact cn JPM since this story wa~ rele?secJ? 

The book is balanced, Qnd the performance clearly is a function of market prices. " 

The Chief Investment Office performance has been good, and that's reflected in 

our results. 

How much have these positions made or lost for JPMC? What is the 

corresponding Joss or gain in your book? 

The "synthetic credit portfolio, or since inception has positively benefited JPMorgan, 

in particular in times of dislocation and stress in credit markets globally, as was 

witnessed in 2006, 2D09, and more recently in the high yield borid market in the 

uS in late 2011. 

Is most of the activity in the 19 index. spe"culative bets by hedge funds? 

Hedge funds are industry participants in CDX"NA.IG credit default swap indices. 

Other industry partiCipants include banks, br'oker-dea!ers, Insurance companies, 

pensionsr sovereign wealth funds, and other investors who seek either to gain 

expOS1.lre to Investment Grade credit vja credit default swap indicesl or to hedge 

existing exposure to Investment Grade credit: Information related to hedge 

fund's relative size js difficult to estimate. however, can be thought of as 

proportional to the capital and funding available to the hedge fund manager 

emplOYIng COX.IG,9 credit default swap indices in its portfolio. 

Confidential Treatmerit Requested by J.P. Morgan & Co. JPM-CIO-PSI0001104 
919 

Is most of the. activity in the lSI index spe<;ulative bets by hedge funds? 

Hedge funds are industry participants in CDX.NA.IG credit default swap indices. 

Oth~.r industry partidpants include banks, broker-dealers, insurance companies, 

penSIons, sovereign wealth funds, and other investors who seek either to gain 

exposure to Investment Grade credit via credit default swap jndices~ orto hedge 

existing exposure to Investment Grade credit. Information related to hedge 

fund's relative size is difficult to estimate, however, can be thought of as 

proportion a! to the capital and funding available to the hedge fund manager 

employing CDX.IG.9 credit default swap indices in its portfolio. 

What risk or type o~ risk at lPMC does the IG.9 position hedge? 

JPMorgan utilizes "IG.9," among other hedging instruments to mitigate or reduce 

portfolio "streSs loss," associated with credit risks on our balance sheetJ 

particularly·in the investments securities portfolio. 

I understand that you're hedging you overaU risk and the investments 

securities portfolio ~ can you give a sense of the r~tative size of hedging 

activity in the past - how big can the 'grossl get and what is the baSis 

risk around this? 

The size Df hedging activity is a functioll of the size of the risks we manage, so it 

changes through time. If you look at the history, heading into the Crisis, the 

Firm's: ALM team in 00 used credit derivatives to purchase protection on high 

yield credit default swap indices with short term maturities and to sel! protection 

on high yield credIT -default swap indices with longer-term maturities-in effect, 

taking a high yield curve flattening position in the credit derivatives market. This 

strategy resulted in tile Firm recognizing some gains as near-term defau!t 'risks 

increased. The gains recognized on these derivatives strategies offset in part the 

IOS5~ that occurred on credit assets held by the Firm. 

Are your examiners aware of this activity? 

Yes, this activity is included in our regulatory reporting practices, in financial 

statements, and-as part of tile Firm-wide Market Risk policy-this activity is 

captured in the Firm's risk measurement systems. 

00 finns on the oth-er side of these trades have an interest rn rorcing you 

out ofth.em? 

Clearly certain market participants have expressed an interest understanding 

wtJat is tile long-term nature of JPMorgan's hedging activity-particularly in 

COX.IG.9. It would be speCUlative to assume participants on the "other side" of 

jPMorgan's activity want to "farce us out/' and we're In the business of risk 

management of our own positiDns, not theirs. JPMcrgan's position In IG.9 is pi3rt 

of a portfolio balanced across a range of outcomes. It is conceivable that the 

opposite position may not be balanced., which CQuid motivate those portfolio risk 

managers to seek to reduce those exposures. 

Why wouid a bank need it synthetic t:redit portfolio? 

A bank or investor may utllize a "synthetic credit portfolio," that is, a portfolio of 

credit derivatives, in particular to construct a hedge to other risks on It's balance 

sheet. It is an efficient means, given liquidity in the inde;o::. market, to establish 

protection against adverse scenarios and "stress events..... It is often more. 

practical to buy protection on credit defau!t swap indices than It is to establish a 

"short Tisk" position in a cash security. 

Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI 0001105 
() 

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0.75y 

CIOisiongrisk/.$huriprotecUo'\ inlO;\! 

5.7SY8spertofa!of>9fcrwarclrlskposHion 

This pos!llon hedges HY shorh; oaJEKlwherll in 

por1foUo. prollides"c<JfTy:' yetrelalne 

\')Of1l'elOtl' In &prllad wlt/ening (CUN9 

InlhsCOIltB.'(\ofmerkeirna\rJngactivily 

pro\llcltoncf1singie name CDS,oolahedglldthrcughbuyiogproll1c\!onon Ihecorresponding Inde-o: (IG.9 Conlail'1l1 MBIA, 

Ra.dlan) 

l'l Inlhl$""9y,lheprolllcliorilW ... 

Ihedealaf'll 

prolectlononIG,1l5.75yr 

ill ThElre.sldua!'malchEldblllll\·glvllsrlsEllll 

.. "ske""·lrad!l.wh!ch 

me85utall'll\ebaslsoolw!laf\alng!onarnas 

f.Irldthalrlndax 

l:I oe'alereIranslerthis ba.slsrisk IQiledge 

fum::ls!ol"8(juceRWA., This is dons lor 

$urprlsinglylowspreads(botwell" 1D.16bp, 

forIG.Il}. 

HedgllFvnd.!len19rlhll"Sk

slIliIogprotecllonon!ilf'lgle

bvy\1'Ig prol",c\!oo on 

II; To fund acllyily, HF's r

Brokers, HF'J:imuslptolii

upi/on! and to cwar MTM 

teg$ofl/lalrade(!.e,lheya[l

!'IliUM) 

HF'll prom from this acHv!!)

Clll11pre$!W1i rno has mo

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holdlng \ome1mllylo eaml

glYenlhaP9capllalrequlre

10 & monaUla 
921 

From: Zubrow, Barry L <barry.l.zubrow@jpmchase.com> 

~nt: Thu, 12 Apr 2012 21:07:12 GMT 

(0: Braunstein, Douglas <Douglas.Braunstein@jpmorgan.com> 

Dimon, Jamie <jamie.dimon@jpmchase.com>; Youngwood, Sarah M 

CC: <sarah.m.youngwood@jpmorgan.com>; Evangelisti, Joseph 

<joseph.evangelisti@jpmchase.com>; Drew, Ina <Ina.Drew@jpmorgan.com> 

Subject: If asked about London / CIa 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 banks 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. 

Barry 

Permanent Subcommittee on Investigations 

EXHmIT#92 

CONFIDENTIAL TREATMENT REQUESTED BY J. JPM-CIO-PSI-H 0002418 
922 

From: Hogan, John J. <JohnJ.Hogan@jpmorgan.com> 

Sent: Fri, 13 Apr 2012 14:35:10 GMT 

To: Dimon, Jamie <jamie.dlmon@jpmchase.com> 

Subject: RE: 00 

Doug and I asked that the first day. Answer was it most "efficient" way to do it. ! would say they just wanted to improve the 

carry on the book by selling protection and taking in some premium. This is all part of the postmortem and we will fix it. 

From: Dimon, Jamie 

Sent: Friday, April 13, 2012 10:29 AM 

To: Hogan, John J. 

Subject: RE: eIQ 

vyhy didn't they just sell vs offset 

From: Hogan, John J. 

Sent: Friday, April 13, 2012 10:24 AM 

To: Dimon, Jamie " 

Subject: 00 

JamieBelow confirms the net notional are truly net nationals with no basis. I spoke with Ashley this morning who is working with 

Achilles to implement a similar limit/governance structure on this book to the one we have in the IS-we will do this for aU of 

ClO over coming weeks and I will keep you posted on that .. Letme know if you need anything else, 

John 

From: Goldman, Irvin J 

Sent: Friday, April 13[ 2012 10:20 AM 

To: Hogan, John J. Subject: Re: 

John, 

Yes, To be perfectly dear there is no basis within-each maturity. 

From; Hogan, John J, 

Sent: Friday, April 13, 2012 10:03 AM 

To: Goldman, Irvin J 

Subject: RE: 

Irv, 

Can you just confirm that the longs and the shorts from each m.aturity bucket net perf.ectly and that the net notional is truly 

the net amount that is shown below without any basis risk? 

Thx, 

John 

From: Goldman, Irvin J 

Sent: Thursday, April 12, 20127:05 PM 

To: Dimon, Jamie; Hogan, John J.; Braunstein, Douglas 

Cc:: Drew; Ina Subject: 

Permanent Subcommittee on Investigations 

Confidential Treatment Requested by J.P EXHIBIT #93 JPM-CIO-PSI 0001753 
923 

All, 

Endosed please .find iG 9 positions by maturity and related volume data and charts. 

Irv 

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on Investigations 

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Permanent Subcommittee on Investigations 

EXHlliIT#94 

Confidential Treatment Requested by J.I JPM·CIO·PSI0001151 
928 

CORPORATE PARTICIPANTS 

Doug Bl'<lun~tl'!inJPMorgan ChQ5l!&Company~ eFD 

Jamie Dimon lPMorian Chase: & (ompiJny- Chairman & CEO 

CONfEREN(E (All PARTICIPANTS 

Glenn Sc:horr Nomura - Ana{yst 

Guy Moszkows.ki SDfA Merrill Lyn~h - Analyst 

John MC:DonaldSanford Bermte:in-Malyn 

Betsy Grilseck MorglIn Stanley- Analyst 

Brennan Hawken VaS-Analyst 

Mike Maya rnA - Analyst 

Matthew O'Connor Deutsche Ban)( - Ana~t 

Ed Najarian lSI Group -Analyst 

Chris Kotows.ki Oppenheimer &- Co.- Analyn 

Andrew Marquardt Evercore r:ortners -Analyst 

Jim Mitchell BUckingham R~Qrch - Malyst 

Paul Miller FBR - Analyst 

Chril:topher WheeJer,Mediobi:mra - Analyst 

PRESENTATION 

Operator 

Good morning, ladle-sand gentiemen.Wekome to JPMorganChase'sfirs.t-quanet2012 earnings talLThiscaU is being recorded_ 

Your line wiH be muted for the duration oftheconference,We will nOW go live to th'e pres-entation. P!e~se stand by. 

At this time! would like to tum the call over to JPMorgan Chase's Chainn~n and CEO, Jamie Dimon, and Chief Rnanclal Offlcer. Doug Braunstein. 

Mr. Br.:tunste.il\ please go ahead. 

Doug Braunstein· JPMorgan Chase& Company ~ (fa 

Thanks.operntor.l am going to be taking you through the eamings presentation, which as you know is available on our wEbsite.! would also ask 

everyone to refer t.o the disclaimer regarding forward· looking statements at the back. of the presentation. 

And wlth that. lfyou all tum to page one, for the quarter we generated net lncome of a S5A billio'!'\, $1.31 per snare. That is on revenues of $27.4 

blHion, up 6% year on year. 24% quarter on quarleT. Return on tangible common equity of the 16% for the quartet and our characterized solid 

performance across most of our business~. particularly strong results in the Investment Bank and significant improvement year over year In 

mortgage bankIng. 

There are a number of significant ir.ems that we are highlightlng here on this page.. We do that every quarter. It includes DBA. reserve re!E'<lses, 

litigation blUed in the WaMu 5ettlement. 

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EveI)' quarter we illso kil\le some modest p!us.es and minu5es, We don't put the5e up front,but if you did totllJ these sIgnificant items they had an 

aggregate ne-gatlve Impact 0(50.09a thare Ol'Ioutrepott",d number~ this quarter,j <1m 99ln9 ta discuss them In much more detail as we go through 

thefintmc-ials.. 

Strong capita! generation in the quarter. We ende-d with Tier 1 common of S12B doUars, that is up $5 brmon-plllS; >110119 Basel! ;:nd Base! f1I ratios 

of1 0.4% and 8A%, respectively. And I wanted just 10 hlg!)light.a couple of trends for the quarter (lnd tht;fl We will go into the busineSSES. 

Rnt 15, if you 1001:; across our busine5"ses, we have continuing sign~ of underlying fundamental growth,So 23% loan growth acroz wholesale year 

on year. Record mlddl('-market klan1 thl~ quarter, up 19"h year an year. $4 bUlioll of Credit provIded to small businesse5., that 1s up 35% ye<lf on 

year. 

Record retlll channel mortgage originations., up 11% this year. Deposits CBB up 8% year overyear.5ales volume in Card up 12% year overye.ar. 

And so the underlying fundamentals year on YEar look strong. 

On the credit s'Kle, we continue \0 have stable ilnd good credit results in OlJr wholE5a1e business aJ'ld on the consumer side r~at cor.tinulng 

Improvement In ConsumN.fwou1d s.ayln aggregatewe are puning on beuerqua!i!)' loans today from that loan growth,butjust twoqu!ck nat!stits. 

In Mortgage net charge-offs are dawn 25% ye~rCtl1 year.in Card M't charge·ofu are down 37%year ony~r. 

50 with that it's sort of an underlying theme. L.et'$ turn to the Investment Bank on pagE threE, 

Forthe qUllrteryoU see circled I1€t ]I"\come Df $1.7 billlon. That is on revenues of $7.3 bl1!i[)n,reported ROE of 70%. 

On page on,," w€ did hIghlight $900 mUlion in OVA losses preta:w.: forthE IS this quarter. And as we have mentioned mnsislently In thl!- pilst, we don't 

con5ider the DVA as a part OfOUf Cofe business results..ln fan.af1er the changes from this qllafle~ if you tememberthe spread wldenir.g,we saw 

in the tllird quarter of 1D11 where we booJ,;ed a $1.9 billion gain on OVA. 

In the !a~t two qllanef!. we MYE now rev!'.t$ed $15 bH~on [)f that"md obviously if spreads ~turned to th.e I"vel they wel"2 last sutnmer we would 

NYI'. gone found trip.So ! 11m going to f(KUS on the IS numbers excluding all OVA.. 

50 in the first quarter re'wmlll'S w~m 58.2 bWiof'.,$2.1 billion in netincome,.and we Mda 23% rEturn on equity. Those numbEflOare aU verycomparabJe 

to wniltms a V'i'.ry strong first quarter of 2{111, but j do want to remind everyone thilt we tend to have a seasonally 5trong fir.;t quarter to stan the 

year, 

IB feES in the quartEr of $:1.4 billion.That is dov.m 23% year o~yea{, up 23% quarter. on quarter, and if)'Du look on appendD: pilge nIne YOll wlll see 

we continue to maintain OUf number onE' markEt-leading share 1n feEs.. 

Markets revenues were relative!)I Rat )lear on year. On a linkEd-quarter bil~i:s revenues were up signif"JCalltly. Fixed income r"V1'!nu" W!l> $5 billion 

and that refle:tted r:ontlnued solid dient revenues across the products, particular $Irfngth this quarter In our global rates bus!nes.s.. 

Equities ~enue of 51.4 biJnon fEatly approved r€sultl ac.rolS Cil~h arid denliatNes.and we continue to have improving performance from our 

prime sErvlces.. We ilfe seeIng inet"aSed balanceg there, a Ifn!e improved le..era9"" tf"! the marke.ts, and II modest uptick In spreads. 

Credit pon:follo revenue was a littlE ol'er$lloo m!!l!on,up from the fourth quanEf,and then expenses in the qUilTler of $4.7 billIon wern down 6% 

yeill on year.The comp-to-Ie"Vl!-nue Tiltio,b: DVA, which is the Wily we manage it, W(I$ 35% fOf the quarter. 

If you go directly to page fiVE, ConstJ~r & BusiTll'!5S Banking, )'01.1 will see circlEd net jnco~e of $775 mililon.That IS down 13% )"'ilr on year. And 

an ROE forth-is buslnessof35%forthe quarter. 

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Revenue of $4.3 bi!lion<That is rell'ltive!y flat q!J'lrtet on Quarter tJut down 1l% yeaTon year, and that reduction yell! over year is generally consistent 

with our guidance on the impact of the Durbin Amendment,whlch we had this qUilnerand didn't come through in the first q.uarteroflast year. 

We continue to see solid year over year underlying performance trends in the business, so the depos.lt is up $29 billion, which) talkt.>d about, up 

8%.We believe that is a growth rate faster than the indus!!), growth ratt.>. BLlsiness banking originations up 8% year on year. 

We had v~ry strong investment sales this quarter as the markets Improved and we continue to build out CPC, our Chase Private Client business,. 

up 41% quarter on quarter_In filct,client investment assets of $147 billion is a'record for Chase Wealth Managf"mf"nt. 

On page six you see Mortgage Production and Servicins-Cirded net income of $460 million for the qUilrter,that compared with 11 net loss of $1.1 

billion in the pr!.oryear,So 51.S bUlion swing year on }/8i!t We rudverystrong produCtion-related revenuesof $1.6 billion and that is driven somewhat 

by higher volumes. Originations were up 6% year on year;app!lcatiolls, as j mentioned, up 33%;a very favorable refinancing environment including 

thE! impact of HARP 2.0. 

But we also had higher margins this quarter as a function of thosevoiumes and some mix iSSues.. We should be cautious ~bout that because WE! 

are likely to see those margins returned to more normalized levels on a go-forward basis.. 

Purchase !os!;esinthe quarterwl"rE $300 milllon. That Is lowerthan ourexpectatlonson a quarterly basls,which remain $350 million plus ormlnus. 

11\ large p"rt thaI was il function of timing. 

If you now move to the servicing side, in the middle of the page you will see f"xpenses there of $1.2 billion.That includes approximately $200 mHlion 

of costs for the foreclosure-related matler5 aJ;.'Sociated with the settlement So if you 2J!dude that $200 million,servic:ing costs continue to remain 

very elevated at $950 million for the quarter. And of that nLlmber $700 mimon i;; related to default expense, which was essentially flat quaner on 

quarter but v~ry, very high. 

A~ we discussed at investor day, you should expect to see our servicing costs come down over time. Volume of deHnquendes,as the units decline 

costs wi!! comedown. We are also working very hard 10 makl" ourproces5eS more efficjent. 

Over time you would expect, consistent with what we shared oll'E'r at investor day, that our normalized expemes for servicing shou'ld be in the 

$300 million to $350 million rnnge.Butthat will take a number of years to get to. 

On page seven you see our Real Erute PortfoHO'i.Cirded net income of $500 milllon ill the Quarter,that compares to a los$ of$l60 million in the 

prioryear. Revenues down 7%yearon year. It's the result of the run-off we nave been talking about for a while. 

Loan balances are down 524 bHlion, 11% year on year, consistent with our guidance..And we have said that you can expect a reduction in Nil in 

this portFolio of about $500 million, plus or minus, forthe yearas we continue tD run off about WaMu portfolio and our other non-core mortgage 

ilssets. 

Credit costs you see is a b-enefit of almost $200 minion and that is a function of de~nQuency t~nds improving across all the mortgage asset dasse!>, 

induding home eqUity. You see a circled number of $808 million for the quarter in net charge-ofts,and as I mentioned,that is down 25% year on 

yeM. 

So based on the J"E'duction In dl"Hnquencies, which, by the way, 1s 1n thl" appendix on page 16, the resolution of the foreclosure settlement and 

what we are seeing is stabmty in OUt severity numbers. We reduced our allowance this quarter by $1 billion. That ls,again, part of the Significant 

items on p.age one. 

But I will say, even after, that reduction, allowance coverage remains at 6% for the portfolio, $7 J billion, which is a very conservative approach to 

our risks and, quite frankly,the 51 billion release is reflective of what we had to do as an actounting martt.>r. 

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! would note one oth~rreporting change here-which is clueto the indu5try'Wlde regulaloryguldance we moved $1,6 blllion of our hign-r!5k seconds 

Into the non~rformlng Io;,n Gltegory,And that is d2Spite the filct that $1.4 bllUon of those $1.6 bi!lJon ilf€ current tOO3)'. 

As you know,we haVE identil'ied thos.e high,risk seoondseany.We put reserves up agaInst them eady and 50 our reserves remain unaffected, But 

if you excluded these changel, NPls would haYe trended down year On year, down quarter on quarter, and the same would b~ true at the 

companywide level as you look at the company statistia. 

On pag€ eight.Card5ervice~and Auto,drded net mcomeuf S1.l biliion.Thal is on revenues of$4>7 bl!!ion..Revenues<.tnd outstandingsare lower 

year on year, that is the Impact of runoff, And modestly lower quarter on quaner,and that i$ prlmarlly due to the seasooal growth that we saw and 

we tend to see inthefourth quarter around the holidays. 

We did S€i2 strong ~!esvQktme In Ca;dA;! mentioned,up 12%. Sut if you exclude the sale of Kohrs,sales wer~ adllalt)' up 15% rorthe system 

llnd the n.ew product 5illes growth for our Freedom. Sllpphire, and Ink products WFfe 1Ictually in exr::e~s of that glOwth rale. 

,Auto originalion5BI~ up 21% year on y~arand that,quite franldy,renects higher industry sales, 

C~djt costs of $740 million f.£'ally reflect two mcton. Tot<J! netcharge-offs are: $1.5 biHion thatls down a !ittle und.er $900 million year on yeaf. We 

have. got lower delinquenryand r)etchatge-off rates circled forCarc! ~t the bottom of the page. 

We do e){pect, by the Wily, the net chalge-off rale to be 4.25% plus Dr minus in the ne)(t qlJ~nef, I would :also note UJ}S r.ltes in Aulo remain very 

low. We recognized 28 basis points of charge-off! tnis quarter_As a reSUlt of all of that informatio.n. we rl?jeased 5750 miHiofl t!lis quarter in Card 

and,ago>in, rese-ves here remaln very robust ellEn after that felellsE. 

One other comment on Card,expeNes were up 6% },ellron year and that feally was related to exiting a non-core product in the business, 

Page nine,Commercia! Banking.Clrded net lncome of almost S600 million on revenues. of $1.7 blJijon;25% return on eQuityl'lnd that is baSed Oli 

~ !ligh!'!f ca.pital ~lIOG<!tion for this busmess this year. 9% year~over-year feV€nue growth. It has been driven by the themes lYe have been talklrog 

~bout,growth in loans and liability balal'lCeS,and that is o!het by the 5pJ'{"<Id 'Compression we nay!:!: elIperienc~d year on year, 

It is our seventh consewtlw. qu,m~ of loan balante grow!h,You see the circled loan bal.llf\c:es of almost Sliti bUnan,up 1Mb.We had record 

revenue ~nd record JOiln balances in Ollf mlddle-mllrketbuslneis for the quarter;tnatwas up 19%. 

C&l loans up 2'1% 'lear on year and j think the best ofwh~twe h/!\le got in industry d~til, industry Yolurnes are up 12% }"Wron year. So if you think 

ota!! that itn:ally does reflect two underlying trends- gr.owth, we believe., io terms of demand, aswe!1 as a combination ofimprovelDl<nts in market 

share across those product sets. 

! wlU cOfltlnue to nole utlllzatio-n does remain re!atlvel)r stable where it has been at a low rate for the last several quaf\ers.Cr~it (Dsts were $80 

million in the quarter here but oe1 cilarge-Qffs were exceediJ\gJ)' low at 4 oolbi painls_ 

• Pilge 10, Treasury 8. Se:curity Services, solid resull:5. here. Net income of $350 million, up 11% ye:ar on year, 40% quarter on quarter.RevenlJes of 52 

b!Ulon,up 9% )I'e<lr on year,and that is agaIn resulting from some ul"lderlyin9 fundamental trend •• hat afe: o/f:o;ettill9 that spread Glmpression that 

we have t:llked ~bol1l. 

UabUiry balanCES are up 34%; international reyenue was. up 12%; assets under custody is a record $17.9 tfi!lion. up 8%; and trade finance 10M 

balances are up 4Q% year on year. You wit! noti(e there, by the WiJy, we had iI modest decline in t:r3de finance quarter on qUllrtE'f. Really a function 

of a Iit!!e bit of seasonality and I would ~ an increased return of competition. particularly from some of our European (ompetitors in the fount> 

-)I'IthefintquaTtef, 

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Page 11,Asset MaoagementWe had improved quarter~on·quarter results in AM.-Iargely driven by market condltions, but we are down from what 

was a Strong [irs;tquarter 2011.(!rded net income of $3S6 million, that is on revenues of $2.4 bililon. 

The results were really driven b)/sQme underlying growth as well as the market improvement we saw this last quarter. It's the 12th consecutive 

quarter oflong-terrn flows - $17 bllflon,$43 billion overthelat:est 12 months.We did set records IUtassets undersupervlsion and recorns for asselS 

under ma03gemenl Expenses were up year an YE'aT and that· has largely been from the lnvestment spE'nding we have been talking about for a 

numberofquaner;;.. 

p,age 12,Carporatl<and Priv,ate E'qulty.Pri':'CIte Equity net Income of $130 mlll1on.That is on $250 million of revenue, predominately marlHCHTlarkets 

for public positions and some modest rea!iZlltion5 th~ quarter. 

So corporate we recorded a net loss of$700 million and the loss included two significant items. The first is a $2.5 billion addition to our litigation 

fe:;efves, predominately mortgage rElated, and W~ identified lhm up on page one. So I am going to make a couple of coJTImen~ here an the 

litigation reserve. 

As you know. IncludIng the actions this quarter, we have been building velY significant teserve~ We believe that currently these reserves are both 

comprehensive in nature and appropriately conservative..given what we know about these ~p05Ures, including the information with the fin;t 

quarter ofth'ls year. 

And I would thlnk,absent" marerial adverse deve.lopment that.could c£rtainty chan91: ourviews,we don't antleipatema-king materiillilddltion to 

these reserves over the course of the year. But I do want to caution facts llnd circumstances can change,n:selVes can go up, they can go down, 

but we feet ba:>ed on what we know today that we are unlikely to add materla!ly to this position. 

We did book 3n addition Df $1.1 billion pretax gain that was also identified on page one. That is from the WaMu bankruptcysettlement.And if you 

excluded those two items, corporate net incoml:, ~dudjng PE,we note on lhe bottom right was $175 m1H1on for the quarter. 

Page 13, the Fortress balance sheet! haw covered a lot of the topio; already but let mejust add two commenu to the page. 

Rrst, as you know, we authorized a new $15 biHlon share rE'purch~se. We have spent <lpproximately $450 million yeaf-to-date on that ne ..... 

authorization,and for those that are likely to ask,irs <ita price of about $'14.75. 

5e{:ond, on trust preferred orTRuPS, we havl< $20 bl!!!on outstandIng as you all knO\/>'. We do expect to redeem $10 bf!lion of that $20 billion in 

total this year,and that Is purs.uant to the Olpitai plan that we submitted in the CCARprocess. For much of that those.securities we are going to 

wait until there Is a r~ulatoT)' caJi event to call those. We were in the market for a $400 mHiion calIon a single seCIJrity that didn't require that 

trigger. 

And forthe remaining $1 0 billion currently our view is that is veT)' attractivelong-tenn finandng. 

On page 14 we do have the outlaok.1 think I have covered all of that And so,bl:fore ! turn it over to Jamie,! did want to lalk about the topiCS in 

the news around 00 and just take a step back and rernind our investors about that activity and performance. 

We have more liabillties, 51.1 trillion of deposIts than we have Ioans,approl'\lmately $720 billion. And we take that differential and we invest it, and 

that portfolio tod~y is approl(imate!y $360 billion. We Invest those securities in very high grade,low risk - we invest tho~e dolla'l 10 high grade. 

low-risk securities. 

We have got about $175 biUion worth of mortgage sf:'.(uribes,we have got government agency securities, hlgh-grad€ credit and covered bDnds,. 

securitized products. munidpals. markE'tab!e CDs.. The vart majorityofthose are government or government-backed and very high gl1lde ln nature. 

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We invest those in order to hedge the interest rete risk of the firm as a function of that liability and asset mismatch. We hedge basis risk, we hdge 

convexity risk, foreign el(change risk is mdnaged through ClO, dnd MSR risk.. We d!SO do it to generate Nil, whkh we do with that ponfolio. 

The result 01 a!! of that is we a/50 need 10 manage the stress loss ('IssDc::iated with that portfolio, and $0 we have put on positions to manage for a 

signlflcantstress event in' Credit WE'. have had that position on for many years and the activities that hal'e beenrE'.ported in thE' paper are baslcally 

part of managing that stress Io~s position. which we moderate and change overtime dE'pending upon ourvle\I(s as to what the risks are for stress 

t~5fromcredlt. 

All of those decisions are made on a very long-term basis.They are done to keep the Company effect!,.,ely balanced from a r!skHandpolnt. We are 

very comfortabli':with our positions as they are held today. 

And I would add that a1!those po51tionsarefully transparent tothe regulators. They review them, have access to them atilny point In time, get the. 

information on those positions on a regular and recurring basis as part of our normalized reporting. AU oftho!>e posilionsMe put on pursuz,nt to 

the risk management at the finn-wide level. 

The la~ comment that lWould make IS that based on,we believe,the spirit of the leglslationaswel! as our reading of the legislation and consistent 

with this long-term investment philosophy we have in Cl0 we believe all of this is comistent with. what we believe the ultimate outcome will be 

reiatl"d toVolcker. 

So with that, maybe,Jamie, 1 wlH turn itnver to you before we open it up fur que>tions. 

Jamie Dimon -JPMorgon Chase& Company -Chairman & CEO 

Doug, thank you,So 1st mejust- let me talk. about one thing and then we will open to questions... 

When is the ~Iock buyback? Obviously we got permission to buy back $15 biHion worth of stock. We wo uld have prefl"rred to have been abll" to 

buyback substantial amounts below tangible book value, but we were unable to.. 

We will always,. as a diSCiplined buyback of the approxim<ltely $] bilHon W~ issue every year, and that is the $3 bil!1on we l~ue mostly fur comp. 

And that is not on a GAAP basis. It's [going to bel issued before investing. etc. 

At 45 we wlll-we reserve - right now we are bUYing bad:. at that rate. but we maydo more. So we reserve the right at any point in time to do 

wh.ateverwe want and it's. based upon baslc<lJIy for thl;,gs. 

VVhat ~f8 the organk opportunities? They might be there, portfolios or more organlc growth. What are t~ investment opportunities? There Clfe a 

lot of things you can bUY,both investments oracquisitlons, which we don't really expect big Ones now. 

Our awn desire to get quid!y- how fast do we want to get to our new capital requirements under Base! ULAnd the stock prke.So It does not 

mean at $45 - obviously when the slock goes up I think we wil! be consl.stem and we will buy less. When it goes down we wi!! buy more. 

We Me a buyerln size around tangible bookvaiue. And then, obviously, we reserve the right to change that at wil!. 

So let's open up to questiol\5orcomments ebout any subject atal!. 

1HOMSON REU1ERS STREE1EVEtfrS! www.str~eteue-nts..comlConlan Us 

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QUESTIONS AND ANSWERS 

Oper~tClr 

(Operator Instructions) Glenn Scnorr, Nomura. 

Glenn Schorr - Nomura· Analyst 

Jarnie,.Just beCilU5e you brought it up, 1 thlnklt's Interesting.lf)'ou took the midpoint of the ral'lge that you outlined in the,shareholder letter and 

you look the $23 bilnon. $24 billion ofover-the-cyde earnings, that is a sub~7 times multiple-It set'ms very <!ttractive at the midpoint of the range. 

I am just curious on how you think through the valuation when you are thinki.ng about the lJse proceeds on the buyback. 

J~mie Ohnon ~ JPMorgan OlaSf & Company. Chairman & ao 

Well, I mean,look.you. said it yourself, anyone can do the numbers_Our tangible booKvalue is extremely attractive,at 40 it will probably be attractive 

and at 45 -I am !lot saying It's notanractlve, but our best thing Is to grow our bu~lnes$ and not to worry about bUying back the stock. 

We are going- to bu.y back the stock when it's a bargain, not just beco!J5e we feelilke It And '>0 you guys can all do the numbers, we are just not 

going to tell you wh<lt we are going to do. 

Glenn Schorr· Nomura· Analyst 

At! right, fair enough. If you look on the quarter foryear-on-ye.ar bas.is.,expenses are up like 15%. N.ow there is litigation costs in there and things 

like that-I think on the investor day you had suggested flat e)(penses year on year. Obviously it depends on !nllesnnent Bank revenues, but can 

you just talk about the revenue expense dynamic? 

J~mil! Dimon -JPMorgaM Chase & Company. Chairman & CEO 

We said Aat expenses; we still expect that. The fir>tquarter is a little bit higher because of FICA and payro!l,a whole bunch of thing; like Ih<it, and 

some one-off ~pen5eS th~t run through there. And that is nat if you back out!B comp and extraordinary stock. 

ThaI number should be about $12 billion a quarter. Obviously It was a lin!e bit higher this quartet to do that, but it wi!! come down overtime we 

think. 

Glenn Schorr· NomurcI- Analyst 

Oki3)',so>tlllflat-. 

Jamie Dimon -JPMorgan Chase &- Company - Chairman &- CEO 

Remember, it's flat but we afe stH! doing a lot of in vesting. So we are getting ~her efficiende:s to help pay forth!! investing. 

Glenn Schorr· No.mum· Analyst 

Fair enough.And then maybe last one for me. t think the fear around issues in Europe has started to subside post the LlllO, a.nd ! think we discussed 

tha1 last c.alLWegot a little bit of a. ';CarE, though. thl< !ilst weekortwo with Spain. 

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Just curious on your thoughts rIght now;where: are we in that prores~ and do you ~tm feel comfortable on the counterperty exposure~? 

Jamil! Dimon· JPM~rg'lr1 Chase & Com.oollY- Chairman & CED 

Yes.! constantly read about WUntl'!rpanies..Our numbNs- we disdosed around S15 bl!lion,a Httle bit higher than lhat now.ThE:Y obviously move 

around. 

! would still say exactly thl'! same thing.The GRO was a massive thlng that took the rea! catastrophe in the short run off the table, but obviou>ly 

the world is going toeVdluate oy~rlime whEthl.'rthef15ca! llnion 1s tightened and given teeth and GlTTOU /J.nd sticks and all thallt's going to look 

at Spain and Italy's bothau • .terity and growth plans, and it's going to be like an atcordion for the next 18 mOnths,So! pen:.onaHyam not going to 

over react to that. 

But I think they have to do some things to give it the real stability. The.LTRO wasn't sufflCient.lt was not a .. it was a shorHlmn rlJ( r.ot a permanent 

fi,. 

G!enn Schorr -Nomura· Anulyst 

Okay, I appreda\f! it.Thankyou. 

---------------

Op;!rato-f 

Guy Moszkowslci, Bank o-f America. 

Guy Mo$Zkow~ki - BofAMerriiJ Lynch· AnalYst 

Good moming.Oo !hl" 00 question,which obviously you have addressed and has goHenso much attention in the press thlsweek..can Ijust ask. 

one further question, wl1ic:h \~ i'lre all of the results ofthE' CIO group reflected Dnly within CorpoJ<lte and Other?There!~ no sharing of any of thoSE 

results with, S3y,F!CC in terms of the reporting that we wolllil see in th~ Inve.stment B<lnk? 

----------- J'70rnie Dimon -JPMorgoll Chas~& CampDny - ChDirmM lfI ao 

No, God, n'o. NO,no.A lot of the Nl1is given to the bu~ln~sse that generate that deposits on a ronsinent fuoo transfer methodology, which - but 

not """th the investment b<mk. Remember,most of that panfoUo is an AFS portfollo, not all of 11, but most of it, 

Guy Mosrko ..... ski· So",," Merrilf Lynch· Analyst 

Rignt,faireno lJ9 n. It'sju5tl{multipiespeBkers) 

Jamie Drmon -JPMoT9an Chcr.>e&Compony. (hufrman 8t CEO 

We disdosed both realized gains, unrealized 9;;ln5, anti mark·to-rnarlu:t gains. You get aU of that. 

-----_._--

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Confidential Treatment Requested by J.P. Morgan & Co. JPM-CIO-PSI0001159 
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Guy Monkowski - &fA Merrll1 Lyndl· Analyst 

Yes, that is l~t a question that I ~sk in order to assess the temp~st in the teapot nature of the stories ~Iatlve to the teYF!nues that we see that just 

don't seem 10 be lhat big. 

JamiQ Dimo.n -JPMorgM Chase&- Company - Chairman & CEO 

It's a complet-e tempest in ;;' 1eapoLEvery bank ha:s a major pomolio;ln thoSE portfol1os- you make investments that)lou think are wise to ofuet 

your exposures... 

Obviously, it's a big pomolio;we are a large company and we try to run It -- it's- sophlstkated obviously with COn'lp!exthings.But at the end of the 

day that is: our job is to iJ"l'lest that portfolio wisely, Intelligently over.a long period of time to i;'am income and 10 offset other !.')lPDSU~S that we 

haye. 

Guy Monkowski - 80fA Mwil1 Lynch-Analyst 

Then turning to the ClIplta! questions, obYiollS1y you have had i!I rapid gro-wth towards your e\lentual Basel III t1!rgets. although of coune we still 

don't know eX3crly what they are, and you have atluded to the conditions under which you would return capita! through buybaclts. aut What about 

the poumtla! for special dividends along Ihe way? If you felt that you had excess capita! and that Share buybacks were not Ihat attract1¥e, how 

would ).Iou think about th.<lt? 

Jamie Dimon ~JPMorgQnChase& Company- Chairman &C£O 

Guy,\ think the right way to 1001: at that is ask that qUl~stlon in two year.;.! mean we aTe not at the Basel1lt targets yeL You shoulq expect dividends 

on a regu!ar- we may change our mind~,but on.a regular annual basis from 1J5 that wil!!ookat what to do. 

Obviously. this is a Board-leYe! decision. But there is going to certainly bl". flO special dividend before we know what the rea! ("pita! rule~ are. '" 

Guy Mu:;::rlo;owski - BofA MmiB Lynch - AnofY5t 

jamIe Dimon· JPMorgo{l ChDse&Compony - Chairman & CEO 

Take that off the table. 

Guy Mankowski ~ lkIfA MefriO Lynch, Analyst 

Okay, thath completely fair. Mortgage origination you alluded to better spteads- obviously,and maybe you could just give us a little bit more color 

of how that came through.Bec<luse it certainty does look lOO:! they improved me~ningfuHy ginn how the revenue evONed versus last quarterver.;us 

the origination voluines. 

Jamie Dimon -JPMorgon OJase& Company- Chairman & CEO 

They were severa! hundred miHion do!lars higher than what we would cal! normal f(Jf a whole bunch of different reaS<Jns, including HARP, 

supply/demand. the prIce at which Fanni<i! Mae and Freddie Mac aresetl.lritlzing things.So 1 would expecl tl'13t to normalize oyer time. 

10 

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From: 

Sent: 

To: 

CC: 

Dimon, Jamie <jamie.dimon@jpmcbase.com> 

Fri, 11 May 2012 09:07:24 GMT 

Will, Kathleen <KATHLEEN.WILL@jpmchase.com> 

Subject: Fw: 10-Q call- Buyside and sellside comments (2) 

From: Youngwood, Sarah M 

Sent: Thursday, May 10, 2012 10:31 PM 

To: Dimon, Jamie; Braunstein, Douglas; Drew, Ina; Staley, Jes; Cutler, Stephen M; Evange!isti, Joseph; Lemkau, Kristin 

C; Miller, Judith B. 

Cc: Investor Relations 

Subject: 10-Q call - Buyside and sellside comments (2) 

Here is the balance of caUs for the evening. All calls returned. See below regarding comments. We have also left 

messages to the extent we couldn't connect (see bottom of mail). 

For reference, we had 3,248 people on the webcast and 4,543 people on the telephone lines. A total of 7,791 people on 

the call. 

Betsy Graseck - Morgan Stanley - Sellside 

• Appreciate Jamie's public apology 

How long will it take to unwind the trades? 

• Why not offset the whole thing with unrealized gains in the AFS book? 

Is this something that happened in the month of April? Did you become aware of this while dosing your books 

or was this something you were aware of in the first quarter? 

• What was the sequence of the events? 

Why did you go back to the old model? 

• What can you point to in terms of market movements? 

• Can we approximate the size of your position based on the losses? 

• Anyone in particular that is putting on these types of trades in? How did this happen? 

• Will you still do your buybacks? 

• Please detail changes in Basel !II 

Glenn Schorr- Nomura 

Everyone should give up on trying to figure what the trades are 

There weren't any issues with credit in the market. Why the big loss? 

• The loss was not that big in the grand scheme of things so why have a call on it? 

I want to understand for intellectua! reasons what happened 

Obviously not about the P&l impact and the capital ratio impact 

One of the few companies that trades on a premium will now lose some of that premium 

• So nothing gets changed for Q1 except VaR and Bill Tier 1? 

• This is just something you found in your internal risk management, right? 

Andrew Marquardt - EVercore - Sellside 

Is this something we should be concerned about in terms of the culture and risk management across the' firm? 

Is this just a strategy gone wrong? On the wrong side of a trade? 

Is this a red flag for regulators? Are the regulators now going to review your controls? 

Permanent Subcommittee on Investi ations 

EXHIBIT #95 

CONFIDENTIAL TREATMENT REQUEST ... ---------... 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0017754 
938 

Can you explain what happened in terms of reducing the credit protection? What was the strategy? What was 

the change? 

• Any impact on buybacks? 

Anything else in the Q that changed? 

Thought it was a good call; appreciate the conversation being upfront, the JPMorgan way 

Guy Moszkowski - BACMl- Sellside 

Thank you for the public apology 

• What does the repositioning of hedges mean? 

Is the $12.7B of derivative disclosure related to the $2B losses? 

How sweeping are the changes not just in model but in personnel? 

Did you restate the 12/31 VaR? 

Old Jamie say that the old model was inadequate? 

• Can you continue to do buybacks? Any updates to that? What about the Fed? They just issued $12-$15B in 

buybacks. Are they going to rescind their authorization? 

The 20 bps decline in Basel Ill, was that related to the stressed VaR? 

Is it fair to say that if you had suffered theses losses in the IB you wouldn't have had this call but because this 

was in CIO and you were so far off guidance that you felt you had to have this ca!!? 

This wi!llook like prop trading to a lot of people; already had Senator Levin on the tapes saying this is why 

Volcker has to be in place; not good from a Washington stand point 

• Embarrassment for JPMorgan but worst for GS and the industry because of the timing of the Whole Volcker rule 

Jamie was dearly falling on his sword - very noble 

Richard Ramsden - GS - Sellside 

• Restated VaR. On what? 

Change in VaR must be because you changed your risk model correct? 

So you want from a standard model to an advanced model and the model didn't work as you thought? 

You didn't give disclosure on your position. Does that mean your position is still open? 

• You must have considerable gains in that portfolio as well correct? 

Are you disclosing this because the auditors thought you should or you thought you should? Was this your 

decision? 

Did this have to do with all the articles Bloomberg has written? 

Did this hedge have to do with tail~risk? Would have thought you would have made money; unless you were 

reducing the hedge? 

Are there going to be other type of effects? 

Does this impact the buyback program? 

• The impact doesn't really change anything; don't think it was that big; don't think it changes the earnings power 

and doesn't impact the capital return story; financially, don't think it was a big deal 

Problem is that people don't expect this from you 

Jim Mitchell- Buckingham Research - Sellside 

• Was this set up to hedge your previous hedges? 

Was it meant to hedge your AFS portfolio from tail risk? 

Why would the VaR change retroactively? In light of this situation, you re~eva!uated the prior model? 

• What does it mean when you say "not monitored well"? 

This was not related at all to the IB correct? 

• When were these positions put on? 

Old the fourth quarter number changed? 

Marty Mosby- Guggenheim - Sellside 

Please confirm this was mark~to-market 

• This was in the corporate division correct? Not related to clients? 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0017755 
939 

• Can you give details on your hedge? 

Is cia taking proprietary positions? What do you mean by excess liabilities? 

Was this related to hedge ineffectiveness? 

What was the core thing that you were trying to hedge? 

Have you given the principal outstanding related to the position? 

Jeff Harte - Sandler O'Neil- Sellside 

How profitable has the portfolio been? 

Why shouldn't we be concerned about all of JPMorgan's risk management? 

Was the jist ofthis"that you hedged the portfolio, had the hedges for a long time and you were trying to take 

the hedges off? 

Can you still buyback stock? 

Is it fair to assume this is new guidance? Does this contradict guidance you had given before? 

• What was the $78+ of unrealized gains? 

Is this related to a hedge being ineffective? 

Would the gains or losses show up in the P&l? 

How has the reaction been so far? 

Dan Marchon - Raymond James - Sellside 

What is a synthetic credit portfolio? 

On the call, Jamie had mentioned that these were trading losses, but then in the lOQ the language was 

different, is that the same thing as mark~to-market? 

Ben Hesse - Fidelity - Buyside 

Over the Easter weekend we spoke and you said there was no losses related to this 

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 

Greg Wachsman -lord Abbett - Buyside 

Is the $2B realized or unrealized? 

So from my understanding it sounds like you're managing exposure at the top of the house, and then you have 

some repositioning and re~hedging of the portfolio - can you go over it again what transpired because 1 need to 

better understand what happened? 

Synthetic credit portfolio - what is that? 15 that CDS? What does that entail? 

What did he mean when he said, "it could be another billion on top of that"? 

Can you quantify the absolute long~term loss? 

Do you know what the notional loss amount was? 

• ThE VaR changed from $67mm to $129mm - can you talk about the model behind it? 

Was this a hedge or prop trading? 

• Any capita! plan changes? 

Since it wasn~t that material, why did you guys host the call? 

Matthew Antle - Putnam Investments - Buyside 

When you gave your Basel!!! hit, did you consider the multiplier effect? 

• Soc Gen had to adjust their VaR even higher after their rogue trading incident - is this considered rogue trading? 

Did the Fed confirm that you can continue to do share repurchase? 

Jeff Busconi - Viking - Buyside 

What does the $67mm in VaR represent in the restated supplement? 

Is the real problem in the marking of the position? Was it mismarked, or did it move against you? 

Why did you come out and do this call? It seems like to numbers aren't that big. "I'd say the $800mm loss is 

immaterial." AU the dealers on the Street know what the position is, and my guess is other people would know 

CONFIDENTIAL TREATMENT REQUESTED BY 

J.P. MORGAN CHASE & CO. JPM-CIO-PSI0017756 
940 

what the position is before long. Seems like you've exacerbated the issue. Most of the dealer community is 

aware of the positions 

• What are the changes you've made in risk management? 

• How is the CIO office actually structured? Does the CIO report to Jamie? 

• Was part of the losses an adjustment to your mark? 

• There are probably other counterparties on the other side of the trade if these are synthetic that are aware of 

the position. And, I'd guess the dealer community is aware of the position as we!1, It must be a pretty big 

notional amount to have lost $2B in a short amount of time. $2B is not large relative to your balance sheet, but 

it is big in the context of tranches. 

Bill Rubin - Blackrock - Buys-ide fe-mail} 

This note further below from Ed Najariall says it all. 

I've spoken with several of our team members at Blackrock. 

Please forward the following comments to executive manageme~t if you deem appropriate. 

We are very disappointed by this turn in events, not 50 much by the size of the loss, but more by the bad 

stumble in risk management/controls. 

Major reputation and sentiment hit, damaging. 

Stepping up and coming dean, mea culpa, was the right thing to do. Appreciated. 

We expect aggressive response on 4 fronts: 

1) As smoothly as possible exiting riskiest remaining positions with least Clmount of further damage to balance 

sheet and inc statement, and fixing policies/procedures/risk controls, ... asJamie Dimon discussed. 

2) Offsets ... are tax implications from reaping further securities gains really that prohibitive? 

3) Yet another look at cost reductions where possible/feasible ... especially with weaker capital markets revenues 

in 20 and likely 2H12, we believe the cost structure remains too high. We believe JPM's revenue opportunity will 

not be hurt by reducing costs further - the company and most of its people are too good to not capture 

opportunities when they arise, and being another -1%2% lighter in costs will not materially diminish that 

capability. 

4) Buy back stock more aggressively. For what it's worth, at'" $38 price, we believe P!BV 0.8x, P(fBV 1.1x, and 

P /E 7x is stupid cheap. The market cap of JPM will be down at least $10 billion tomorrow. If the company can 

truly generate $24 bn in net income in a couple years, any stock repurchase anywhere remotely dose to these 

stock prices will be very, very attractive prices indeed. 

Just ideas and suggestions to consider. 

Please forward to executive management if you deem appropriate. 

(Ed Najarian's note below.) 

lSI: lPM -lPM announces $2bn trading loss 

Company Note: lPMorgan Chase (Buy, $52 PT) 

Maintain Buy; stock over-discounting the loss 

'/r After the market closed, JPM announced a slightly more than $2bn mark-to-market trading loss in a 

synthetic credit portfolio that was initially designed to hedge global credit exposure. The hedge ~-as initially 

designed to deliver positive revenue in a credit stressed environment. However, a first quarter strategy to reduce 

the hedge was poorly designed, poorly executed, and poorly monitored and have resulted in more than $2bn in 

mark-to-market losses thus far in 2Q. JPM plans to partially offset the loss by reaping $lbn of "investment 

securities gains. Thus, the net loss to 2Q BPS thus far is about $80Orrm after tax or equal to about $0.21 per share. 

Additionally. the loss could grow or shrink over the balance of this quarter and is likely to lead to more earnings 

volatility over the balance of this quarter and next quarter. For example, it is not unreasonable to assume that JPM 

could lose another $lbn on this position. Accordingly, based on this loss and OUr perception that core trading 

revenue has been weaker than eJ..'Pected thus far in 2Q, we are reducing our 2012 EPS estimate by $0.35 from 

$5.05 to $4.70. We are maintaining our 2013 and 2014 BPS estimates at $5.50 and $6.10. We Ore also maintaining 

our one year price target of $52. 

CONFIDENTIAL TREATMENT REQUESTED BY 

J,P. MORGAN CHASE & CO. JPM-CIO-PSI0017757 
941 

* However, JPM stock is now off nearly 7'% in after hours trading or about $2.70 per,share. We would note 

that with JPM stock off$2.70/sh that represents about $10bn oflost market cap based on only a $2bo pre-tax 

trading loss. We frnd it very difficult to, imagine that this poorly structured synthetic credit position will ever lead 

to $10bn of cumulative after-tax losses. We would expect the cumulative loss figures to remain significantly 

below that threshold (perhaps in the several billion dollar range and thus not more than $1 per share). 

Additionally, we remind investors that]PM recently received approval to repurchase up to $15bn of stock over 

the 12 months from 3/31112 - 3/31/13 and we fully expect JPM to use near term weakness in the stock to buy it 

back aggressively. Furthermore, ata current after-hours price of about $38 this stock is yielding 3.2%. 

Accordingly, we would advise investors to not sell into tomorrow's weak]PM stock price. In fact, we would 

regard tomoITow~s weakness as a buying opportunity. 

* ~ile this incident is unfortunate and dearly represents a major error of judgment, risk management, 

and execution within the ChiefInvestment Office of JPM, we have confidence that]PM will ~"ork diligently, 

aggressively, and thoughtfully to resolve it in the best way possible with a focus on minimizing its <0ditional 

damage to shareholder value. Finally, we ~ote that based on this position JPM did revise its 3/31/12 Basel 3 Tier 1 

Common equity ratio to &.2% from 8.4%. But the company remains well positioned to repurchase significant 

amount of stock and surpass a 9.5% Basel 3 threshold by the end of2013. 

Voice mails {calls returned; left vm; will connect tomorrow} 

Sellside: Thang To (151 junior),John Dunn/Marc Lombardo (Meredith Withney), Paul Miller (FBR) 

Buyside: Kush Goel (Neuberger), Dick Manuel (Columbia), Bill Auslander (Alliance Bernstein), Patrick Hughes 

(Olayan), Ryan Long (Chesapeake), Jay Mai (Glenview), Ryan Lente!l (Manulife),John Baldi (Clearbridge), Ravi 

Chopra/Jeff Barnes (Samlyn), Greg Anderson (UBS AM) 

Sarah 

Sarah Youngwood I Managing Director 1 Head of Investor Relations I JPMorgan Chase Co. 

270 Park Avenue, New York, NY 100171 T: 212 622 61531 F: 21227016481 

CONFIDENTIAL TREATMENT REQUESTED BY 

J,P, MORGAN CHASE & CO, JPM·CIO·PSI 0017758 
942 

I Raw Transcript 

10-May-2012 

JPMorgan Chase & Co. (JPM) 

Business Update Call 

FAa-SET: call street 1·877·FACTSET www.callstreetcom 

Total Pages: 20 Permanent Subcommittee on Investigations :001.2012 FactSet CaliStree!, LLC 

EXHIBIT #96 
943 

JPMorgan Chase & CO. (JPM) 

Business Update Call 

MANAGEMENT DISCUSSION SECTION 

WI Raw Transcript 

1O-May-2012 

Operator: Please stand by. We are about to begin. This call is being recorded. Your lines will be muted for the 

duration of the call. Please stand by. 

At this time, I would like to turn the call over to JPMorgan Chase's Chairman and CEO, Jamie Dimon. Mr. Dimon, 

please go ahead. 

Jamie Dimon 

Operator, thank you. Good afternoon, everybody: I would like to thank you all for joining on short notice. I want to 

update you on a few items that we have in OUI just filed lO-Q. 

Specifically, we had given prior guidance that Corporate - that net income in the Corporate segment - notice it's 

not the corporation, it's one of the segments ex Private Equity and litigation would be approximately plus or 

minus $200 million. This includes the CIO's overall performance. 

We currently estimate this number to be minus $800 million after-tax. This change is due to two items, both in 

CIO this quarter - I'm going to get back to give you pre-tax numbers now - slightly more than $2 billion trading 

loss on our synthetic credit positions and a $1 billion of securities gain, largely on the sale of credit exposures. 

I want to remind you that CIO has over $200 billion in its investment portfolio and unrealized gains as of March 

30th of $8 billion. ClO manages all its exposures in total as a whole, and it doesn't in light of the Firm's total 

requirements. 

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. The numbers I just gave are effective March 30th, the first quarter. 

Regarding what happened, the synthetic credit portfolio was a strategy to hedge the Firm's overall credit exposure, 

which is our largest risk overall in its trust credit environment. 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 than economic hedge than we thought. 

What have we done? We've had teams from audit, legal, risk and various control functions all from corporate 

involved in an extensive revieyv of what happened. 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. 

We've had many lessons learned and we'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. Most 

important, some of our best talent from across the company, particularly traders and risk managers, are fully 

engaged in helping to manage the portfolio. 

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Ii Raw Transcript 

The portfolio still has a lot of risk and volatility going forward. So how are we going to manage that? So, number 

one, we're going to manage it to maximize the economic value for shareholders. What does that mean? It means 

that we're not going to do something stupid. We're willing to hold as long as necessary inventory, and we're v.illing 

to bear volatility. 

Therefore, the volatility for the rest of this quarter and next quarter or so will be high. It could cost us as much as 

$1 billion or more. Obviou.sly, we're going to work hard to have that not be a negative at all. But it is risky, and it 

will be for a couple of quarters. 

Clearly, markets' and our decisions will be a critical factor here. Hopefully, this will not be an issue by the end of 

the year, but it does depend on the decisions and the markets - the decisions we make in the markets we have. 

However unfortunate this event is, I do want to put this in perspective. One of the reasons we keep a fortunate 

balance sheet is to handle surprises, although this is not the kind of surprise we wanted to have. Our Basel I ratio 

will stay very strong and it doesn't change at all as a result of - March 31 result is, our Basel III ratio, which 

remembers a rough estimate anyway will be amended down to 8.2% from 8-4% effective March 30. We will 

however in the future continue to meet our very conservative targets for both Basel I and Basel III. 

Wbile we don't go I also want to say, while we don't give overall earnings guidance and we are not confirming 

current analyst estimates, if you did adjust current analyst estimates for the loss, we still earned approximately $4 

billion after-tax this quarter give or take. 

Neither of these things absorbs us from blame. So speaking for the Senior Management team and myself, while we 

can't assu~e you we won!t mistakes, we will - we can assure you we are going to try not to. 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 operate the company. This is not how we want to run a business. 

We will discuss all these matter and more and in fulsome detail on our second quarter analyst call and we are 

going to ·take some questions on this call. I do want to tell you now we are not going to take questions about 

specific risk positions, strategies or specific people. 

Finally, however unfortunate incident is, we will do what we always do, we admit it, we will learn from it, we will 

fix it, we will move on, hopefully in the end, it will. make u.s a hetter company. We are business to serve clients and 

nothing here distracts all the great things that our 203,000 employees around the world do every day for our 

clients. and communities. 

So thank you for spending a little time with us and we'll be happy to take a few minutes of questions. 

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QUESTION AND ANSWER SECTION 

Operator: Your first question is from Glenn Schorr with Nomura. 

Glenn Schorr 

I Raw Transcript 

10-May-2012 

Q 

Hi thanks. Just curious on when this was caught, if it wasn't caught internally or caught by a regulator when you 

update the regulators, when you talk to the rating agencies, just curious on how all inner workings works? 

Jamie Dimon A You should assume that we try to keep our readers update 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 dig into this more and more, most of 

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. 

Glenn Schorr Q So I am not clear when did the losses accumulate? In other words was this something that happened most recently 

or this was an era in the past and is just updating your risk amount now? 

Jamie Dimon A There were small ones in the first quarter, hut 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 come to our attention. 

Glenn Schorr Q Got it. Okay, thanks, Jamie. 

Jamie Dimon A You are welcome. 

Operator: Your next question is from Guy Moszkowski with Bank of America Merrill Lynch. 

Jamie Dimon A 

Hey, Guy. Guy? 

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Operator: Guy, your line is open. Please make sure that your line is not muted. There is no response from Guy. 

So we will move to the next question, that question is from Matt Burnell with Wells Fargo Securities. 

Matthew Burnell Q 

Good afternoon, Jamie. Just two interrelated question, does this change your capital plan for 2012, or does this 

have any effect of the regulatory plan that submitted earlier this year to the regulators? 

Jamie Dimon 

No. I do want to say one other thing that a lot of us have analysis week, buy-side and sell-side and we feel terrible 

because we obviously !mew a lot but because of FD we couldn't say anything. So on behalf of all of the JPMorgan 

people who did that and I personally !mow that it's the [indiscernible] this week we do obviously apologize for 

that. 

Matthew Burnell Q 

Thank you. 

Operator: Your next question is from Moshe Orenbucb with Credit Suisse. 

Moshe Orenbuch Q 

Great, thanks. Was that - the 1 billion of securities gain you said was related to that coming out of CIO was that 

part of the sarne reduction aod could you talk a little bit about the process of kind of mitigating the risk of the 

balance of tbe next couple of quarters? 

Jamie Dimon 

Yeah, we wanted to reduce our overall credit exposure and there were AFS securities in CIO gains we sold those 

and took gains. 

Moshe Orenbuch Q 

And in terms of the process of getting the exposure down over the next several quarters, I mean can you talk a 

little bit about - about how that... 

Jamie Dimon A 

We're going - We bave the top tearns involYed we'ye reviewed a couple of - probably a couple of times a day at this 

point and I've always said that the principle wise how we're going to do that. Maximize economic value, volatility 

obviously you can lose more money and I mean I can repeat it five times but that's what we're going to do. 

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Business Call 

Moshe Orenbuch Q 

Okay, thanks. 

Jamie Dimon A Yeah. 

Operator: Your next question is from Matt O'Connor with Deutsche Banle 

Jamie Dimon A 

Hi, Matt. 

Matthew O'Connor Q Hi. I hope this is another stupid question but I guess when I sit back and I thlnk about the earnings power and all 

the moving pieces of your company my first thought is on a net basis $1 billion I guess I still like the message 

maybe it's worst than what the numbers are and I'm trying to better understand you know why you felt like you 

need to disclose it in the Q, wbat's - because last quarter you had 2.5 billion of litigation and you absorbed that 

then some. 

Jamie Dimon A Yeah. 

Matthew O'Connor Q So it just seems like ... 

Jamie Dimon A 

No, it's a very good question and that fact is, first of all- we've already said it could get worse and it's been going 

on for a little bit, unfortunately. That's number one. Number two is, so soon after the end of the first quarter when 

we basically gave you different kind of guidance. 

,And number three just what to tell you what We know, we're not telling its worse, not could I completely agree 

what you said. It's not going to stop us to building a great company. But it's unfortunate and of courSe it's going to 

r:aise questions and we just want to answer those as best we can. 

Matthew O'Connor 

Okay. Thankyou. 

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Operator: Your next question is from John McDonald with Sanford Bernstein. 

John McDonald Q 

Yes. 

Jamie Dimon A 

Hi, John. 

John McDonald Q 

Yeah. Hi, Jamie. So just - while we have you, did - was there any other items in the Q that changed in terms of 

your outlook not having any chance to go through it yet? 

Jamie Dimon A I don't know it they were running it on CNBC, the litigation and potential future, hut I think it was like almost the 

same number from the past. And I think most of the guidance was approximately the same, right? 

A A little hit of guidance around the investment bank trading and ... 

Jamie Dimon .A 

Right, okay. 

A And mortgage margin? 

John McDonald Q 

Okay. No, change on your expense. You're still looking to keep you adjusted at the 49 billion this year? 

Jamie Dimon A 

There was - yeah, there was no comment in there at all. 

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John McDonald 

Okay. So we sbould assume you're still sbooting for that? 

Jamie Dimon 

Well, of course. Yeab. But 'that can change too, but yes. 

John McDonald 

Q 

A 

Q 

Okay. And then, any - too early to kind of just think about a broader rethinking of CIO and bow it's structured or 

bow you managed tbe risk that you're looking to bedge there. Is it too early on that or any comments just from a 

big picture there? 

Jamie Dimon A 

Yeab, so all - remember all banks bave fairly big all banks bave portfolio and big banks bave basically large 

portfolios. You have to invest excess cash, have invested around the world in deposits and rem~mber the CIO bas 

done a great job for a long extended period of time. Tbis was a unique thing we did and obviously it bad a lot of 

problems and we are cbanging appropriately as we are getting our bands around it, but we are going to bave a CIO 

wbo is going to bave talented people there, continue to do wbat they've always done. 

John McDonald Q 

Okay. And a last thing, the $800 million for tbis quarter, that's only for this quarter, you are not talking about 

continuing we will see on the future quarters but tbat's just for tbis quarter rigbt. 

Jamie Dimon A It's this quarter currently. So we were telling you, there is going to be a lot of volatility here and could easily get 

worse this quarter or better, but could easily get worse and the next quarter we also think we have a lot of volatility 

next quarter. I am not going to update about number changes a lot. We are not going to make calls every time the 

number moves around, by $0.5 billion. 

John McDonald Q 

Okay. Tbanks. 

Jamie Dimon 

Okay. Yes. 

Operator: Your next question is from Bill Rubin from BlackRock. 

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Bill Rubin 

WI Raw Transcript 

10-May-20l2 

Q Yes. I don't know if this was asked or ranched [ph] yet, but this doesn't change anything with the c-core [ph] 

capital plan or the buyback capability at all, does it? 

Jamie Dimon A I don't think so because our capital is strong, we are going to meet all our commitments, we can handle highly 

stressed environment, so no, we donlt think SQ. 

Bill Rubin Q So you can be in the market tomorrow after this? 

Jamie Dimon A I believe so, 

Bill Rubin Q 

Okay. Thanks. 

Jamie Dimon A 

My general counsel is sitting right here, so he would have kicked me if I was wrong. 

Bill Rubin Q 

Thank you. 

,Operator: Your next question is from Guy Moszkowski with Bank of America Merrill Lynch. 

Guy Moszkowski 

Hi hopefully this will work better. 

Jamie Dimon 

Hey Guy, did you hear my little apology? 

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~8:,:us~inC"e~ss'..:U:.>p~d~at=e~C~al:.1 _____________________________ .-:.:.10.May.2012 

Guy M oszkowski Q No. I didn't. Butl didn't hear anything for a few minutes. So - b"t. thank you. 

Jamie Dimon A I apologize. When you were here. I knew you were here and I didn't have - obviously I couldn't tell you about this 

and. of course. I feel terrible about that. 

Guy M oszkowski Q Well. that's okay. Thank you. Listen, I'd really like to understand what type why yon felt that you needed to add 

this kind of SJ'Ilthetic credit exposure? Were you ... 

Jamie Dimon A 

Okay. 

Guy Moszkowski Q 

Were you not esteemed that you had enough exposure through core lending businesses; and what was gomg on? 

Jamie Dimon A 

Exactly. The original premise of the synthetic credit exposure was to hedge the company in a stress credit 

environment. Our largest exposure is credit across all fonus of credit. So we do look at the fat tails that would 

affect this company. That was the original proposition for this portfolio. 

In re-hedging the portfolio. I've already said, it was a bad strategy. It was badly executed. It became more 

complex. It was poorly monitored. We don't - obviouslYl we don't have to do anything like this at alll if we don't 

want. And I understand you can ask that question. So I don't want to give you specifics because we've already said 

we're not going to talk about the actual positions or anything like that. 

Guy Moszkowski Q 

And. Jamie. the $1 billion that you referred to in your prepared remarks about - of incremental loss potential. is 

that fue max that you envision above and beyond this sort of net $800 million ... 

Jamie Dimon 

No. 

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Guy Moszkowski 

... after-tax number? 

Jamie Dimon 

I Raw Transcript 

1D·May·2012 

Q 

A No. That is - I said the volatility could easily be that. Obviously, it could be worse than that. We're going to 

manage this for economics. Hopefully, by the end of the year, it's the hope that this won't be a significant item for 

us. We want to maximize the economic value of these positions and not panic to do anything stupid. Therefore, 

we're willing to hear volatility. 

Guy Moszkowski Q 

And the final question is how liquid do you view these exposures as being? In other words, granted you don't want 

to, you know, make economically silly decisions and just cut it off right here, but how easy would it be for you to 

exit completely and just call it a day and be done with it? 

Jamie Dimon A I think, I have already said, I am not going to talk about spe<:ific risk positions at all. 

Guy Moszkowski Q 

Okay, I am not asking specific positions just liquidity. 

Jamie Dimon A 

Yet, you are getting specific. We will do what we have to do to maximize the shareholder value. We've got to stay in 

pm-veT and we are going to use it. 

Guy Moszkowski Q 

Okay, fair enough. And thanks very "much and thanks for putting me back in the queue. Appreciate it. 

Operator: Your next question is from Brennan Hawken with UBS. 

Brennan Hawken Q 

Hi. Just kind of curious to the extend that you can comment, if you if the regulators are aware of this and 

whether there has been any regulatory response, if there is heaven forbid any kind of vocal related implications on 

this matter? 

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Jamie Dimon 

I Raw Transcript 

10-May-Z012 

A I think you should assume, I can answer this 100 times, you should assume that we keep our regulators up to date. 

That is a policy of the ·company. Sometinles you don't give them great information, we don1t have great 

~oIIDation. You can assume they are up to date. They will take their own point of view on this. 

Brennan Hawken Q 

Okay: r'justdidn't lmow whether they made ... 

Jamie Dimon A We always said, this violates our principles whether or Dot it violates Volcker principles and you know we want to 

rim and build a great company. We do believe we need to have the ability to hedge in a CIO type position and that 

Voleker allows that. This trading may not violate the Voleker rule but it violates the diamond principle. 

Brennan Hawken Q 

Okay. And you had mentioned that this was a new strategy that you had decided to exit, is it possible for you to let 

mow how new that strategy was? 

Jamie Dimon A Not new, it was the - I said new but what I meaut is it was the strategy to reduce the credit hedge. So it's kind of a 

new strategy was devised. And as I already said it was poorly constructed and poorly monitorial that and that's the 

place over the course ofless couple of months. 

Brennan Hawken Q 

And the implication I guess might have been that there was all this fresh speculation about certain trading 

individuals out of London where some staff fairly Dew that came into execute this new or this some of this new 

angle and are those folks no longer in that that's been retriggered I think you said, right? 

Jamie Dimon A 

No, no nothing new folks a little bit to do with the Oracle the press so it was somewhat related to that'it's obviously 

more than that but somewhere related to that. And I also think we acted a little too defensively to that. 

Brennan Hawken 

Okay, thanks for the color. 

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Jamie Dimon 

Yeah. 

II Raw Transcript 

10-May-i012 

A 

Operator: Your next question is from Mike Mayo with Credit Agricole Securities. 

Mike Mayo Q 

Hi. 

Jamie Dimon A Hi. 

Mike Mayo Q 

How much of the $2 billion trading loss is due to terrible execution which you mentioned versus the environment 

you seem to be implying none of this is due to the environment? . , . 

Jamie Dimon A 

No, no I'm sorry. I think in hindsight their strategy that execution obviously the environment because these are 

mark to market positions. So obviously that. ljust don't want to make excuses and start talking about market and 

dislocationa! stufflike that bec:.use that's truly just an excuse. 

Mike Mayo Q 

And so would this be a JPMorgan specific issue or is there a chance to others also have some losses on similar 

positions? '-' 

Jamie Dimon A I don't know just because we are stupid doesn't mean everybody else was. I have no idea what the people are 

doing. 

Mike Mayo Q And just in rea! simple terms in six weeks you lost $2 billion so - and as simple as you can simple it what went 

wrong? 

Jamie Dimon A 

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1[J.May-2012 

You already mentioned, there're huge moves in the market place, is a - we made this position more complex. The 

strategy was barely executed, barely monitored. And like I repeated 800 times, I'm not going to get into too more 

specifics than that. 

Mike Mayo Q 

And you mentioned ... 

Jamie Dimon A But Mike, we will be - I already said, at the end of the quarter we will be talking more about this to satisfy your 

needs and ours. 

Mike Mayo Q 

And you - can you say what recon [Ph] this was done and you're not going to disclose any of that? 

Jamie Dimon A 

Global. 

Mike Mayo Q 

Global. And what caused you to change the VaR model in tbe first place? I mean you had something that was 

working and you changed it. 

Jamie Dimon A 

There are constant changes and updates to models, always trying to get them better than they were before. That is 

an ongoing procedure. 

Mike Mayo Q 

And this is kind of sensitive, but you've - probably just helping the company of having - being great risk 

managers and this is mistake and you11- as you say, you'll learn from that. But is there any sense that the mistake 

made in the eIO office could also be in place where at JPMorgan? 

Jamie Dimon A 

Mike, we operate in a risk business and obviously it puts egg on our face and we deserve any criticism we get, so 

feel free to give it to us. We'll probably agree with you. But we think we run a pretty good company, with pretty 

good risk controls and pretty risk management. We are not in a business where we're not going to make mistakes; 

we are going to make mistakes. 

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10-May-20l2 

We've always said thatl hopefully this small, hopefully few and far berneen. I'm sorry, could never promise you no 

mistakes. This one, we will put in egregious category and I understand full why you or anyhody else will question 

us generally. 

Mike Mayo Q And lastly, just one last follow-up. You said you had some smaller losses in the first quarter whether - even in 

retrospect were there any sings that perhaps you should have paid more attention to looking back? 

Jamie Dimon A Yes. In retrospect, yes. 

Mike Mayo Q What would those be? 

Jamie Dimon A 

Trading losses. 

Mike Mayo Q 

Okay. So actually ... 

Jamie Dimon ,A There is Some stuff in the newspaper and bunch of other stuff. 

Mike Mayo Q Got it. 

Jamie Dimon A 

Hindsight is - even in hindsight, it's not 20/20. But with hindsight, yes, obviously, we should have been paying 

more attention to it. 

Mike Mayo 

All right. Thank you. 

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Jamie Dimon 

Yeah. You're welcome. 

Operator; Your next question is from Chris Kotowski with Oppenheimer. 

Chris Kotowski 

I Raw Transcript 

10-May-2012 

A 

Q Yeah. Hi. You said that you still have an $8 billion gain in the AFS securities portfolio. So should we assume that 

that's the combination of some gains and sort of the plain vanilla investment portfolio securities that you normally 

have and then a negative position here? 

Jamie Dimon 

No. The $8 billion - the synthetic credit is mark-ta-market. There are no unrealized gains or losses. The AF 

portfolio is held at cost. The $8 billion is an unrealized gain in the AFS portfolio. And if you go to our lO-Q, you 

could see exactly where those gains reside as of December 31st. 

Chris Kotowski Q 

Okay. 

Jamie Dimon A 

Okay. They're in positions all over from mortgages, etcetera. 

Chris Kotowski Q 

All right . 

. Jamie Dimon A And we can take some of those gains ... 

Chris Kotows ki Q 

Okay. 

JamieDimon ,,-\ 

We can take some of those gains, and we can take them to offset this loss. We can take them because we want to 

reduce other exposures. But usually, it's tax inefficient. So we're very careful about taking gains. 

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Chris Kotowski 

III Raw Transcript 

10·May-2012 

Q 

Right. And so when you said this quarter there was $1 billion of gains and a $2 billion trading loss, the $1 billion of 

gains, that was in other portfolios. It had nothing to do with these. 

Jamie Dimon A No. The $1 billion of gains is in theAFS portfolio. On March 31st, it had an $8 billion unrealized gain. We realized 

$1 billion of it, bringing it down to $7 billion, but it's higher today than it was then. So it should be something 7-

plus right now. 

Chris Kotowski Q 

Okay. And I have a feeling, I know the answer, but obviously in a skittish world where people are always worked 

about exposures to pigs and all these kinds of things and there is always a feeling that one can rarely get the real 

exposures, is there any way you can draw a box around how big the bread box is and ... 

Jamie Dimon A I've already done that for you, to the extent I am going to do it. 

Chris Kotowski Q 

Okay. Thank you. 

Jamie Dimon A 

You',re welcome. 

Operator: Your next question is from Keith Horowitz with Citigroup. 

Keith Horowitz Q 

Hey Jamie. Thanks for coming clean on this and I think it's important that you did, I guess the question I really 

had is you are open about the strategy that was poorly monitored, but the real question I guess I had is do you feel 

that the hedge put on, the position put ort, was the intention really to hedge or do you feel like the person you put 

it on, his intention for profits [ph] or to make sure ... 

Jamie Dimon A It's been on for a long time, it actually made money. I won't talk about what it did, it actually did quite well. It was 

there to deliver a positive result in a quite stressed environment and we feel we can do that and make some net 

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II Raw Transcript 

10-May-2012 

income. And that was and in the process of changes new environments, new markets and all that! rve already 

described the outcome. 

Keith Horowitz Q 

So we had a stressed environment in terms of credit and so this is where your strategy [ph] didn't work but you 

feel that as you go back and put money more in quarter back and you look at how the position got so big, do you 

feel that itwas done with the intention of trying to hedge the tail risk for JPMorgan? 

Jamie Dimon A I know it was done with the intention to hedge the tail risk for JPMorgan, but I am telling you, it morphed over 

time and the new strategy which was meant to reduce the hedge overall made it more complex, more risky and it 

was unbelievably ineffective. And poorly monitored and poorly constructed and poorly reviewed and aJl that. 

Keith Horowitz Q 

Okay. The other thing on that is you had guidance of 200 million per quarter for corporate and its mostly for 2012 

but as you kind of think longer term for that business line is that a business line you still think will continue to 

make money or is this kind of meant to be more just hedge ... 

Jamie Dimon A It's not a business line for the most part it is net corporate expenses which move around we always give you what 

we think that number is going to be so you can put in your models_ And it's the net income that is not allocated 

from CIO's portfolio to the businesses. The net income from CIO's portfolio is aJlocated on the consistent basis 

and this is the net residuaJ space here. There are aJso other things in corporate that run through this. You know 

there is just a lot of things that run through corporate. So as you know the 200 million was its kind of a guidance 

that bounce around overtime. 

Keith Horowitz Q 

And then the last question is I guess when you thought about the business when you took over and you thought 

about this corporate line business is going to shape up investment office do you feel like the mandate has changed 

over the last five years or do you feel that the mandate is still the same as it was five years ago? 

Jamie Dimon A You know a little change I mean first of all when we got here remember the portfolio went from $150 billion to 

300 there were a lot of cash coming in which we had to invest. And we did - I think we improved - I read 

somewhere that we made it more aggressive I wouldn't call more aggressive I would call better which we added 

different types of people, talented people and stuff like that. That is what we were supposed to do. We will manage 

that flXed income portfolio to maximize the returns to the shareholders and we've been very, very careful. So look 

at aJl the things we've done we've been very careful. So if you look at aJl of the things we've done, we've been very 

careful and, I think, quite successful. And this is obviously not in that category. 

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Keith Horowitz 

Okay. Thank you. 

Jamie Dimon 

I Raw Transcript 

10·May·2012 

Q 

A All right. I should point out to all the folks on the phone, you could see - you can go to the lO-Q and see what 

people have those portfolios. And some banks do some things and some do others, but to invest it in actual [ph] 

deposits, you buy securities. That's been going on for 100 years in banking. 

Operator: [Operator Instructions] Your next question is from Nancy Bush with NAB Research. 

Jamie Dimon A 

Hey, Nancy. 

Nancy Bush Q 

Good afternoon. Obviously, Jamie, the timing of this could not be much worse. And I kind of go back to the 

Voleker issue. If Dick Durbin stands on the floor of the Senate tomorrow and says this is why we need the Voleker 

Rule, what's your replay? 

Jamie Dimon A It is very unfortunate. But the fact of it is this does not change analyses, facts, detailed argument. It is very 

unfortunate. It plays right into all the hands of a bunch of pundits out there, but that's like not to do with that. 

Nancy Bush Q 

Okay. Thank you. 

Operator: There are no further questions at this time. 

Jamie Dimon 

Folks, thank-you very much. We're sorry to have to call you on a short notice for something like this, but we 

appreciate you taking the time. Thank you. 

Operator: Thank you for participating in today's teleconference. At this time, you may no,!, disconnect. 

FAGSET: call street 1-B7HACTSET www.callstreetcom 

19 

Copyright © 2001·2012 FactSet Call Street, LLC 
961 

JPMorgan Chase & Co. (JPM) 

Business Update Call 

Discl<!irner 

I Raw Transcript 

10·May·2012 

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962 

Fehnmry 4. 2ul J 

bdmry L Schram. E~lJ. 

Senior ('(IV mod 

U.S. Scnate I'cnnaneot SUI)<!Olllllliltce on Invo5ligatinrrs 

19Q Russell Senate Oflk~ BuHdiu!.\ 

Washington. D.C 205 W ' 

( I. 

Douglas L. Braunstein 

Vi(€ (hdirman 

I alll "riring 1() d3ril~' one aspect of illY inte,.view with ytlU and ('thers on Sep(cmb.:r I~. 2(J 12, as 

tll \\hkh i Ul1dcN.:llld fWI1l discu~si(\ns wilh Illy ",'unsellhallh"rc may bl.' ;;\>l11e Illisund~rslanding. 

By "ny nfhac.kgwund. h"rwl.'en AnTi! 5 :lI1d April 13, 1 r"~ci\,,d inliJrmmiol1 ,jxllll a IIU111h.:r,'!' 

,,'urGes regarding the CIOILollti"" Whale is."" During that pCli",l. tlll!d rlum"",,us cwwcrsali(ln' with 

loa Drc". J.P. MClrgml', Chierhll'estmcnl Offkl'f. 1l1~ll1bers nfbcr LOlldofl,oased t<'Hm. including CIO's 

Chief Risk om"~1 and Chief Fimmdal OITiccr, liS well as wilh 1(,1111 Hogan. J.P. Morgan'~ ChierRi~~ 

Officer. I aiM' reviewed s,:vcr:J1 rrc"~lltali()I1S relating 10 the no's trading strategy and the 'Iatus (lfthc 

SYnlhclic Credit Book as of April. During Ill ... illl';f\'iew, I spcciiic~ll)' re-.::allc(L and direcll,d your 

ancntion to. 111 .. "Synthetic ere,iil Stllnn!:!ry: Risk &. l'iL Scenario,," an eighl-page presentation prepal'l.'(l 

M\ tll<i Londo" \crun. with input ( .. ,lOt es. Venkat.;,krislman and (Jlh'ier Vigemon in Kbk Management. 

Thai prl'SCnlalioo was p1'<lvidcd to me ami "thors ,)jj <\prll 11. I 'l'cdlie:dly recall Lhatl referred to 1)lIg" 

.seven pfthal pn:st'nlatipn a;; ""<' "rlhe base, ti'r my ,ialcmcm<J1l April 13 fhal J.I'. M!lrgan was "\,I.'l') 

cOllllhrtaf,Ic" wilh Ihe posili,»1s. and I directed ~"ur attention In Ihe ccmral scenarios included on thai 

page dc,crihill~ an 80% likdih""d of;1 rang.e of nulcmnes hetWl'Cllll loss or $::!50 million and a gain fir 

$35<1 million. 

I "bh to clarifY (WI! Pt111l1S. First. Illid 11<)\ Slfile during Ih" illler";,,w thaI Iliad rclk-d OIl page 

se\'cn of Ihe April! 1 pr~sel1lati"'l for my undcr;-'Iandillg regarding the hcuging chnrac(cristks ofthc 

portfnliu. Second. my stall"111cnts 011 April 13 regarding Lhose hedging characteristics were rclcrencl!s to 

th~ I"'rtlitlil)', {ksign lIlId hisINicall).'l'f(lrmaflt~ llS n h~dge. ! Wlb lUll commenting 1)fI the hedging 

cffl'cti\'clle~, nrth~ pr>nf(,lir>", or ApriliJ. 

I hope lhi~ infclOllillinn i,; helplill In y\lll lll1d Y~)lIr COIlClI)!m:>, I'h:aw COlllilel Reg Bmwn (lI)2-

6bl-!>~3iil nr I laITY W..:;ss (2(J~-M,:;-6q9) I if)"u h~ve any lunl"'f Ilucslilln~. 

Sinc~rcJy yours. 

Doug Bl'llunstcin 

.:"10 PC]I'~ i'\"".:fJW~ Npw "'!Jtr, N"W'Y1;tf1<: WiJr:';:')i4 

Tt."f~pfli'f~" i~' ~>// '.(HO ;:'>l~Siitj\~ '1J}' ,It,.'i 1':.}8 df:!i.['],l,_l: ,!Lll·,i''l-ij(.'JIJ\fHi'~''.~li.~ 'nl 

ermanent Subcommittee 00 Investi ations PSI·JPMC-35-000001 

EXHIBIT #97 
963 

Report of JPMorgan Chase & Co. Management Task Force 

Regarding 2012 CIO Losses 

January 16,2013 

Permanent Subcommittee on lnvesti ations 

EXHIBIT #98 
964 

TABLE OF CONTENTS 

I. Executive Summary ...................................................................................................................... 1 

A. Summary of Events ......................................................................................................... 2 

B. Key Observations ............................................................................................................ 7 

C. Remedial Measures ....................................................................................................... 14 

II. Key Facts ................................................................................................................................... 18 

A. Relevant Personnel ........................................................................................................ 18 

B. Overview ofCIO and its Functions .............................................................................. .21 

C. Key Events .................................................................................................................... 25 

1. Trading ............................................................................................................... 25 

2. Valuation ............................................................................................................ 46 

3. The "London Whale" Story and Senior Management's Response .................... 56 

4. Continued Declines and Internal Reviews ......................................................... 70 

5. Disclosure of the Losses .................................................................................... 72 

D. Risk Limits and Excessions .......................................................................................... 75 

1. Value at Risk ...................................................................................................... 77 

2. Credit Spread Basis Point Value ........................................................................ 80 

3. Credit Spread Widening 10% and Stress Loss .................................................. 82 

III. Key Observations ..................................................................................................................... 83 

A. CIO Judgment, Execution and Escalation in the First Quarter of2012 Were Poor ..... 84 

I. The Priorities ...................................................................................................... 85 

2. The Trades ......................................................................................................... 85 

3. The Reporting .................................................................................................... 86 

4. The Concerns ..................................................................................................... 86 

5. The Marks .......................................................................................................... 89 

6. The Estimates ..................................................................................................... 89 

7. Compensation Issues .......................................................................................... 91 

B. The Firm Did Not Ensure that the Controls and Oversight of CIa Evolved 

Commensurately with the Increased Complexity and Risks of Certain CIO 

Activities ................................................................................................................ 93 

C. CIO Risk Management Was Ineffective in Dealing with Synthetic Credit Portfolio ... 97 

D. Risk Limits for CIO Were Not Sufficiently Granular. ................................................ 103 

E. Approval and Implementation ofCIO Synthetic Credit VaR Model 

Were Inadequate .................................................................................................. 104 

IV. Remedial Measures ................................................................................................................ 106 

A. CIO Leadership, Governance, Mandate and Processes Revamped ............................ 106 

1. Team ................................................................................................................ 106 

2. Governance ...................................................................................................... 108 
965 

3. Mandate ............................................................................................................ 110 

4. Reporting and Controls .................................................................................... 110 

B. Risk Self-Assessment and Risk Management Changes ............................................. .112 

1. Model Governance and Implementation ......................................................... .113 

2. Market Risk and Governance ........................................................................... 114 

3. Risk Independence ........................................................................................... 116 

C. Finn-wide Risk Governance and Organization ........................................................... 116 

1. Risk Governance .............................................................................................. 117 

2. Risk Organization ............................................................................................ 117 

V. Conclusion .............................................................................................................................. 119 

Appendix A: VaRModeling ........................................................................................................ 121 

A. Development of the New VaRModel... ...................................................................... 122 

B. Operation of the V aR Model ....................................................................................... 127 

C. Discovery of Problems with the New VaR Model and Discontinuance ..................... 128 
966 

This Report summarizes the review ofthe JPMorgan Chase & Co. ("JPMorgan" or the 

"Firm") Management Task Force regarding the losses incurred in 2012 by the Firm's Chief 

Investment Office ("CIO").! These observations are based on a review conducted by the Task 

Force and its legal advisors, which has included a significant number of interviews of current and 

former JPMorgan employees, and an examination of millions of documents and tens of 

thousands of audio files. The Task Force has shared and discussed these observations with the 

Review Committee established by the Board of Directors (the "Board") as well as the full Board. 

I. Executive Summary 

This Report addresses three basic questions. First, it addresses what happened by 

describing the trading strategies and activities that in 2012 led to large losses in a portfolio 

managed by CIO (the "Synthetic Credit Portfolio"). Second, the Report addresses how it 

happened by offering observations about the flawed trading strategies, lapses in oversight, 

deficiencies in risk management, and other shortcomings this incident has highlighted. Finally, 

the Report addresses where the Firm is now by summarizing the comprehensive remedial 

measures the Firm has undertaken in light of the lessons learned. 

1 The Task Force was led by Michael Cavanagh, currently co-Chief Executive Officer of the Corporate 

and Investment Bank. 
967 

A. Summary of Events2 

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. The Synthetic Credit Portfolio was composed of both long and short positions in 

credit default swap indices and related instruments.3 

By late December 2011, CIO was considering major changes to the Synthetic Credit 

Portfolio, both because senior Firm management and CIO management had a more positive view 

of the economy, and because the Firm was in the midst of an effort to reduce its "risk-weighted 

assets" ("RWA"), in connection with which senior Firm management directed CIO to reduce 

RWA. Tn particular, CIO was considering reducing the size of the Synthetic Credit Portfolio 

and, as explained afterwards by CIO, also moving it to a more credit-neutral position (a shift 

from its short risk orientation in the fourth quarter of 20 11). CIO was led at this time by the 

2 The description of "what happened" is not a technical analysis of the Synthetic Credit Portfolio or the 

price movements in the instruments held in the Synthetic Credit Portfolio. Instead, it focuses on the 

trading decision-making process and actions taken (or not taken) by various JPMorgan personnel. The 

description of activities described in this Report (including the trading strategies) is based in significant 

measure on the recollections of the traders (and in particular the trader who had day-to-day responsibility 

for the Synthetic Credit Portfolio and was the primary architect ofthe trades in question) and others. The 

Task Force has not been able to independently verifY all of these recollections. 

3 In simple terms, positions in credit default swap indices can be analogized to buying protection similar 

to insurance policies on the credit risk presented by groups of companies. Trader A sells Trader B 

protection (in the form of credit default swaps) against a range of corporate credit events (for example, 

bankruptcy, failure to pay, and/or restructuring) in exchange for periodic premiums. In this scenario, 

Trader A is said to be "long risk" and Trader B is "short risk." Unlike most insurance policies, it is 

unnecessary for the buyer of protection to own the underlying credit risk. 

2 
968 

Firm's Chief Investment Officer, Ina Drew, and responsibility for implementing these changes 

belonged primarily to her, together with the Synthetic Credit Portfolio's managers and traders.4 

CIO initially considered achieving these goals by unwinding some of the positions in the 

Synthetic Credit Portfolio, including certain high-yield short positions. In mid-January, 

however, one of the traders advised Ms. Drew that their unwind efforts had been costly. In 

response, Ms. Drew said that the team might have additional flexibility on the R W A reduction 

mandate, and that the team should be more sensitive to the profit-and-loss impact of their trading 

activities. Thereafter, that trader informed another ofthe traders who managed the Synthetic 

Credit Portfolio that he was not to worry as much about RW A reduction, and that he should 

instead focus on profits and losses. Around this same time, this latter trader was also directed to 

ensure that the Synthetic Credit Portfolio was well-positioned for future corporate defaults. 

In the ensuing weeks, the traders began to add substantially to their investment-grade 

long positions, and by January 26, the Synthetic Credit Portfolio had a roughly credit-neutral 

positionS (as reflected in a measure called CSW 10%).6 By the end of January, the portfolio's 

4 The names of certain UK-based individuals have been excluded from this document in order to comply 

with United Kingdom data privacy laws. 

5 It continued to fluctuate thereafter. 

6 Credit spread widening of 10% ("CSW 10%") is one of several different measurements of how long or 

short risk a eredit book is. CSW 10% stresses all credit spreads in a book upwardly by 10% and then 

calculates the resulting profit-and-Ioss effect. This one measure is not determinative ofthe overall risk 

status ofa portfolio as complex as the Synthetic Credit Portfolio. CSW 10% assumes that all spreads on 

all instruments for all maturities change by the same percentage at the same time. CSW 10% ignores the 

historical relationships among various instruments as well as any relationships among them that may be 

inferred from the market, both of which might provide a more realistic risk predictor. In addition, CSW 

3 
969 

year-to-date, mark-to-market losses were approximately $100 million. The traders continued to 

add to the investment-grade long positions in February. The concept of "defending" their 

positions may have played a role in these transactions.7 The traders also at this time began to 

add substantial high-yield short positions. The traders hoped that the combined effect of these 

additions would allow them, among other things, to earn premiums (from the addition of the long 

positions); position the Synthetic Credit Portfolio to earn revenues in the event of corporate 

defaults (from the short positions); and potentially prevent RWA from substantially increasing 

(from a combination of both). The losses continued to grow, however: by the end of February, 

the Synthetic Credit Portfolio had experienced an additional $69 million in reported mark-tomarket losses. 

The traders continued to grow the Synthetic Credit Portfolio throughout much of March. 

In the latter half of the month, the traders concluded that the portfolio remained short 

(notwithstanding the fact that under CSW 10%, it appeared relatively balanced), and they 

therefore significantly added to its long exposure over the course of several days. By the time 

Ms. Drew suspended trading in the portfolio on or about March 23, the traders had significantly 

increased both the overall notional size and the long exposure of the Synthetic Credit Portfolio. 

10% does not reflect the impact on a portfolio of a corporate default. The CSW 10% measure is 

explained in more detail in Section ILO.3. 

7 For an explanation of "defending" positions, see Section II.C.1. 

4 
970 

The portfolio's year-to-date mark-to-market losses as of the end of the first quarter of2012 were 

approximately $718 million.s 

On April 5, Ms. Drew informed the JPMorgan Operating Committee that the Wall Street 

Journal and Bloomberg were planning to run stories about CIO's trading and specifically about 

one trader, who was referred to in the articles as the "London Whale." CIO was asked to and did 

provide information and analyses about the Synthetic Credit Portfolio to JPMorgan Chief 

Executive Officer Jamie Dimon, Chief Financial Officer Douglas Braunstein and Chief Risk 

Officer John Hogan. These analyses concluded, in broad terms, that the Synthetic Credit 

Portfolio was generally "balanced," that the market was currently dislocated, and that mark-tomarket losses were temporary and manageable. One of the traders in particular expressed 

confidence that mark-to-market prices in the Synthetic Credit Portfolio would "mean revert.,,9 

On an April 13 analyst call, Mr. Dimon agreed with an analyst'S characterization of the pUblicity 

surrounding the Synthetic Credit Portfolio as a "tempest in a teapot" and Mr. Braunstein stated 

that the Firm was "very comfortable" with its positions. 

The losses in the Synthetic Credit Portfolio, however, increased in the weeks after the 

April 13 earnings call. These losses prompted senior Firm management in late April to direct 

8 This figure includes a $155 million liquidity reserve that was taken on certain of the portfolio's 

positions, but does not reflect the additional losses reported in the Firm's first-quarter restatement 

described in Section IT.C.5. 

9 in this context, the phrase "mean revert" refers to the potential for the prices or correlations of certain 

instruments held in the Synthetic Credit Portfolio to return to their historic average relationships to other 

instruments. 

5 
971 

non-CIO personnel to review and, ultimately, assume control of the Synthetic Credit Portfolio. 

A team led by a senior member of Firm-wide Market Risk examined the portfolio, and after 

analyzing, among other things, correlations of the positions and sensitivities under a range of 

market scenarios, the team concluded - and informed senior Firm management - that the 

portfolio faced much greater exposure than previously reported by CIO. The team also found 

that the market's knowledge of CIO's positions would make it even more challenging to reduce 

the risks presented by those positions. 

In addition to this risk-related review, in preparation for the filing of its Form 10-Q for 

the first quarter of2012, the Firm undertook a review relating to the valuations of certain 

positions in the Synthetic Credit Portfolio. Based on this review, the Firm concluded that its 

marks at March 31 for the Synthetic Credit Portfolio complied with U.S. Generally Accepted 

Accounting Principles ("U.S. GAAP"). This conclusion was reached in consultation with the 

Finn's outside auditors, PricewaterhouseCoopers LLP ("PWC"). 

On May I 0, the Firm disclosed that there were significant problems with the trading 

strategy for the Synthetic Credit Portfolio. In Mr. Dimon's words, the strategy was "flawed, 

complex, poorly reviewed, poorly executed, and poorly monitored:' The Finn disclosed that the 

Synthetic Credit Portfolio had incurred slightly more than $2 billion in mark-to-market losses up 

to that point in the second quarter, with the possibility of additional future losses and volatility. 

Shortly after May 10, a Task Force was formed to investigate the causes of the losses. In 

the course of the Task Force's ensuing work, it became aware of evidence - primarily in the 

6 
972 

form of electronic communications and taped conversations - that raised questions about the 

integrity of the marks in the Synthetic Credit Portfolio in March 2012. After consulting with 

PwC, the Firm concluded that it was no longer confident that the March 31 marks reflected 

good-faith estimates of the fair value of all the instruments in the Synthetic Credit Portfolio. 

Accordingly, on July 13, the Firm announced that it would be restating its first-quarter net 

income, to lower it by $459 million. At the same time, the Firm also announced that it had been 

expeditiously reducing risk in the Synthetic Credit Portfolio and that the cumulative year-to-date 

losses through June 30, 2012 had grown to approximately $5.8 billion. 

B. Key Observations 

The Task Force has made five key observations based on its review. These observations 

reflect the Task Force's view that direct and principal responsibility for the losses lies with the 

traders who designed and implemented the flawed trading strategy. They also reflect the Task 

Force's view that responsibility for the flaws that allowed the losses to occur lies primarily with 

CIO management but also with senior Firm management. 

To this end, and before outlining its Key Observations, the Task Force offers its 

perspective on the roles of some ofthe Firm's senior-most managers in these events. In 

particular, the Task Force believes that as the Firm's ChiefInvestrnent Officer, Ina Drew failed 

in three critical areas with respect to the Synthetic Credit Portfolio: first, by failing to ensure that 

CIO management properly understood and vetted the flawed trading strategy and appropriately 

monitored its execution; second, by failing to ensure that the CIO control functions - including 

7 
973 

the CIO Risk and Finance organizations were performing well and were providing effective 

oversight ofCIO's trading strategy; and, third, by failing to appreciate the magnitude and 

significance of the changes in the Synthetic Credit Portfolio during the first quarter of20l2, 

including the increases in RW A, size, complexity and riskiness of the portfolio. 

The Task Force also believes that Barry Zubrow, as head of the Firm-wide Risk 

organization before he left the position in January 2012,10 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 perfonned ineffectively as the portfolio grew in size, complexity and riskiness 

during that period. 

As the Firm's Chief Financial Officer, Douglas Braunstein bears responsibility, in the 

Task Force's view, for weaknesses in financial controls applicable to the Synthetic Credit 

Portfolio, as well as for the CIO Finance organization's failure to have asked more questions or 

to have sought additional information about the evolution ofthe portfolio during the first quarter 

of20l2. This includes the failure by CIO Finance to have sufficiently questioned the size ofthe 

positions, the increase in RW A notwithstanding the RW A reduction mandate and the Synthetic 

10 John Hogan, who succeeded Mr. Zubrow as the Finn's Chief Risk Officer in January 2012, did not 

have sufficient time to ensure that the CIa Risk organization was operating as it should. Nevertheless, 

the Task Force notes that there were opportunities during the first and second quarters of 2012 when 

further inquiry might have uncovered issues earlier. 

8 
974 

Credit Portfolio's profit-and-loss perfonnance. And while the Task Force believes that the 

principal control missteps here were risk-related, the CIO Finance organization could have done 

more. That they did not stems, in part, from too narrow a view of their responsibilities i.e., a 

view that many of the issues related to the Synthetic Credit Portfolio were for the Risk 

organization and not for Finance to flag or address. 

The Task Force's views regarding Finn Chief Executive Officer Jamie Dimon are 

consistent with the conclusions he himself has reached with respect to the Synthetic Credit 

Portfolio. Mr. Dimon has stated: 

CIO, particularly the Synthetic Credit Portfolio, should have gotten 

more scrutiny from both senior management, and I include myself 

in that, and the Finn-wide Risk control function. . . .. Make sure 

that people on risk committees are always asking questions, 

sharing infonnation, and that you have very, very granular limits 

when you're taking risk ..... In the rest of the company we have 

those disciplines in place. We didn't have it here. 

* * * 

These were egregious mistakes. They were self-inflicted, we were 

accountable and what happened violates our own standards and 

principles by how we want to operate the company. This is not 

how we want to run a business. 

As Chief Executive Officer, Mr. Dimon could appropriately rely upon senior managers who 

directly reported to him to escalate significant issues and concerns. However, he could have 

better tested his reliance on what he was told. This Report demonstrates that more should have 

been done regarding the risks, risk controls and personnel associated with CIO's activities, and 

9 
975 

Mr. Dimon bears some responsibility for that. Importantly, once Mr. Dimon became aware of 

the seriousness of the issues presented by CIO, he responded forcefully by directing a thorough 

review and an internal program of remediation. Mr. Dimon reports to the Board, and the Board 

will weigh the extent ofMr. Dimon's responsibility. 

* * * * * 

The Task Force's five key observations are summarized as follows: 

First, CIO'sjudgment, execution and escalation of issues in the first quarter of2012 were 

poor, in at least six critical areas: (I) CIO management established competing and inconsistent 

priorities for the Synthetic Credit Portfolio without adequately exploring or understanding how 

the priorities would be simultaneously addressed; 11 (2) the trading strategies that were designed 

in an effort to achieve the various priorities were poorly conceived and not fully understood by 

CIO management and other CIO personnel who might have been in a position to manage the 

risks of the Synthetic Credit Portfolio effectively; (3) CIO management (including CIO's 

Finance function) failed to obtain robust, detailed reporting on the activity in the Synthetic Credit 

Portfolio, and/or to otherwise appropriately monitor the traders' activity as closely as they should 

have; (4) CIO personnel at all levels failed to adequately respond to and escalate (including to 

senior Firm management and the Board) concerns that were raised at various points during the 

II As discussed below, these priorities iocluded (1) balancing tbe risk in the Synthetic Credit Portfolio, (2) 

reduciog RWA, (3) managing profits and losses, (4) managing or reducing VaR, and (5) providing "jumpto-default" protection. 

10 
976 

trading; (5) certain of the traders did not show the full extent of the Synthetic Credit Portfolio's 

losses; and (6) CIO provided to senior Firm management excessively optimistic and inadequately 

analyzed estimates of the Synthetic Credit Portfolio's future performance in the days leading up 

to the April 13 earnings call. 

The Task Force has also considered whether compensation might have played a role in 

these matters. Here, the Task Force has concluded that, although the Firm could have done a 

better job in communicating to the traders that they would be fairly compensated 

notwithstanding the eventual wind-down ofthe Synthetic Credit Portfolio, the Firm's 

compensation system did not unduly incentivize the trading activity that led to the losses. 

Second, the Firm did not ensure that the controls and oversight of CIO evolved 

commensurately with the increased complexity and risks ofCIO's activities. As a result, 

significant risk management weaknesses developed within cro that allowed the traders to pursue 

their flawed and risky trading strategies. On this point, the Task Force has concluded that senior 

Firm management's view ofCIO had not evolved to reflect the increasingly complex and risky 

strategies CIO was pursuing in the Synthetic Credit Portfolio; instead, they continued to view 

CIO as the manager of a stable, high-quality, fixed-income portfolio. As a result, they were less 

focused on CIO relative to client-facing businesses, and did not do enough to verify that cro 

was well managed or that the Firm was fully applying its various risk and other controls to the 

11 
977 

Synthetic Credit Portfolio's activities.J2 Compounding the matter, the CIO Finance function 

failed to ensure that its price-testing procedures for the Synthetic Credit Portfolio were being 

properly and rigorously implemented, and that it produced robust reporting and analytics 

regarding the portfolio's performance and characteristics. More generally, although primary 

responsibility for managing risk lies with the business head and Risk organization, the CFO of 

CIO (like the other members of CIO senior management) missed a number of opportunities 

during the first quarter to meaningfully challenge the trading strategy. 

Third, CIO Risk Management lacked the personnel and structure necessary to manage the 

risks of the Synthetic Credit Portfolio. 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. 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 

12 The Task Force recognizes that, by the time the Finn's new ClllefRisk Officer was appointed in 

January 2012, separate initiatives were underway both to ensure that appropriate risk management 

practices were in place throughout the Finn, and to review and revamp risk limits within CIO. These 

initiatives came too late to prevent the losses. 

12 
978 

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. 

CIO Risk Management made a number of key missteps, including failures to (I) review 

the appropriateness of the CIO risk limits used from 2009 to 2012; (2) ensure that the change to 

the CIO Value-at-Risk ("VaR") model for the Synthetic Credit Portfolio in January 2012 was 

appropriate and being properly implemented;13 and (3) appreciate thc significance ofthe changes 

in the Synthetic Credit Portfolio during early 2012. 

Fourth, the risk limits applicable to CIO were not sufficiently granular. There were no 

limits by size, asset type or risk factor specific to the Synthetic Credit Portfolio; rather, limits in 

CIO were applied only to CIO as a whole. The absence of granular limits played a role in 

allowing the flawed trading strategies to proceed in the first quarter, especially as the positions 

grew in size. 

Fifth, approval and implementation ofthe new CIO VaR model for the Synthetic Credit 

Portfolio in late January 2012 were flawed, and the model as implemented understated the risks 

presented by the trades in the first quarter of2012. As discussed in detail in Appendix A, the 

]3 For more information on the issues that were identified by the Task Force with respect to the action 

plaos embedded in the CIa VaR model's approval, see Appendix A below. 

13 
979 

model suffered from significant operational shortcomings that received inadequate scrutiny by 

CIO Market Risk, the Model Review Group, and the model's developer in the model approval 

process. Moreover, although the model produced significantly different results from its 

predecessor, the personnel involved in reviewing and approving the new model required only 

limited back-testing. 

C. Remedial Measures 

The Firm has taken comprehensive remedial steps to address deficiencies identified since 

the losses. These include the following: 

First, the Firm has replaced the individuals within CIO responsible for the losses. It has 

terminated the employment or accepted the resignations ofthe traders and managers who were 

responsible for the trades that generated the losses, and is pursuing the maximum clawback of 

their compensation. It has also accepted Ms. Drew's retirement, as well as her voluntary 

agreement to return or waive amounts that the Firm otherwise deemed subject to a c1awback.14 

The Firm has also substantially reduced (in some cases, to zero) the 2012 incentive 

compensation for a number of employees and, in addition to reductions for specific CIO 

employees, has also reduced the 2012 incentive compensation pool for all ofCrO. 

14 Three of the individuals whose employment was terminated also subsequently agreed to the Firm's 

c1awback demaods. In addition, as described in Section IV .A.2, the Firm also expaoded the existing 

protection-based vesting provisions in certain equity awards to include a specific threshold for CIO. 

These provisions permit the Firm to conduct a review of ao employee's compensation in the event the 

fmaocial results for that employee's business or function fall below a certain threshold aod, as 

appropriate, claw back portions of that employee's compensation. 

14 
980 

Second, the Firm has appointed a new, experienced CIO leadership team, headed initially 

by Matthew Zames and now by Craig Delany as the new ChiefInvestment Officer,15 Marie 

Nourie as the new CIO Chief Financial Officer, and Chetan Bhargiri as the new Chief Risk 

Officer for CIO, Treasury and Corporate. The new leadership team began promptly to reposition 

CIO to focus on its basic mandate, and the Firm also has increased resources for key support 

functions within CIO, including Finance and Risk Management. 

Third, the Firm has adopted a variety of governance measures to improve its oversight of 

CIO, and ensure that CIO is better integrated into the rest of the Firm. For example, the Firm has 

instituted new and robust committee structures within CIO, and has taken steps to enhance the 

Firm's internal audit coverage of CIO activities and ensure tight linkages among CIO, Corporate 

Treasury and other operations within the Firm's Corporate sector. 16 The Firm has also integrated 

the existing CIO Valuation Control Group ("VCG") staff into the Investment Bank's Valuation 

Control Group. In addition, the Firm has established a CIO Valuation Governance Forum 

("VGF") as part of a Firm-wide initiative to strengthen the governance of valuation activities. 

The Firm has also mandated that the CIO Corporate Business Review be condl!cted with 

increasing frequency, and with the same rigor as similar reviews for the Firm's client-facing 

lines of business. 

15 Mr. Delany reports to Mr. Zames, who has been named co-Chief Operating Officer of the Firm. 

16 The Corporate sector (also referred to as the "CorporateiPrivate Equity" sector) comprises Private 

Equity, Treasury, ChiefInvestment Office, and Other Corporate, which includes corporate staff units 

(such as Audit, Finance, Human Resources, and others) and other centrally managed expense. 

15 
981 

Fourth, the Firm has overhauled the Risk Committee for CIO and enhanced the 

independence of the CIO Risk function. For example, the new CIO Chief Risk Officer's 

functional reporting practices now conform to his official reporting line; there is no confusion 

about his accountability to the Firm-wide Risk function. His compensation and career 

advancement will be controlled by the Firm Chief Risk Officer, with input about his performance 

from others, as appropriate. CIO's Risk Committee has been renamed the CIO, Treasury and 

Corporate Risk Committee, and now has broader responsibilities, covering Treasury and 

Corporate functions as well as CIO, and significant representation beyond CIO. The committee 

now meets on a weekly basis. Meetings are chaired by Mr. Bhargiri as the Chief Risk Officer for 

CIO, Treasury and Corporate, and Mr. Zames as the Finn's co-Chief Operating Officer. 

Attendees also now include other members of senior management, from within and outside of 

CIO. 

Fifth, CIO has implemented more than 200 new or restructured risk limits covering a 

broad set of risk parameters, including geographic and concentration risks. With respect to the 

Synthetic Credit Portfolio in particular, a total of25 new granular limits were applied in May 

2012, including limits specific to the Synthetic Credit Portfolio and limits measuring geographic 

exposure, credit-type exposure, single-index positions (effectively a notional-type limit), and 

curve shifts and compression. 

Finally, under the guidance of its Chief Risk Officer, the Firm has conducted a 

comprehensive self-assessment ofits entire Risk organization and, as a result, has implemented a 

16 
982 

series of improvements both Finn-wide and within the lines of business. In addition to working 

to improve model development, review, approval, and monitoring, the Finn is reaffinning and, 

where appropriate, revising its market risk limits across all ofits lines of business, and has 

already introduced additional granular and portfolio-level limits. It has strengthened the Firmwide limit excession policy to provide for more rapid escalation and a more thorough review. It 

is working to further improve market-risk reporting, and has made substantial enhancements to 

risk reports presented to the Board of Directors' Risk Policy Committee ("DRPC,,).17 The Finn 

also has restructured its Finn-wide Risk Operating Committee in order to increase focus on 

identifying and implementing best practices across the Finn. Finally, the Finn has enhanced the 

structure of its Risk Governance Committee and established a Finn-wide Risk Committee. 

The Task Force noted that while substantial progress has been made with respect to each 

ofthese initiatives, the Finn considers the improvement of its risk practices to be a continuing 

exercise and thus, its work in this area is ongoing. 

17 According to its charter, the DRPC is responsible for oversight of management's responsibilities to 

assess and manage the corporation's credit risk, market risk, interest rate risk, investment risk, liquidity 

risk and reputation risk, and is also responsible for review of the Firm's fiduciary and asset management 

activities. 

17 
983 

II. Key Facts 

A. Relevant Personnel 

The key individuals discussed in this Report include: 

Senior Firm ManaRement 

• Jamie Dimon: Mr. Dimon is the Chief Executive Officer and Chairman of 

JPMorgan. Mr. Dimon became CEO on January 1,2006, and one year later also 

became Chairman of the Board. He was named President and Chief Operating 

Officer upon the Firm's merger with Bank One Corporation on July 1,2004. 

• Douglas Braunstein: Mr. Braunstein was the Chief Financial Officer and a 

member of the Operating Committee1B of JPMorgan between 2010 and the end of 

2012, reporting until July 2012 to Mr. Dimon and thereafter to Mr. Zames. He 

recently stepped down from his role as CFO and currently serves as a Vice 

Chairman ofthe Firm. Marianne Lake, the former Chief Financial Officer of the 

Firm's Consumer & Community Banking business, succeeded Mr. Braunstein as 

CFO. 

• John Hogan: Mr. Hogan is the Chief Risk Officer and a member ofthe 

Operating Committee of JPMorgan, reporting to Mr. Dimon. Mr. Hogan was 

18 The Operating Committee is the most senior management committee responsible for the major lines of 

business and functions of tbe Firm. 

18 
984 

appointed to this position in January 2012, and previously served as the Chief 

Risk Officer for JPMorgan's Investment Bank since 2006. 

• Barry Zubrow: Mr. Zubrow is the Head of Corporate and Regulatory Affairs. 

He previously served as Chief Risk Officer of JPMorgan. He reported to Mr. 

Dimon from the date he joined the Firm in 2007 until July 2012, when he began 

reporting to Mr. Zames. He served on the Firm's Operating Committee from 

2007 until October 2012. Mr. Zubrow announced his retirement from JPMorgan 

in October 2012; his retirement is effective February 2013. 

CIO Management and Traders 

• Ina Drew: Ms. Drew was .TPMorgan's Chiefinvestment Officer from 2005 until 

May 2012, when she retired from the Firm. She was a member of the Firm's 

Operating Committee and reported to Mr. Dimon. 

• Other UK-based CIO managers and traders with responsibility for the Synthetic 

Credit Portfolio who are not named in this document due to United Kingdom data 

privacy laws. 

CIO Risk Personnel 

• Irvin Goldman: Mr. Goldman was CIO's Chief Risk Officer from January 

through mid-May 2012, reporting to Mr. Hogan with "dotted line" reporting to 

Ms. Drew. Prior to becoming Chief Risk Officer, Mr. Goldman had served as 

CIO's Head of Strategy. He resigned in July 2012. 

19 
985 

• Peter Weiland: Mr. Weiland was the Head of Market Risk for CIO and the most 

senior risk officer within CIO prior to mid-January 2012, when he began 

reporting to Mr. Goldman. Mr. Weiland resigned in October 2012. From 2009 

until mid-January 2012, Mr. Weiland reported to Mr. Zubrow, with "dotted line" 

reporting to Ms. Drew. From January 2012 until May 2012, Mr. Weiland 

reported to Mr. Goldman. Thereafter, Mr. Weiland reported to Mr. Bhargiri until 

October 2012. 

CIO Finance Personnel 

• John Wilmot: From January 2011 to mid-May 2012, Mr. Wilmot was CIO's 

Chief Financial Officer, reporting to Ms. Drew, with "dotted line" reporting to 

Mr. Braunstein. Prior to serving as the CFO ofCIO, Mr. Wilmot was responsible 

for Bank Owned Life Insurance and JPMorgan Partners Private Equity 

Investments within CIO. Mr. Wilmot has announced his resignation and is 

expected to leave JPMorgan in 2013. 

Other CIO Personnel 

• Other UK-based CIO personnel who were involved at various times with the 

Synthetic Credit Portfolio but who are not narned in this document due to United 

Kingdom data privacy laws. 

20 
986 

Risk Personnel 

• C.S. Vcnkatakrishnan: Mr. Venkatakrishnan is the Head of Model Risk and 

Development. Mr. Venkatakrishnan assumed this position in February 2012, and 

reports to Mr. Hogan. Prior to February 2012, Mr. Venkatakrishnan was the Head 

of Investment Bank Structuring and Pricing Direct. 

• Other UK-based Risk Personnel who were involved at various times with the 

Synthetic Credit Portfolio but who are not named in this document for data 

protection purposes. 

B. Overview of CIO and its Fnnctions 

JPMorgan is a global financial services firm and one ofthe largest banking institutions in 

the United States, with more than 250,000 employees. The Firm had $2.3 trillion in assets and 

$183.6 billion in stockholders' equity as of December 31, 2011. The Firm's major businesses 

include financial services for consumers and small businesses (including mortgage lending, 

student and auto lending, credit card lending and branch banking), commercial banking, financial 

transaction processing, investment banking and asset management. 

JPMorgan's businesses take in more in deposits than they make in loans and, as a result, 

the Firm has excess cash that must be invested to meet future liquidity needs and provide a 

reasonable return. The primary responsibility ofCIO, working with JPMorgan's Treasury, is to 

manage this excess cash. CIO is part of the Corporate sector at JPMorgan and, as of December 

31,2011, it had 428 employees, consisting of 140 traders and 288 middle and back office 

21 
987 

employees. Ms. Drew ran CIO from 2005 until May 2012 and had significant experience in 

CIO's core functions. 19 Until the end of her tenure, she was viewed by senior Firm management 

as a highly skilled manager and executive with a strong and detailed command of her business, 

and someone in whom they had a great deal of confidence. 

CIO invests the bulk ofJPMorgan's excess cash in high credit quality, fixed-income 

securities, such as municipal bonds, whole loans, and asset-backed securities, mortgage-backed 

securities, corporate securities, sovereign securities, and collateralized loan obligations. The 

bulk of these assets are accounted for on an available-for-sale basis ("AFS"), although CIO also 

holds certain other assets that are accounted for on a mark-to-market basis. 

Beginning in 2007, CIO launched the Synthetic Credit Portfolio, which was generally 

intended to protect the Firm against adverse credit scenarios. The Firm, like other lenders, is 

structurally "long" credit, including in its AFS portfolio, which means that the Firm tends to 

perform well when credit markets perform well and to suffer a decline in performance during a 

credit downturn. Through the Synthetic Credit Portfolio, CIO generally sought to establish 

positions that would generate revenue during adverse credit scenarios (e.g., widening of credit 

19 Prior to assuming her role as the Firm's ChiefInvestment Officer, Ms. Drew had more than 20 years of 

experience performing asset-liability management for the Firm and its predecessors, including as head of 

the Treasury function. 

22 
988 

spreads and corporate defaults) in short, to provide protection against structural risks inherent 

in the Firm's and CIO's long credit profile?O 

The positions in the Synthetic Credit Portfolio consisted of standardized indices (and 

related tranches21 ) based on baskets of credit default swaps ("CDS") tied to corporate debt 

issuers. CIO bought, among other things, credit protection on these instruments, which means 

that it would be entitled to payment from its counterparties whenever any company in the basket 

defaulted on certain payment obligations, filed for bankruptcy, or in some instances restructured 

its debt.22 In exchange for the right to receive these payments, CIO would make regular 

payments to its counterparties, similar to premiums on insurance policies. As described in 

greater detail below, the actual trading strategies employed by CIO did not involve exclusively 

20 Although the Task Force has reviewed certain general background information on the origin of the 

Synthetic Credit Portfolio and its development over time, the Task Force's focus was on the events at the 

end of 20 11 and the first several months of 20 12 when the losses occurred. 

21 CDS index tranches are financial instruments based on a CDS index, where each tranche references a 

different segment of the loss distribution of the underlying CDS index. Tranches have been issued on 

several indices, including the CDX North American Investment Grade Index (the "CDX.NAIG"). The 

lowest tranche, known as the equity tranche, absorbs the first losses on the index due to defaults up to a 

maximum of3% of the total index. The next tranche (mezzanine) absorbs losses of3-7%. Further losses 

are absorbed by higher-ranking tranches (senior and super-senior tranches). In return for being more 

likely to suffer losses, the equity tranche yields the highest coupon (or stream of payments); conversely, 

the super-senior tranche yields the smallest coupon. 

12 For certain indices, the triggering criteria include other types of adverse credit scenarios. The list of 

event~ that trigger payment is established in the CDS contracts, and the question of whether a triggering 

event has occurred is determined by an industry panel convened by the International Swaps and 

Derivatives Association. 

23 
989 

buying protection or always maintaining a net credit short position (under CSW 10%);23 rather, 

CIO traded in an array ofthese products, with long and short positions in different instruments.24 

The standardized indices in which CIO traded are created by a company named Markit, 

and like equity indices, such as the Dow Jones Industrial Average or the S&P 500, these credit 

indices can be used by market participants to express general market views rather than a view as 

to one particular company. There are two primary CDS index groups, CDX and iTraxx. CDX is 

a group of North American and Emerging Markets indices, and iTraxx is a group of European 

and Asian indices. Each index group has a number of more specialized indices, such as those 

focused on "investment-grade" ("10" for CDX, or "MN" for iTraxx) or "high-yield" ("HY" for 

CDX, or "XO" for iTraxx) companies. 

Markit creates a new series of each index every six months; by way of example, the CDX 

investment-grade index issued in September 2012 is "10-19" and a corresponding index issued 

in September 2007 is "10-9." The newly created indices have updated reference entities: new 

companies are added to replace those no longer qualifYing for inclusion in a particular index 

23 The Synthetic Credit Portfolio's trading strategies sought, among other things, to take advantage of 

changes in the relative prices (the "basis") among different CDS indices and tranche instruments. These 

relationships reflect supply and demand in the market, theoretically driven by views on such matters as 

the relative strength of U.S. versus European credit, or investment-grade versus high-yield corporate 

credit; the likelihood of deteriorating credit in the short tenn versus strengthening credit in the longer 

tenn; and the likelihood that there will be some, but not too many defaults. In addition, some market 

participants trade the "skew," or the basis between the index CDS price and prices for the single name 

CDS that make up the index. 

24 Even when the Synthetic Credit Portfolio was net long under CSW 10%, it could still maintain "jumpto-default" protection. 

24 
990 

because of corporate actions, ratings changes, lack ofliquidity or other reasons. The date on 

which a new index is published is referred to as the "roll" date, and because many market 

participants seek to take positions in the new index, the roll date is typically a time when there is 

a significant amount of trading and liquidity in the market. After the roJ] date, the older ("offthe-run") series continue to be traded, and some of those series are liquid, but liquidity typically 

is concentrated in the newly issued "on-the-run" series. All of these instruments are issued in 

different maturities, of which the most widely traded are the five and ten years. 

As ofOecember 31, 2011, the Synthetic Credit Portfolio contained25 approximately $51 

billion in net notional positions of credit index and tranche positions. 

C. Key Events26 

1. Trading 

From its inception until late 201 1, the Synthetic Credit Portfolio generated roughly $2 

billion in gross revenues. 27 Coming into the end of2011, the Synthetic Credit Portfolio 

contained sizeable long and short positions in many of the COX high-yield and COX investment25 The Synthetic Credit Portfolio, on a gross basis, held a larger total oflong and short positions. 

However, when the long and short positions are netted against each other, these positions result in a 

portfolio of approximately $51 billion in net notional positions. 

26 This Report sets out the facts that the Task Force believes are most relevant to understanding the causes 

of the losses. It reflects the Task Force's view of the facts. Others (including regulators conducting their 

own investigations) may have a different view of the facts, or may focus on facts not described in this 

Report, and may also draw different conclusions regarding the facts and issues. In addition, the Task 

Force notes that its mandate did not include drawing any legal conclusions, and accordingly, this Report 

does not purport to do so. 

27 This figure reflects the aggregate mark-to-market net gains (profit) for all Synthetic Credit Portfolio 

transactions, including the impact of premiums paid and received. 

25 
991 

grade series, among others, including both off-the-run and on-the-run series and spanning 

multiple maturities and tranche positions. In the fourth quarter of 20 II, the Synthetic Credit 

Portfolio was in an overall short risk posture (as measured by CSW 10%), with a short risk 

position in high-yield offset to some extent by a long-risk investment-grade position. 

In late 2011, CIO considered making significant changes to the Synthetic Credit 

Portfolio. In particular, it focused on both reducing the Synthetic Credit Portfolio, and as 

explained afterwards by CIO, moving it to a more credit-neutral position. There were two 

principal reasons for this. First, senior Firm management had directed that CIO - along with the 

lines of business - reduce its use ofRWA. Second, both senior Firm management and CIO 

management were becoming more optimistic about the general direction ofthe global economy, 

and CIO management believed that macro credit protection was therefore less necessary. 

Under a series of international agreements known as the Basel Accords, banking 

organizations must maintain certain capital ratios. The amount of capital that a banking 

organization is required to hold, under most regulatory capital ratios, is measured against the 

amount of its R WA, which, broadly speaking, considers the nature ofthe assets held by the 

banking organization, and certain off-balance sheet exposures. Two of the recent Basel Accords, 

commonly referred to as "Basel lIS' and "Basel III," alter the RWA calculation for JPMorgan 

and other banking organizations. As the new standards become effective over a phase-in period, 

certain assets held by banking organizations such as JPMorgan will generally be assigned a 

higher risk-weighting than they are under the current standards; in practical terms, this means 

26 
992 

JPMorgan will be required to either increase the amount of capital it holds or reduce its RWA. 

Basel III has not yet become effective, but JPMorgan has begun voluntarily disclosing estimated 

calculations under Basel III in its financial reporting. 

In 2011, JPMorgan was engaged in a Firm-wide effort to reduce RWA in anticipation of 

the effectiveness of Basel III. The Synthetic Credit Portfolio was a significant consumer of 

RWA, and the traders therefore worked at various points in 2011 to attempt to reduce its R W A. 

As part of this effort, in late 2011, CIO discussed unwinding certain positions in the Synthetic 

Credit Portfolio. 

In the last week of December, Mr. Braul)stein asked CIO to evaluate the impact of a 

further reduction of$20, $40 or $60 billion ofRWA (in addition to a $30 billion reduction that, 

according to Mr. Wilmot, was already called for under the initial20J2 CIO RWA budget)?8 Ms. 

Drew, Mr. Wilmot and two senior members of the Synthetic Credit Portfolio team conferred as 

to how they could accomplish this in a manner that would minimize costs and trading losses, and 

in their internal discussions on the matter considered the possibility of unwinding additional 

positions in the Synthetic Credit Portfolio. According to one ofthe traders, on or about 

December 26, one ofthe Synthetic Credit Portfolio team members who had been party to these 

discussions called him and informed him that Ms. Drew wanted to know how much it would cost 

to reduce R W A by an additional amount. The trader infonned him that, under the circumstances, 

28 Contemporaneous e-mails suggest that the initial 2012 CIO R W A budget called for a $20 billion 

reduction. 

27 
993 

he believed that the solution would be an unwind and that he would ask another trader to prepare 

an estimate of how much it would cost. Shortly thereafter, an analysis prepared by another trader 

and provided to Ms. Drew, Mr. Wilmot and an executive from the Synthetic Credit Portfolio 

team indicated that a 35% proportional unwind of the Synthetic Credit Portfolio would result in a 

$10 billion RWA reduction, but could cost slightly more than $500 million. These cost estimates 

included trading and execution costs associated with reducing the positions, as well as the 

prospective loss of premiums received for any long-risk positions that CIO unwound?9 

Ultimately, the Firm chose not to modify its initial RWA budget, and for 2012, CIO as a whole 

was only required to make the RW A reduction contemplated by its original budget. 

In early January, the Synthetic Credit Portfolio incurred mark-to-market losses of 

approximately $15 million. On January 10, one of the traders informed Ms. Drew that the losses 

resulted from the fact that (among other things) it "ha[ d) been somewhat costly to unwind" 

positions in the portfolio. Ms. Drew responded that there might be additional flexibility on the 

R W A reduction mandate, and requested a meeting to review the unwind plan to "maximize p [&] 

L,~30 

29 Other materials from tills time indicate that the traders also believed that an unwind of short positions 

would cause them to forfeit revenue that they were positioned to earn upon the occurrence of defaults. 

30 Shortly before this exchange, Ms. Drew and Mr. Wilmot had notified Messrs. Dimon and Braunstein 

that CIO (as part ofits budgeted RWA reduction) would reduce the Synthetic Credit Portfolio's RWA by 

year-end 2012, from $43 billion to $20.5 billion. They explained that tills would be accomplished by 

allowing existing positions to expire ($13 billion), as well as via "active reduction" ($10 billion). Ms. 

Drew discussed the RW A mandate around this time with Mr. Braunstein, who informed her that the 

deadline for CIO to meet its RWA requirement was the end of2012. 

28 
994 

Around this time, Ms. Drew participated in a conference call with Mr. Wilmot and 

members of the Synthetic Credit Portfolio team, during which the RWA reduction mandate was 

discussed. According to one of the traders, he informed Ms. Drew during that call that the only 

certain approach to RWA reduction was to unwind positions, and he advised her that unwinding 

25% of the Synthetic Credit Portfolio would cost approximately $500 million. After the 

meeting, one ofthe more senior members of the Synthetic Credit Portfolio team who attended 

the meeting instructed the trader to formulate multiple options for RWA reduction for Ms. Drew 

to consider. 

On or about January 18, Ms. Drew, Mr. Wilmot, Mr. Weiland and two senior members of 

the Synthetic Credit Portfolio team met to further discuss the Synthetic Credit Portfolio and 

RWA reduction. According to a trader who had not attended the meeting, after the meeting 

ended, one of the Synthetic Credit Portfolio team members who had attended the meeting 

informed him that they had decided not to reduce the Synthetic Credit Portfolio, and that the 

trader's focus in managing the Synthetic Credit Portfolio at that point should be on profits and 

losses. Nonetheless, R WA continued to be a matter of real concern for that individual and CIO, 

and he thus also sent a follow-up e-mail to the meeting participants in which he set out a number 

of options for achieving RWAreduction by the end of2012. In that e-mail, he stated that the 

preferred approach was to select an option under which CIO would attempt to convince the Firm 

to modify the model that it used to calculate RWA for the Synthetic Credit Portfolio, and delay 

29 
995 

any efforts to reduce RWA through changes in positions in the Synthetic Credit Portfolio until 

mid-year. 

At approximately the same time as the mid-January discussions were taking place, a 

significant corporate issuer defaulted on its debt. The Synthetic Credit Portfolio was not well 

positioned for this event, and a number ofthe portfolio's positions suffered significant losses as a 

result.31 These losses caused management to become concerned that the Synthetic Credit 

Portfolio was not providing sufficient credit loss protection. Management therefore instructed 

the relevant trader to avoid similar losses on defaults in the future, and to ensure that the 

Synthetic Credit Portfolio had appropriate "jump-to-default" protection in place.32 

In response to this instruction, the traders began to discuss adding high-yield short 

positions in order to better prepare the Synthetic Credit Portfolio for a future default.33 The 

traders, in late January, also added to their long positions, including in the 10-9 index (and 

related tranches).34 These long positions generated premiums, and (among other things) would 

help to fund high-yield short positions; the tmders also believed that these long positions would 

31 One of the traders expressed the view that these losses stemmed from the expiry or unwind of certain 

high-yield short positions in late 2011. The lrading data confirms that certain high-yield short positions 

did expire or were unwound during this time, but also indicates that the traders largely replaced them at or 

around the same time. 

31 "Jump-to-default" exposure refers to the risk that a position will experience losses through the 

instantaneous move to a default on a reference name as a result of a credit event, such as a bankruptcy. 

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. 

34 As described below, the traders continued to build this position in February. 

30 
996 

help offset (from both a credit risk and, potentially, an RWA perspective) their high-yield short 

positions. The traders chose to use the IG-9 index for this offset because, as one of them 

explained, it had the liquidity of investment-grade credit derivatives but with a feature that 

allowed the traders to hedge part of the high-yield structural short a~ well. The feature to which 

that trader was referring is the fact that the IG-9 index contained a number of so-called "fallen 

angels," which are companies whose debt had been considered investment-grade at the time of 

the IG-9's issuance in September 2007, but had subsequently become high-yield. Because the 

IG-9 index contained these high-yield reference entities, the traders believed that a long position 

in the IG-9 would offset to some degree the high-yield short positions.35 

By the end of January, the Synthetic Credit Portfolio traders had added approximately 

$20 billion in long-risk notional positions to their I O-year IG-9 position. At the same time, 

however, they also added $12 billion in 5-year IG-9 short risk notional positions - i.e" they 

bought credit protection on the same companies for which they were selling protection - except 

that the maturities for this short position were five years from the creation ofthe index rather 

than ten years.36 The net effect of these additions was to increase the Synthetic Credit Portfolio's 

long credit exposure, both because they added more long positions than short positions, and also 

35 Because not all of the reference entities in tbe IG-9 instruments overlapped with those in the high-yield 

instruments, this strategy also introduced new risks into the Synthetic Credit Portfolio. 

36 The traders referred to this trade (the "IG-9 Forward Trade") as the forward trade, or at times, as a 

flattener. 

31 
997 

because longer-dated trades are more sensitive to movements in credit spreads than shorter-dated 

trades,37 due to the fact that the exposure to risk is for a longer period.38 

Ms. Drew did not receive detailed trading or position reports on the Synthetic Credit 

Portfolio in the ordinary course, did not request any such reports during this time,39 and regularly 

monitored only the Synthetic Credit Portfolio's profits and losses, VaR and stress VaR.40 She 

did understand generally around this time that the traders were planning to add long positions in 

order to balance the Synthetic Credit Portfolio, and she also participated in a number of meetings 

at which RWA and the profits and losses of the Synthetic Credit Portfolio were discussed.4

! 

37 A longer-dated CDS instrument will move more in price to a given change in a credit spread in the 

same way that a longer-dated bond's price moves more to a given change in credit spreads or interest 

rates than a shorter-dated bond. 

38 A trader from the Synthetic Credit Portfolio team appears to have described this trading strategy in a 

January 26 "Core Credit Book Highlights" PowerPoint that he circulated 10 other traders on January 26 

and on February 2. In that PowerPoint, the trader described the technical details of the "trades that make 

sense," which involved building a long position and then adding various short positions in the event of a 

market rally. 

39 Among othcr things, there is no evidence that Ms. Drew received the January 26 PowerPoint described 

in Footnote 38. 

40 Stress VaR is a charge for market risk under Basel II.5 based on a 1 O-day, 99%-confidcnce level VaR 

that incorporates inputs using historical data from a one-year period of significant financial stress relevant 

to the Firm's portfolio. While VaR assumes volatility consistent with recent market conditions, stress 

VaR assumes difficult market conditions. 

41 With respect to RWA reduction, Mr. Weiland sent an email to a member of the Synthetic Credit 

Portfolio team on February 3 expressing concern that the member was providing overly optimistic 

estimates to Ms. Drew as to the likelihood that CIO would be able to convince the Firm to modify its 

R WA calculation model. 

32 
998 

By January 26, the Synthetic Credit Portfolio was roughly balanced, as measured by 

CSW 10%.42 One of the trader's contemporaneous e-mails reflect that he understood this, but 

also reflect that he began to have concerns - which he shared with other members of the 

Synthetic Credit Portfolio team - about the continued mark-to-market losses in the Synthetic 

Credit Portfolio. Around the same time, in light of these losses, an executive responsible for the 

Synthetic Credit Portfolio directed the senior-most trader to focus solely on the Synthetic Credit 

Portfolio to the exclusion of his other responsibilities. On January 31, that executive sent an email to the same trader - which he also forwarded to Ms. Drew - in which he stated that the 

Synthetic Credit Portfolio was not behaving as intended and described the Synthetic Credit 

Portfolio's perfonnance as "worrisome." In the same e-mail, he included one of several late 

January e-mails reflecting another trader's concern about the Synthetic Credit Portfolio's 

positions.43 In that e-mail, the trader explained that, as designed, the Synthetic Credit Portfolio 

"would lose money now on a default in us hy and make money if the default occurs in ig world." 

According to this trader, however, the high-yield positions were losing more money than 

expected, and the investment-grade positions were earning less money than expected (i.e., the 

price movements were not correlating as expected, leading to mark-to-market losses). 

42 By January 31, the Synthetic Credit Portfolio had moved to a modest net long position as measured by 

CSW 10%, and it continued to fluctuate thereafter. Although the Synthetic Credit Portfolio was long as 

measured by CSW 10% by this time, it could continue to maintain substantial protection against corporate 

defaults. 

43 This was one in a series of e-mails that the other trader wrote to himself and to other traders in the last 

two days of January, all expressing similar views about the performance of the Synthetic Credit Portfolio, 

and the options available as to how best to manage it. 

33 
999 

In separate e-mails on January 30, the same trader suggested to another (more senior) 

trader that CIO should stop increasing "the notionals," which were "becom[ing] scary," and take 

losses ("full pain") now; he further stated that these increased notionals would expose the Firm 

to "larger and larger drawdown pressure versus the risk due to notional increases." While the 

documentary record does not reflect how, if at ali, the more senior trader responded to these 

concerns, the traders nonetheless continued to build the notional size of the positions through late 

March. 

By early February, the trader's concern about the losses - including his lack of 

understanding as to why they were occurring - prompted him to request a meeting with his 

managers, including Ms. Drew, in order to discuss the Synthetic Credit Portfolio. He prepared a 

presentation for the meeting, which he sent to the more senior trader on February 2. The 

presentation was provided to Ms. Drew and an executive responsible for the Synthetic Credit 

Portfolio on February 3.44 

The trader did not present his slides at the meeting. Ms. Drew did ask the trader how 

much more he thought CIO could lose if they reduced the Synthetic Credit Portfolio. According 

to this trader, he explained that he thought that the Synthetic Credit Portfolio could lose a 

significant amount, perhaps an additional $100 million, and that it was possible that they did not 

have the right long position in light ofthe characteristics ofthe IG-9 position and the relevant 

44 According to a calendar invite sent by Ms. Drew's executive assistant for a February 3 meeting (likely 

the meeting in question), Mr. Wilmot, Mr. Goldman, Mr. Weiland and various members of the Synthetic 

Credit Portfolio team were invited, among others. 

34 
1000 

market dynamics. Ms. Drew appeared not to be overly concerned by this potential $100 million 

loss for the portfolio, and instead focused on the Synthetic Credit Portfolio's RWA profile.45 

One week after this meeting, the same trader conferred with the attendees ofthat meeting 

(but not Ms. Drew) regarding an anticipated credit event involving another company.46 He 

explained that in order to be better positioned for this event, he would need to buy further 

protection on the high-yield index, and finance that protection by adding long positions in an 

investment-grade index. He explained that this trading would increase RWA, but was instructed 

to proceed, and to concentrate on managing profits and losses. The executive with whom he 

conferred also instructed a senior trader to travel to lPMorgan's New York offices to see what 

could be done to remove the RWA constraint from the Synthetic Credit Portfolio. 

Throughout February, the traders continued to add to their investment-grade long 

positions, and also at this time began to add significantly to their high-yield short positions. It 

appears that among the reasons for at least some ofthis trading (and possibly other trading 

during the first quarter) was that the traders sought to "defend the position" or "defend the P&L." 

The phrase was not defined in a consistent way by the traders who used it, but it appears to be a 

response to one or more concerns expressed by the traders throughout much ofthe first quarter. 

45 Also on February 3, Mr. Wilmot sent an email to Mr. Braunstein requesting "approval to raise [CIO's) 

lQI2 RWA by $7bn to $167bn." Mr. Wilmot explained that it was a "one quarter request" and that CIO 

believed they were "on target to achieve the $160bn level for 2Q 12-4Q 12." Mr. Wilmot wrote that CIO 

was "less confident in the R WA reduction from the MTM book, specifically the tranche book which is 

where [CIO hoped) to continue to achieve significant reductions throughout the year." 

46 The company in question ultimately filed for bankruptcy in the second quarter. 

35 
1001 

First, the traders appeared to be concerned about creating a perception in the market that CIO 

was reversing course on its trading strategy, which would cause other market participants to take 

advantage in pricing and trading behavior. Second, they expressed concern that the prices they 

were receiving from other market participants were distorted because those with opposing 

positions (e.g., CIO was long where they were short) were engaged in tactical trading or were 

providing indicative prices that they would not stand behind. The traders appeared to believe 

that if they did not respond through additional trading, they would be forced to recognize losses. 

Notwithstanding the continued trading, the Synthetic Credit Portfolio continued to 

experience mark-to-market losses. On February 13,2012, a trader advised Ms. Drew of mark-tomarket losses in the Synthetic Credit Portfolio, explaining in an e-mail that "we report a loss of 

28m from last Tuesday elose" and attributing most ofthe losses to the IG_9.47 The trader in 

question subsequently forwarded this e-mail to senior members of the Synthetic Credit Portfolio 

team (but not Ms. Drew). 

By late February, the Synthetic Credit Portfolio had experienced year-to-date losses of 

approximately $169 million. A trader observed around this time that, although credit spreads 

had stayed relatively constant, the IG-9 continued to lose ground. This was contrary to his 

expectations, and he therefore advised another Synthetic Credit Portfolio trader not to trade IG-9 

because he wanted to observe its behavior. He also advised a more senior trader of his plans, but 

47 Ms. Drew also received separate daily profit-and-Ioss reports on the Synthetic Credit Portfolio. 

36 
1002 

the latter instructed him to trade because they needed to participate in the market to understand 

the price at which parties were actually willing to transact. 

The trader engaged in a significant amount of trading at the end of February, after being 

directed by at least one senior member ofthe Synthetic Credit Portfolio team to increase the 

default protection in the Synthetic Credit Portfolio. The trader also traded at this time in order to 

determine the market prices of the positions. His trading was not limited to short positions; he 

also added a significant amount oflong positions - specifically in the IG-9 index in order to 

offset the cost and risk of the additional short positions. In an e-mail sent to another trader late in 

the evening of February 29, he explained, "I have sold important amounts of protection in ig9 

lOyr (close to 7bln all day or 3.5m csO I) and this will push the csO I beyond the 25m limit. This 

is related to month end price moves that were all adverse although we could limit the damage .... 

I picked [the IG-9 IO-year index] because this is the most obvious one when we analyze the lags 

we have in the core book .... This trade will also increase the rwa snapshot at month end I am 

afraid.,,48 

On February 29, Ms. Drew, Mr. Wilmot, Mr. Goldman and an executive from the 

Synthetic Credit Portfolio participated in a regularly scheduled "business review" meeting with 

Messrs. Dimon, Braunstein, Hogan, Zuhrow and others. The meeting covered aU ofCIO's 

activities. With respect to the Synthetic Credit Portfolio, the primary focus of the discussion was 

48 It is unclear to what limit the trader was referring because neither CIO CSOI limit was $25 million (the 

mark-to-market CSOllimit for CIO was $5 million and the aggregate CSOllirnit was $12 million), and 

both limits had been exceeded by this point. 

37 
1003 

RWA reduction, and the written materials, which were prepared by individuals from Market 

Risk and the Synthetic Credit Portfolio team, indicate that CIO was taking steps to reduce R W A. 

CIO management did not disclose any significant problems or concerns with the Synthetic Credit 

Portfolio, and CIO management did not explain that CIO was not pursuing the expected course 

of action of achieving the RWA reduction via an unwind and was instead embarking on a more 

complicated and different strategy that entailed adding significantly to the size of the positions. 

The written materials prepared by CIO described the Synthetic Credit Portfolio at a very high 

level as a 'Tail Risk Book," and as an "option with positive convexity, positive carry and upside 

on large spread widening and default waves (similar to 2008-2009).,,49 The materials do not 

explain under what scenarios the Synthetic Credit Portfolio could be expected to lose money, or 

that: 

CIO had decided not to reduce the size of the Synthetic Credit Portfolio (at least 

in the near term); 

• the Synthetic Credit Portfolio had increased substantially in both gross and net 

notional size; and 

49 A tail event is 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. Carry is generally understood to be the profit or loss experienced by a portfolio with the passage 

of time but with no change in any other market variable or additional trading. Positive convexity exists 

when a portfolio is predicted to profit more (or lose less) on a larger market move than the profits (or 

losses) predicted for a smaller market move would imply. Negative convexity exists when a portfolio is 

predicted to profit less (or lose more) on a larger market move as compared to the predicted profits (or 

losses) on a smaller market move. Using CSW 10% and CSW 50% as an example, if a portfolio is 

predicted to lose $100 if credit spreads widen by 10%, but to lose $400 if credit spreads widen by 50%, 

then the portfolio reflects positive convexity (a portfolio with no convexity would lose $500). It is 

unclear if the written materials for the February 29 meeting were employing these definitions. 

38 
1004 

• the plan was no longer to reduce RWA by $23 billion by allowing positions to 

expire and by active reduction (to the contrary, the February Business Review 

materials suggest that CIO was unwinding the portfolio, explaining that "the 

change in regulatory capital regime is likely to force a re-size I run-off of 

synthetic portfolio in order to maintain RWA targets for the Firm" and "CIO is 

currently working to reduce [R WAD." 

By the end of February, the Synthetic Credit Portfolio had experienced an additional $69 

million in mark-to-market losses, from approximately $100 million (year-to-date through 

January) to $169 million (year-to-date through February). 

On March 1, the day after the CIO Business Review, an executive with responsibility for 

the Synthetic Credit Portfolio e-mailed one ofthe traders to express concern that if the traders 

needed to "[a ]ctually reduce the [Synthetic Credit Portfolio]" in order to decrease R W A, they 

would not be able to "defend" their positions. This e-mail appears to address the concern that an 

unwind of positions to reduce RWA would be in tension with "defending" the position. The 

executive therefore informed the trader (among other things) that CIO would have to ''win on the 

methodology" in order to reduce RWA. This phrase refers to the traders' goal, described above, 

to convince the Finn that it should change the methodology ofthe model used to calculate RWA 

for the Synthetic Credit Portfolio. 

On March 7, Mr. Venkatakrishnan reported to Ms. Drew, Mr. Hogan, Mr. Goldman, Mr. 

Weiland and a member of the Firm-wide Market Risk team on the results of model-related work 

he had been performing relating to the accuracy ofCIO's RWA calculation. Mr. 

Venkatakrishnan had gotten involved in early March in response to concerns in CIO about the 

39 
1005 

increase in RWA. Mr. Venkatakrishnan reported on March 7 that RWA for the Synthetic Credit 

Portfolio had increased significantly since the beginning of the year, and explained that this 

increase was "entirely explained by a $33bn notional increase in short protection (long risk) in 

[CIO's] portfolio between [January] and [February]." Ms. Drew forwarded this information to 

Mr. Goldman, Mr. Weiland and two members of the Synthetic Credit Portfolio team. In 

response, one of the recipients from the Synthetic Credit Portfolio team expressed the view that 

the notional amounts reflected in Mr. Venkatakrishnan's calculations were incorrect,so despite 

the fact that this information had been provided by cro's middle office, and asked to discuss the 

methodology used to calculate RWA.S1 

By mid-March, the Synthetic Credit Portfolio was still experiencing mark-to-market 

losses.52 A trader performed a detailed analysis around this time and determined that, even 

though the Synthetic Credit Portfolio appeared to be balanced under CSW 10%, its actual 

performance - and in particular, the fact that it lost money when the markets rallied - suggested 

50 The relevant recipient may have been expecting Mr. Venkatakrishnan to calculate the notional amounts 

on a monthly basis (i.e., January I to 31 and February I to 29) and not January 18 to February 22, as Mr. 

Venkatakrishnan had done. 

"Mr. Venkatakrishnan's analysis, which was only of those positions that drove the increase in RWA, did 

not trigger further inquiry or concern within or outside CIO at this time regarding the size of the portfolio. 

CIO management likewise appears to have focused on the notional increase only insofar as it affected 

R W A. In addition, at that time, there were discussions within CIO and with Mr. Hogan that some of the 

positions in the Synthetic Credit Portfolio would more appropriately receive a different treatment for 

capital purposes than under the currently used method, and that this change would result in a reduction of 

RWA to acceptable levels. At the time, the rules under Basel U.5 and III, which alter the RWA 

calculation for JPMorgan and other banking organizations, had not been finalized by U.S. regulators. 

52 As discussed below, the losses during this period were likely more substantial on at least some days 

than were being reflected in CIO's daily valuation estimates. 

40 
1006 

that it continued to have a short bias. The trader attributed this to the significant amounts of 

protection that he had purchased since January, and he therefore considered what steps he might 

take to finally balance the Synthetic Credit Portfolio. He concluded that he did not want to sell 

more protection in IG-9 because the instrument had not behaved as he had expected all year and 

the position was already quite large and "dangerous"; he also understood that he could not 

reduce his high-yield position because of the expense associated with that projected liquidation. 

The remaining option, in his view, was to increase his long exposure in on-the-run investmentgrade instruments, such as IG-17 and IG-18, with a goal of stemming the losses that he attributed 

to its imbalance, and ultimately "put[tin]g [the Synthetic Credit Portfolio] to sleep." Once the 

portfolio was balanced, he believed he could wait for CIO Management to decide how to 

proceed. 

Consistent with this strategy, by March 15, the trader proposed to add a very large 

position in an on-the-run investment-grade index. He reasoned that this was the best way to 

balance the Synthetic Credit Portfolio because: using the on-the-run index would make the 

positions less transparent to other market participants, especially if the positions were acquired 

on or near the roll date (presumably because of increased liquidity); and ifhe could put on a 

large position very quickly near the roll date (March 20), Risk Management personnel would 

have sufficient time in advance of the quarter-end to calculate the attendant changes in RWA, 

VaR and other risk metrics. 

41 
1007 

The trader described his plan in a series of e-mails to another trader. On March 15, he 

sent an e-mail explaining that "[t]his [] may be the solution: let the book run off. So I prepare it 

for this outcome." Similarly, on March 19, he wrote to some of the other traders that his 

proposed strategy was to "let the P&L fluctuate while not defending, just maintaining the upside 

on defaults over time." Further, he wrote, "the solution proposed amounts to be longer risk and 

let the book expire carrying the upside on default: I think we own [] a very good position for a 

size that is also significant .... " 

Beginning on March 19 and continuing through March 23, the trader added significant 

long positions to the Synthetic Credit Portfolio. These additions roughly coincided with the roll 

date and the issuance of the lG-18, and included additions to the 5-year IG-1710ng position (a 

notional increase of approximately $8 billion), the 5-year IG-18 long position (a notional 

increase of approximately $14 billion), and several corresponding iTraxx series, most notably the 

5-year-SI6 ($12 billion) and the 5-year-SI7 ($6 billion). 

While this trading was being considered and implemented, on March 20, a review ofCIO 

was presented to the DRPC (a summary of which was later presented to the full Board), in which 

Ms. Drew and Mr. Goldman provided a structural risk summary and addressed overall portfolio 

allocations within CIO, how interest rate movements would affect the company, and how CIO 

manages the attendant risk. CIO management did not disclose the increasing mark-to-market 

losses, the recent breaches in certain ofCIO'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 

42 
1008 

earlier in the year.53 Further, CIO management did not explain that CIO was embarking on a 

complicated strategy that differed from the unwind that had been previously described to senior 

Firm management. 

On March 23, a trader explained to CIO Market Risk the trading he had done: "[I] 

switched the book to long risk[.] [I] am done[.]" He explained his view that "this is it for a 

neutral profile[, and] right now we have a market neutral ratio between HY and IG." He further 

explained that "the reason why I did that is because [I] wanted to have the position set in order to 

prepare for month end and avoid defending the pnl [] because it would have resulted in larger 

positions[.] This one position I put [on] is different and liquid." The relevant individual from 

CIO Market Risk noted that, "somehow I think the percep[tion] was that you would be addling] 

to the [on-the-run index] and reducing elsewhere[.] [I am n]ot sure how this was established[, 

but I] think what happened is that people seeing [that ]Ihe book is longer in 5y maturity[, and 

has] bigger risk[,] and bigger capital[,] and the issue is RWA." The trader stated, "ok the 

RWA[,] this is what kills me." He proceeded to explain that, because of pressure to reduce 

53 Under the Firm-wide Risk Appetite policy in effect at the time, either the CEO or the CRO was 

required to notify the Chairman of the DRPC of modifications to or breaches ofthe prescribed DRPC 

market risk stress or VaR "limits." The Finn-wide Market Risk Management policy likewise required the 

CRO to "report all material excesses to the Chairman of the DRPC." (These DRPC-approved limits were 

not identical to Firm-wide limits; as a result, not all breaches of Firm-wide limits necessarily required 

reporting to the DRPC.) As of January 2012, the DRPC-approved VaR limit was $200 million (as 

opposed to the Firm-wide VaR limit of$125 million). Although Firm-wide Market Risk provided the 

DRPC with an update on Market Risk Limits at the March 20,2012 DRPC meeting, this update only 

covered (as intended) developments through year-end 2011. The breaches in the CIO and Firm-wide VaR 

limits that occurred in January 2012 were not discussed. (The highest the Firm-wide VaR reached iu 

January 2012 was approximately $160 million.) 

43 
1009 

RWA, the market could come to the conclusion that he did not like his position, and he therefore 

wanted to "[drop] out of the radar screen and earn carry." He predicted that "eventually" the 

Synthetic Credit Portfolio would profit, and in the meantime, "the carry is 2-3m a day[, and] the 

protection I sold grossly added l.IM a day of carry." 

On March 21 (i.e., while the traders were adding large long positions), one ofthe traders 

met with Ms. Drew to discuss both the mark-to-market losses and the increase in RWA for the 

Synthetic Credit Portfolio. Before the meeting, he informed Ms. Drew that he believed the 

Synthetic Credit Portfolio's positions had been leaked to the market (a concern he and another 

trader voiced previously), and explained that he was nervous that other market participants could 

use this information against CIO in their trading. He also e-mailed Ms. Drew that the traders had 

already reduced RWA by $10 billion in the Synthetic Credit Portfolio, and recommended that 

they "sJigh[t]ly" increase the investment-grade long position, and address RWA the following 

quarter. In fact, RWA for the Synthetic Credit Portfolio had increased from the beginning ofthe 

year. 

The day after the meeting, Ms. Drew learned that the positions in the Synthetic Credit 

Portfolio were significantly larger than had been reflected in the figures discussed at the prior 

day's meeting, as the figures used during the March 21 meeting were from March 7 and did not 

reflect trading activity during the intervening two weeks.54 Ms. Drew reacted strongly to this 

54 The written materials prepared for the March 21 meeting noted that the figures were as of March 7, but 

did not indicate that there had been significant changes in the positions since then. 

44 
1010 

and a meeting was scheduled for March 23. A senior member ofthe Synthetic Credit Portfolio 

team informed her at that time that he believed the Synthetic Credit Portfolio had the "right 

position," because the Synthetic Credit Portfolio was "long IG [and] the market [was] moving 

tighter and tighter." Around this time, a trader informed Ms. Drew that he wanted to continue 

trading in order to defend the position; Ms. Drew reacted strongly to this as well and informed 

him that he was not permitted to do so. Either on Friday, March 23, or soon after, Ms. Drew 

directed the traders to suspend trading, and shortly thereafter, trading in the Synthetic Credit 

Portfolio largely stopped.55 By this point, the Synthetic Credit Portfolio had assumed an overall 

net-long credit-risk orientation on a CSW 10% basis.56 

On March 30, the executive responsible for the Synthetic Credit Portfolio requested 

assistance from Firm-wide Market Risk in understanding the relationship between their trading 

and RWA. In an e-mail to Mr. Hogan on the subject, the executive stated that the Synthetic 

Credit Portfolio's "prox[y]ing" ofthe IG-9 position as an offset of the high-yield short "did not 

work and resulted in almost total loss of hedging effectiveness." He also stated that he was no 

longer confident in his team's "ability to achieve the targeted RWA and their understanding of 

the synthetic levers to achieve the RWA objectives." He therefore requested that an expert from 

55 There was a change in position on March 28, when the IG-9 5-year short position was reduced by $4.2 

billion notional, from $36.9 billion to $32.7 billion notional. 

56 Even after these trades, the traders did not view the Synthetic Credit Portfolio as net long despite the 

fact that the Synthetic Credit Portfolio's CSW 10% profile showed a long risk bias. 

45 
1011 

the Investment Bank be assigned to CIa for the second quarter of2012 to help the Synthetic 

Credit Portfolio traders understand and meet their RWA targets. 

2. Valuation 

As noted, the Synthetic Credit Portfolio was experiencing regular mark-to-market losses 

throughout much of the fIrst quarter. We describe here the valuation process and how, from at 

least mid-March through early April, the Synthetic Credit Portfolio's losses appear to have been 

understated. 

One of the junior traders in CIa had responsibility for estimating the fair value of each 

position in the Synthetic Credit Portfolio on a daily basis. Because the market for at least some 

ofthese instruments is small and relatively illiquid, he -like other market participants -

generally could not simply look to a single defmitive source to perfonn that task. Rather, he 

collected data from a nmnber of different sources about the value of the positions and, after 

exercising judgment and often in consultation with another trader, assigned a value to each 

position. 

In general, the trader looked to three different sources in order to value the positions in 

the Synthetic Credit Portfolio: (I) recently executed trades; (2) indicative, or non-binding, price 

quotes received from dealers and counterparties (including for both the specifIc instrmnent and, 

at times, similar instruments); and (3) his observations of and judgment regarding market 

conditions, including the relationships between and among different instruments. Tbe 

infonnation he received from other market participants was typically in the fonn of a bid-offer 

46 
1012 

quotation. However, in order to perform the daily valuation process, he was required to identify 

a specific price. For each instrument, he therefore selected one quote (often among several he 

received) and then assigned a price within the bid-offer spread for that quote. Once he had 

identified a price for each position, he would input this data into a series of programs that would 

generate an estimate of the daily profit or loss, known as the "P&L Predict." He would also 

draft, often together with another trader, an explanation for the gains or losses, which would be 

included in the daily P&L Predict. The daily profit-and-loss numbers were circulated within 

CIO and to certain personnel within the Firm-wide Risk organization. Ms. Drew received the 

daily P&L information (although not the P&L Predicts themselves), and also received some or 

all of the commentary in her daily reports. 

At certain points throughout early 2012, the information the trader was collecting from 

the market indicated losses in the Synthetic Credit Portfolio. But on a number of days beginning 

in at least mid-March, at the direction of his manager, he 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. The traders variously referred to the aggregate differential between 

the prices being assigned and the unadjusted mid-market price (i.e., the mathematical mid-point 

between the best bid and best offer in the market, often referred to as the "crude mid") as the 

47 
1013 

"divergence," "lag" or "distance."s7 In the view of one trader, the divergence resulted from the 

fact that the price information supplied by this illiquid market was distorted. Along these lines, 

the traders believed that CIO's counterparties had obtained information about the Synthetic 

Credit Portfolio's positions, and that CIO's counterparties were engaging in strategic pricing 

behavior and intentionally providing prices that did not accurately reflect market values, i.e., 

they were not prices at which the counterparties would actually be willing to transact. 58 

Furthermore, one trader expressed the belief that the market prices would ultimately correct, 

vindicating the CIO valuations. 

Notwithstanding any genuinely held views on the validity of quoted prices or the 

integrity of counterparties' trading activities, both U.S. GAAP and Firm policy required that CIO 

make a good-faith estimate of the exit prices9 for a reasonably sized lot of each position, and 

57 Certain traders also, at times, appeared to use 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. 

58 The prices provided by market participants that were considered in valuing certain positions in the 

Synthetic Credit Portfolio were "indicative," which meant that cro could not expect counterparties to 

transact at those prices. On occasion, CIO would attempt to transact at an indicated price, and a market 

participant, who had posted the bid or offer, would decline. The Synthetic Credit Portfolio traders 

referred to this behavior as the market participants "framing" prices. 

59 Neither U.S. GAAP nor the Firm policy required CIO to mark to the "crude mids." Accounting 

Standards Codification paragraph 820-10-35-36C notes that "if an asset or a liability measured at fair 

value has a bid price and an ask price (for example, an input from a dealer market), the price within the 

bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair 

value .... " While paragraph 820-1 0-35-36D notes that mid-market pricing is not precluded from being 

used "as a practical expedient," such conventions are not required and good faith estimates ofthe 

appropriate exit price are necessary. 

48 
1014 

assign values reflecting those estimates.6o At the direction of a more senior trader, however, the 

relevant trader may not have always done SO.61 The Task Force has found no evidence that 

others beyond three of the Synthetic Credit Portfolio traders were aware of or part of this 

directive. 

One instance of "divergence" occurred on or about March 12, when a trader informed 

another trader that the "crude mids" had moved away from where he and the third trader 

expected them to be. He told the trader that, as a result, the mark-to-market losses in the 

Synthetic Credit Portfolio based on "crude mids" had grown to approximately $50 million, and 

that he viewed these losses as a warning sign. He recommended that they reflect this as a loss on 

the books, even though they could not explain the market movement. The trader in question 

disagreed with his recommendation, apparently because he did not believe that the market moves 

around this time were real. He then informed the first trader that they should discuss this issue 

the following week. 

According to a trader-maintained spreadsheet reflecting prices from March 12 to March 

16, the divergence from the crude mids for at least some of the positions had grown to 

approximately $292 million62 year-to-date for the Synthetic Credit Portfolio.63 On March 16, a 

60 See n. 59. 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. 

61 As noted, the more senior trader may have believed that his view of the true value of these positions 

would ultimately be realized once the market returned to normal. 

62 This figure may include amounts by which the traders believed that the positions were underperforming 

vis-it-vis their expectations, including as a result of market participants distorting the prices; it is not 

49 
1015 

trader infonned another trader that he estimated that the divergence would likely reach $400 

million in the near future. 

By March 19, the relevant trader had showed a small loss on the daily P&L Predicts 

every day for seven consecutive days. He told another trader that a more senior trader had 

pressured him throughout this period not to show large losses in the Synthetic Credit Portfolio. 

On March 20, that other trader apparently directed the relevant trader to show the full loss he had 

calculated for that day and said that he himself would accept responsibility for the loss with the 

more senior members of the team. 

The relevant trader reflected a loss on his March 20 daily P&L Predict of approximately 

$40 million. Shortly thereafter, a more senior trader called the other trader to discuss the loss. 

The senior trader expressed two related concerns. First, he stated that the report would cause 

problems for him during a meeting scheduled for the following day with Ms. Drew (the March 

21 meeting described above), and stated that he wished that he could have raised the loss issue 

with Ms. Drew in person during that meeting.64 Second, he expressed concern that Ms. Drew 

might prohibit his team from adding to their long positions. 

necessarily a measure of the aggregate amount of any mis-mark since the crude mid is not necessarily 

reflective of the price at which market participants are transacting. 

63 The spreadsheet showing the divergence from March 12 to March 15 was circulated to a senior member 

of the Synthetic Credit Portfolio team on March 15. The Task Force also located an additional copy of 

the spreadsheet that included the divergence for March 16. 

64 Ms. Drew would historically follow up with the more senior trader in the evening ifthe Synthetic 

Credit Portfolio experienced losses greater than $5 million for a particular day. 

50 
1016 

The estimated mark-to-market losses continued to grow throughout the end of March. 

On March 23, a trader sent another trader an informal loss estimate likely year-to-date - of 

$300 million using, for each position, the "best" bids or asks and $600 million using the "mids." 

The third trader also continued to report losses to him during this period, and continued to be 

directed by the other trader to show them. The year -to-date losses reported by the traders totaled 

about $400 million through March 29. 

These valuation issues received additional attention from the traders on March 30, which 

was the last trading day of the first quarter.65 As shown by the following four sets of 

conversations, one of the traders was very focused on the impact of showing significant losses on 

that day. 

First, throughout the day, that particular trader (who was more senior and to whom the 

other traders reported) repeatedly discussed with a second trader the size of the estimated losses. 

Early in the day, the second trader had informed the more senior trader that the daily loss would 

be approximately $250 million. The senior trader asked him ifhe could reduce the loss to $200 

million and encouraged him to trade, even though, as discussed above, Ms. Drew had just 

ordered the team to stop trading. The second trader declined to continue trading. Nevertheless, 

throughout the day, a third trader reported to the second trader that the prices he was observing in 

the market were improving, and the second trader therefore reported improved numbers to the 

65 The marks on the fmal trading day of the quarter are subject to veo price-testing procedures described 

below. 

51 
1017 

senior trader as the day progressed. Eaeh time he or the third trader showed a smaller loss figure, 

the senior trader urged him to reduce the size of the loss further. 

Second, the more senior trader and Mr. Goldman discussed the estimated losses for the 

day. During this conversation, Mr. Goldman pressed the trader for estimates, and he responded 

that he was expecting the losses to be significant because he would not be "defend[ingJ" the 

position. He further stated that he did not want to "fight" and increase the position, and added 

that they should have "stopped doing this three months ago and just rebalanced the [Synthetic 

Credit Portfolio ].,,66 He also asked Mr. Goldman (who had called him at Ms. Drew's request) 

not to share these estimates with Ms. Drew because the market had not yet closed and, given the 

size ofCIO's positions, a small movement could result in a significant change in the profits and 

losses. 

Third, at the end of the day, the same more senior trader directed another trader to stay 

late and monitor prices until the markets closed in New York, in the hopes that he would be able 

to use later - and more advantageous prices in marking the Synthetic Credit Portfolio. 

Fourth, the same more senior trader directed another (more junior) trader on March 30 to 

use the "best" prices, which appears to have prompted that more junior trader to take two steps. 

First, for at least one instrument, he selected the most beneficial dealer quote when marking his 

positions. Another trader encouraged him to use this more beneficial quote - which was more 

66 This statement is difficult to reconcile with another trader's statement that, at the same time, the more 

senior trader was encouraging him to trade. 

52 
1018 

advantageous than the quotes he had received earlier in the day - telling him that it was not too 

aggressive and that it was "very good." Second, the more junior trader priced many of the 

positions at or near the most advantageous boundary of the bid-offer spread. And for at least one 

position, he consulted with the other trader, who advised him to be slightly less aggressive. 

Later in the evening of March 30, he reported an estimated loss for the day of$138 million. 

Unlike the January and February month-end prices, the marks for March 30 were not generally at 

or near the mid. 

The quarter-end prices generated on March 30 were to be used as the basis of the Finn's 

financial reporting. Accordingly, per standard practice in CIO, they were subjected to a separate 

review by CIO's VCG, a price-testing group that is part of the Finance function and analyzes 

market data to test month-end front office marks. VCG is responsible for confinning the traders' 

marks or making necessary adjustments to the front office marks to arrive at the fair value for 

purposes of the U.S. GAAP for the Finn's books and records. 

Under the applicable policy, CIO VCG's price-testing procedures involved multiple 

steps, including the following: First, the relevant member ofthe VCG team received the March 

30 front office marks. Second, that individual reviewed infonnation about the value of each 

position derived from third-party sources - principally, quotes from dealers, recent transaction 

data, and consensus pricing data from third-party pricing services such as Markit and Totem -

and generated a price (the "VCG mid price") for each position. He then compared the trader's 

prices to the VCG mid price. 

53 
1019 

As noted above, Finn policy called for the positions to be marked at fair value, which in 

accordance with accounting rules, it defines (consistent with U.S. GAAP) as the exit price for a 

reasonably sized lot. CIO VCG recognized that, given the nature ofthe market, market 

participants could arrive at different yet reasonable conclusions as to the fair value of a particular 

position. When comparing the VCG mid price to a trader-provided price, CIO VCG's policy 

was to consider a VCG-generated price-testing threshold designed to reflect the bid-offer spread 

to the VCG mid. For example, if the CIO VCG mid price was 35 and the threshold was 2, the 

acceptable valuation range for the trader-provided price would be 33 to 37. If the trader's price 

fell within that range, under the Finn's policy, CIO VCG could adopt that price as final. lfthe 

trader's price fell outside that threshold, under the Finn's policy, CIO VCG was to adjust the 

price to the closest outer boundary of the threshold. Thus, in the above example, if the trader had 

a price of38, CIO would make a one-point adjustment to move the mark back to the closest 

outer boundary of37.67 PwC was aware ofCIO VCG's use ofthresholds prior to the first 

quarter of 20 12. 

CIO VCG conducted its price testing on the March 30 valuations for the Synthetic Credit 

Portfolio in April. In the course of this price testing, it observed that many of the positions were 

marked at or near the boundary ofthe bid-offer spread. However, because it concluded that they 

67 VCG did not, as a technical matter, actually adjust the trader's marks for individual instruments, rather 

it provided information to the CIO Middle Office, which simply made an aggregate dollar amount 

adjustment that resulted from the adjusted marks. 

54 
1020 

were within VCG thresholds (with exceptions for which an adjustment was made), it concluded 

that the trader marks were acceptable.68 

Although CIO VCG's independent price-testing process, including the use ofthresholds, 

was appropriately designed to determine whether a trader's mark is a reasonable estimate of fair 

value, CIO VCG price testing had been identified as having some deficiencies and 

inconsistencies in its price-testing practices. Specifically, on March 30, 2012, the Firm's Internal 

Audit group issued a report on EMEA CIO Credit Market Risk and Valuation Practices in which 

it assigned a rating of "Needs Improvement.,,69 This assessment ofCIO VCG was due, in part/o 

to the lack of "a formally documented price sourcing hierarchy to govern the consistent use and 

appropriate application of independent prices for price testing purposes" and "the lack of 

formally documented/consistently applied price testing thresholds." With respect to the latter, 

Internal Audit concluded that thresholds were applied by CIO VCG "without sufficient 

transparency or evidence." The "root cause" ofthe deficiencies and inconsistencies in CIO 

68 VCG's calculation of the March month-end pre-adjustment difference between VCG prices and the 

traders' marks contained mathematical and methodological errors; as these errors were discovered, the 

figure was revised upwards to $512 million on May 9. In July, the difference between the VCG mid and 

the front office marks was adjusted to $677 million before the application of the thresholds, $660 million 

after the application of thresholds, and $472 million after the subsequent application of a liquidity reserve. 

See Section III.B. 

6' Internal Audit issues three ratings: Satisfactory, Needs Improvement, and Inadequate. The latter two 

are considered "adverse" ratings. CIO VCG received a "Satisfactory" rating in its prior audit of CIO 

EMEA Credit on February 26, 2010. 

70 As part of this same report, Internal Audit also identified weaknesses in CIO's risk management 

practices, such as the use of unapproved risk and valuation models, a lack of documented stress testing 

methodology, and a need to enhance controls around certain aspects of the VaR calculation. 

55 
1021 

VCO's price-testing practices was identified as "insufficient assessment/formalisation of certain 

price testing methodologies and poorly documented CIO VCO practices.,,71 

The Internal Audit report included an action plan for VCO to, among other things: (1) 

define and implement a price sourcing hierarchy to ensure a consistent and appropriate price 

sourcing and testing approach; (2) ensure price testing is performed consistently with front office 

marking policy; (3) document the rationale for and clearly define certain price-testing thresholds; 

and (4) improve evidence of certain price-testing processes. The individual who was the "issue 

owner" for this action plan had a target date oOuly 31, 2012, to complete the action plan. As 

part of his response to Internal Audit's recommendation to more clearly demonstrate and 

document the use ofthresholds, this individual immediately madc certain adjustments to 

formulas in the spreadsheets he used. These changes, which were not subject to an appropriate 

vetting process, inadvertently introduced two calculation errors, the effects of which were to 

understate the difference between the VCO mid-price and the traders' marks. 

3. The "London Whale" Story and Senior Management's Re~ponse 

On April 5, Ms. Drew sent an e-mail to the lPMorgan Operating Committee (which 

included Messrs. Dimon and Braunstein) in advance of articles that the Wall Street Journal and 

Bloomberg would be publishing the following day about one of the Synthetic Credit Portfolio 

71 Although the report was formally issued on March 30, consistent with Internal Audit's processes, 

Internal Audit personnel interacted with CIO VCG, market risk management and Finance personnel 

during the audit process. In mid-to-Iate March, members of the audit team shared fmdings, 

communicated about management's action plan, and obtained other input from Messrs. Goldman, 

Wilmot, Weiland and other members ofCIO Market Risk, Finance and VCG, among others. 

56 
1022 

traders, whom the articles referred to as the "London Whale." In her e-mail to the Operating 

Committee, Ms. Drew provided a brief overview ofCIO's investment strategies, explaining that 

the strategies had turned pro-risk and the Synthetic Credit Portfolio was moved into a long 

position, and that it had not performed as expected in 2012.72 She acknowledged that (I) the 

position was not sized or managed well; (2) mistakes were made, which she was in the process of 

addressing; (3) the losses to date were approximately $500 million, which netted to negative 

$350 million as a result of gains in other positions; and (4) Firm earnings for the first quarter had 

not been affected "since [CIO] realized gains out of the [$]8.5 billion of value built up in the 

securities book." 

Mr. Braunstein and Ms. Drew met the following day, on April 6. Mr. Braunstein asked 

Ms. Drew to provide a detailed overview of the Synthetic Credit Portfolio's position by the 

following Monday, April 9. Later on April 6, Mr. Braunstein sent Mr. Dimon a brief update on 

his discussions that day regarding the Synthetic Credit Portfolio. He informed Mr. Dimon that 

he "[s]poke with Ina. Would like to add a liquidity reserve73 for [the] Series 9 Tranche Book 

(approx 150mm). Wilmot will be sending e-mail detailing analysis." Mr. Braunstein also 

informed Mr. Dimon of the overview he had just asked Ms. Drew to prepare by April 9, and 

added that he was "working with [the Investment Bank] to make sure there are no similar 

n Although the Synthetic Credit Portfolio had shifted to a net long position by early April under CSW 

10%, it also continued to hold short risk positions and substantial "jump-to-default" protection. 

73 A liquidity reserve is taken to mitigate uncertainty when a price is not available or where the exit cost 

may be uncertain due to illiquidity. 

57 
1023 

positions in the [Investment Bank's] book .... Separately think we need to look at coordinating 

between the CIO and [Investment Bank] approaches. Have talked to John Hogan about this as 

well.,,74 

Meanwhile, Ms. Drew reached out to a senior member of the Synthetic Credit Portfolio 

tearn on the afternoon of April 6 and asked for a "full diagnostic," explaining that the analysis 

should be "[m]ore focused on p [&11 than nva at [the] moment[.],,75 This individual said hc 

would perform the work, and explained that any further losses would be the "result of further 

distortions and marks between the series where we are holding large exposures." He added that 

he had ''no doubt that both time and events are healing our position," and stated that a trader with 

whom he had consulted was "convinced that our overall economic risk is limited." He also 

noted that the traders were concerned that information about CIO's Synthetic Credit Portfolio 

position had been leaked to the market a concern they had expressed previously suggesting 

that the losses may have been driven by their counterparties who, they believed, knew of CIO's 

positions and were distorting the market. In a separate e-mail to Ms. Drew, a trader estimated 

74 Late on April 6, Mr. Braunstein also received an e-mail from Mr. Venkatakrishnan, via Mr. Hogan, 

stating that Mr. Venkatakrishnan had noticed that the notional exposures at CIO were vel)' large, totaling 

about $10 trillion in each direction. Mr. Venkatakrishnan who had become involved in early March to 

assist with RWA calculations - was concerned about counterparty credit risk (i.e., risk that a counterparty 

would fail), and pointed out that $6.5 trillion of these positions carne from just four trades. Mr. 

Venkatakrishnan subsequently detennined that these numbers were incorrect, however (he had not 

recognized that many of these trades were internal and thus netted out), and the total notionals were much 

smaller than he had initially thought (although still large). Upon learning of this, on April 9, he infonned 

Messrs. Hogan and Goldman that he was "more comfortable now." 

75 This focus differed from the focus at the end of March, which at that time was principally On R W A. 

58 
1024 

that, although he would conduct a confirmatory analysis, the worst-case scenario for the second 

quarter (excluding "very adverse" outliers) would involve losses of no more than "-200 MM 

USD ... with the current book as it is." 

Over the weekend of April 7 and 8, two ofthe traders prepared the requested analysis. 

One ofthem initially attempted to formulate a loss estimate by constructing numerous loss 

scenarios that were very harsh, and then evaluating how those scenarios would impact the 

Synthetic Credit Portfolio's positions. For example, he assessed how the market might behave in 

a "bond market crash" or a "Middle East shock," and then attempted to determine how that 

market behavior could affect the Synthetic Credit Portfolio. In this way, he generated a number 

of probability-weighted profit-and-loss estimates for the second quarter; the estimates ranged 

from losses of $750 million to gains of $1.925 billion, with six ofthe nine scenarios generating 

losses (the smallest of which was a loss of$350 million). 

This trader sent his loss estimates to the other on April 7. According to the trader who 

prepared the loss estimates, the other trader responded that he had just had a discussion with Ms. 

Drew and another senior team member, and that he (the latter trader) wanted to see a different 

analysis. Specifically, he informed the trader who had generated the estimates that he had too 

many negative scenarios in his initial work, and that he was going to scare Ms. Drew ifhe said 

they could lose more than $200 or $300 million. He therefore directed that trader to run a socalled "Monte Carlo" simulation to determine the potential losses for the second quarter. A 

Monte Carlo simulation involves running a portfolio through a series of scenarios and averaging 

59 
1025 

the results. The trader who had generated the estimates did not believe the Monte Carlo 

simulation was a meaningful stress analysis because it included some scenarios in which the 

Synthetic Credit Portfolio would make money which, when averaged together with the scenarios 

in which it lost money, would result in an estimate that was relatively close to zero. He 

performed the requested analysis, however, and sent the results to the other trader in a series of 

written presentations over the course ofthe weekend. This work was the basis for a secondquarter loss estimate of -$150 million to +$250 million provided to senior Finn management, 

described below. 

On April 8, the same trader sent a draft presentation - prepared based on the Monte Carlo 

analysis - to the other trader, and advised him that "[ w]e should stress that some standalone 

economic scenarios can cost up to 500M although, mixing all the stress scenarios we get to a 

more decent number of 150 to 250 depending on whether spreads widen in Q2. The book keeps a 

usefuloptionality [i]fthings tum really bad again. This is what it is meant for. I am reviewing 

now the names in 10 on the run that could be damaging to us .. they are very few given that we 

still have a short risk in 1014-1015 and 1016 .... " 

On the afternoon of April 8, the trader who had generated the estimates was asked by a 

more senior team member for an estimate of potential profit-and-Ioss for the second quarter, with 

an 80% degree of confidence, assuming CIO held the positions and that they "maintain the book 

as balanced and 'neutral' as possible .... " The trader responded that he was "80pet confident 

the pnl for q2 is going to range between -150m and 250m .... This forecast includes the fact that I 

60 
1026 

am NOT optimistic for now about the impact of the recent press releases. I prefer to forecast q2 

results in light of what happened in end of qJ." His senior responded "Got ... it -Iet'[s] hope 

it['s] true - we must prove the point today[.]"76 

That evening, Ms. Drew led a call with Mr. Goldman and the senior members of the 

Synthetic Credit Portfolio team who, along with CIO Market Risk and others, had been 

involved with the profit-and-Ioss analysis and discussions over the weekend - to prepare for the 

following day's meeting with Mr. Braunstein. After the call, one ofthe attendees from the 

Synthetic Credit Portfolio team e-mailed Ms. Drew, copying Messrs. Dimon, Braunstein and 

others, and provided an overview of the trading strategies. He explained that CIO had decided to 

neutralize the Synthetic Credit Portfolio at the end of2011 because oflarge realized gains at the 

end of 20 11 from a corporate default, among other things. He stated that the "attempt to 

neutralize the book ha[dJ been unsuccessful," and that they had lost $575 million on the highyield short positions, but the investment-grade trade meant to neutralize the high-yield short 

position had delivered only $50 million in revenue, meaning that the Synthetic Credit Portfolio 

had lost $525 million year-to-date. He offered two reasons that the price movements oflong and 

short positions had acted in what he characterized as an "idiosyncratic" manner and had not 

correlated with each other as expected: (1) the off-the-run long positions (10-9 and iTraxx 9) 

steepened by 24 basis points because of excess liquidity and a "pro-risk environment" in the 

76 The full text of the senior team member's e-mail stated that they must "prove the point today with as 

much ambiguity as poss[iblel." It is the Task Force's understanding that he meant to say "little" rather 

than "much." 

61 
1027 

market; and (2) the series in which the Firm held key long positions (Le., the IG-9) 

underperformed other investment-grade indices. He also explained that "we [had] chosen these 

IG proxies" to offset the short high-yield positions because they contained "the very names that 

we are short in the HY instruments," and that "although thus far unsuccessful, these IG proxies 

best neutralize and balance our synthetic books to event risk." 

He concluded that the Synthetic Credit Portfolio was "overall risk balanced," and for the 

second quarter, he provided an estimate of "a P&L range of -150MM to +250MM," with a 

"significantly positive" upside potential in the event of corporate defaults. His statement about 

default protection was consistent with a contemporaneous analysis that was being performed by 

Mr. Venkatakrishnan and a member of Model Risk and Development, and provided to Messrs. 

Dimon and Braunstein, which concluded that "[t]oday there is considerable default protection 

coming from IG9 tranches ... ," explaining that the IG-9 positions were currently positioned for 

a "gain of + 146m on average per name to a loss of -572m per name post December 2012" for 

each ofthe 121 names in the IG-9 index." 

On April 9, Ms. Drew, Mr. Braunstein, Mr. Wilmot, and an executive from the Synthetic 

Credit Portfolio team met to discuss the Synthetic Credit Portfolio. Ms. Drew told Mr. 

Braunstein that the Synthetic Credit Portfolio was balanced, and Mr. Braunstein requested 

additional follow-up, including a "clear analysis of the positions - maturities, balances, spreads 

(current) and normalized." Mr. Braunstein updated Mr. Dimon bye-mail on this meeting, as 

well as on a number of other press- and analyst-related topics. Shortly after the meeting, the 

62 
1028 

executive from the Synthetic Credit Portfolio also forwarded Mr. Braunstein a written 

presentation on the Synthetic Credit Portfolio and information on a proposed liquidity reserve for 

the IG-9 tranches in the Synthetic Credit Portfolio. The presentation summarized likely profitand-loss impacts under a variety of scenarios, all of which were viewed by Mr. Braunstein as 

manageable. 

That evening, Mr. Hogan e-mailedMr.DimonregardingCIO.Mr. Hogan had been 

independently discussing the Synthetic Credit Portfolio with Mr. Venkatakrishnan and an 

individual from Model Risk and Development, who were in London and had been assisting in 

assessing certain aspects oftbe Synthetic Credit Portfolio. Among other tbings, Mr. Hogan told 

Mr. Dimon that "the current issue [relating to losses incurred by the Synthetic Credit Portfolio 1 is 

fine and I understand tbc rationale for it," but added that he tbougbt the cra needed "tighter 

governance/controls/escalation protocols" and that he believed Ms. Drew agreed. Messrs. 

Braunstein and Hogan also received an analysis from Mr. Goldman regarding tbe Synthetic 

Credit Portfolio's counterparty risk (i.e., risk based on the creditworthiness of particular 

counterparties and their ability to perform their contractual obligations). 

The following day, one of the traders also e-mailed Ms. Drew, Mr. Wilmot, Mr. 

Goldman, Mr. Weiland and an executive from the Synthetic Credit Portfolio team an explanation 

of why his team had decided to increase their investment-grade position instead of reducing 

high-yield short positions. He stated that they had been unable to trade out ofthe bigh-yield 

short positions and viewed the addition of a long-risk position in IG-9 as the "next best hedge." 

63 
1029 

Mr. Wilmot forwarded a slightly revised version of this explanation to Messrs. Dimon, 

Braunstein, and Hogan. 

Mr. Wilmot also e-mailed Mr. Dimon, Mr. Braunstein, Mr. Hogan, Ms. Drew, and others, 

providing information on the size ofthe net positions in the Synthetic Credit Portfolio. The email stated that CIO's IG-9 position represented the equivalent of 10-15 trading days of 100% of 

the average daily trading volume. 77 This e-mail (along with a subsequent April 12 e-mail 

showing longer exit periods for certain of the I G-9 instruments) indicated that the positions were 

large, but senior Firm management took comfort from the fact that CIO had no need to sell the 

positions and could therefore wait until the market normalized. 

April 10 was the first trading day in London after the "London Whale" articles were 

published.78 When the U.S. markets opened (i.e., towards the middle of the London trading day), 

one ofthe traders informed another that he was estimating a loss of approximately $700 million 

for the day. The latter reported this information to a more senior team member, who became 

angry and accused the third trader of undermining his credibility at JPMorgan. At 7:02 p.m. 

GMT on April 10, the trader with responsibility for the P&L Predict circulated a P&L Predict 

indicating a $5 million loss for the day; according to one of the traders, the trader who circulated 

this P&L Predict did so at the direction of another trader. After a confrontation between the 

77 This estimate was prepared by CIO Market Risk, and initially circulated (0 Ms. Drew, Mr. 

Venkatakrishnan, Mr. Goldman, Mr. Weiland and senior members ofthe Synthetic Credit Portfolio tearn. 

The estimate does not account for the size ofIG-9 tranche positions, and also does not reflect the potential 

time required to exit the position, generally. 

78 The markets were closed in London on Monday April 9 due to the Easter holiday. 

64 
1030 

other two traders, the same trader sent an updated P&L Predict at 8:30 p.m. GMT the same day, 

this time showing an estimated loss of approximately $400 million. He explained to one of the 

other traders that the market had improved and that the $400 million figure was an accurate 

reflection of mark -to-market losses for the day. 

After the markets closed, Ms. Drew notified Messrs. Dimon and Braunstein about the 

day's mark-to-market loss of $412 million. It was, she observed, an eight-standard-deviation 

event that she attributed to the market's belief that JPMorgan would have to liquidate the 

positions described in the articles.79 Shortly thereafter, Ms. Drew circulated a second e-mail to 

Messrs. Dimon, Braunstein, Hogan, Zubrow, Staley, Goldman, Wilmot and an executive from 

the Synthetic Credit Portfolio, attaching the trader's updated second-quarter profit-and-loss 

summary and scenario analysis, which was to be discussed the following morning.80 The 

analysis showed an 80% likelihood of a second-quarter result in the range of -$250 million to 

+$350 million for the Synthetic Credit Portfolio, with a 10% "extreme" result of -$650 million 

and a 10% "optimistic" result of +$1.725 billion. 

On April 11, Messrs. Dimon and Braunstein received updates related to the Synthetic 

Credit Portfolio. Mr. Hogan also copied them on a description of the Investment Bank's risk 

limits for comparable products and expressed the view that these should be implemented in CIO 

79 A senior member ofthe Synthetic Credit Portfolio team stated at the time that the losses were 

attributable to the market's increased awareness of JPMorgan's position and were thus part ofan 

aberrational pattern that would eventually "mean revert." 

gO The updated estimate noted that "these scenarios do not include 10 April P&L, which would accrete 

back into each scenario +$400MM, if re-calibrated for today's market moves." 

65 
1031 

as soon as possible. Mr. Hogan separately informed Mr. Braunstein that Mr. Venkatakrishnan 

had informed him - and had included in an analysis being prepared - that in an extreme loss 

scenario (ofa steepening movement of20 basis points), the total loss for the second quarter 

could be up to $1 billion if certain offsetting hedges did not work, and up to $550 million if they 

did work. 8i 

On April 11, Mr. Wilmot circulated to Messrs. Dimon, Braunstein and others a 

presentation on the Synthetic Credit Portfolio that addressed, among other things, notional 

exposure relative to various counterparties,82 maturities, certain positions and profit-and-loss 

scenarios, noting that it had been reviewed with Jes Staley,S3 Mr. Braunstein, Ms. Drew, Mr. 

Zubrow and Mr. Hogan. The presentation outlined second-quarter profit-and-Ioss estimates for a 

number of scenarios, including a -$150 million "Status Quo" estimate and a +$350 million 

"Central Scenario" estimate.,,84 1be presentation also detailed the extent of the Synthetic Credit 

Portfolio's considerable default protection coming from the IG-9 tranche positions. It further 

81 The email circulating these materials reads: "Jamie, Attached please fmd 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." This presentation was created by a member of CIa Market 

Risk, and initially circulated to Ms. Drew, Mr. Goldman, Mr. Wilmot, Mr. Weiland, Mr. 

Venkatakrishnan, and members of the Synthetic Credit Portfolio and Model Risk and Development 

teams, to usc in an unspecified meeting. 

82 The notional information appears to be directed at counterparty risk, and identifies (among other things) 

the nct notionals outstanding with other parts of the Firm ($13 billion), with an exchange through which 

certain third-party trades are cleared ($96.7 billion) and with third parties for whom trades are not cleared 

through the exchange ($47.5 billion). 

83 Mr. Staley was, at this time, the Chief Executive Officer ofthe Investment Bank. 

84 The presentation also outlined a 10% "extreme" result of a $650 loss million and a 10% "optirrllstic" 

result of $1. 725 billion gain. 

66 
1032 

included a description of Mr. Venkatakrishnan's April 11 extreme loss scenario analysis, 

described above.85 

Finally, Messrs. Dimon and Braunstein were provided an update on press activity. This 

included a Wall Street Journal article entitled "Making Waves Against the Whale," which 

suggested that CIO's activity in the market had affected prices, first by driving down the price of 

buying protection when it was selling a large amount of protection, and then causing the price of 

protection to go back up when CIO completely stopped selling protection. Mr. Braunstein 

forwarded the article to Ms. Drew and others and asked, "[i]f the seIling pressure impact 

described in the article was accurate[,] then [might] the change in value [that is causing CIO to 

lose money] ... be in part a return to a more normalized range post our selling activity." One of 

the recipients responded by circulating an analysis from CIO Market Risk that, as he described it, 

demonstrated that CIO's activity was "not a big driver of the market moves." 

That same day (April 11), Ms. Drew forwarded to Messrs. Dimon, Braunstein, Hogan, 

Zubrow and others an "Executive Summary" e-mail written by one of the traders. This trader 

characterized the Synthetic Credit Portfolio as "balanced in terms of directionality." He 

85 Mr. Venkatakrishnan's estimate was based on an underlying analysis performed by CIO. Although not 

evident on the face of the document, the Task Force has determined that the underlying analysis was 

based on an incomplete analysis by CIO London of the potential risks presented by the Synthetic Credit 

Portfolio. Specifically, the analysis is predicated on losses arising from a steepening of the credit curve, 

and assumes the existence in the Synthetic Credit Portfolio of a significant flattening position that would 

limit potential exposure. In fact, there was not a significant flattener in the Synthetic Credit Portfolio, and 

the analysis also did not consider the impact of an outright movement in the curve. As a result, the 

presentation's estimate of the worst-case profit-and-Ioss scenarios was understated. Mr. Venkatakrislman 

was not aware of these issues when he assisted CIO. 

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1033 

acknowledged that the hedges in the Synthetic Credit Portfolio had not perfonned as expected 

and that the market "goes against all economic sense," but stated that, although it "might take 

some time," he remained "very confident" that the Synthetic Credit Portfolio would recover its 

losses for three reasons: (I) because of the increased carry the Synthetic Credit Portfolio gained 

as a result of market moves; (2) because of the possibility of future defaults that might generate 

revenue; and (3) because the market for the positions that should have (but had not yet) offset the 

losses would, in his view, "mean revert" and eventually begin to operate as expected. He also 

suggested that the press coverage may have played a role in distorting the market value ofthe 

positions. A chart attached to the e-mail shows that the Synthetic Credit Portfolio had almost 

doubled its net notional amount of certain synthetic credit positions since January 2012. 

Messrs. Dimon and Braunstein also received additional data,from Ms. Drew and Mr. 

Goldman regarding the Synthetic Credit Portfolio on April 12, including additional infonnation 

about the Synthetic Credit Portfolio's net notionals, background on the synthetic credit market, 

the historic purpose of the Synthetic Credit Portfolio, and infonnation regarding the size of 

certain IG-9 and high-yield positions. On the evening of April 12, as is customary, the Finn's 

Executive Committee met in advance of the first-quarter earnings call that was scheduled for the 

following day. Ms. Drew spoke about CIO-related issues that would likely be raised the next 

morning. She stated that the Synthetic Credit Portfolio had significant value and was weJIbalanced, and that the current issues were a media event that had pushed the market against CIO. 

After the meeting concluded, Mr. Dimon confirmed with Ms. Drew that CIO could hold its 

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1034 

positions for as long as it wanted, and that no third party had a contractual right to force it to sell. 

Mr. Dimon wanted to confirm that CIO could hold the positions until the market returned to 

normal levels, and that there was no contractual risk that CIO would be required to sell unless it 

wanted to do so. 

The first-quarter earnings call was held on the morning of April 13. During the earnings 

call, Mr. Braunstein addressed the Synthetic Credit Portfolio issues. While he had prepared 

remarks regarding the Firm's financial results, he had not planned on addressing Synthetic Credit 

Portfolio positions, and thus did not have prepared remarks relating to CIO. However, shortly 

before the call, the Global Head of Corporate Communications suggested that Mr. Braunstein 

address the matter and he agreed to do so. Mr. Braunstein explained on the call that the 

Synthetic Credit Portfolio had historically taken positions designed to manage the potential 

losses that could result from a significant stress credit environment. Specifically, Mr. Braunstein 

explained that: 

[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. 

Mr. Braunstein further stated his belief that the Firm was "very comfortable" with the positions. 

Mr. Dimon did not discuss the Synthetic Credit Portfolio in his opening remarks, but he 

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1035 

responded to analyst questions on the subject and agreed with an analyst's characterization of the 

issue as a "tempest in a teapot." 

Mr. Dimon had been briefed on the issue and the work being performed, although he had 

not been involved firsthand in many of the discussions that had taken place during that period.86 

After the analyst call, Mr. Dimon sent an e-mail to Mr. Hogan asking why the Synthetic Credit 

Portfolio team had decided to increase their investment-grade position instead of reducing the 

high-yield position. Mr. Hogan responded that he and Mr. Braunstein had asked the same 

question and had been told that increasing the position "was [the] most 'efficient' way to do it," 

but that he (Mr. Hogan) thought that CIO had "wanted to improve the carry on the book by 

selling protection and taking in some premium." 

4. Continued Declines and Internal Reviews 

In the week after the April 13 earnings call, the Synthetic Credit Portfolio experienced 

additional losses totaling approximately $117 million.87 By the week of April 23, the losses 

began to accelerate rapidly. On April 23, the Synthetic Credit Portfolio experienced a single-day 

&6 Mr. Dimon had not been in the office from April 2 until his return on April 12. 

87 Mr. Goldman provided the DRPC on April 17 with an update on CIO's activity, focusing on recent 

news reports regarding the so-called "London whale." According to the meeting minutes, Mr. Goldman 

"reviewed the history ofClO's synthetic credit book and how it fits within CIO's overall hedging 

strategy. He described the attributes of the lG·9 index and how purchasing of that index was used to 

ofE~et other existing positions. Mr. Goldman noted that recent news reports were based on an inaccurate 

market perception that the portfolio was unhedged, based on a lack of knowledge of how ClO manages 

the structural risk of the company; he reported that in fact the risk was balanced. In response to questions 

from the Committee, Messrs. Braunstein and Hogan noted that the information they had received was 

consistent with this analysis. Messrs. Goldman and Hogan also described an ongoing post mortem on 

these trades that includes governance and market limits." 

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1036 

loss of approximately $161 million. This was followed by losses of approximately $82 million 

and $188 million on April 24 and 25, respectively (with a total loss of almost $800 million over 

the course of the six trading days ending on April 30). These losses were inconsistent with the 

earlier loss estimates and prediction from one of the traders that the market would "mean revert," 

and they caused Messrs. Dimon, Braunstein and Hogan as well as Ms. Drew to question whether 

the Synthetic Credit Portfolio team adequately understood the Synthetic Credit Portfolio or had 

the ability to properly manage it. 

Senior Firm management decided to commission a thorough review of the Synthetic 

Credit Portfolio, conducted by personnel outside ofCIO, in order to better understand the losses 

it was experiencing and whether the Synthetic Credit Portfolio was being properly managed. On 

April 26, Mr. Hogan directed a senior member of Firm -wide Market Risk to commence a 

position-by-position review of the Synthetic Credit Portfolio. This individual, who was in New 

York on business, returned to London on April 27 and began working with an experienced trader 

from the Investment Bank and others to analyze the Synthetic Credit Portfolio. As requested by 

Mr. Hogan, this team examined every position in the Synthetic Credit Portfolio, and attempted to 

understand how each position was performing and how it was (or was not) correlated to the other 

positions in the Synthetic Credit Portfolio. The team worked long hours on this review, 

reporting back to senior Firm management on daily update calls. By Sunday, April 29, after 

hearing its initial reports, Messrs. Dimon and Hogan asked the team to take over responsibility 

for the Synthetic Credit Portfolio. 

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1037 

The team continued their intensive review (and the twice-daily update calls) throughout 

the following week. The team, purposefully not taking into account CIO's views as to what they 

had intended and how the Synthetic Credit Portfolio was supposed to work, independently 

analyzed the correlations among the various positions under a range of market scenarios. Based 

on this review, they concluded that the Synthetic Credit Portfolio was not as well protected 

against various market scenarios as had been previously thought. In addition, they found that the 

market's knowledge of the positions and a continued decrease in liquidity made risk reduction 

even more challenging. 

5. Disclosure a/the Losses 

The JPMorgan Audit Committee met on May 2 to review a draft of the first-quarter Form 

10-Q. At that meeting, Ms. Drew made a presentation on the Synthetic Credit Portfolio and 

explained the rationale for the trades that had been put on in the first quarter. Ms. Drew provided 

the explanation given to her previously by one ofthe traders as to the increase in the notional 

size of certain positions in the Synthetic Credit Portfolio, explaining (among other things) the 

RW A reduction required by the upcoming Basel rules, the anticipated improvement of the 

economy at the end of 20 11, the purported difficulties encountered by the traders in unwinding 

the positions, and the ensuing use of the IG-9 long position as an offset to the high-yield short 

positions. She also explained that the Synthetic Credit Portfolio had, by the date of the meeting, 

moved to a net long credit position. 

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1038 

The deadline for filing the Fonn I O-Q was May 10, and management noted at the May 2 

meeting that it would continue its efforts to understand the Synthetic Credit Portfolio's positions 

- and the likely losses as it prepared the Fonn 10-Q for filing. On May 10, JPMorgan filed its 

first-quarter 2012 Fonn 10-Q, and on an analysts' call disclosed that the Synthetic Credit 

Portfolio had incurred approximately $2 billion in mark-to-market losses in the second quarter to 

date, with the possibility of additional future losses and volatility as the positions were unwound. 

As a result ofthe operational issues relating to the VaR model described in Appendix A, the 

Finn also stated on May 10 that it had reverted back to its prior VaR model for CIO. 

In addition to the review led by the senior individuals from Finn-wide Market Risk and 

the Investment Bank, the Finn also perfonned substantial additional work from late April up 

until the May 10 filing relating to the valuation of the positions in the Synthetic Credit Portfolio 

to confinn that they had been priced consistently with Finn policy and U.S. GAAP. The review 

had two primary components. First, a combination of individuals from CIO Finance, the Finn's 

internal accounting department, valuation experts from the Investment Bank, and others 

examined the prices assigned by CIO to the positions in the Synthetic Credit Portfolio, including 

at March 30.88 This work included collecting market infonnation about the positions in the 

Synthetic Credit Portfolio; perfonning an analysis of the positions using the Investment Bank's 

valuation methodology and personnel; and obtaining explanations from the traders about the 

88 Price validation analyses were conducted by (among others) the Head of JPMorgan's Accounting 

Policy Group for CIO EMEA. 

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1039 

bases for the prices assigned to the positions in question. The review of the pricing data 

confmned that the valuations of the positions in the Synthetic Credit Portfolio were within the 

range of reasonable fair values for such instruments. 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. 89 And, when questioned about 

the March 30 marks, the traders all confirmed that the marks at March 30 reflected their goodfaith estimation of the positions' value, and olle of them explicitly denied any bias. 

Second, in addition to the review of the front office marks, the Firm also conducted a 

review of the VCO process related to the valuation of the Synthetic Credit Portfolio. As a result 

of its work, the Firm confirmed that PwC was aware of the CIO VCG process and the Firm 

concluded that the process - including the identification of a mid-market price and application of 

a threshold around that price - was designed to result in marks that were compliant with U.S. 

GAAP. The Firm therefore concluded, after consultation with PwC (which was conducting its 

quarterly review procedures), that the marks were determined in accordance with U.S. GAAP 

and Firm policy. 

During its subsequent efforts to obtain and understand all the facts relating to the CIO 

losses, the Task Force became aware of facts that caused it (and the Firm and PwC) to revisit 

89 There were some marks that had been outside the thresholds, but those had been adjusted by VCG in 

early April to the threshold, for a total adjustment of approximately $17 million. 

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1040 

these conclusions.9o With respect to the front office marks, the Task Force learned that not all of 

the marks appeared to reflect an unbiased assessment by the front office of exit prices and 

instead that some of the marks reflected, at least in part, pressure exerted by one of the traders to 

minimize the losses shown. This new information, which was uncovered in electronic 

communications and recorded conversations subsequent to the May 10 filing, was shared with 

'?wC, and the Firm decided - following analysis and consultation with PwC - to restate its 

fmancial statements for the first quarter to reflect the valuations that would have been employed 

if the positions had been marked to an objectively determined "mid" valuation.91 The 

announcement of the restatement was made on July 13. 

D. Risk Limits and Excessions 

The three primary categories of risk metrics applicable to CIO were VaR, stress, and nonstatistical credit-spread widening metrics (Credit Spread Basis Point Value ("CSBPV") 92 and 

CSW 10%93). Pursuant to Firm policy, each of these metrics was subject to certain limits. 

Limits are classified by type, as Levell, 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 1O-Q VaR and CIO stress 

90 Much of this subsequently discovered infonnation is described in Section Il.C.2 of this Report (among 

other places) and includes the discovery ofthe "divergence," as well as the March 30 and April 10 

valuation-related evenls. 

91 The Finn re-marked the positions to objectively determined "mid" valuations, which the Finn believes 

was reasonable under the circumstances. 

92 See Section ILD.2. 

93 See Section ll.D.3. 

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1041 

limits were Levell limits, while the CIO CSBPV and CIO CSW 10% limits were Level 2 limits. 

Any excessions of Level I or Level 2 limits had to be reported to the signatories to the limit, the 

Risk Committee for the line of business, and the Market Risk Committee or Business Control 

Committee for the line ofbusiness.94 Under Firm policy, all excess ion 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. Excessions 

are addressed differently depending on type, but in the event of an "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. 

Limits are not rigid restrictions, and some excess ions are expected. The excession 

process, however, serves an important function: triggering discussion and analysis ofthe reasons 

for an excession and of the limit that has been exceeded. 95 

94 There was no specific number of days by which the notifications were required to be distributed at the 

time, although Market Risk Management typically sent such notifications within a matter of days of a 

limit having been exceeded. As described in Section IV.B.2, as part of its remedial measures, the Firm 

has instituted a policy specifying procedures, including time limits, for escalation of limit excess ions. 

95 An earlier limit breach within CIO appears to have been part of the impetus for a review ofCIO's limit 

structure begun by CIO's Head of Market Risk in the summer of2011, described below. Beginning in 

March 2011, CIO's aggregate stress loss limit was in breach for some time. The breach, which was 

discussed among the ChiefInvestment Officer, the Firm-wide Chief Risk Officer, and the CIO Head of 

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1042 

At various points and for different reasons, discussed in further detail below, the limits 

for each ofthese metrics were exceeded in the first quarter of2012. The CIO GloballO-Q VaR 

limit was exceeded in the second half of January. These excessions were addressed by position 

changes and by implementation of a new VaR model, which had been in process for almost six 

months when the CIO VaR began to be exceeded. The other excessions ofCIO limits in the first 

quarter of2012, namely, the CSBPV limit, the CSW 10% limits, and the stress loss limits, were 

the subject of discussion within CIO, and, in the case of the stress loss limit, among senior Firm 

management. However, the trading had largely ceased by the time the aggregate CSW 10% limit 

and the stress loss limits, in particular, were exceeded in late March and April 2012.96 

1. Value at Risk 

VaR is a statistical estimate of the risk ofloss on a portfolio of assets. A portfolio's VaR 

represents an estimate of the maximum expected mark-to-market loss over a specified time 

period, generally one day, at a stated confidence level, assuming historical market conditions. 

Beginning in mid-January 2012, CIO breached its VaR limit on multiple days, which also 

contributed to breaches of the Firm's VaR limit. CIO explained to Mr. Hogan and Firm-wide 

Market Risk that the breaches were being addressed in two ways: (1) continued management of 

CIO's positions, and (2) implementation ofa new, "improved" VaR model for CIO. In response 

Market Risk, appears to have been caused principally by activity unrelated to the Synthetic Credit 

Portfolio, in CIO's international rates sector. 

96 CIO's mark-to-market CSW 10% limit was flIst exceeded on March 22, 2012, the day before Ms. Drew 

gave the instruction to stop trading. The aggregate CSW 10% limit was not exceeded until April 10, 

2012. 

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1043 

to the notification ofa second consecutive breach in the Firm-wide VaR limit on January 18 

(which was primarily driven by "position changes in CIO"), Mr. Hogan requested that Mr. 

Weiland and a senior member of Firm-wide Market Risk look into the factors driving the 

increase in the CIO VaR and report back with a recommendation. Mr. Weiland advised Firmwide Market Risk that it was CIO's intention to "bring the VaR down, even under the current 

VaR model," and another member ofCIO Market Risk further advised that they expected the 

breach of the VaR limit to be resolved through "active risk management," meaning by trading in 

a manner expected to reduce the risk profile of the portfolio. In an e-mail to Mr. Hogan on 

January 20, Mr. Goldman explained that "position offsets to reduce [the CIO] VaR" were 

happening daily. With respect to the implementation ofa new VaR model, Mr. Weiland 

informed Firm-wide Market Risk that CIO was in the final phase of a model review for a "new 

VaR model for the tranche book" (meaning the Synthetic Credit Portfolio) and that the new 

model was expected to result in a lower VaR for CIO. 

Mr. Weiland recommended a temporary, one-offincrease in the Firm-wide VaR limit, 

with an expiration set to coincide with the expected timing of the VaR model approval. A 

subsequent e-mail from Market Risk Reporting on January 23 requested Messrs. Dimon and 

Hogan's approval for a temporary increase in the Firm's 10-Q VaR limit97 from $125 million to 

$140 million, expiring on January 31, 2012. The request noted that there was an approval 

97 The Firm's "lO-Q VaR" is the VaR faT all the Finn's mark-to-market positions; it includes CIO's 

GloballO-Q VaR. 

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1044 

pending for a new model for the CIO Synthetic Credit Portfolio and that the new model was 

expected to reduce Firm-wide VaR back below the $125 million Iimit.98 Messrs. Dimon and 

Hogan approved the temporary increase in the Firm-wide VaR limit, and Ms. Drew approved a 

temporary increase in CIO's IO-Q VaR limit. In an e-mail to Mr. Hogan on January 25, Mr. 

Goldman reported that the new model would be implemented by January 31 "at the latest" and 

that it would result in a "significant reduction" in the VaR. On January 28, in response to an 

inquiry from Mr. Hogan about the change in methodology, Mr. Goldman advised him that the 

new model had been approved by the Model Review Group and that the Model Review Group 

considered it to be "superior" to the model used by the Investment Bank. There was no 

corresponding change made to the CIO Global IO-Q VaR limit at the time of the new model's 

implementation - i.e., it remained at $95 million.99 Following implementation of the new model, 

the CIO VaR fell below the limit, as expected. 

98 As explained in further detail in Appendix A, a significant reduction in the CIa VaR was expected 

upon implementation of the new model, which had been in development throughout the Fall of201!. 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. 

99 A reduction in the CIa VaR limit was being con.sidered at this time as part of a broader ongoing 

discussion about a revised limit structure for CIa. For example, in a January 25, 2012 e-mail exchange, 

Mr. Hogan asked Mr. Goldman whether CIa had any intention of further increasing its temporary VaR 

limit or recommending an increase in the Firm-wide VaR limit in response to the ongoing breaches in the 

CIa and Firm-wide VaR limits. Mr. Goldman replied, "The new VaR model was approved today and we 

will get a significant reduction under the limit when implemented - January 31" at the latest. I do not 

think it's worth changing limits till [the new 1 model is implemented." Although a proposal to reduce the 

VaR limit and to change the limit structure of CIa was under active discussion at this time (Messrs. 

Goldman and Weiland presented a version of it to Ms. Drew in February 2012 and Mr. Weiland made a 

presentation to the CIa Risk Committee in March), a new CIa limit structure was not implemented until 

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2. Credit Spread Basis Point Value 

CSBPV is one measure of the sensitivity of a portfolio to a one basis point move. 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. 

Although Ms. Drew did not regularly receive reports with CIO's CSBPV figures or receive 

notifications from Market Risk Reporting when the limit was exceeded (because it was a Level 2 

limit and she was not a signatory to it), there was discussion among other personnel within the 

CIO Risk Management function when the CSBPV limit began to be exceeded in the first quarter. 

For example, when the CSBPV limit was first breached on January 6, 2012, an individual from 

CIO Market Risk, in an e-mail to Mr. Goldman, Mr. Weiland and two senior members of the 

Synthetic Credit Portfolio team noted that CIO was actively taking steps to reduce risk in order 

to move within the CSBPV threshold. This individual continued to monitor the CSBPV limit 

status and to update his manager. Ms. Drew was aware, by virtue of an e-mail she received from 

Mr. Goldman on February 13,2012, that the CIO Global Credit Spread CSBPV limit had been in 

breach for most of the year. She responded that she had no memory of this limit and that, in any 

case, it needed to be "recast with other limits" because it was "old and outdated." It was one of 

May 2012, and those limits were substantially different from and more detailed than the limits that had 

been included in Mr. Weiland's proposal. 

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1046 

the limits that was to be adjusted or replaced altogether as part of a proposal by Mr. Weiland to 

revise the CIO limit structure, which was pending at that time.1oo 

At various times, beginning in February, CIO Market Risk suggested a temporary 

increase in the mark-to-market ("MfM") CSBPV limit, from $5 million to $20 million, $25 

million or $30 million. On March I, Firm-wide Market Risk Management e-mailed Mr. Weiland 

and a senior member of the Synthetic Credit Portfolio team (the signatories to the limit) 

requesting their approval to temporarily increase the aggregate and MfM CSBPV limits until 

March 31.101 Although Mr. Weiland agreed with the suggestion to increase the limit, neither he 

nor his co-signatory from the Synthetic Credit Portfolio approved the request for a temporary 

increase and no such increases were implemented. An e-mail 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." The notification went on to point out that 

the CSBPV had certain flaws that made it less reliable than the CSW 10% (i.e., that it was not 

normalized for the level of spreads and did not capture convexity) and that a full limit review 

was underway for the CIO business, which would result in a proposal that was expected to 

address those issues. 

100 See n. 99. 

101 The CSBPV fOT both the mark-to-market portfolio and part of the asset-backed securities portfolio are 

included in the calculation of the aggregate CSBPV metric. The MTM CSBPV limit takes into account 

only the CSBPV for the mark-to-market portfolio. 

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3. Credit Spread Widening 10% and Stress Loss 

The CIO CSW 10%102 aggregate and mark-to-market limits and the aggregate and markto-market stress loss limits began to be exceeded in late March. CSW 10% stresses all credit 

spreads in a book wider by 10% - for example, a CDS currently marked at 100 basis points will 

be revalued at 110 basis points - and then calculates the profit-and-Ioss effect. 

The CS W 10% mark -to-market limit began to be exceeded on March 22, 2012, and the 

CSW 10% aggregate limit began to be exceeded on April 10, 2012. The MTM limit breach was 

first reported in the CIO Daily Limit Report on March 26, 2012, and the aggregate limit breach 

was reported on April II, 2012. The Daily Limit Report was distributed within CIO to, among 

others, Mr. Goldman and Mr. Weiland, although it was not distributed to Ms. Drew. It included 

a Position Limit and Loss Advisory Summary Report that provided detail on each of CIO's 

limits, including the amount of each limit, the limit's current level of utilization, the percentage 

by which a limit was in excess, if any, the amount of each limit in the previous four trading days, 

and the monthly trend for each limit. Both CIO CSW 10% limits continued to be exceeded 

throughout April. The excessions were attributed to "portfolio and hedge rebalancing since [the 1 

start of2012." 

On March 29,2012, the aggregate and mark-to-market stress limits for CIO, which were 

tested weekly, also began to be exceeded. Stress testing is used to measure the Firm's 

vulnerability to losses under adverse and abnormal market environments. Its purpose is to assess 

,0, For an explanation ofCSW 10%, see n. 6. 

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the magnitude of potential losses resulting from a series of plausible events in these hypothetical 

abnormal markets. Stress testing is performed by applying a defmed 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 tum 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.)03 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. 

III. Key Observations 

The Task Force agrees with Mr. Dimon's public acknowledgement that CIO's trading 

strategies for the Synthetic Credit Portfolio in the first quarter of 20 12 were "poorly conceived 

and vetted," CIO "did not have the requisite understanding of the risks [it] took," and "risk 

)03 The report was circulated to Mr. Dimon, Mr. Staley, Mr. Hogan, Mr. Zubrow, Ms. Drew, Mr. 

Goldman and Mr. Weiland, among others. 

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control functions were generally ineffective in challenging the judgment of CIO's trading 

personnel." 

A. CIO Judgment, Execution and Escalation in tbe First Qnarter of 2012 Were 

Poor 

The Task Force has identified six areas in which CIO failed in its judgment, execution 

and escalation of issues in the first quarter of2012: (1) CIO management established competing 

and inconsistent priorities for the Synthetic Credit Portfolio without adequately exploring or 

understanding how the priorities would be simultaneously addressed; (2) the trading strategies 

that were designed in an effort to achieve the various priorities were poorly conceived and not 

fully understood by CIO management and other CIO personnel who might have been in a 

position to manage the risks ofthe Synthetic Credit Portfolio effectively; (3) CIO management 

(including CIO's Finance function) failed to obtain robust, detailed reporting on the activity in 

the Synthetic Credit Portfolio, and/or to otherwise appropriately monitor the traders' activity as 

closely as they should have; (4) CIO personnel at all levels failed to adequately respond to and 

escalate (including to senior Firm management and the Board) concerns that were raised at 

various points during the trading; (5) certain ofthe traders did not show the full extent of the 

Synthetic Credit Portfolio's losses; and (6) CIO provided to Firm management excessively 

optimistic and inadequately analyzed estimates of the Synthetic Credit Portfolio's future 

performance in the days leading up to the April 13 earnings call. In addition, the Task Force has 

considered the impact ofthe Firm's compensation structure on the events in question. 

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1050 

1. Tile Priorities 

By early 2012, CIO management, including Ms. Drew, had imposed multiple priorities 

on the Synthetic Credit Portfolio. These priorities included (l) balancing the risk in the 

Synthetic Credit Portfolio, (2) reducing RWA, (3) managing profits and losses, (4) managing or 

reducing VaR, and (5) providing 'jump-to-default" protection. These priorities were potentially 

in conflict, and the requirement that the traders satisfY all ofthese goals appears to have 

prompted at least some of the complicated trading strategies that led to the losses. Rather than 

imposing a multitude of potentially competing priorities on the traders, CIO management should 

have determined (or engaged senior Firm management on the question of) which of these 

priorities should take precedence, how they could be reconciled, and how CIO intended to 

execute on the priorities. That did not occur and instead, CIO management imposed inconsistent 

and potentially competing priorities on its traders. 

2. Tile Trades 

The trading strategies that were put in place in early 2012 were poorly conceived and 

vetted, and neither the trading nor its impact on RW A were fully understood by CIO 

management or the traders. The Firm expected them to subject CIO trading strategies to rigorous 

analysis and questioning prior to implementation, and to understand the risks inherent in the 

trading strategies. Here, they did not, and instead put in place the trading strategy without fully 

understanding what risks were being taken on, particularly in light of the size of the positions 

being built over the course ofthe fust quarter of2012. 

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1051 

3. The Reporting 

The Firm's ChiefInvestrnent Officer did not receive (or ask for) regular reports on the 

positions in the Synthetic Credit Portfolio or on any other portfolio under her management, and 

instead focused on VaR, Stress VaR, and mark-to-market losses. As a result, she does not appear 

to have had any direct visibility into the trading activity, and thus did not understand in real time 

what the traders were doing or how the portfolio was changing. And for his part, given the 

magnitude of the positions and risks in the Synthetic Credit Portfolio, CIO's CFO should have 

taken steps to ensure that CIO management had reports providing information sufficient to fully 

understand the trading activity, and that he understood the magnitude of the positions and what 

was driving the performance (including profits and losses) of the Synthetic Credit Portfolio. 

4. The Concerns 

A number ofCIO employees, including Ms. Drew, Mr. Goldman, Mr. Wiimot, Mr. 

Weiland and members of the Synthetic Credit Portfolio team became aware of concerns about 

aspects ofthe trading strategies at various points throughout the first quarter. I04 However, those 

concerns failed to be properly considered or escalated, and as a result, opportunities to more 

closely examine the flawed trading strategies and risks in the Synthetic Credit Portfolio were 

missed. Examples include (but are not limited to): 

104 See Section II.C.1. 

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December 2011 

One ofthe traders raised concerns with senior members of the Synthetic Credit 

Portfolio team about P&L volatility that could accompany an effort to reduce 

RWA by selling protection. 

January 2012 

In late January, Mr. Wihnot expressed concern to Mr. Goldman about the VaR 

levels. 

On January 30, one of the traders wrote to another trader expressing concerns 

about the lack of liquidity in the market and the fact that any additions to the 

positions, notwithstanding any near-term benefits, would ultimately increase the 

risks and size of the Synthetic Credit Portfolio, as well as its sensitivity to price 

moves and trading costs. 

On January 31, a senior member of the Synthetic Credit Portfolio team forwarded 

to Ms. Drew an e-mail exchange between himself and one of the traders, which 

included an e-mail from another ofthe traders. That senior member expressed the 

view that the Synthetic Credit Portfolio was not behaving as intended and that 

financial perfonnance was "worrisome"; the trader's underlying e-mail noted that 

the losses were large because the notional size ofthe positions was large, and that 

the Synthetic Credit Portfolio was losing money on a number of positions. 

February 2012 

On February 2, according to one of the traders, he advised Ms. Drew and another 

trader that the Synthetic Credit Portfolio could experience additional losses of 

$100 million, and explained that it was possible that they did not have the right 

long position in light of the characteristics ofthe IG-9 position and the relevant 

market dynamics. 

On February 2, Mr. Weiland sent an e-mail to one ofthe traders regarding VaR 

and RWA measurements for the Synthetic Credit Portfolio, expressing concern 

that that trader had provided an "overly optimistic" view of the likelihood that the 

Firm's RWA model would be changed and the forward projection for RWA 

reduction. 

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On February 13, Mr. Goldman e-mailed Ms. Drew and noted that the CIO Global 

Credit Spread CSBPV limit had been in breach for most of the year. 

On February 15, Mr. Weiland noted for a member ofCIO Market Risk (among 

others) that CIO had, since mid-January, been in breach of its CSBPV limits, 

primarily as a result of position changes in the Synthetic Credit Portfolio. 

March 2012 

On March 1, one senior member ofthe Synthetic Credit Portfolio team expressed 

concern to another such member that the traders would be unable to defend their 

positions if they were forced to effect an unwind in order to meet R WA targets. 

On March 7, Mr. Venkatakrishnan wrote to Ms. Drew, Mr. Hogan, Mr. Goldman, 

Mr. Weiland and Firm-wide Market Risk that the Synthetic Credit Portfolio's 

RWA had increased by approximately $3 billion between January and February 

as a result of a $33 billion increase in notionals in long index risk. 

On March 20, Ms. Drew and Mr. Goldman presented an overview ofCIO to the 

DRPC. Neither of them raised the increasing mark-to-market losses, the 

substantial change in the trading strategy, the recent and ongoing breaches in 

certain of CIO' s risk limits, the significant growth in the Synthetic Credit 

Portfolio's notionals, or the delay in the trading-based RWA reduction effort. The 

change in the VaR model and breaches ofthe CIO and Firm-wide VaR limits that 

had occurred in January 2012 were also not discussed. 

By late March, one of the traders informed Ms. Drew that he was considering 

adding to the size of the Synthetic Credit Portfolio in order to "defend" their 

position. 

April 2012 

In early April, Mr. Wilmot raised questions with Ms. Drew about whether the 

traders could effect the RW A reduction without an unwind of positions. 

These concerns were not fully explored. At best, insufficient inquiry was made into them 

and, at worst, certain ofthem were deliberately obscured from or not disclosed to CIO 

management or senior Firm management. Although in some instances, limited steps were taken 

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to raise these issues, as noted above, no one pressed to ensure that the concerns were fully 

considered and satisfactorily resolved. 

S. TheMarks 

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.JOS That practice 

concealed from Ms. Drew and others their good-faith view of the market price of these positions, 

and it deprived management of a possible opportunity to curtail the trading before late March 

and potentially avoid some of the ensuing losses. When questioned about the marks in late April 

and early May prior to the Firm's filing of its first-quarter Form 10-Q, they maintained that the 

marks had represented their good-faith judgments regarding fair value of the positions. The Task 

Force's subsequent discovery that these statements were likely untrue caused the Firm to restate 

its earnings and re-file fmancial reports. 

6. The Estimates 

CIO provided in early April what in hindsight were overly optimistic and inaccurate 

analyses regarding the potential losses to which the Synthetic Credit Portfolio was exposed. 

These estimates all predicted that any losses would be in a range that was manageable for the 

Firm, and they were accompanied by assurances from CIO that the market was temporarily 

dislocated. The estimates generally predicted that the market would recover or "mean revert," 

10' The Task Force has noted that some of the marks on the Synthetic Credit Portfolio's positions at 

March 30 were within the bid/offer spread, but were to the benefit of the portfolio's positions. 

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meaning that the market prices were distorted and that the prices would return to their historic 

average relationships to other instruments. CIO advised senior Firm management that the 

Synthetic Credit Portfolio was "overall risk balanced," and for the second quarter, showed "a 

P&L range of -150MM: to +250MM:," with a "significantly positive" upside potential in the event 

of defaults. In fact, this profit-and-Ioss range turned out to be significantly off-the-mark, and the 

record uncovered during the Task Force's subsequent investigation revealed that this profit-andloss estimate was largely based on a Monte Carlo analysis in which the person performing the 

analysis did not have confidence, and which appears to have been selected by his supervisor 

specifically because it generated more positive profit-and-Ioss estimates. Against the backdrop 

ofthe concerns that had been expressed internally at various points during the first quarter of 

2012 by (or to) Ms. Drew, Mr. Wilmot, and members of the Synthetic Credit Portfolio team, the 

optimistic estimates failed to provide Messrs. Dimon, Braunstein and Hogan with a complete 

picture of how the team managing the Synthetic Credit Portfolio viewed it and the concerns they 

had previously raised within CIO. This failure was especially critical in early April when senior 

Firm management was focused on preparations for the April 13 earnings call and was relying on 

Ms. Drew to provide and explain information regarding the Synthetic Credit Portfolio. 

It bears mention that, although these faulty estimates were largely initially generated by a 

trader (working with another more senior trader), there were other employees in CIO, including 

in its Risk, Finance and management functions, who were positioned to consider and question 

the validity ofthese estimates. They failed to do so adequately, and instead, accepted these 

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1056 

estimates - together with the assertions that the Synthetic Credit Portfolio was "balanced" - and 

passed them along to senior Firm management. On this score, senior members of the Synthetic 

Credit Portfolio team, including Ms. Drew, as well as CIO Finance and CIO Risk Management, 

should have more thoroughly questioned, tested and/or caused others to test the estimates and 

conclusions being presented. 

7. Compensation Issues 

Incentive-based compensation systems are premised on the basic assumption that one of 

the factors that influence individuals' performance and conduct is financial reward. When 

employees take steps such as those that Jed to the losses in the Synthetic Credit Portfolio, the 

question naturally arises whether something in the compensation framework incentivized them to 

do so and whether the Task Force should be recommending adjustments to that framework. 

Based on the Task Force's review, however, there does not appear to be any fundamental flaw in 

the way compensation was and is structured for CIO personnel. 106 What the incident does 

highlight is the particular importance of clear communication to front office personnel engaged 

in activities not expected to generate profits (such as the winding down of a trading portfolio) 

that they will nonetheless be compensated fairly for the achievement of the Firm's objectives, 

including effective risk management. 

106 To this end, the Task Force believes that even if the traders and others had received only a fixed salary 

and no incentive compensation, they nevertheless might have harbored concerns about the consequences 

oflosses on their future salary and professional prospects in light of the Synthetic Credit Portfolio 

unwind. 

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1057 

CIa does not have its own incentive compensation system; instead, it participates in the 

Finn-wide annual incentive plan that is reviewed and overseen by the Compensation and 

Management Development Committee of JPMorgan's Board of Directors. 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. These factors include 

financial performance - for the Firm, for the business unit and for the individual in questionbut they also consider "how" profits are generated, and compensation decisions are made with 

input from Risk Management and other control functions (as was the case for CIa).107 

The Task Force has found little in the form of direct evidence to reveal what Ms. Drew 

and the other Synthetic Credit Portfolio managers and traders were thinking about their own 

specific compensation as they made decisions with respect to the Synthetic Credit Portfolio. 

Throughout the relevant period, however, at least two of the traders clearly 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. At the beginning of 20 12, a priority for CIa 

was to reduce RWA, and the Synthetic Credit Portfolio was a significant user of RWA. There 

was also a belief that CIa should neutralize the credit exposure of the Synthetic Credit Portfolio. 

And there was recognition, reflected in the February 2012 CIa Business Review, that "[d]espite 

the effectiveness of the Tail Risk Book hedging credit portfolio, the change in regulatory capital 

107 Risk management personnel were asked to provide input on the traders during their 2011annual 

perfonnance reviews. None of the input raised risk-oriented concerns. 

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regime is likely to force are-size / run-off of synthetic portfolio in order to maintain RWA 

targets for the Firm." Ms. Drew and other senior members of the Synthetic Credit Portfolio team 

knew that winding down the portfolio brought with it the likely prospect of significant trading 

costs (that is to say, from a profit-and-loss perspective) in implementing this priority. 

As a result, the Task Force believes that the CIO management, including Ms. Drew, 

should have emphasized to the employees in question that, consistent with the Firm's 

compensation framework, they would be properly compensated for achieving the RW A 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 (either in absolute terms or relative to past 

performance) 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. 

This approach is fully consistent with the current incentive compensation structure, but should be 

reinforced through clear communication. 

B. The Firm Did Not Ensure that the Controls and Oversight of CIO Evolved 

Commensurately with the Increased Complexity and Risks of Certain CIO 

Activities 

The Task Force believes that the Firm did not ensure that the controls and oversight of 

CIO evolved commensurately with the increased complexity and risks ofCIO's activities. As a 

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result, there existed significant risk management weaknesses within CIO that played a key role in 

allowing the flawed, risky trading strategies to be pursued. 

For a significant period of time prior to the first quarter of2012, 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. These matters became even more critical 

once the Synthetic Credit Portfolio grew in size, complexity and risk profile during the first 

quarter of2012. Further, by the time the Firm's new Chief Risk Officer was appointed in 

January 2012 and launched an effort to compare and improve practices throughout the Firm, it 

was too late to build the risk controls and develop the structure that may have helped to prevent 

the losses in CIO. 

The Task Force has identified six factors that it believes may have led to less rigorous 

scrutiny for CIO. First, CIO and the Synthetic Credit Portfolio had largely performed very well 

in the past. Neither had a history of significant losses and, as Mr. Dimon has explained, there 

"was a little bit of complacency about what was taking place [in CIO] and maybe 

overconfidence." Moreover, CIO EMEA Credit - the unit in which the Synthetic Credit 

Portfolio was located - had not previously experienced major control issues. In particular, CIO 

EMEA Credit received "Satisfactory" ratings in prior audits. Nevertheless, senior Firm 

management did not take sufficient steps to confum the belief that CIO was subject to 

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appropriate oversight and risk limits, nor did they confirm how the Firm-wide Risk organization 

was monitoring and overseeing CIO's activities. 

Second, CIO is not a client-facing business and does not involve the host of regulatory, 

risk and other limits applicable to dealings between the lines of business and their clients, which 

require more attention from various control functions, including compliance, audit, legal and 

fmance. There was no meaningful effort to ensure that, notwithstanding this fact, cro was 

subject to appropriately rigorous risk and other limits and was updating those limits on a regular 

basis. 

Third, the more conservative nature ofthe majority ofCrO's portfolio, as well as its 

overall mandate to invest the Firm's investment portfolio in "top ofthe capital structure" 

instruments, may have suggested to senior Firm management that CIO did not present significant 

risks. 

Fourth, the large size ofCIO's overall portfolio may explain the lack of an aggressive 

reaction of numerous people, including senior Firm management, to the relative size of the 

Synthetic Credit Portfolio. When coupled with representations of CIO traders and management 

that the Synthetic Credit Portfolio was "balanced" (as well as the fact that CIO could hold the 

positions for a long period), the notional numbers that were being discussed at the time were 

large but not alarming. But, the growth in the notional size of the Synthetic Credit Portfolio 

during the first quarter of20 12 should have prompted additional scrutiny by the Risk 

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1061 

organization (at both the Firm and CIO level) into both the trading strategies that had caused this 

growth and the proposed exit strategy. 

Fifth, the implementation ofa new model that significantly reduced CIO's VaR likely 

distracted focus from the increase in VaR that occurred in January 2012. Absent the new model, 

or ifVaR limits had been promptly adjusted downward following the implementation of the new 

model, breaches of the CIO OloballO-Q VaR limit would have continued, and could have 

triggered a more rigorous analysis by Risk Management personnel both inside and outside CIO -

potentially leading to earlier discovery of the risks in the Synthetic Credit Portfolio and 

modification or termination of the trading strategies that persisted through late March. 

Sixth, the cro Risk organization did not mature into the type of robust and independent 

function that is needed for trading activities that involve significant risk. The CIO Risk function 

was not staffed with as many experienced or strong personnel as it should have been. The Firmwide Risk organization bears responsibility for not having built, over time, a strong, independent 

Risk function within CIO. This failure meant that notwithstanding the new Chief Risk Officer's 

efforts beginning in early 2012 to improve controls and oversight, the necessary infrastructure 

was not in place when the need arose and the CIO Risk function was tested. CIO management 

also bears responsibility for this weakness in the CIO Risk function. 

In addition to these risk-related controls, the Task Force has also concluded that the Firm 

and, in particular, the CIO Finance function, failed to ensure that the CIO VCO price-testing 

procedures an important financial control- were operating effectively. As a result, in the first 

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1062 

quarter of2012, the CIO VCG price-testing procedures suffered from a number of operational 

deficiencies. For example, CIO VCG did not have documentation of price-testing thresholds. In 

addition, the price-testing process relied on the use of spreadsheets that were not vetted by CIO 

VCG (or Finance) management, and required time-consuming manual inputs to entries and 

formulas, which increased the potential for errors. 

C. CIO Risk Management Was Ineffective in Dealing with Synthetic Credit 

Portfolio 

CIO Risk Management lacked the personnel and structure necessary to properly riskmanage the Synthetic Credit Portfolio, and as a result, it failed to serve as a meaningful check on 

the activities of the CIO management and traders. This occurred through failures of risk 

managers (and others) both within and outside ofCIO. 

CIO's Risk Management group faced key organizational challenges during the relevant 

period - from the end of 20 11 through the first quarter of 20 12 - and in particular was faced· with 

transitions in key roles. The position of Chief Risk Officer within CIO was filled by Mr. 

Goldman in January 2012. Previously, Mr. Weiland, the head ofCIO Market Risk, had overseen 

Risk Management within CIO since the principal risks taken by CIO were market risks. In his 

capacity as de facio Chief Risk Officer for CIO, Mr. Weiland had reported to Mr. Zubrow, who 

served as the Firm's Chief Risk Officer until January 13,2012.108 Mr. Weiland participated in 

108 After Mr. Goldman took over as CRO for CIO, Mr. Weiland maintained his responsibilities for CIO 

Market Risk but reported to Mr. Goldman rather than Mr. Zubrow, with "dotted line" reporting to Firmwide Market Risk in February 2012. 

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Mr. Zubrow's management team meetings and sat on the Finn-wide Risk Working Group, 

chaired by Mr. Zubrow. 

Prior to Mr. Goldman's appointment as CIO Chief Risk Officer, his previous experience 

had been as a trader and as a manager and executive responsible for corporate strategy. His only 

previous direct experience with risk management was as chair of the Fixed Income Trading Risk 

Management Committee at another large finn, a position he had held more than 10 years 

earlier.l09 As a result, although he had been working in another role within CIO before being 

109 Mr. Goldman was previously Head of Strategy for CIO. Before joining JPMorgan, Mr. Goldman held 

several roles at Cantor Fitzgerald. He served fIrst as Chief Executive Officer and President of debt capital 

markets and asset management, and then as Chief Executive Officer and President of Cantor's broker 

dealer, where he oversaw that fIrm's strategy and global expansion. After leaving Cantor Fitzgerald in 

2007, Mr. Goldman was hired by Ms. Drew as a portfolio manager in CIO in January 2008. He 

subsequently took a leave of absence in June 2008, and later resigned, in order to respond to a New York 

Stock Exchange investigation involving allegations that Cantor Fitzgerald had failed to supervise Mr. 

Goldman because he had traded stocks in his personal accounts while simultaneously trading in those 

same stocks in Cantor Fitzgerald's proprietary accounts. After the New York Stock Exchange inquiry 

concluded with no action against Mr. Goldman, Ms. Drew hired him to work directly for her on strategic 

projects, primarily related to asset allocation. In late 201 O/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 CIa. Ms. Drew and Mr. Zubrow created the position because CIa had been growing and their 

view was that they needed to enhance CIa's Risk staff mg. They engaged an executive search fIrm, 

which met with nearly a dozen individuals. However, none of the candidates who advanced to interviews 

with CIa management was deemed to be right for the position, and in late 2011, the search was put on 

hold. Shortly after learning ofMr. Hogan's impending appointment as Chief Risk Officer for the Firm, 

Mr. Zubrow and Ms. Drew discussed Mr. Goldman for the role of Chief Risk Officer of CIa. Ms. Drew 

believed that Mr. Goldman was a good choice for the job, based on, among other things, his 

understanding of markets. She secured Mr. Hogan's assent to the appointment. While others at the Firm 

were aware of Mr. Goldman's background and relationship with Mr. Zubrow and Ms. Drew and Mr. 

Zubrow may have assumed Mr. Hogan's awareness, Mr. Hogan did not in fact know of the relationship 

between Messrs. Zubrow and Goldman, or of the earlier New York Stock Exchange investigation. Mr. 

Hogan considered the hiring of Mr. Goldman as CIO Chief Risk Officer as effectively Mr. Zubrow's last 

personnel appointment rather than as his first. Nevertheless, in reliance on the recommendations of Mr. 

Zubrow and Ms. Drew, Mr. Hogan believed that Mr. Goldman was a good fIt for the CIa CRO position, 

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1064 

appointed CIO Chief Risk Officer, he was still climbing the learning curve when much of the 

trading at issue was conductedYo 

Meanwhile, other senior risk management positions were in transition during this time, 

including the Firm's Chief Risk Officer (Mr. Hogan) and the Firm's Head of Market Risk. (Mr. 

Hogan was appointed Chief Risk Officer in January 2012.) Having both previously served in the 

Investment Bank, these individuals were still in the process of becoming acquainted with CIO's 

activities and Risk Management function, as well as that of other parts of the Firm, at the time 

the relevant trading strategies were being executed. 

The CIO Risk function had also 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 CIO had long-tenured Risk personnel in less senior positions (such as 

Mr. Weiland), 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 CIO. Rather, at 

and was comfortable that Mr. Goldman's broad managerial and trading experience had provided him with 

the necessary skill set for the position. The Task Force notes that the Firm should have a more formal 

process in place, with the participation of the Firm's Human Resources personnel, to assure that, in 

connection with the hiring of Operating Committee members and their direct reports, the Firm and all 

appropriate personnel are aware of all relevant background information. If, with that additional 

information, Mr. Hogan had any concerns or reservations about Mr. Goldman, he could have taken any 

steps he deemed necessary to satisfY himself. 

110 The Task Force has considered whether former traders are qualified to serve as risk managers, and 

believes that they can be, as trading experience is highly relevant. Indeed, some of the Firm's best risk 

managers have backgrounds as traders. 

99 
1065 

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 that they could and should take. 

Responsibility for this failure lies not only with CIO Risk managers, but with Ms. Drew as well. 

Further, the CIO Risk Committee met only three times in 20 II. There was no official 

membership or charter for the ero Risk Committee and attendees typically included only 

personnel from CIO, such as the regional Chief Financial Officers and ChiefInvestment 

Officers, the Chief Risk Officer, the Chief Operating Officer, the Global Chief Financial Officer, 

and Ms. Drew. Although Mr. Zubrow regularly was invited to attend cro Risk Committee 

meetings, he typically did not do so, in contrast with his frequent participation in Investment 

Bank Risk Committee meetings. Had there been senior traders or risk managers from outside 

CIO or had the cro Risk Committee met more often, the process might have been used to more 

pointedly vet the traders' strategies in the first quarter of2012. As it was, the Committee was 

too slow to recognize the need to put in place risk limits specific to the Synthetic Credit Portfolio 

or an updated limit structure for cro as a whole.Ill 

III Internal Audit's report dated March 30, 2012, which examiJ,led CIO EMEA Credit's control structure 

as of year-end 2011, stated that "CIO is currently undertaking a comprehensive review of the risk 

measurement limits framework across all asset classes to assess potentially required enhancements 

including whether additional risk factors are required for inclusion." As a result, although Internal Audit 

noted that CIa did not "explicitly measure the portfolio sensitivity to certain potentially applicable risk 

measures such as bond/CDS basis, index basis and prepayment risk," a detailed assessment was not , 100 
1066 

CIO Risk Management personnel fen well short of the Firm's expectations. First, 

contrary to Firm policy, they did not conduct any review of the adequacy ofCIO's risk limits 

between 2009 and 2011.112 Second, they failed to appreciate and to escalate the significance of 

the changes in the nature and size of positions that were occurring in the Synthetic Credit 

Portfolio, despite having been presented with information and metrics that could have alerted 

them to a problem earlier, and dismissed too easily breaches of existing limits. Third, as 

discussed in Appendix A, they were not sufficiently engaged in the development and subsequent 

implementation and operation of the VaR model. They took passive roles in the model's 

development and review and took no steps to ensure that the action plans required by the model 

approval were completed or that the model was implemented as intended. Similarly, although a 

proposal was under consideration to lower the VaR limit contemporaneously with the VaR 

model change in January, it was not acted upon until May 2012. Fourth, CIO Risk managers 

performed of the market risk limits as part ofthis audit and the existing limits were not identified as 

significantly outdated. 

112 Under the Market Risk Limits Policy applicable to CIO before May 2011, the review oflimits 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. A new 

Market Limits Policy became effective in May 2011. Under the more recent policy, limits are required to 

be established by Market Risk and business heads, and certain of these are required to be reviewed at least 

annually by the Board and semi-annually within each line of business. In the first quarter of2012, Mr. 

Weiland was in the process of developing a proposal to revise the CIO limit structure. He began that 

process in July 2011, recognizing that a semi-annual review of the limits had not yet been conducted and 

that certain of CIO's limits need to be revised and/or updated. He discussed an early version ofrus 

proposal at one ofrus weekly meetings with Ms. Drew in the slimmer of 20 II. When Mr. Goldman 

became CIO's Chief Risk Officer in January 2012, he became involved in the process as well. Although 

the proposal was the subject of active discussion in the first quarter of2012 and a version ofil was 

presented to the CIO Risk Committee in late March, new Jimits were not implemented until May 2012. 

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1067 

themselves fell short of expectations in implementing a strong Risk function. In particular, they 

did not establish a relationship with CIO management that enabled Risk personnel to feel 

comfortable voicing opposition to management. 

The Task Force notes that, although it believes that primary control failures were risk 

management failures, it has also considered whether the CIO Finance organization - and in 

particular its fonner CFO - could or should have done more. The primary responsibility ofthe 

CFO ofCIO, like the CFO of the lines of business, is to oversee the Finance organization within 

that unit and ensure that effective financial controls are in place. As described above, the Task 

Force notes that the CIO Finance organization's VCG process, while appropriately designed, 

suffered from operational shortcomings that became more pronounced in the first quarter of 20 12 

as the size and characteristics ofthe Synthetic Credit Portfolio changed. In addition, the failure 

to have robust reporting protocols, including sufficient circulation of daily trading activity 

reports, made early detection of problems less likely. 

In addition to the core responsibility of overseeing the line of business Finance function, 

the Task Force believes that a line of business CFO -like all members of senior management of 

a unit - bears additional responsibility for identifYing and reacting to significant fmancial risks. 

To this end, the Task Force believes that, although primary responsibility for managing risk lies 

with the business head and Risk organization, the CFO ofCIO (like the other members ofCIO 

senior management) missed a number of opportunities during the first quarter to meaningfully 

challenge the trading strategy. 

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D. Risk Limits for CIO Were Not Sufficiently Granular 

The risk limits in place before May 2012 appJied to CIO as a whole (and not to the 

Synthetic Credit Portfolio in particular) and were insufficiently granular. 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. When contrasted against the granular and 

tailored risk limits that are applied elsewhere in the Firm, it is evident that the Firm-wide Risk 

organization failed to ensure that CIO was subject to appropriately rigorous risk controls.ll3 

The risk limits for the Synthetic Credit Portfolio should have been specific to that 

portfolio and should have applied to the specific risks being taken. For example, these more 

granular limits should have included specific controls on notional size (particularly for less liquid 

113 Prior to 2009, Single Name Position Risk ("SNPR") limits applied to the Investment Bank, but cra 

did not trade in any single names and hence did not have any single name limits. The Firm's SNPR 

policy thus exempted the following assets, among others, from its scope: (1) investments managed by 

cra as part of the Firm's Strategic Asset Allocation investment portfolio; and (2) cra index and index 

tranche activity. Messrs. Zubrow and Weiland agreed that these assets should be exempt from the policy 

because they were longer-term, strategic investments and because calculating single name default 

exposure for a portfolio of indices and !ranches is extremely complex. As CIa began to add positions 

with exposures to single names, Messrs. Zubrow and Weiland approved sets of name-specific limits for 

the particular names to which CIa's indices and tranches had single name exposure. These limits were 

separate from the SNPR limits applicable to the Investment Bank, and trading in these instruments by 

CIa did not result in SNPR limits usage. By late 2011 and early 2012, CIa's exposure to single names 

grew to the pcint that Mr. Weiland and Firm-wide Market Risk agreed that it made sense to include the 

calculation of that exposure within the SNPR policy, because the amount and aggregation of those 

exposures were becoming more significant. In early 2012, they began to discuss how to include CIa's 

index and index tranche activity within the SNPR. The exact means by which that would be done were 

the subj ect of ongoing discussion throughout the first quarter of 20 12, due to the complexity of the 

calculations and the fact that including the short positions in the Synthetic Credit Portfolio in the SNPR 

would have had the effect of creating more availability for the limit (in part, because CIa owned equity 

protection, meaning that it earned money on individual defaults). 

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1069 

positions) as well as specific limits on credit risk and on counterparty risk. More numerous and 

specific limits may have increased focus on the risks in the Synthetic Credit Portfolio earlier. 

E. Approval and Implementation of CIO Synthetic Credit VaR Model Were 

Inadequate 

In a number of respects, the process surrounding the approval and implementation of the 

new VaR model was inadequate. First, inadequate resources were dedicated to the development 

of the model. The individual who was responsible for the model's development had not 

previously developed or implemented a VaR model, and was also not provided sufficient support 

- which he had requested - in developing the model. 

Second, the Firm model review policy and process for reviewing the new VaR model 

inappropriately presumed the existence of a robust operational and risk infrastructure similar to 

that generally found in the Firm's client-facing businesses. It thus did not require the Model 

Review Group or any other Firm unit to test and monitor the approved model's implementation. 

Back-testing was left to the discretion of the Model Review Group before approval and was not 

required by Firm policy. In this case, the Model Review Group required only limited backtesting of the new model, and it insufficiently analyzed the results that were submitted. 

Third, and relatedly, the Model Review Group's review of the new model was not as 

rigorous as it should have been and focused primarily on methodology and CIO-submitted test 

results. The Model Review Group did not compare the results under the existing Basel I model 

to the results being generated under the new model. Rather, it theorized that any comparison of 

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the numbers being produced under the two models was unnecessary because the new model was 

more sophisticated and hence was expected to produce a more accurate VaR. 

Fourth, the model was approved despite observed 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 Groupnor CIO Risk followed up to 

determine whether the automation had in fact taken place. 

Fifth, CIO Risk Management played too passive a role in the model's development, 

approval, implementation and monitoring. CIO Risk Management personnel viewed themselves 

more as consumers of the model than as responsible in part for its development and operation. 

Sixth, CIO's implementation of the model was flawed. CIO relied on the model creator, 

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. 

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IV. Remedial Measures 

JPMorgan has taken a broad range of remedial measures to respond t? and act on the 

lessons it has learned from the events described in this Report. 

A. CIO Leadership, Governance, Mandate and Processes Revamped. 

1. Team 

Once it discovered the source and scope of the Synthetic Credit Portfolio's losses, the 

Firm responded by accepting the retirement of Ms. Drew and terminating the employment of 

some members of the Synthetic Credit Portfolio team, and accepting resignations from others, 

including Messrs. Goldman, Wilmot, II 4 and Weiland.l15 In addition, the Firm announced on July 

13 that it would pursue the maximum c1awback of compensation from three individuals, each of 

whom subsequently acceded to the Firm's demands regarding the cancellation and recovery of 

the" relevant awards. This equates to approximately two years' worth of each individual's total 

compensation. In the Task Force's view, these steps were appropriate given each individual's 

role in the losses at issue. Ms. Drew agreed voluntarily to the cancellation and recovery of her 

awards that were subject to claw backs. Senior Firm management, in consultation with the 

Board, has also reduced compensation for other employees, and the incentive compensation pool 

for all ofCIO was reduced as well. 

ll4 Mr. Wilmot has announced his resignation and is expected to leave the Firm in 2013. 

115 Mr. Zubrow has also announced his retirement. 

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The Finn has put in place a new CIO leadership team. Matthew Zames, who had served 

as co-Head of Fixed Income in the Investment Bank, replaced Ms. Drew as the Firm's Chief 

Investment Officer. He occupied that role from May 14,2012 through September 6, 2012. Mr. 

Zames is now the co-Chief Operating Officer ofthe Finn and oversees, among other things, both 

the CIO and Treasury functions. Craig Delany replaced Mr. Zames as Chief Investment Officer 

and currently reports to him. Other key appointments include Marie Nourie (CFO for CIO); 

Chetan Bhargiri (Chief Risk Officer for CIO, Treasury and Corporate); Brendan McGovern (CIO 

Global Controller, a position that had been open since January 2012); Diane Genova (General 

Counsel for CIO and General Counsel for Markets in the Corporate and Investment Bank); Pat 

Hurst (Chief Auditor); and Ellen Yonnack (Senior Audit Manager). These are experienced, 

tested professionals, with knowledge of best practices that they are able to bring to bear in their 

new roles in CIO. Resources were also increased in key support functions; within the Risk 

function alone, Mr. Bhargiri has added 20 new employees since May 2012. With these new 

appointments, the Finn has reconfigured the entire CIO management team with strong and 

knowledgeable individuals who are expected to bring more rigor to the management ofCIO. At 

the same time, this new team has established stronger linkages within CIO by introducing fonnal 

lines of communication across the various regions, and the practical result has already been 

increased dialogue and consistency in each of the three regions reporting to Mr. Delany. 

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2. Governance 

The Firm has enhanced governance within CIO and the Corporate sector more generally. 

New and more robust committee structures have been instituted, including weekly CIO 

Investment Committee meetings run by Mr. Delany, with a set schedule and set attendees. There 

are also now monthly Business Control Committee meetings and a monthly Valuation 

Governance Forum ("VGF"), both of which are new structures. 

The CIO Valuation Governance Forum, whose membership includes Ms. Nourie, Mr. 

Bhargiri and Mr. McGovern, is responsible for understanding and managing the risks arising 

from valuation activities within CIO and for escalating key issues to a Firm-wide VGF, which 

was established in 2012 as part ofa Firm-wide initiative to strengthen the governance of 

valuation activities. The cro VGF has recently overseen the integration ofCIO VCG staff into 

the Investment Bank VCG reporting structure, the review ofCrO VCG processes (including a 

review of all manual spreadsheets and the implementation of enhanced controls for key 

spreadsheets), and the enhancement of other CIO VCG procedures based on the Investment Bank 

VCG's guidelines and best practices. The Firm has also increased the cro VCG headcount and 

hired a new head ofEMEA VCG for CIO. 

Beyond new structures within CIO, the Firm has implemented additional linkages among 

CIO, Corporate Treasury and other Corporate activities. In particular, Mr. Zames is now in 

charge ofCIO, Treasury and Corporate, so that overall management of these related functions 

has been brought together. Similarly, Mr. Bhargiri is now the Chief Risk Officer for CIO, 

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Treasury and Corporate. Furthermore, Corporate Business Reviews of CIO are to be conducted 

with increasing frequency and with the same structure as they are performed in the Firm's clientfacing businesses. The Firm will also expand the CIO VGF in 2013 into a Corporate VGF, 

which will cover Treasury and other Corporate functions in addition to CIO. 

Finally, the Firm has modified and expanded the criteria that will allow it to claw back 

certain equity awards in the event of poor performance by CIO. Under the Firm's protectionbased vesting provisions, the Firm is entitled to conduct a discretionary review of certain senior 

personnel and, in the event of certain types of poor financial performance, cancel certain equity 

awards to which those personnel might otherwise have been entitled. Historically, senior CIO 

personnel were only subject to such a review upon poor performance by the entire Firm, whereas 

senior personnel from the lines of business were subject to these reviews upon poor performance 

by their line of business (and not just the entire Firm).Jl6 The Firm has determined to modify the 

protection-based vesting trigger for 2013 equity awards for senior-level CIO personnel, and it 

now includes a CIO-specific trigger. The Firm's intent is to ensure that, based upon significantly 

poor performance in CIO, the Firm has the ability to recover certain previously granted equity 

awards from those responsible. 

116 The protection-based vesting program is distinct from the Firm's other compensation recovery 

programs, which have been employed against CIO personnel in this matter and allow the Firm to claw 

back prior equity awards for other reasons such as termination for cause and improper or grossly 

negligent risk assessments. 

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3. Mandate 

Under the leadership of Mr. Zames and now Mr. Delany, CIO has refocused on its core 

mandate of traditional asset-liability management. As part of this refocusing, the Firm moved a 

substantial portion of the Synthetic Credit Portfolio from CIO to the Investment Bank, and 

effectively exited the remainder of the Synthetic Credit Portfolio's positions in the third quarter 

of2012. As a result of these changes and others, CIO no longer engages in the type of trading 

that generated the losses, and any CIO synthetic credit positions in the future will be simple and 

expressly linked to a particular risk or set of risks. 

4. Reporting and Controls 

Since the appointment of the new management team in May, CIO has also enhanced its 

key business processes and reporting. For example, the CIO Executive Management Report and 

Global Daily Risk Report now contain trading and position reports and are more appropriately 

distributed so that this content reaches the appropriate managers. The Global Daily Risk Report 

provides management with a consolidated and transparent view of all risk positions; its 

distribution includes the Firm-wide CEO, CRO, Deputy CRO and co-COO in addition to senior 

managers within CIO (including CIO Finance). In addition, Ms. Nourie and her team have spent 

substantial time since May reviewing and revising basic policies and procedures with respect to 

valuation and price verification. That initiative has improved the quality control of the VCG by 

enhancing CIO senior fmance management supervision of the valuation control process, 

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implementing more formal reviews of price-testing calculations, and instituting more formal 

procedures around the establishment and monitoring of price-testing thresholds. 

Beyond these specific steps, the new CIO leadership team - as well as senior Firm 

management - recognizes the importance of an open and transparent culture, including in its 

communications with the Firm's regulators. The Firm has been working to improve CIO's 

culture and its communications - both internally and with regulators - to ensure regulators 

consistently have full and timely visibility into CIO's activities. More broadly, senior Finn 

management continues to be committed to enhancing a culture of prompt and complete 

disclosure to its regulators in accordance with regulators' expectations. 

In addition, the Firm has recently established a new Oversight and Control Group that is 

especially dedicated to solidifYing an effective control framework, and looking within and across 

the lines of business (and CIO) to identifY and remediate control issues. Oversight and Control 

will work closely with all control disciplines - partnering with Compliance, Risk, Audit and 

other functions - in order to provide a cohesive and centralized view of and from all control 

functions. Among other things, Oversight and Control will allow the Firm to detect problems 

and escalate issues quickly, get the right people involved to understand the common threads and 

interdependencies among various businesses, and then remediate these issues across all affected 

areas of the Firm.lI7 

117 While the Oversight and Control function will facilitate a Firm-wide view of the control framework 

and operational risk across the Firm, serving as both a partner and a check and balance to line of business 

!II 
1077 

B. Risk Self-Assessment and Risk Management Changes 

In the wake of the Synthetic Credit Portfolio's losses, in May 2012 the Firm under the 

guidance of its Chief Risk Officer - mandated a self-assessment of the Risk function within each 

line of business and CIO. As part ofthe self-assessment process, the Finn identified three 

general categories for review and improvement: Model Governance and Implementation, 

Market Risk and Governance, and Risk Independence. Within each category, the Firm identified 

specific areas of focus. In Model Governance and Implementation, the Firm focused on 

conducting a spot check of significant drivers ofthe Firm's VaR and broadening the model 

approval process to encompass implementation and ongoing monitoring. Within the category of 

Market Risk and Governance, the areas offocus were: (I) the appropriateness ofthe limit 

structure relative to risks undertaken; (2) the appropriateness ofthe risks undertaken; (3) policy, 

response, and escalation process concerning limit breaches; and (4) consideration within line of 

business risk committees ofliquidity and concentration in positioning. Within the category of 

Risk Independence, the Finn reviewed its risk committee structure. 

Mr. Hogan directed each of the Firm's lines of business to review these areas offocus to 

assess whether any of the issues identified in CIO existed elsewhere across the Firm and, ifso, to 

remediate those issues immediately. The Chief Risk Officer for each line of business Was 

required to attest to the completion ofthe necessary actions identified in that business's review, 

management and Corporate functions, it will not remove ultimate responsibility for the effectiveness of 

the control environment from the line of business CEOs and Corporate Functional Heads. 

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and to provide documentation supporting completion ofremediation. Each line of business CEO 

also was required to sign off on completion of the action plan, along with the line of business 

Risk Committee, and Mr. Hogan and Firm-wide Market Risk. 

The Firm has now undertaken, or is in the process of undertaking, substantial remedial 

measures, described in further detail below, to address the concerns arising from this selfassessment in each of these areas. 

1. Model Governance and Implementation 

In the area of Firm-wide Model Governance and Implementation, the Firm has 

substantially reformed its model risk policy, which governs model development, review, 

approval, and monitoring. It is working to minimize model differences for like products; capture 

all of its models in a central database; improve functionality and support for that central 

database; review its old or rarely used models; and identify its most significant models. It also 

will emphasize model implementation testing and comparisons to benchmark models, and 

institute a formal escalation process for model reviews, as necessary. The Model Review Group 

is now required to sign off on closure of all action plan items.lI8 In addition, the Firm is 

enhancing staffing of the Model Review Group, and is working to implement and staff a model 

governance function. 

With respect to VaRin particular, the Firm ha~ conducted a spot review of significant 

drivers ofVaR throughout the Firm, including in CIO, to ensure accuracy of the Firm's lO-Q 

11& For more information on action plans, see Appendix A below. 

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VaR. In CIO, that spot review involved confirming that all ofthe positions comprising the CIO 

lO-Q VaR were being captured accurately, and included a comprehensive one-day check to 

ensure accurate data feeds into the CIO VaR model; a horizontal review to identify data quality 

issues among key data streams and a comparison with third-party data sources, where possible; a 

comparison of calculators identified in approved model reviews with those actually employed; a 

review of the process used to identify and separate lO-Q VaR vectors; and resolution of thenoutstanding model issues identified as "high" importance. 

2. Market Risk and Governance 

The Firm has now substantially reconstituted the Risk function within CIO. First, as 

noted above, it has appointed Mr. Bhargiri to replace Mr. Goldman as Chief Risk Officer for 

CIO, Treasury and Corporate. Mr. Bhargiri carne to this role with substantial experience as a 

managing director of Market Risk at the Investment Bank, and the Firm has ensured that Mr. 

Bhargiri's functional reporting practices conform to his official reporting lines. Second, it has 

authorized Mr. Bhargiri to hire additional risk management officers, including senior level 

officers, to extend the capacity of the Risk function within CIO, Treasury and Corporate, and he 

has made 20 such hires since May 2012. The CIO Risk team has added product expertise in 

emerging markets, securitized products, credit (single name), municipal bonds, and interest rates 

and currency trading. 

The Firm has reviewed and, where appropriate, revised market risk limits across all of its 

lines of business and introduced additional granular and portfolio-leve1limits. As part of its 

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ongoing risk management governance, it continues to conduct periodic reviews of the 

effectiveness of existing limit structures. CIO now has in place a total of 260 limits. 

Enhancements to the limits structure (as of December 6) include 67 redesigned VaR, stress and 

non-statistical limits, including both global and regional Levell and Level 2 limits; 80 new asset 

class concentration limits for the AFS securities portfolio, applicable to both CIO and Treasury; 

60 new single name limits for the CIO Municipal AFS portfolio; and 53 new country exposure 

limits, also applicable to both CIO and Treasury, as a subset to the Firm-wide Country Exposure 

Limits. New limits related to geographic concentration, curve risk, single name risk, and 

compression risk were made specifically applicable to the Synthetic Credit Portfolio during the 

second and third quarters of2012 (while it continued to be held by CIO, before it was transferred 

to the Investment Bank and effectively closed out). 

In addition, the Firm has strengthened its processes across all businesses to deal with 

limit excessions. Aged or significant excessions must be further escalated to senior management 

and to risk committees. All validl19 or "under investigation" limit excessions, whether at the 

lines of business or Firm-wide level, that are in excess for three business days or longer, or over 

limit by 30% will be escalated to the line of business CEO, Chief Risk Officer, and Market Risk 

Head, as well as to the Firm's CEO, CRO, co-COO and Deputy CROlHead of Firm-wide Market 

Risk, and to the Firm-wide Risk Committee. 

119 In contrast to "valid" excesses, "invalid" excesses are caused by data quality issues and do not require 

remedial steps. 

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3. Risk Independence 

The Firm has reviewed its Risk Operating Committee structure and governance and 

restruetured the Risk Operating Committee to increase focus on identifYing and implementing 

best practices where appropriate across lines of business. The Firm's Risk Governance structure 

was enhanced to include the creation ofthe Firm-wide Risk Committee and Risk Governance 

Committee. 

Within CIO, the Firm has overhauled the CIO Risk Committee which, as noted, 

previously had met only infrequently, without any official membership, and was composed 

entirely of personnel from within CIO. There is, in its place, a CIO, Treasury and Corporate 

Risk Committee, which conducts weekly meetings chaired by Messrs. Zames and Bhargiri. It 

includes representatives from CIO, Treasury, and Corporate as well as other key senior 

management from within and outside ofCIO, including the Firm's CRO, Deputy CRO, and 

CFO, in order to ensure greater consistency across the Firm's various lines of business. 

C. Firm-wide Risk Governance and Organization 

In addition to the specific improvements described above in the areas of focus addressed 

by the Firm-wide risk self-assessment, the Firm has conducted a review of its entire Risk 

organization in response to the events in CIO and has made or is making changes to that Risk 

organization'S governance, organizational structure and interaction with the Board. 

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1. Risk Governance 

In the area of risk governance, the Finn created the new roles of Deputy CROlHead of 

Finn-wide Market Risk and Wholesale Chief Credit Officer ("WCCO"). The role of Deputy 

CROlHead of Market Risk involves review and assessment of Finn-wide market risk. The 

incumbent's responsibilities include managing the Finn's risk appetite and risk limits, risk 

mitigation strategies, and working with Mr. Hogan to lead and develop the Finn's Risk 

organization. He is also responsible for directing the Finn's market risk coverage resources. 

Stephen Eichenberger, who also currently serves as Chief Credit Risk Officer for the Investment 

Bank, assumed the newly created role ofWCCO in July 2012. The WCCO reports to Mr. Hogan 

and is responsihle for credit risk across all wholesale businesses. In this capacity, the WCCO 

will chair a Wholesale Credit Risk forum to ensure better communication between each business 

and across all Risk functions; work with line of business Chief Risk Officers to identifY and 

effectively manage key credit risks and concentrations across the wholesale businesses; and 

partner with the line of business Chief Risk Officers to engage in initiatives across wholesale 

lines of business, including defming credit risk appetite and setting appropriate limits, supporting 

key growth initiatives while maintaining strong credit risk management controls, coordinating 

regulatory responses, building a credit risk stress framework, and enhancing credit risk reporting 

and credit risk systems. 

2. Risk Organization 

Four Finn-wide risk committees have been added and will focus on risk themes. 

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The Risk Governance Committee will meet monthly and will focus on risk governance 

and other policy matters, risk analytics, model governance, Basel/Regulatory issues, risk 

appetite, and updates to Firm-wide risk programs in the areas of compliance, liquidity, and 

operational risks. Required attendees at these meetings include the Firm's CRO, CFO, 

Controller, line of business CROs, ChiefInvestment Officer, and personnel from Legal, 

Compliance, Audit, and Regulatory Policy. 

The Firm-wide Risk Committee will focus on business activity, including by conducting 

periodic reviews of Firm-wide risk appetite and certain aggregate risk measures, serving as an 

escalation point for matters arising in the line of business Risk Committees and for certain limit 

breaches pursuant to the limits policy, and considering relevant business activity issues escalated 

to it by line of business Chief Risk Officers and CEOs. It will meet monthly and required 

attendees include the Firm's CEO, CFO, CRO, Deputy CROIHead of Market Risk, line of 

business CEOs, CIO Head, General Counsel, Chief Auditor, Compliance Head, Regulatory 

Policy Head, Consumer Risk CRO, Wholesale Credit Risk CRO, Model Risk and Development 

Reputation Risk Officer, Country Risk Head, Corporate Risk CFO and Chief Administrative 

Officer and line of business risk officers. 

The Risk Management Business Control Committee will meet quarterly and will focus on 

the control environment, including outstanding action plans, audit status, operation risk statistics 

(such as losses, risk indicators, etc.), compliance with critical control programs, and risk 

technology. Required attendees at these meetings include the CRO, the Deputy CRO, the line of 

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business CROs, the Risk CFO and Risk Chief Administrative Officer, the Operational Risk 

Head, and personnel from Model Review and Development, Audit, and Compliance. 

Finally, the Risk Operating Committee will focus on risk management, including setting 

risk management priorities, escalation of risk issues, and other issues brought to its attention by 

line of business Chief Risk Officers and the Risk Team. Mr. Hogan will direct these bi-weekly 

meetings, which will also include Risk Human Resources and Risk Chief Technology Officers. 

In addition to these Risk committees, the Firm established a Valuation Governance 

Forum in June 2012 to oversee the management of risks arising from valuation activities 

conducted across the Firm. The Firm-wide VGF is chaired by the Firm-wide head ofVCG, and 

its membership includes the Corporate Controller; the Deputy CRO; the CROs and Controllers 

of the Investment Bank, Mortgage Bank, and CIO; the CFOs ofthe Investment Bank, CIO, and 

Asset Management; and the Firm-wide Head of Model Risk and Development. The Firm-wide 

VGF will meet twice per quarter to review issues and matters relating to valuation, the VCG 

function, and related issues, and to address issues elevated to it by line of business VGFs. 

Finally, the Firm is continuing its efforts to improve the process for highlighting key 

issues to the DRPC, with an emphasis on conveying information in a manner that is more timely, 

useful and focused. 

V. Conclusion 

The Task Force does not believe that the CIO losses stemmed from anyone specific act 

or omission. Rather, as described in this Report, the Task Force has concluded that the losses 

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were the result of a number of acts and omissions, some large and some seemingly small, some 

involving personnel and some involving structure, and a change in anyone of which might have 

led to a different result. This experience, as we hope is clear from this Report, has caused 

substantial and healthy introspection at the Firm and recognition of the need for continued 

improvement in multiple areas. Ultimately, the Task Force believes that this incident teaches a 

number of important lessons that the Firm is taking very seriously. 

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Appendix A: VaR Modeling 

VaR is a metric that attempts to estimate the risk of loss on a portfolio of assets. A 

portfolio's VaR represents an estimate of the maximum expected mark-to-market loss over a 

specified time period, generally one day, at a stated confidence level, assuming historical market 

conditions. 'Through January 2012, the VaR for the Synthetic Credit Portfolio was calculated 

using a "linear sensitivity model," also known within the Firm as the "Basel I model," because it 

was used for purposes of Basel I capital calculations and for external reporting purposes. 

The Basel I model captured the major risk facing the Synthetic Credit Portfolio at the 

time, which was the potential for loss attributable to movements in credit spreads. However, the 

model was limited in the manner in which it estimated correlation risk: that is, the risk that 

defaults of the components within the index would correlate. As the tranche positions in the 

Synthetic Credit Portfolio increased, this limitation became more significant, as the value of the 

tranche positions was driven in large part by the extent to which the positions in the index were 

correlated to each other. The main risk with the tranche positions was that regardless of credit 

risk in general, defaults might be more or less correlated. 

This limitation meant that the Basel I model likely would not comply with the 

requirements of Basel II.S, which originally had been expected to be formally adopted in the 

United States at the end of2011. One of the traders responsible for the Synthetic Credit 

Portfolio therefore instructed an expert in quantitative finance within the Quantitative Research 

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team for CIO International to develop a new VaR model for the Synthetic Credit Portfolio that 

would comply with the requirements ofBase1 II.5. That individual (henceforth referred to in this 

Report as "the modeler") began work on developing that model in or around August 2011. 

The trader who had instructed the modeler to develop the new VaR model (and to whom 

the modeler reported at the time), CIO Market Risk, and the modeler hirnselfalso believed that 

the Basel I model was too conservative - that is, that it was producing a higher VaR than was 

appropriate. 120 The modeler believed that an improved model should both (I) adequately capture 

correlation risk in the Synthetic Credit Portfolio, and (2) produce a lower and more accurate 

VaR. 

A. Development ofthe New VaR Model 

The modeler is a London-based quantitative expert, mathematician and model developer. 

In addition to the considerable responsibility of developing a new VaR model, he continued to 

perform his existing responsibilities in providing analytical support to the Synthetic Credit 

Portfolio traders. On a number of occasions, he asked the trader to whom he reported for 

additional resources to support his work on the VaR model, but he did not receive any. 

Early in the development process, CIO considered and rejected a proposal to adopt the 

VaR model used by the Investment Bank's credit hybrids business for the Synthetic Credit 

120 As noted above, VaR is a metric that attempts to estimate the risk ofloss on a portfolio of assets. Both 

the modeler aod a member of the CIO Market Risk team who was also involved in the new model's 

development were of the view that the Basel I model might be overstating the VaR for the Synthetic 

Credit Portfolio, in part because the amount oflosses had exceeded the stated VaR limit less frequently 

thao would be expected based on the stated confidence level. 

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Portfolio. Because the Investment Bank traded many bespoke (i,e., customized), illiquid CDS, 

its VaR model mapped individual instruments to a combination of indices and single name 

proxies, which CIO Market Risk viewed as less accurate for CIO's purposes than mapping to the 

index as a whole. He believed that, because the Synthetic Credit Portfolio, unlike the Investment 

Bank, traded indices and index tranches, the Investment Bank's approach was not appropriate for 

CIO. The Model Review Group agreed and, in an early draft of its approval of the model, 

described CIO's model as "superior" to that used by the Investment Bank "in that it [was] a full 

revaluation approach." 

From September to November 20 11, the modeler corresponded regularly with the 

relevant individuals from the Model Review Group, and on November 25,2011, he submitted 

his new methodology (known internally as the "full revaluation" or "Basel U.5 model") for 

formal approval. The Model Review Group performed only limited back-testing of the model, 

comparing the VaR under the new model computed using historical data to the daily profit-andloss over a subset of trading days during a two-month period. The modeler informed the Model 

Review Group that CIO lacked the data necessary for more extensive back-testing of the model 

(running the comparison required position data for the 264 previous trading days, meaning that a 

back-test fOT September 2011 would require position data from September 2010). Neither the 

Model Review Group nor CIO Market Risk expressed concerns about the lack of more extensive 

historical position data. 

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During the review process, additional operational issues became apparent. For example, 

the model operated through a series of Excel spreadsheets, which had to be completed manually, 

by a process of copying and pasting data from one spreadsheet to another. In addition, many of 

the tranches were less liquid, and therefore, the same price was given for those tranches on 

multiple consecutive days, leading the model to convey a lack of volatility. While there was 

some effort to map less liquid instruments to more liquid ones (i.e., calculate price changes in the 

less liquid instruments derived from price changes in more liquid ones), this effort was not 

organized or consistent. 

By the end of2011, some of the pressure to complete the review of the new model 

appears to have abated because it became clear that Basel II.S would not be implemented on the 

previously anticipated timetable. However, as described in Section n.D.l, CIO exceeded its 

Global lO-Q VaR limit at several points between January 16 and January 26, 2012, which in turn 

caused a breach in the overall Firm lO-Q VaR limit. The Synthetic Credit Portfolio was the 

primary driver of each of those excess ions. A temporary limit increase was requested121 and 

required approval of senior Firm management. CIO recommended a temporary limit increase on 

the grounds that it was taking steps to reduce the VaR and that, in any event, the newly 

developed model was about to corne online that would show a substantially reduced VaR. 

121 Finn-wide Market Risk raised the possibility of a temporary limit increase to Mr. Hogan on January 

20,2012. On January 21, 2012, the then-head of the Risk Reporting and Finance function - told Mr. 

Hogan "We are working towards a temporary one-off for CIO and the Finn proposed as follows: JPMC 

$140mm (vs. $125mm permanent limit) CIO $105mm (vs. $95mm permanent limit." Mr. Weiland also 

e-mailed Mr. Hogan on January 22, 2012 regarding a proposed temporary VaR limit increase. 

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Mr. Weiland and another member ofClO Market Risk contacted the Model Review 

Group regularly in the last two weeks of January to inquire into the progress of the model 

approval and, in a January 23,2012 e-mail to the modeler, the trader to whom the modeler 

reported wrote that he should "keep the pressure on our friends in Model Validation and 

[Quantitative Research]." There is some evidence 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. 

On January 26, the Model Review Group discovered that, for purposes ofa pricing step 

used in the VaR calculation, cro was using something called the "West End" analytic suite 

rather than Numerix, an approved vendor model that the Model Review Group had thought was 

being used. The Model Review Group had never reviewed or approved West End, which (like 

Numerix) had been developed by the modeler. i22 CIO provided the Model Review Group with a 

reconciliation test, based on a limited number of days, showing that the valuations from West 

End and Numerix were in "good agreement," and the Model Review Group committed to 

conduct a full review of West End separately, but not before approving the VaR model. The 

Model Review Group did not examine West End until early May 2012 (the results of which are 

discussed below). 

122 The modeler had previously worked at N umerix. While there, the N umerix repricing model was 

developed under his supervision. 

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On January 30, the Model Review Group authorized CIO Market Risk to use the new 

model for purposes of calculating the VaR for the Synthetic Credit Portfolio beginning the 

previous trading day (January 27). Once the new model was implemented, the Firm-wide lO-Q 

VaR limit was no longer exceeded. Formal approval of the model followed on February 1. The 

formal approval states that the VaR calculation would utilize West End and that West End in tum 

would utilize the Gaussian Copula modelJ23 to calculate hazard rates I 24 and correlations. It is 

unclear what, if anything, either the Model Review Group or CIO Market Risk did at the time to 

validate the assertion that West End would utilize the Gaussian Copula model as opposed to 

some other model, but that assertion later proved to be inaccurate.125 

As part of its approval of the new model, the Model Review Group included an action 

plan with respect to two of the risk areas that were identified. First, it mandated automation of 

the VaR model by January 31, 2012 (i.e., contemporaneously with the model's approval). 

123 The Gaussian Copula is a commonly accepted model used to map the approximate correlation between 

two variables. 

124 A hazard rate is the probability of failure per unit of time of items in operation, sometimes estimated as 

a ratio ofthe number of failures to the accumulated operating time for the items. For purposes of the 

model, the hazard rate estimated the probability of default for a unit of time for each of the underlying 

names in the portfolio. 

125 A March 30, 2012 Internal Audit report on the Market Risk and Valuation Practices in CIO's credit 

portfolios (including the Synthetic Credit Portfolio) assigned a rating of ' Needs Improvement' due in part 

to CIO's use of "unapproved models in the calculation of risk (including VaR)." The reference to the use 

of "unapproved models" in the calculation of the VaR is to West End, which, as the Internal Audit report 

noted, had not been submitted to the Model Review Group for Review. The Internal Audit report 

included an action plan for CIO to document the West End analytics engine and submit to the Model 

Review Group with a target completion date of June 30, 2012. While the Internal Audit report also noted 

problems with the control processes surrounding the VaR calculation, Internal Audit found no specific 

examples of incomplete or inaccurate data. 

126 
1092 

Second, it required monitoring of illiquid tranches to assess whether mapping to more liquid 

tranches would be necessary, and ultimately development and submission to the Model Review 

Group of a risk mapping methodology. Neither of these action plans was completed. The Model 

Review Group and CIO Market Risk apparently believed that work was already underway to 

complete automation but took no steps to determine that automation had in fact been completed. 

The modeler likewise did not submit, nor was he ever required to submit, a complete risk 

mapping methodology. 

B. Operation of the VaR Model 

From February to April, the new VaR model was in operation. A CIO employee who 

reported to the modeler was responsible for daily data entry and operation of the new model. In 

April, an employee from the IT Department (who had previous experience as a senior 

quantitative developer) also began to provide assistance with these tasks. Notwithstanding this 

additional assistance, a spreadsheet error caused the VaR for April 10 to fail to reflect the day's 

$400 million loss in the Synthetic Credit Portfolio. This error was noticed, first by personnel in 

the Investment Bank,126 and by the modeler and CIO Market Risk, and was corrected promptly. 

Because it was viewed as a one-off error, it did not trigger further inquiry. 

126 On April 18, a member of the market risk team for the Investment Bank obtained information on the 

Finn-wide and CIO VaR calculations to determine the impact of the April 10 loss on the Firm-wide VaR. 

Upon discovering that the loss was not reflected in the CIO VaR, he reported his fIndings to Finn-wide 

Market Risk, who in turn reported to Mr. Hogan that CIO's VaR appeared to have an error. 

127 
1093 

c. Discovery of Problems with the New VaR Model and Discontinuance 

In early May 2012, in response to the recent losses in the Synthetic Credit Portfolio, Mr. 

Venkatakrishnan asked an employee in the Model Review Group to perform a review ofthe 

West End analytic suite, which, as noted, the VaR model used for the initial steps of its 

calculations. The West End analytic had two options for calculating hazard rates and 

correlations: a traditional Gaussian Copula model and a so-called Uniform Rate model, an 

alternative created by the modeler. The spreadsheet that ran West End included a cell that 

allowed the user to switch between the Gaussian Copula and Uniform Rate models. 

The Model Review Group employee discovered that West End defaulted to running 

Uniform Rate rather than Gaussian Copula in this cell,including for purposes of calculating the 

VaR, contrary to the language in the Model Review Group approval. Although this error did not 

have a significant effect on the VaR, the incident focused the reviewer's attention on the VaR 

model and ultimately led to the discovery of additional problems with it. 

After this re-review, a decision was made to stop using the Basel U.5 model and not to 

rely on it for purposes of reporting CIO VaR in the Firm's first-quarter Form IO-Q. Following 

that decision, further errors were discovered in the Basel 11.5 model, including, most 

significantly, an operational error in the calculation ofthe relative changes in hazard rates and 

correlation estimates. Specifically, after subtracting the old rate from the new rate, the 

spreadsheet divided by their sum instead of their average, as the modeler had intended. This 

error likely had the effect of muting volatility by a factor of two and oflowering the VaR, 

128 
1094 

although it is unclear by exactly what amount, particularly given that it is unclear whether this 

error was present in the VaR calculation for every instrument, and that it would have been offset 

to some extent by correlation changes. It also remains unclear when this error was introduced in 

the calculation. 

129 
1095 

Office of the Comptroller of the Currency --------------------

April 15,2013 

The Honorable Carl Levin, Chairman 

Permanent Subcommittee Oil tnvestigations 

Committee on H0Il1c1um1 Security and Government Affairs 

United State~ Senate 

Washington, DC 20510 

Dear Chairman Lc,·in: 

Washington, DC 20219 

During the March 15,2013 hearing on "lPMorgan Chase Whale Trades: A Case History of DC";vatives Risks & 

Abuse,' held hy Ihe Permanent Subcommittee on Investigations (PSI), you requested thm the acc inquire 

ah()Ol whether lPMorgan Chase's (JPMCl pricing of certain position, in its synthetic credit portfolio (SCPl was 

consislent with U.S. Generally Accepted Accounting Principles (GAAP). 

Sp~cifically, you requesfed that W~ inquire or thOse charged with c\labli~hing and enrorcing accounting 

standards whcther .lP\!C's Chief Inl"OSII11ont Offi<e', fair vaille mark' of the positions within the SCP complied 

\vith GAAP during the. first quarter of 1012 and before JPIvlC tlctcnllined a restatement was necessary. In 

response to your request. the acC's ornee of the Chief Accollntant consulted with representatives from the 

Financial Accounting Standards Bonrd (FASll) and the Securities and Exchange Commission', (SEC's) OtTice 

of the Chief Accountant. 

A~ you are awnrc, there arc multiple ongoing governmental investigations of JP£\.1C's trading tosses, including 

the rair value marks of the pm;i(ion~ within the SCP~ that have not yet conclud~tI. Becau!'l~ lhe~e invesligati()n~ 

have y~t to conclmk. we arc unable to providt: any final determinations ahout this matter at this time. Howl'YL'r. 

We have shared both the tl'stirnony from the hearing: and rhe report rL'i('a~ed by PSI \\-'ilh the agL'llcic!-j1 rC!-Ipcctivc 

investigation teams. The nee continues to coordinnte with the SEC and other govcmmcntal agencies. in 

support or their investigations. 

As a matter of policy, FASS does not opine on the application or its standards by individual reporting entities. 

HOWl'Vl!L FA.SB starr provided excerpls or thl.;' sections of the relevant standard that addresses the use or pricing 

convcntions anJ th.: r~Jated disclo:wre requirements. 1 have ,aHach~d the!'c excerpts to lhi~ letter for your 

information. 

cc: Leslie Seidman, Chairman, FASll 

Paul Beswick, Chier Accoun.t'iiilf.ll., .".F.r ____________ • 

Permanent Subcommittee on Investigations PSI,OCC-26-000001 

EXHIBIT #99 
1096 

Selected Accounting Standard References 

from the Financial Accounting Standards Board 

ASC 820 Fair Vallie Meawueme11ls 

Inputs Based on Bid and Ask Prices 

820-10-35-36C 

If an asset or a liability measured at fair value has a bid price and an ask price (for example, an input 

from II dealer market), the price within the bid-ask sprcaclthat is most reprcsentative of fair \'aluc in the 

cirCulllst,lIlCCS shall be lP'cd to measure fair value regardless of where the input is categorizcd within 

the fair value hierarchy (that is, LcvcJ 1,2. or 3). The lLIC of bid priccs l'or asset positions and ask 

prices for liability positions is permitted but is not required. 

820-10-35-360 

This Topic docs not preclude thc usc of mid-markct pricing or othel' pricing conventions that arc used 

by market participants as a practical expcdient for fair value mea.llu·cmcnts within a bid-ask sprcad. 

Disclosure 

820-10-50-1 

A reponing cntity shall disclose informatiol1that helps lIsers of its financial statements assess both of 

the following: 

a. For assets and liabilities that arc measured at fair value on a recurring or nonrecurring basi, 

in the sll1temcnt of financial position after initial recognition. the valuation techniques and 

irulllts used to dcvelop those lllC,burcmCfllS 

b. For recurring fair value measurcments using significant unobservable inputs (Level 3). the 

effect of the measurements on earnings (or changcs in net assets) or other comprehensive 

income for the period. 

820-10-50-2 (bbbJ 

bbb. For rceurring and nonrecurring fair value measurements categorized within Level 2 and Level 3 

of the f<tir value hierarchy. it description or the valuation technique!s) and thc inputs used in the fair 

value measurcmenl. If there has been it change in valuation technique (for cxample, changing from a 

market ap[2roach to an incomc approach or the usc Df an additional valuation technique), the reporting 

entity shall disclose that change and the rcasun(s) ror making it, For fair v[llue measurements 

categorized within Level 3 Dr the fair value hierarchy. a reporting entity shall provide quantitative 

infonnation about the significant unobservable inputs used in the rair value measurement. A reponing 

entity is not required to create quantitative information to comply with Ihis disclosure requirement ir 

quantitative unobservable inputs are not developed by the reponing entity when measuring fair value 

(for example, when it reporting entity uses prices from prior transactions or third-party pricing 

information without adjustment). However, when providing this disclosure. a reporting entity cannot 

ignore quantitative unobsCl"vable inputs that 'lfC significant to the fair value measurement and arc 

reasonably available to the rcponing entity. 

PSI-OCC-26-000002 
1097 

820-10-50-2 (I"-g) 

f. For recurring and nonrecurring fair value measurements categorized within Level 3 of the 

fair value hierarchy. a description of the valuation processes used by thereporting entity 

(including. for cxample. how un entity decides its valuation policies ane! procedures anel 

analyzes changes in fair value measurements from period 10 period). Sec paragraph 820-lO-55-

105 for further guidance. 

g. For recurring fair value measurements categorized within Level 3 of the fair value 

hierarchy, a narrative descriptioll of the sensitivity of the fair value measurement to changes in 

unobservable inputs if a change in those inptllS to a different amount might result in a 

significantly higher or lower faif value mea.surement. If there are interrelationships between 

those inplils and other unohservahle inputs used in the fair value measurelllcnt. a reporting 

emiry shall also provide a description of those intcrrdationships and of how they might 

magnify or mitigate the effect of changes in the unobservable inputs on the fair value 

measurement. To comply with that disclosure requirement. the narrative description of the 

sensitivity to changes in ullobservable inputs shall include, at a minimum. the unobservable 

inputs disclosed when complying with paragraph R2U::,lO-SO-2(bbbL 

820-1 0-55-J 05 

For fair valuc mea'llrCnlcnts categorized within Level :; of the fair value hierarchy. this Topic requires 

a reporting entity to disclose a description of the valuation prot'~"es used by the reporting emity. A 

reporting entity might disclose the following to comply with paragraph 8"O-l O-SO-2( fI: 

a. For the group within the reporting entity that decides the reponing entity's valuation policies 

und procedurcs: 

o 1. Its description 

o 2. To whom that group rcports 

o 3. The internal reporting procedures in place (for example, whether and, if so, how 

pricing! risk lnanagcmcnt, or audit commiuees discuss and assess the fair vuluc 

measurements). 

b. The freqllency and methods for calibration. back tC~ling. and other tcst ing procedures. of 

pricing models. 

c. The procc.ss for analyzing changes in fair valuc measurements from period 10 period. 

d. How the reporting entity determined that third-party information, stich as broker quotes or 

pricing services, used in the fair value measurement was de\'e1oped in accnnlance with this 

Topic. 

e. The methods used to develop and substantiate the unobservable inputs used ill a fair value 

measurement. 

2 

PSI-OCC-26-000003 
1098 

Information about Sensitivity to Changes in Significant Unohservable Inputs 

820-10-55-J 06 

For recurring fair value meaSlIl'ements categorized within Level 3 of the fair value hicr~rchy, this 

Topic requires a reporting entity to provide a narrative description of the sensitivity of the fair value 

measurement to changes in significant unobservable inputs and a description of any interrelationships 

between those unobservable inputs, A reporting entity might disclose the following about its residential 

mortgage-backed securities to comply with paragraph 820-JO-5()-2(~). 

The significant unobservable inputs used in the fair vuluc measurement of the reporting entity's 

residential mortgagc-backed securities arc prepayment rates, probability of default, and 1o,;" 

severity in the event of default. Significant increllses (decreases) in lIny of those inputs in 

isolation would result in a significantly lower (higher) fair value measurement. Generally, a 

change in the assumption used for the probability of default is accompanied by a directionally 

similar change in the assumplion used for the loss severity and it direclionally opposite change 

in the aS5umptiolluScd for prepayment rates. 

3 

PSI-OCC-26-000004 
1099 

RESPONSES TO QUESTIONS FOR THE RECORD 

for 

Douglas Braunstein and Michael Cavanagh 

JPMorgan Chase & Co. 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Hearing on 

JPMorgan Chase Whale Trades: 

A Case History of Derivatives Risks & Abuses 

March 15, 2013 

Permanent Subcommittee on Investigations 

EXHffiIT #100a 
1100 

JPMorgan's Responses to the April 12, 2013 Letter from the 

United States Senate Permanent Subcommittee on Investigations 

1. Does JPMorgan Chase currently provide daily profit and loss data for the Chief 

Investment Office (CIO) to the Office of the Comptroller of the Currency (OCC)? 

If so, does it also provide daily profit and loss data for the CIO's individual 

investment portfolios? How often is that profit-loss information provided? 

JPMorgan currently provides daily profit and loss ("P&L") data for CIO to the OCC on a 

daily basis. This data is contained in the daily CIO Senior Management Report ("CIO SMR"). 

On a weekly basis, the OCC also receives the information that goes into the CIO Finance and 

Risk Weekly Review Report, which includes more granular CIO P&L information. The current 

CIO SMR is in the process of being enhanced to provide more granularity on products and 

portfolios. 

2. Hearing Exhibit 39 is a list of CIO risk limit hreaches prepared hy JPMorgan Chase 

in May 2012. The list indicates that, in the fourth quarter of 2011, the Synthetic 

Credit Portfolio hreached its risk limits 6 times; in the first quarter of 2012, it 

breached its risk limits 170 times, and in the month of April alone, it breached its 

risk limits 160 times. Were JPMorgan Chase's risk management personnel aware 

at the time of this sudden increase in the number of risk limit breaches by the 

Synthetic Credit Portfolio? If so, please identify who knew and what action was 

taken in response. If not, has JPMorgan Chase since established a system to alert 

risk management personnel to that type of sudden increase in risk limit breaches? 

Risk management personnel who were signatories to a limit would have received 

notifications of any excessions of that limit. The signatories to a limit are dependent on its 

type-whether it is Firm-wide or CIO and whether it is categorized as Levell or Level 2. None 

of the limits described in Question 2 were specific to tbe Synthetic Credit Portfolio, and not all of 

the limit excessions identified were attributable to contemporaneous activity in the Synthetic 

Credit Portfolio or constituted a valid excession of a Firm-wide or CIO risk limit. The limit 

excessions tbat occurred in the fourth quarter of2011 and in the first and second quarters of2012 

that were caused by contemporaneous activity in the Synthetic Credit Portfolio were of a 

combination of Firm-wide and CIO Levell and Level 2 limits. During this time period, the only 

person in JPMorgan's risk management organization who received notifications for both Level I 

and Level 2 limit excessions was the former Head of Market Risk for CIO, Peter Weiland. We 

have not determined whether individuals in the Firm or CIO risk organization received 

information about the number of excess ions outside the formal notification system. 

In addition to the notifications, limit excessions that occurred during the preceding 

quarter were a topic of discussion at quarterly CIO Risk Committee meetings. Discussions often 

included reference to the number of days a limit was in excess during the quarter. However, as 

the Firm's Management Task Force Report (the "Task Force Report") acknowledged, the CIO 

risk function's response to the limit excessions that occurred in the first quarter of2012 was 
1101 

inadequate, as were the frequency with which the CIO Risk Committee met and the composition 

of the Committee itself. Had the CIO Risk Committee met more often or had risk officers from 

outside CIO been in attendance, the process might have worked to more effectively review CIO 

activities in the first quarter of 20 12. 

As part of the remedial measures instituted in response to the Task Force Report, the 

Firm has made a number of changes to both the CIO and the Firm-wide Risk Management 

functions. The CIO Risk Committee has been reconstituted as the CIO, Treasury and Corporate 

Risk Committee. It now meets on a weekly basis, and those meetings are chaired by the Firm's 

Chief Investment Officer and the Chief Risk Officer ("CRO") for CIO, Treasury and Corporate. 

The Committee includes representatives from CIO, Treasury and Corporate, as well as other key 

senior management from within and outside of CIO, including the Firm's Chief Financial 

Officer, CRO, and Deputy CRO. In addition, the Firm has strengthened its processes across all 

businesses to deal with limit excessions. If a Firm or Line of Business-level limit has been in 

excess for more than three business days or is over limit by 30% or more, that excession is 

automatically escalated to the Corporate or Line of Business Chief Executive Officer ("CEO"), 

CRO, and Market Risk Head, as well as to the Firm's CEO, CRO, Deputy CROlFirm-wide Head 

of Market Risk, and the Firm-wide Risk Committee. If a Business Unit-level limit has been in 

excess for more than three business days or is over limit by 30% or more, that excess ion is 

automatically escalated to the Business Unit Head and Business Unit Market Risk Executive, as 

well as to the Corporate or Line of Business CEO, CRO and Market Risk Head, the Firm's 

Deputy CRO/Firm-wide Head of Market Risk, and the Line of Business Risk Committee. These 

notifications are sent every day that the escalation criteria applies. 

5. On March 30, 2012, at the end of the business day in London, CIO personnel sent an 

email to their CIO colleagues predicting that the Synthetic Credit Portfolio would 

incur a daily loss of about $138 million. According to its profit-loss records, 

however, the CIO reported internally that, on March 30, the Synthetic Credit 

Portfolio incurred a daily loss of about $319 million. 

a. Who made the decision to increase the amount of daily losses on March 30, 

2012, from about $138 million to about $319 million? 

b. Please explain the reasons for the increase, including by identifying the three 

credit derivative positions whose values changed the most from the initial 

estimate to the final reported loss and, for each such position, its prior and 

subsequent reported price and total dollar value. 

The P&L Predict circulated by CIO traders on the evening of March 30 reflected an 

approximately $138 million loss for the Synthetic Credit Portfolio. II The P&L Predicts were 

generated daily on the basis of the marks entered by the traders for each instrument that day. 

JI JPM-CIO-PSI0015283. 

2 
1102 

The Total Rate of Retum Report ("TRR"), which reflects the official March 30 P&L for the 

Synthetic Credit Portfolio, reported $149 million. 

Per the standard practice at quarter-end, the March 30 trader-based marks were subject to 

a separate review by CIO's finance function. The $319 million loss number is the final postquarter number after liquidity reserves of $153.1 million and CIO Valuation Control Group 

("VCG") adjustments of $16.9 million made by CIO Finance. The individuals from CIO 

Finance involved in that process were John Wilmot and Ed Kastl. The VCG adjustment resulted 

from an analysis performed by an individual in CIO VCG. 

8. The CIO changed its derivatives pricing practices for the Synthetic Credit Portfolio 

after that portfolio began incurring substantial losses, moving from marking at or 

near the midpoint to marking at, near, or outside the boundaries of the daily price 

range (bid-ask spread). Has JPMorgan Chase taken any steps to inform its 

personnel that changing derivatives pricing practices to minimize losses~ven if the 

prices being used fall within the bid-ask spread-is against bank policy? If so, what 

steps, if any, has JPMorgan taken to enforce compliance with that policy? 

Throughout the relevant time period, JPMorgan' s corporate accounting policy was to 

mark at fair value mark-to-market positions, such as those contained in the Synthetic Credit 

Portfolio,21 as required by U.S. generally accepted accounting principles ("US GAAP"). During 

the relevant period, JPMorgan believed that the CIa traders were continuing to mark the 

portfolio at fair value; however, as the Firm now knows based on evidence uncovered by the 

Management Task Force (and not known at the time the Form I O-Q was issued), the CIO 

traders' marks may not have represented reasonable, good faith estimates of fair value on 

particular days in the first quarter of2012. 

The Firm has issued guidance to all front office personnel in CIa and the Corporate and 

Investment Bank ("CIB") reinforcing their obligation to comply with US GAAP and Firm-wide 

policy and to reflect fair value in the marks they assign to financial assetsY The guidance states 

that knowingly marking or valuing a Firm position or instrument in a way that is not 

representative of fair value is prohibited and constitutes a falsification of the Firm's business 

records. Any employee who is aware of a position not being marked at fair value or suspects 

that a position may not be marked at fair value is required to notity Compliance immediately.41 

l! Fair value is 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. Fair value is sometimes referred to as Hexit price." 

l! See December 2012 Front Office Valuation Guidance, circulated on December 20, 2012. Produced at 

JPM-CIO-PSJ-H 0006945. 

if Jd. 

3 
1103 

9. With respect to the Value-at-Risk (VaR) model change that was disclosed in 

JPMorgan Chase's third quarter 2012 10-Q filing and resulted in an approximately 

20% decrease in the VaR results reported to the public, please explain: 

a. Who developed the model change; 

The new model implemented in the third quarter of 20 12 (known internally as the "Index 

VaR" model) was developed by an individual in the Firm's Market Risk group, in conjunction 

with the head of the model development team in the Firm's Model Risk and Development group. 

b. When the model change took effect; 

The review of the model was completed on June 30, 2012 and the model change took 

effect on July 1,2012.21 

c. What units within JPMorgan Chase use the revised VaR model; 

The model is used by the CIB. 

d. Whether the change applies to VaR models with a 95% or 99% confidence 

level; 

The model produces a 95% confidence level VaR. 

e. Whether the model change created a difference between the VaR models 

used by JPMorgan Chase to calculate its capital requirements and the VaR 

models used by JPMorgan Chase to inform the public about its risk analysis; 

The model has been used solely to calculate the Firm's VaR as reported in the Firm's 

Form IO-Q for the third and fourth quarters of2012. It also was submitted to regulators during 

the third quarter of 20 12 for approval for regulatory capital purposes as part of the Basel 2.5 

model review process. (The Firm's regulators do not provide approvals ofVaR models for 

purposes of risk management or SEC filings.) As in the first and second quarters of2012, the 

legacy Basel I model continued to be used for purposes of calculating Basel I regulatory capital 

requirements. At present, the Firm's general practice is to use the same models for purposes of 

financial reporting and the calculation of regulatory capital. Going forward as well, the Firm 

intends, where possible, to maintain consistency in the application of models for purposes of 

'Ji As the Finn disclosed in its first quarter 2013 earnings supplement, in order to achieve consistency among 

like products within CIB and consistent with the implementation of Basel 2.5 requirements, the Firm moved the 

Synthetic Credit Portfolio to an existing VaR model within the CIB. This change had an insignificant impact to the 

average fixed income VaR and average total CIB trading and credit portfolio VaR, and it had no impact to the 

average total VaR compared with the models used in the third and fourth quarters of2012. When compared with the 

model used prior to the model change in the third quarter of2012, this VaR model resulted in a reduction to average 

fixed income VaR ofSl1 million, average total CIB trading and credit portfolio VaR of$1O million, and average 

total VaR of $8 million, for the three months ended March 31, 2013. 

4 
1104 

public disclosures, risk management, and regulatory capital, subject to regulatory approvals and 

changing requirements governing the calculation of regulatory capital. 

f. What specific components of the revised model are primarily responsible for 

the decrease in reported VaR results; 

The relevant components are: (i) correlation modeling; (ii) valuation input; (iii) index 

approach; and (iv) time series. 

g. Why JPMorgan Chase believes its activities should be seen as substantially 

less risky than they were prior to the model change; and 

The impetus behind the model change was to enhance aspects of the prior VaR model 

and to build a model that could be approved for use for regulatory capital purposes as part of the 

Basel 2.5 model review process. With respect to the Index VaR model itself, it should be noted 

that the model does not produce a consistently lower VaR than the Basel I model, and that the 

average difference between the output of the two models over the second quarter of 20 12 was 

only 4%. The Firm believes that the Index VaR model is more robust than the prior model 

because it uses approved valuation models for inputs and uses underlying CIB-risk management 

systems to calculate risk sensitivities. Independent of the model change, the Firm has continued 

to de-risk the positions through active portfolio management prior to and throughout the period 

of the model's implementation. 

h. Whether the model change was approved by the OCC and, if not, why not. 

As indicated above, the Firm's regulators do not approve VaR models for risk 

management or reporting purposes. The acc and other banking regulators were informed of the 

upcoming change during the model's development phase and notified of the model's formal 

implementation the same day it went live. In the third quarter of 20 12, the Firm sought 

regulatory approvals for the use of the Index VaR model for regulatory capital purposes. 

10. After purchasing a credit derivative position, does the CIO or the Investment Bank 

currently determine whether that position should be evaluated using the 

Comprehensive Risk Measure (CRM) or the Incremental Risk Charge (IRq 

required by the OCC, by calculating which measure would produce lower Risk 

Weighted Assets (RWA) results? If not, please indicate whether the CIO or 

Investment Bank ever used that approach in the past and, if so, during what dates. 

If the CIO or Investment Bank uses that same approach for other types of 

derivatives, please identify those other types of derivatives. 

The Firm does not determine the evaluation of positions in this manner. Positions are 

booked into the Firm's CRM and IRC models based on regulatory requirements and standards. 

lPMorgan's policy is-and always has been-that the interpretation of those requirements and 

standards is controlled by the Corporate Regulatory Policy Group (which is independent from 

5 
1105 

the lines of business) and the Firm's capital governance process, which has not evaluated and 

does not evaluate positions in this manner. 

11. Has JPMorgan Chase ever hired or contracted with any third party, including any 

accounting firm, to obtain advice or services related to mathematical model 

revisions, procedures for categorizing assets, or other practices to "optimize" Risk 

Weighted Assets, produce lower RWA results, or minimize capital requirements? If 

so, please identify each such third party, the nature of the advice or services 

provided, and approximate dates. 

No, the Firm has not hired or contracted with any third party, including any accounting 

firm, with the purpose of obtaining advice or services related to mathematical model revisions, 

procedures for categorizing assets, or other practices to "optimize" Risk Weighted Assets 

("RWA"), produce lower RWA results, or minimize capital requirements. 

12. During his hearing testimony on March 15, when asked about the Synthetic Credit 

Portfolio, Mr. Braunstein stated: "In hindsight, Senator, the position and the 

portfolio did not act as a hedge." 

a. When did JPMorgan Chase come to that conclusion? 

b. What is the basis for that conclusion? 

While the Firm is not aware of a specific moment when it concluded that the Synthetic 

Credit Portfolio had ceased to act as a hedge, the Firm believes that at some point between April 

30,2012 and May 10,2012, the Firm understood that the Synthetic Credit Portfolio no longer 

provided the hedging protection it had provided historically. Beginning on April 23, the 

Synthetic Credit Portfolio began to suffer large losses, totaling almost $800 million over the 

course of six trading days. These large losses were inconsistent with the assurances CIO had 

provided to management prior to April 13 that the portfolio was a hedge, was balanced, and 

would "mean revert," and they caused senior Firm management to send a new team headed by 

a senior member of Firm -wide Market Risk - to conduct a detailed analysis of the positions in 

order to provide an independent assessment of the portfolio and its risks. During the course of 

this review in late April and early May, the team concluded that the positions in the Synthetic 

Credit Portfolio were not as well correlated as had been previously understood, and as a result, 

the Synthetic Credit Portfolio was both different from - and riskier than how it had previously 

been described by CIO. 

13. At the hearing, JPMorgan Chase indicated that it supported requiring 

contemporaneous hedging documentation to identify the assets being hedged, how 

the hedge would reduce the risks associated with those assets, and how the hedge 

would be tested for effectiveness. Please describe any steps JPMorgan Chase has 

taken to institute that requirement and provide copies of any relevant forms. 

6 
1106 

IPMorgan understands that its regulators are currently developing rules that will contain 

appropriate documentation and other control requirements regarding hedging activity, and 

JPMorgan will adhere to those requirements. In the meantime, IPMorgan has taken steps to 

impose stronger internal controls over its structural hedging activity in a manner that 

appropriately reflects the approach in the proposed rules. 

CIO investments are sUbject to the investment parameters and investment targets as 

established by the CIO Investment Committee and in accordance with the Firm-wide risk policy 

and limit frameworks. Investment strategies and portfolio management processes are established 

by CIO senior management and the Investment Committee, with adherence to safe and sound 

banking practices. The risk appetite for CIO is set annually by the Firm-wide Chief Operating 

Officer and the CIO, Treasury and Corporate Chief Risk Officer, Firm-wide CEO and Firm-wide 

CRO and presented to the Directors Risk Policy Committee. 

The CIO Investment Committee, which is chaired'by the Global ChiefInvestment 

Officer, is responsible for establishing the overall investment strategies to effectively manage the 

Firm's structural interest rate and FX risks and overseeing hedging activities involved in 

managing those risks. 

The CIO Investment Committee is also required to approve new or changes to CIO 

hedging mandates. As part of the approval, the risks being hedged and the parameters to be 

applied to the management of those risks must be clearly defined and documented. This sets the 

framework for the effective hedging of those risks and the basis of the reporting and monitoring 

of that effectiveness. 

14. Please identify by date and description, and provide a copy of, the earliest document 

that JPMorgan Chase provided to the Office of the Comptroller of the Currency 

(OCC) identifying the Synthetic Credit Portfolio by name. 

While the name of the portfolio, both within JPMorgan and in communications with 

regulators, has changed over time, IPMorgan provided the OCC with regular reporting with 

respect to the portfolio. On a routine basis, JPMorgan sent weekly Stress Results Reports to the 

OCC. In 2011 and early January 2012, a number of these Stress Results ReFt0rts contain specific 

references to the "synthetics credit portfolio,,;!>1 the "synthetic credit book,,;-I and the "synthetic 

credit tranche book".&' In the years prior to 2011, reporting sent to the OCC also specifically 

§! Stress Report - JPM-CIO-PSI-H 0006898 (Nov. 18,2011); Stress Report JPM-CIO-PSI-H 0006947 

(NOY. 26.2011); Stress Report - JPM-CIO-PSI-H 0006949 (Jan. 6, 2012). 

l! Stress Report - JPM-CIO-PSI-H 0006951 (Nov. 4, 2011). 

!I See, e.g., Stress Report - JPM-CIO-PSI-H 0006953 (Apr. 14,2011); Stress Report - JPM-CIO-PSI-H 

0006955 (June 3, 2011); Stress Report - JPM-CIO-PSI-H 0006957 (July 1, 2011); Stress Report - JPM-CIO-PSI-H 

0006959 (August 12,2011); Stress Report - JPM-CIO-PSI-H 0006961 (Sept. 9, 2011). 

7 
1107 

referred to the portfolio, but it was generally referred to as the "Core Credit Book", "EMEA 

Credit Tranche" book and the "CIO international credit tranche" book. 

We are continuing to look for additional, earlier references to the Synthetic Credit 

Portfolio, by that name, in communications with the OCC and will supplement this response as 

necessary. 

8 
1108 

JPMorgan Chase & Co. Response to Questions 3,4, 6 and 7 of the April 12, 2013 Letter 

from the United States Senate Permanent Subcommittee on Investigations 

Questions 3,4,6 and 7 of your April 12, 2012 letter ask JPMorgan Chase & Co. 

("JPMorgan" or the "Firm") to reconstruct the historic bid-ask spread for March 16 and 23 and 

April 11 and 17,2012; and to explain whether the CIO used prices within the daily bid-ask 

spread on those dates and how the CIO traders' reported loss amounts were derived. 

Unlike the U.S. equities market, where market participants have access to centralized, 

aggregated, real-time information reflecting the best bids and offers for a security, the derivatives 

market is a decentralized over-the-counter market where dealers are not required to publish 

binding bid-ask quotes and where their indicative quotes are not systematically disseminated. 

Because there is no mandated consolidated quotation system for derivatives, there is no 

uniformly acknowledged mechanism for identifying, on a historic basis, the relevant bids and 

offers in the market. While certain consensus prices for indices are available, those prices do not 

show a bid-ask spread; moreover, consensus prices for index tranches are not available on an 

intra-month basis. Consequently there is no historic data trail that shows bid-ask spreads for the 

dates you have asked about. After consulting with Firm personnel and a number of market 

experts, JPMorgan has not been able to identify any third party service or vendor who can create, 

maintain or reconstruct definitive bid-ask spreads for the indices and tranches. In addition, the 

CIO traders were not required to retain copies of all the indicative quotes and other market data 

they may have received and referred to when determining their marks on a day-to-day basis. For 

these reasons, JPMorgan has not been able to reconstruct a reliable and accurate historic market 

bid-ask spread for the intra-month dates you asked about and is therefore not able to state 

whether the CIO used prices within such a bid-ask spread on those particular trading days. 

3. On March 16,2012, Julien Grout prepared a spreadsheet indicating that, on that 

day, losses incurred by the Synthetic Credit Portfolio had increased by at least $140 

million. According to its profit-loss records, however, the CIO reported internally 

that, on March 16, the Synthetic Credit Portfolio incurred a daily loss of about $3.9 

million. 

a. In calculating that $3.9 million loss, did the CIO use prices within the daily 

price range (bid-ask spread)? 

As discussed above, the Firm is not able to reconstruct an historic bid-ask spread and 

therefore is not able to state whether the CIO used prices within such a bid-ask spread. 

b. Please explain how the $3.9 million loss amount was derived, including 

whether prices at, near, or outside ofthe boundaries of the daily price range 

(bid-ask spread) were used. 

The profit and loss ("P&L") for each of the four days identified in Questions 3, 4, 6 and 7 

were generally derived as follows: On the basis of observable market data, including non-
1109 

binding bid-ask quotations, from a number of different sources, the traders were responsible for 

assigning a value for each instrument in the book every business day. The traders entered the 

value for each instrument into the Firm's trade management systems. Those values together with 

the book's position data were used to generate the daily P&L for the Synthetic Credit Portfolio. 

Because it is not possible to recreate the historic bid-ask spread data for each of the instruments 

in the book, the Firm is not able to determine whether the value assigned for such instruments by 

the traders were at, near or outside the boundaries of the spreads. 

4. On March 23,2012, Bruno lksil sent the following communication to his supervisor, 

Javier Martin-Artajo: "I reckon we have today a loss of 300M using the best bid 

asks and approx. 600m from mids." According to its profit-loss records, however, 

the CIO reported internally that, on March 23, the Synthetic Credit Portfolio 

incurred a daily loss of about $12.6 million. 

a. In calculating that $12.6 million loss, did the CIO use prices within the daily 

price range (bid-ask spread)? 

See above response to Question 3.a. 

b. Please explain how the $12.6 million loss amount was derived, including 

whether prices at, near, or outside the boundaries of the daily price range 

(bid-ask spread) were used. 

See above response to Question 3.b. 

6. On April 11, 2012, according to its profit-loss records, the CIO I'eported internally 

that the Synthetic Credit Portfolio incurred a daily loss of about $6.3 million, even 

though the prior day, the reported losses totaled about $415 million. 

a. In calculating that $6.3 million loss, did the CIO use prices within the daily 

price range (bid-ask spread)? 

See above response to Question 3.a. 

b. Please explain how the $6.3 million loss amount was derived, including 

whether prices at, near, or outside the boundaries of the daily price range 

(bid-ask spread) were used. 

See above response to Question 3.b. 

7. On April 17, 2012, according to its profit-loss records, the CIO reported internally 

that the Synthetic Credit Portfolio incurred a daily gain of about $10 million, after 

eight consecutive days of losses. 

a. In calculating that $10 million gain, did the CIO use prices within the daily 

price range (bid-ask spread)? 

2 
1110 

See above response to Question 3.a. 

b. Please explain how the $10 million gain amount was derived, including 

whether prices at, near, or outside the boundaries of the daily price range 

(bid-ask spread) were used? 

See above response to Question 3.b. 

3 
1111 

FRONT on'TCE VALUATION GUIDANCIl, December 2012 

t VahJation Principles 

It is a critical core value that employee.<; act v..rith integrity at aU time!:. when conducting finn business. including ~1!! 

maintenance of accurate business records relating to the valuation pliJli:ipJes ,md processes. described in this communication. 

As a U.S. regulaTed corporation. J.P. Morgan Cha:o;e & Co. (the "Finn''') is required to follow U.S. gene:ral1y accepted 

accounting principles ("US GAAP"), Under US G.A..i\P. the Firm records celllun fin'lUcial assets and Jinbilitics at fair v,lIne on 

the balance: sheet. with changes in fair v;iluc reported in thl! Income Statement or Other Compl'C'.hensivc Income. In addition. 

the Firm manages certain othe:f a~1\eL" or liabilitie..; Qil a fair vulue basis and produces dtlily e.."tim3(C~ of fair v,\}uc ~nd 

associat~d reporting. even though they are Ilot call1oo at f<lir value on the balance shct·t for US GAAP purposes, This 

cnmmunlcn1illil rel<Jtc:o. to allY finandal as~et or lhlbiH1y whcre a fnir ,,'alue estimate IR required. 

US GAAP defines fair value ns "the price th~\t would be received to seU an as..~et or paid to tf31tsfcr a liability in an orderly 

transaction between market p3rtkipanb;. at the :ml:"::;lsuremcnt date," This is sometimes referred to as "exit price:' Fair value b 

the price that 3 third pa.rty would be willing til p~~y for an asset. nm whilt JPM lllay believe th" a.."i~el shl)uld be WOlih. Fair 

yulue is tnea..~ured for a 'nonna!' sizc.d position, 

The determination orexit pJi(·c within the hid-offer spread typically hlYolv!!s judgment by th~, trading desk or risk tilKing 

busillCli:" th:lt manages the Firm' s open positions (the ·'.Front Office") and specific practices and nonn~ should be agreed with 

VCG and the LOB CFO, rOt' example, the Firm marks (l.,) t\ mid Jl.!vel for d~rivntive market making bonks ali a practical 

ex-pedient. Any ~lddjtiomd vahmtion adjusrments. inclllding.th{)se for size, would need to be agreed with VeG through the Fair 

Value: Adjustment proCt'SS. 

Knowingly markjng or providing:l valuatjon on a Firm positi\)n or im;trument by the Front Office which is not representative 

of fuil' v::Uuc is a fijjsiticnr1{)o of bllsim.~ ... s records - it is known as HOlisJll<ll'kipg" :md is prohibited, You nlust provide marb 

and vaJu<1tions consistent with the guidance he-rein. if you are awart~ Of suspect that a position or instruHlCllr. may not be 

m:uked at fair value. you have an obligation {(l notify Compli.mc.: immcdialc:ly. 

Any questions or uncertainty about the applicability of thi:-: communication to a pa[1icuJar c:in::um,swnce mu:,;t be rllised with 

your mi'lnager and the LOB CFO contoe[ in your husine.', .. <j, In ad~jiti()n. Irading or 1; ... K tnking personnd who manage the Firm'~ 

open positions mU!it ide,ntify tn their Jllunugcmcnt and LOB ern any situation \\'here n posjtion Qr inMnlll1ent is not being 

valul!.tJ in nccordaJ)cc with th..:- Firm's fair valuation process described belo,,,.'. 

II. F'r()ut Office ValU.liODS 

111e Front Office hns the re~ponsibility for markin£ the Finn 's inbtrument~ to fair value on a regular b~is. Thiii responsibiHty 

extends to instmments classified in alllevcls of the f;.til' value hicran::hy. All Front Office marks form the foundation for the 

Fiml's estimates ni fair value and daily prl1fit and loss reponing. 

Front Oflice marks must be calculated u~ing nyaiJabtc market~ba:-;cd infonn.nioll. inc1uding reCl!ill wlOl'action dam, pricc 

quotations. LlI1d other valuntion inputs, Fair \'l.llue ~h()uld be estimated using the. fOllowill£. hjerarchy. ReifJ.rdl('~s of the method 

used, or the type of ,\sst't (!',g, private equity Of un exc1mngt! truded equity), the objL'edve remain.s the )i.nm~. to most accumtely 

e::.timatc the exit price in the cunclll m.u·ke.t: 

Quoted market pricl!s- ur inPUts for [he same instnnnent. such ns recent transactinn datil, where available 

Quoted market price$ or Inputs for .simihU' but still liquid instruments 

Quoted market prices ol'inputs for le~s liquid !-imilar in::.'trument.:; 

For tho:-.e positions where an observabJe market doe." not exist (Level 3). the. Front Office may use u valuation modd 

if it has been approved by the Model Review and Development Group ("MRG") to cstimat(: fair value 

For ce.rtain ins.trumcnts where automJted data feeds of pticing information are av~rilab1e On a continuous basis (price sourcing) 

the Front Office may use the feeo to serve :1'1 the basis for valuations. 

In l.\ddition, the Front Offke is also responsible for ensuring that any model used to estimate fair value, to the best of [heir 

knowledge, is: being used appropriately. For .::lny trade thut is upproximntcly loaded. the Front Oftice mu.~[ t:'nsure chat it is 

appropriately flag.ged in Ihe ~yst\!m and that the Mjddk Oftice and yeG are both norified, For any trade that ls ~l.pprox.ll1lately 

CONFIDENTIAL TREATMENT REQUESTED BY J,P, MORGAN CHASE & CO, JPM·CIQ.PSI·H 0006945 
1112 

modeled, the Front Office should notify both Quantitative Re"","ch and MRG to highlight the appro.imation for funher 

review. 

III. vcr;. Verifies Fair Value 

veo is a conh"ol fU""tiOll, independent of the Front Office, whose respon,ibility is to: Ii) indepondently verify the Front Offl« 

m(!.Tks, and (in determine ;lny valuation adjustmem required to the Fmnt Office mark~ to ensure that as.l)cts and liubHitie.s are 

recorded at fair valuC'. a,.; defined by US GAAP. VCG ha. ... sol~ responsibility for tletennining. documenting and executing any 

"aluation adjustments required to record positions /.\t fdir ,,~dllc. 

In the event there is a difference of opinion around Fair Value between the Front Office and VCG~ the burden of ptoofrests 

with the Front Office to support its opinion wld veo \oJm determine the Fuir Value. to be recorded in the books and records of 

the Finn. 

2 

CONFIDENTIAL TREATMENT REQUESTED BY J.P. MORGAN CHASE & CO. JPM-CI()'PS~H 0006945 
1113 

RESPONSES TO QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Office of the Comptroller of the Currency 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Hearing on 

JPMorgan Chase Whale Trades: 

A Case History of Derivatives Risks & Abuses 

March 15,2013 

Contents Bates Number Page 

Correspondence from the Comptroller of the Currency 

to the Permanent Subcommittee on Investigations ........ PSI-OCC-27-000001 

OCC Responses to Questions for the Record ............ PSI-OCC-27-000003 

Question 2-3, Attachment 1 .......................... PSI-OCC-27-000015 

Question 2-3, Attachment 2 .......................... PSI-OCC-27-000022 

Question 2-3, Attachment 3 .......................... PSI-OCC-27-000031 

Question 5, Attachment 1 ........................... PSI-OCC-27-000155 

Question 5, Attachment 2 ........................... PSI-OCC-27-000182 

Question 5, Attachment 3 .......................... PSI-OCC-27-000188 

Permanent Subcommittee on Investigations 

EXHIBIT #101 
1114 

C) Office of the Comptroller of the Currency 

june 27. 2013 

The Honorahle Carl Levin 

Chairman 

Permanent Suhcommittee on Investigations 

Committee on Homeland Security and Governmental Affairs 

United Statcs Senate 

Washington, DC 20510 

Dear Chairman Levin: 

Washington, DC 20219 

Enclosed please find my responses 10 the questions for the record submitted following the 

March 15,2013, hearing on "jPMorgan Chase Whale Trades: A Case History of Derivatives 

Risks and Ahuses." 

Since the hearing. the acc has been giving careful consideration to the recommendations in 

the PSI's report on the jPMorgun Chase trades. and has taken several sleps to improve our 

supervision of large bank derivatives portfolios. We have detailed these steps in our 

responses (0 the ljllestions that follow. 

In addition. I wanted to ensure you were aware that our Large Bank Supervision (LBS) 

program h(l~ nine network groups in specialty risk areas, including one for Capital Mmkets. 

Examiners from each large hank team are memhers of the network groups, and each group is 

headed hy a Lead Expcn. These groups arc intended to ensure that the following key 

ohjectives arc accomplished; 

Systemic (lOd cmerging risk isslies and policy related issues arc identified and 

discussed; 

Information and unique supervision techniques to promote consistent and progressive 

supervision arc shared; 

• Senior LBS leadership is kepI informcd of systemic and emerging risk issues, and 

policy related isslIcs; 

• Appropriate risk metrics arc developed by working with Data and Analytic, User 

groups; and 

• Examiner training and development initiatives arc sponsored and formalizcd. 

With these ohjcctives in mind, our Capital Markets network group will be critical to the 

sLlccess of the improvements we arc making to om supervision of derivatives portfolios. 

PSI·OCC·27·000001 
1115 

I hope the information delailed in the enclosure is helpful to the Comrnillee. If you have .my 

questions, please contact Carrie Moore, Director, Congressional Liaison. at (202) 649·6737. 

Enclosure 

PSI-OCC-27 -000002 
1116 

QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Watemouse, and Michael Sullivan 

Oftice or the ComptroUer of the Currency 

PERMANENT SUBCOMMITTEE ON INVESTIGA nONS 

Hearing on 

"JPMorgan Chase Whale Trades: A Case History or Derivatives Risks & Abuses" 

1. JPMorgan Chase did not fully disclose to the oee the existence and nature of the Synthetic 

Credit Portfolio for five years. Please describe what steps the Office of the Comptroller of the 

eurrency (OCC) has taken or plans to take, if any, to require the large banks it regulates to 

identify all internal investment portfolios or trading books with derivatives over a specified 

notional size, and provide periodic performance data for those activities or holdings. Please 

provide copies of any related written materials given to examiners on this issue. 

Response: The OCC is taking several steps to require the large banks we regulate to identify 

large derivatives holdings. The recommendations in the report of the Senate Permanent 

Subcommittee on Investigations (PSI) regarding the JPMe trading loss, along with the results of 

our internal review, were widely discussed with, and distributed to, our large bank examiners and 

already are being incorporated into the OCC's examination processes. aur examiners have 

reinforced with all large institutions our expectation that they report to the ace all material 

aspects of their operations. In addition, aee examiners are reviewing the effectiveness of bank 

reporting and other control processes to ensure that banks' derivative activities and perfonnance 

are transparent, both to their own internal control personnel and to eltaminers. 

Second, the ace is revising our examination handbook that covers trading and derivatives 

activities, to integrate the recommendations from the PSI report and lessons learned from the 

aee s own internal investigation. The handbook will incorporate these recommendations into 

procedures for use by all of our large bank examiners to ensure that trading and derivative 

activities of large banks are examined in a consistent and rigorous manner. The revised handbook 

will describe the control framework that banks are expected to maintain for the safe and sound 

use of derivatives, including when that use is for hedging purposes. The handbook will 

specifically make clear that the framework will need to include the identification and reporting of 

significant derivatives exposures, anywhere in the bank. The ace plans to expedite the 

communication to the industry of this aspect of the handbook through the issuance of interim 

supplemental examination procedures. 

The ace will shqre the new handbook and any guidance referenced in our answers with the 

Subcommittee. as soon as they are issued. 

2. Please describe what steps the aee has taken or plans to take. if any, to detect at the large 

banks it regulates undisclosed derivatives trading with notional values. net exposures, or profitloss reports over specified amounts. Please provide copies of any related written materials given 

to examiners or other aee personnel on detecting undisclosed derivatives trading. 

Response: As discussed above, the OCC is taking several steps to require the large banks we 

regulate to identify and provide more detailed reports on significant derivlltive exposures. 

Consistent with the lessons we have learned from the Whale incident. and the recommendations 

of the PSI's Report, we also are taking steps to detect undisclosed derivatives trading activity. 

1 

PSI-OCC-27-000003 
1117 

QUESTIONS FOR THE RECORD 

for 

ThmlJus Curry, Scott Wuterhouse, uud Michuel Sullivan 

Office of the Comptroller of the Currency 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Hearing 011 

"JPMorgan Chase Whule Trades: A Cu,~c Hi~tory of Dcrivutives Risks & Abuses" 

We have directed our large bank examiners to review cllrcrully the reports provided by the large 

banks we regulate, !Iud we have specifically emphasized to our examiners the importunce of 

reviewing these reports to identify inconsistencies with information provided to senior 

management and regulators. We have also directed our examiners to evaluate the effectiveness of 

bunks' risk management nnd internal audit functions in ensuring that bank management reports 

accurately represent risks posed by banks' derivative llctivities. We will incorporate specific 

reference to these procedures into our revised examination handbook. 

In addition, the OCC is using data from third-party repositories as a means to identify 

concemmted risk positions and undisclosed truding Ilctivity. As described in greater detail below, 

the OCC is monitoring data on credit default SWllp (CDS) tnmsactions using data we obtain from 

the Trade Information Warehouse of the Depository Trust and Clearing Corporation (DTCC). 

While this data has some limitations, it provides an independent source of information on bank 

CDS activities. Since April 2012, the OCC has been providing this data to examiners for lise in 

their regular interaction with bank risk mllflagcrs, and as a cross-check to bank-reported 

information for CDS. 

The OCC 11150 is exploring options to ohtain more dewilcd and comprehensive trade data 

regarding CDS and certain other types of derivatives from swap data repositories (SDRs). SDRs, 

which were mandated by the Dodd-Frank Act (DFA), will ultimately be the repositories for 

detailed transaction data on all categories of swaps. However, the OF A requires the OCC and 

other prudential regulators to agree to indemnify the SDR in order to access swap dam. impeding 

our access to it, The OCC ClInnot [lrovide an open-ended indemnification to SDRs that would 

expose the agency to an unknown contingent liability. In addition to supporting a legislative 

solution to this problem. the OCC is working with other agencies to find a means to obtain this 

data. This data would provide us with another mellO, to identify undisclosed trading activity in a 

broader range of asset classes, in addition to CDS. 

Examples of related written materials given to examiners on detecting undisclosed derivatives 

trading are included in Appendix A, 111i5 topic is also discussed in the following handbooks: 

Comptroller's Handbook: Risk Munagement of Financial Derivatives 

http://www .nce .go v /publ icat ions/plI bl icati ons-by-type/co mptrollers-handb Dok/deri v . pd [ 

(which is being revised) 

Comptroller's Handbook: Management and Board Process 

hllp:llwww.occ.gov/publications/publications-by-typc/compLrolJershandbook/managementl.pdf 

Comptroller's Handbook: Management 111 formation System 

hltp:llwww.occ,gov/puhlications/publications-by·tYPc/cOl1lptrollcrs-htlndbooklmis.pdf 

2 

PSI·OCC·27·000004 
1118 

QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Office of the Comptroller of the Currency 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Hearing on 

"JPMorgan Chase Whale Tradl'S: A Case History of Derivativcs Risks & Abuses" 

Comptroller's Handbook: Internal lind External Audits 

http://www.occ.gov/llublicarions/publicatiollli:hY.:!Y.ru;/colllptrollel's 

handbook/200JAuditH B.pdf 

3. JPMorgan Chase increased the notional size of the Synthetic Credit Portfolio from $4 billion 

to $51 billion in 2011, and to $157 billion in the first quarter of 2012. Please describe what 

procedures the OCC uses or plans to use to monitor the size of the derivatives holdings at the 

large banks it regulates, to track rapid increases within a quarter, and to determine when the sheer 

size of a particular derivatives holding or portfolio is incurring too much risk and needs to be 

reduced. In addition, please describe what actions a bank examiner is e;>;pected to take when a 

particular derivatives holding or portfolio becomes too large or too risky. Please provide copies of 

any related written materials given to examiners on monitoring and evaluating the size of bank 

deri vative holdings. 

Response: As described above, the OCC is taking several steps to require the large banks we 

regulate to identify and provide reports on significant derivative positions. The OCC is using 

these reports to monitor the size of the derivatives holdings at large banks, to track rapid increases 

within a qUllrtcr. and to identify when the sheer size of particular derivatives holdings Illay be 

overly risky. As tnentioned above. we also !Ire using CDS trade data from DTCC's Tmde 

Information Warehouse, \I'hich is available at the transaction-level, to monitor the size of certain 

derivatives holdings of the institutions that we supervise. The OCC also is routinely reviewing 

the Warehouse's data for concentrated positions in individual reference l1ame.~ (e.g., credit 

derivatives indices) to identify positions that may become illiquid, exacerbating risk. 

A goal of supervision is to ensure bank processes (particularly limit stmctures and internal control 

functions) are strong enough to prevent an exposure that is impmdent. When an examiner 

believes thnt a portfolio or holding has become too large or too risky. we eXpl'Ct the examiner to 

inform the bunk's examiner-in-charge and investigate the issue more fully. The examiner is 

expected to meet with management to discuss the nature of the exposures created by the portfolio 

or holdings and any limit breaches. If warranted, the examiner is expected tu perfurm a targeted 

examination to identify any impmdcnt risks created by the bank's purtfolio or holdings. 11' a bank 

is found to be taking excessive risks, the OCC expects our examiners to initiate a supervisory 

action. 

The OCC's general expectation for examiners to identify and communicate to bank management 

areas of emerging risks was reinforced ill the OCC's Supervisory Memo 20J J-5 011 the use of the 

OCC's Risk Assessment System (RAS). As noted in that memo, the RAS is meant to be used as 

II tool to identify. communicate. and effect appropriate responses to the build-up of risks or 

deficiencies in risk management systems at OCC-supervised institutions. The memo instructed 

examiners that they should take nppropriutc supervisory actions when there arc unwarranted risks 

that require better mitigation, exposures that must be reduced, or inadequate/ineffective risk 

1Th1nagement practices that must be remediated. We plan to reinforce these general expectations 

in our revised trading and derivatives handbook. 

3 

PSI-OCC·27 ·000005 
1119 

QUESTlONS FOR THE RECORD 

for 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Ol1ice of the Comptroller of the Currency 

PERMANENT SUBCOMMI1TEE ON INVESTIGATIONS 

Hcaring lin 

"JPMorgun Chase Whale Trades: A Case History of Derivatives IUsks & Abuses" 

Examplcs of rdated wrincn materials given (0 examiners on lIlonitoring and evaluating the size 

of bank derivative holdings lin! included in Appendix A. This topic is also discussed in the 

following handbooks: 

Comptroller's Handbook: Risk Managcment of financial Derivativcs 

b!tp:/lwww.tll·L.g(lv/miliJimtil)n.&iPI)I1lic;!li!)n.·hy:lyp.fI;ol)lfltr(lJkrs:lllll.1dtmJllilllrxi~:>l!r 

(which is being revised) 

Comptroller'S Hnndbook: Man:lgcmcnt Information System 

)11Ip:llwww.(~{lY!Jlldi!£Ulh.®l!1IJhlkiI!illD5:.hx:!Y/1£ll·t)rnp.tn.llt'rs·handbo()k/ll)is./ldJ 

Comptroller's Handbook: Large Bank Supervision 

http://www.occ.gov/publicalionslpubliclllions-hy-lype/con.w!rn!k.I.·s-h;!!l!:!bookIlJ2:.-J..1li 

4. Docs JPMorgan Chase currcntly provide thc OCC with daily profit (lnd loss data for the Chief 

Investment Office (Cia)? Docs it also provide daily profit and loss data for the Cia's individual 

investment portfolios or trading hooh1 If nO!, does the OCC pilln to require duily profit nnd los$ 

data for the Cia's individual investment portfolios or trading hooks? 

Response: Yes. Wc now receive duily profit and loss statements covcring all CIO investmcnt 

and trading activities. 

5. HeMing Exhibit 39 is a list prepared by JPMorgan Chas~ of CIO risk limit brcnchcs. The list 

indicatcs that, in the foimh quartcr of 2011, the Synthetic Credit Portfolio breached its risk limits 

6 times: in the first quarter of 2012, it breached its risk limits 170 times; and in the month of April 

alone, it breached its risk limits J 60 times. 

a. Were OCC cxaminers at JPMorgun Chasc aware at the time of this slIddt!l1 increase in thc 

number of risk limit breaches by the Synthetic Credit Portfolio? 

Response: The ace receivcd a dnily e-mnil that contained spreadshcet attachments highlighting 

limit excesses. We reviewed Corporate and hlv<'stmcnt Bank positions on u rcgular basis. 

However, based on our faulty assumption that the CIO was not engaged in any high-risk 

activities, wc did nO! regularly review the cia spreadsheets and, consequently, we did not detect 

the rapid increase in exposurcs. 

b. Please describe what sleps the OCC has taken or plans to takc, if any, to cnsure on-sitc 

eXilminers at large banks nnuly7.c the bank's risk limit bre,_eh data on it timely b:tsis to identify 

sudden or prolongcd jncr~ascs in thc number of risk limit hrea~hes or other problcms. Please 

provide copies of any related wrillen materials given to examiners requiring the imalysis of bim\( 

risk limit breach data. 

Response: The OCC is laking a number of stcps to ensure that ollr large bank cxaminers analyze 

banks' risk limit hreach data in a timely manner to identify suddcn or prolonged in~rcascs in thc 

4 

PSI-OCC·27-000006 
1120 

QUESTIONS I~OR THE RECORD 

for 

Thomas Curry, Scott Wllterhousc, and Michael Sullivan 

Offiec of the Comptroller of the Currellcy 

PERMANENT SUBCOMMIITEE ON INVESTIGATIONS 

Hcuring 011 

"JPMorgan Cbase Whale Trades: A Case History (If Oerivlltivcs Risk.~ & Abuses" 

number of risk limit breaches. First, we have emphasized the imponancc of evaluating limits and 

breaches in the context of discussing the JPMC trading loss, and the results of our internal review, 

with our large bunk c)tamincrs. We also have cominucd to emphnsize the imponancc or 

evaluating the ongoing eff~'Ctjveness of processes and trends in b:mk exposures, including 

breaches, both through the process of selling supervisory strmcgies for large banks and in regular 

discussion groups organized for large bank examiners. In additiun, the OCC's I1!vised handbook 

will make clear that examiners must review banks' risk limit breHch data on a timely basis. It 

also will clarify that examiners must determine whether banks them.elves have strong risk 

management processes, including audit functions to ensure that risk limit breaches are 

appropriately monitored and addressed. 

Written materials regarding analysis of bank risk limit breaches is discussed in the slide deck 

used for training purposes titled "Derivatives Basics lind Bank Supervision" included in 

Appendi.~ A. and in: 

Comptroller's Handbook: Risk Management of Financial DerivatiVe'S 

hltp:llwww.occ.!!ov/publicalioll~!P!!hliJ.:.lliol]rh):-Jj'J2!;It:()lll!lJ!QII~rl!:-nall\1Q~1()kfdI.2Ih:..Jllif 

(which is being revised) 

c. If an on-site examiner at a large bank hecomes aware of a sudden or prolonged increase in the 

number of risk limit breaches at a bank, please describe what steps the DCC has taken or plans to 

take, if any, to instruct that examiner 011 the actions to be taken in response. Is it sufficient for the 

DCC examiner simply to determine that the bunk itself is aware of the breach dm .. , or mltst the 

examiner also identify the risky llctivitics causing the breaches and ensure those risky <lctivities 

are being curbed? Please provide copies of any related wrinen materials given to 11Ifge bank 

examiners on the aCfions to be taken in response to elevated risk limit breaches. 

Response: During monthly calls with our large bank ~xaminers, we have emphasized that the 

DCC expects our examiners \0 assess the reasons for sudden or prolonged breaches, and 

determine if management's actions in response to such breaches are appropriate. It is not 

sufficient for un examiner to simply ensure the btmk is aware of risk limit breaches. 11':111 

exmniner determines that the bank has inadequate risk controls, we expect the examiner to 

escalate the issue to more senior levels of bank imd ace management. through discussions or nn 

in-depth review. A bank's failure to prudently lIddress limit brellehcs could result in u 

supervisory action. Dur expectation Ihat e)(amincrs need to investigate the 1'00t cause of sudden 

and prolonged breaches of a bank's risks Iimi1.~. lind to direct that the bank take appropriate 

corrective action, is an underlying principle of our examination manuals (Illd procedures. As w.: 

update our revised handbook for trading and derivatives activity. we will be slIre that these 

expectations are clearly articulated. 

The examination of risk controls is currently discussed in: 

Comptroller'S Handbook: Bank Supen'isiotl Process 

ht Ip:I Iwww.()I.x.g!w/publkaljl>l1slP!J!:tlicatium·by-typ<.icolTljllml.lt:r..;: 

Il"ncJ!lv!.~"L_Jl(jf/h"I)~ .. ~JI.n\!rvi,,,i.<mp..m.~~p-'!f 

PSI-OCC-27 -000007 
1121 

QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Waterhouse, lind Michuel Sullivan 

Officc of the Comptroller of the Currency 

PERMANENT SUBCOMMIITEE ON INVESTIGATIONS 

Hearing on 

"JPMorglln Chase Whale Trades: A Case History of Derivatives Risks & Abuses" 

Comptroller's Handbook: Management and Board Process 

http:// www .oee .gov / pUhlicat iOlls/ pl! hi itat ions-by-t ypC/COIll)1t rollershandbook/management I.pdf 

Comptroller's Handbook: Large Bank Supcrvision 

httpj{www.occ.gnv/f1l1blicatiolls/p!!hlications-Q.Y:!YJNlI;Q!!]ptroIlcrs-halldbookllhs.pdf 

Copies of OCC enforcement policies also are included in Appendix. A. 

6. The JPMorgan Chase whale trades disclosed how, once the Synthetic Credit Portrolio began 

incurring losses, the bank's personnel changed the way they were valuing the derivatives and 

used prices that produced smaller reported losses. However, because they slillused prices that 

generally fell within the daily price range (bid-ask spread), JPMorgan Chase supported their 

changed derivative valuation practices. 

:to Ple:tse describe what steps the acc has taken or p11ns to take, if any, to strengthen its 

oversight of derivative valuation practices at large banks and stop the manipUlation of derivative 

prices to reduce reported losses. Please provide copies of related written materials given to 

examiners to evaluate derivative valuation practices. 

Response: The acc is taking a number of steps to strengthen the oversight of derivative 

valuntion practices at large banks. First, the ace hilS made clear to our large bank examiners 

thatlhey are responsible for reviewing banks' valuation controls relating to the pricing of 

derivatives. Traders provisionally mark their portfolios on a daily basis. At month-end, banks 

use various sources to determine the portfolios' fair value as required by U.S. GAAP. When 

determining fair value. GAAP requires prioritizing observable. unadjusted inputs. such as prices 

from a stock exchange, over unobservable. adjusted inputs. such as internal models. To ensure 

accurate pricing, large banks have valuation control groups to contiI'm independently those 

month-end prices. The acc expects our examiners to review the effectiveness of these 

independent efforts. including reviewing summary reports issued by valulltion control groups that 

identify variations in desk level activity. For example, examiners must evaluate how a bank 

resolves pricing disagreements between the independent control group and traders and contirm 

that the independent control group is prevailing in pricing disagreements. 

The OCC also plans to reinforce widely recognized best practice guidance issued by thc 0-301 by 

indicating that market-makers should vallie derivative positions at the mid-market price, less 

adjustments (e.g., credit or liquidity). The oec will also emphasize that. by contrast, end-users 

(i.e., a non-market-making price taker), should mark a derivative on the bid side of the rnarket if 

the posilion is long, (lOd the offered side of the market, if the position is short. 

I Derivatives: Practices lind Principles [Global Derivatives Study Group), July. 1993 

6 

PSI-OCC-27 -000008 
1122 

QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Watcrhouse, and Michacl Sullivan 

Office of the Comptroller of Ihe Currency 

PERMANENT SUBCOMMITIEE ON INVESTIGATIONS 

Hearing on 

"JPMorgan Chase Whale Trades: A CII.~e History oC Derivllllws Risks & Abuses" 

These pl1lctices and principles will he included in the revisions to the examination handbook that 

covers tr.tding and derivatives activities, mCnlioned ahove. Additionally, OCC policy units arc 

reviewing other potential avenues, such as the acc's Bank Accounting Advisory Series. to 

reinforce appropriate valuation principles and compliancc with GAAP. 

The evuluation of derivative valuation pmctices is discussed in the following mtlterillis provided 

to examiners: 

OCC Bulletin 1999·2, Risk Manngement of Financial Derivatives and Banking Trading 

Activities - Supplemental Guidance 

http://www.ne.: .gnvhwIVs.i.""ullceslhullcrillsl 1999Ibulkrill·19t)t)·2. hlml 

Comptroller's Handbook: Risk Management of Financia\ Derivatives 

hlln:/ Iwww.oce.grll. fl}uhli.m\i.911~!lllh1 kal iOlls~b I' -\ ypekmnpt n ,I It'!'s-h,mdhook/deri U1rrf 

(which is being revised) 

Comptroller's Handbook: Management and Board Process 

.hll Il :f/w\'r .. i.li.Sll:, J!.<.ll:!mlbli.cat i{!!15lm!hl ie at IOll-s·hv·1 YIlt'/ COIllpt rollers .. 

J.m.II(lb()<ll)Lmt!lt;tg~IU~Jl!.LL1!lf 

Comptroller's Handbook: Internal <lnd External Audits 

!lliJ:?;lIwww.occ.!!ol./puhlil.<Ili(lm/puhlicali •• m·lw·lvpekornl21.ml!.m: 

!.t;.!J!!Jh(lQ~a.QQ}/\ mJ!!.!i!1ru!f 

b. Has the acc t<lken or docs it plan to take any steps to encourage large banks to use' 

independent derivatives pricing services that mark derivalive values at or nellr 

{he midpoint of the daily price range (bid·ask spread)'! 

Response: Independent derivatives pricing services provide important information for bank 

valuution proce~scs and have been in regular usc at the largest banks for years. The OCC expects 

banks to also usc independent pricing services as well as other independent ~ourcc~ 10 value 

deri vati V\!S. 

The revised examination handbook will emphasize the OCC's expectations with respect to bank 

use of independent sources for pricing derivati\'t:s, as described in 6a. 

c. What examination activities, if any, does the OCC currently conduct with respect 10 

independent derivatives pricing serviccs1 

Response: The ncc docs not directly examine independent pricing services. Instead, as 

discussed fUl1her below, the ncc reviews bank valuation controls to ensure thaI bank.' hllve 

independent processes to evaluate the integrity of all sources used in valuing their positions. In 

addition. we cXilmillc the effectiveness and results of these valuation control processes. 

7 

PSI·OCC~27-000009 
1123 

QUE~ONSFORTHERECORD 

for 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Offic:e of the Comptroller of the Currency 

PERMANENT SUBCOMMITI'EE ON INVESTIGA TlONS 

Hearing on 

"JPMorgan Chase Whale Trades: A Case History of Derivatives Risks & Abuses" 

d. At the hearing, you indicated that the OCC requires the banks it regulates to comply, at a 

minimum, with U.S. Genemlly Accepted Accounting Principles, including Accounting Standards 

Codification Topic 820-10-35 on fair value measurements and disclosures related to derivatives. 

Has the acc taken or does it plan to take any steps to inform the large banks it regulates that it is 

against ace policy for a bank to change its derivatives priCing pmctices when losses are 

occurring and repon smaller losses - even when the prices foil within the bid-ask spread? 

Response: Fedemllaw requires large insured depository institutions to prepare financial 

statements in accordance with GAAP. See 12U.S.C.183Im; 12 CFR pan 363. U.S.GAAPdoes 

not allow entities to change valuation practices to minimize losses. A fonhcoming addition of the 

OCC's Bank Accounting Advisory Series, and the revised handbook will make this clear. 

e. Has the acc taken or does it plan to take any steps to require large banks to quantify and 

disclose at month or quarter end the extent to which their derivatives prices deviated from the 

midpoint prices during the covered time period, and disclose when their deri votive prices fell at, 

near, or outside the boundaries of the daily price mnge (bid-ask spread)? 

Response: As described in response to question 6(a), the acc is taking a number of steps to 

strengthen the oversight of derivative valuation practices at lorge banks. The revised handbook 

will emphasize that banks' control processes need to provide suppon for all prices used in valuing 

positions. It will stale that prices used must be independently confirmed, including an 

independent and thorough analysis of the validity of the information that control processes rely on 

10 verify valuation. We also will incorpomte these expectations in the interim supplementol 

examination procedures that we are developing. 

7. With respect to the Value-at-Risk (VaR) model change that was disclosed in IPMorgan 

Chase's third quarter 2012 IO-Q filing and resulted in an approKimotely 20% decrease in the VaR 

results reported to the public, please explain: 

a. What units within the JPMorgan Chase bank use the revised VaR model? 

Response: The model was used by the Chief Investment Office and the Corpomte and 

Investment Bank. 

b. whether the change applies to VaR models with a 9S% or 99% conrtdence level; 

Response: The change applies only to the VaR model with a 9S% confidence level, which is the 

confidence level mandated by the SEC. 

c. whether the model change was approved by the OCC and, if not, why not. 

Response: JPMC requested ace approval to use the revised VaR model at a 99% confidence 

level for regulatory capital purposes. The ace reviewed the bank's methodology and decided 

not to approve the change because it did not meet acc requirements for morket risk regulatory 

capital models: it did not adequately capture single name exposures and was not consistent with 

8 

PSI-OCC-27-000010 
1124 

QUESTIONS FOR THE RECORD 

ror 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Office or the Comptroller or the Currency 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

HearingoD 

"JPMorgBD Chase Whale Trades: A Case History of Derlvatlves RIsks & Abuses" 

the model used in the Investment Bank for other CDS index nnd tranche positions. Furthermore, 

the acc was not satisfied with the bank's model controls Bnd would not have approved the 

model change for capital purposes until the bank had improved its established controls to the 

acc's satisfaction. However, the bank was not required to obtain acc approval for its SEC 

filings. 

d. whether the model change has created a difference between the VoR models used by 

JPMorgan Chase to calculate its capital requirements and the VaR models used 

by JPMorgan Chase to inform the public about its risk analysis and, if so, whether the acc has 

any concerns about that difference; 

Response: The acc believes that banks should provide robust public disclosure of their market 

risks. Public disclosure imposes martet discipline on banks' market risk capital models and 

banks' capital adequacy. Accordingly, the acc now requires banks to make various public 

disclosures using the same VaR models they use to cak:ulate capital. The acc's revised market 

risk capital rule, effective January 1,2013, requires banks to make public quantitative and 

qualitative disclosures regarding their market risk and martet risk capital requirements. See 12 

CFR part 3, appendix B, § 12. These disclosures include, for each material trading portfolio, the 

bank's high,low, and mean VaR and stressed-VoR and the characteristics of the bank's market 

risk capital models. 

e. what review, if any, the acc conducted of the model change and whnt specific components 

of the revised model are primarily responsible for the decrease in reported VaR results; and 

Response: The OCC reviewed the bank's model documentation provided by the bank, including 

testing results and performance analysis. That analysis showed the two most important changes 

to the VoR model that caused a decrease in measured VaR were the use of price data from less 

actively-traded credit indices and the use of relative shifts in credit sprellds. 

f. whether the OCC agrees with JPMorgan Chase that its adivities should be seen as 

substantially less risky than they were prior to the model change 

Response: No, we do not agree with JPMorgan Chase that its activities should be seen as 

substantially less risky than they were prior to the model change. Changing the VaR model does 

not change the riskiness of the underlying activities; it only changes the way the risk is described. 

8. The evidence indicates that JPMorgan Chase applies two sets of Value-at-Risk models to its 

credit derivative portfolios, a VaR model with a 99% confidence level for acc bank call reports 

and a VaR model with a 95% confidence level for SEC public filings. Please describe the legal 

basis and substantive rationale for pennilling a bank to apply two different Value-at-Risk models 

10 the same portfolio and provide different V AR results in its ace call reports versus its SEC 

public filings. Please also describe how common it is for large banks to use different VaR models 

and report different VaR results in their acc call reports versus their SEC filings. 

9 

PSI-OCC-27-000011 
1125 

QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Office or the Comptroller or the Currency 

PERMANENT SUBCOMMI1TEE ON INVESTIGA nONS 

Hearing on 

"JPMorgan Chase Whale Trades: A Case History of Derivadves Risks & Abuses" 

Response: The OCC's market risk capital rule, which is consistent with the international Martet 

Risk framework developed by the Basel Commillee on Banking Supervision and the International 

Organization of Securities Commissions, requires banks to measure general martet risk using a 

VaR model with a 99% confidence level. The OCC believes this confidence level is necessary to 

determine an appropriately conservative capital requirement over the longer term, e.g., a 5-7 year 

credit cycle. Additionally, the disclosures that are required by the OCC's revised market risk 

capital rule, which became effective on January 1,2013, provide transparency to martel 

panicipants with regard to the calculation of a bank's martel risk capilal requirement. The SEC 

permits companies to make market risk disclosures using VaR models with a 95% confidence 

level. Using different confidence levels can be appropriate to meet different objectives. For 

example, the OCC's capital rules are designed 10 ensure that banks have adequate capilal relative 

to risk. while the SEC's disclosure rules are designed to provide the public with information to 

make informed investment decisions based on how banks manage risks on a daily basis. 

9. Please describe what coordination lakes place, if any, between the OCC and the Securities and 

Exchange Commission (SEC) regarding disclosures in SEC filings by nationally 

chanered banks regarding VaR results or VaR model changes. In addition, please explain to what 

extent OCC and SEC requirements and procedures have been coordinated or integrated to ensure 

meaningful VoR disclosures about bonk risks to investors. 

Response: The OCC has recently reached out to SEC staff to discuss possible ways to achieve 

more clear and meaningful VaR disclosures. The OCC is currently in the process of reviewing 

VaR disclosures provided by lorge bonking orgonizations, bOlh domestic and foreign. We are 

working to identify "best practice" disclosures. We plan to share our conclusions regarding these 

best practice disclosures with the SEC. 

10. Evidence shows that JPMorgan Chase took steps to change the models it used to calculate 

Value-at Risk, Comprehensive Risk Measure, and Risk Weighted Assets results to produce lower 

risk results and capilal requirements. Please describe what steps the OCC has taken or plans to 

take, if any. to require iarge banks to disclose when a proposed change to a required risk or 

capital model is likely to produce materially lower risk resull~ or capital requirements; to conduct 

a rigorous review of any such model changes to determine whelher lower results or capital 

requirements are justified; and to uncover. punish. and prevent any attempts at model 

manipulation. 

Response: The OCC's market risk capital rule requires the OCC's prior written approval before a 

national bank may use a model to calculate its capital requirements. The rule requires a national 

bank to notify the OCC if it plans to ( I) make a change to an approved model that would result in 

a material change to the bonk's risk-weighted assets, (2) extend the use of an approved model to a 

new business line or product type, or (3) make any moteriol change to its modeling assumptions. 

The rule contoins many additional requirements designed to ensure that models properly caJculate 

risk. See 12 CFR pan 3, appendix B. § 3. The OCC has published additional supervisory 

guidance on model risk management, the latest being OCC Bulletin 20J J-12. 

10 

PSI-OCC-27-000012 
1126 

QUESTIONS FOR THE RECORD 

for 

Thomas Curry, Scott Waterhouse, and Michael Sullivan 

Office of the Comptroller of the Currency 

PERMANENT SUBCOMMfITEE ON INVESTIGATIONS 

Hearing on 

"JPMorgan Chase Whale Trades: A Case History of Derivatives Risks & Abuses" 

The OCC will bring appropriate action against any national bank that attempts to manipulate its 

capital models or violate the OCC's capital rules. For example, the OCC's consent order with 

JPMC noted violations of the OCe's market risk capital rule. The order contains a detailed 

article requiring improvements to the bank's model risk management to comply with OCC rules 

and standards. The OCC issued a news release publicizing the order. Both the release and the 

order are on the OCC's website. 

Finally, the fedeml securities laws could require a bank's holding company to disclose an OCC 

enforcement action in public SEC filings. 

II. During his hearing testimony on March IS, 2013, when asked about the Synthetic Credit 

Portfolio, Mr. Braunstein stated: "In hindsight, Senator, the position and the portfolio did not act 

as a hedge." 

a. When did IPMorgan Chase first provide that information to the OCC? Please describe the 

circumstances, including the date and the pDl1ies involved, and provide a copy of any related 

written materials. 

Response: JPMorgan Chase did not provide this information to the acC. However, various 

bank officials made public statements to this effect after the CIO's losses became public. For 

example, Jamie Dimon, JPMorgan Chase's chairman and chief executive, acknowledged in his 

testimony before the Senate Banking Committee in June 2012 that "this portfolio morphed into 

something that, rather than protect the firm, created new and potentially larger risks." 

b. Does the OCC agree that the Synthetic Credit Portfolio did not act as a hedge? 

Response: Yes, we agree. 

12. Until the hearing, JPMorgan Chase had repeatedly described the Synthetic Credit Portfolio as 

a risk-reducing hedge, even though it was unable to produce contemporaneous documentation 

indicating the assets being hedged, how the hedge was designed or sized, or how its effectiveness 

was tested. Please describe what steps the acc has taken or plans to take, if any, to require large 

banks to establish contemporaneous hedging documentation that identifies 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. 

Response: The OCC plans to incorporate the PSI's recommendations with respect to hedge 

documentation into the revised handbook for derivatives activities. The OCC also has discussed 

these recommendations with exam staff at the large trading firms as pan of its normal monthly 

Price Risk calls. In addition, the acc is in the process of developing interim supplemental 

examination procedures to clearly communicate our expectations regarding documentation of 

material derivatives hedges to our examiners. 

13. Under current OCC risk weighted asset and capital rules, large banks may have lessened 

capital charges for derivatives positions than for other assets, including fully collateralized loans. 

11 

PSI-OCC-27-000013 
1127 

QUESTIONS FOR THE RECORD 

ror 

Thomas Curry, Scott Watemouse, and Michael Sullivan 

Omce of the Comptroller of the Currency 

PERMANENT SUBCOMMrrrEE ON INVESTIGATIONS 

Hearing on 

"JPMorgan Chase Whale Trades: A Case History of Derivatives RIsks & Abuses" 

Section 13(d)(3) of the Bank Holding Company Act (BHCA) explicitly authorizes the OCC and 

other regulators to impose higher capital charges for derivatives positions that arise from 

"permitted activities" under the Volcker Rule. Please describe what steps the OCC has taken or 

plans to take. if any. to implement higher capital charges for derivatives positions under Section 

13(d)(3) of the BHeA, the Basel III framework. or other applicable statutes or rules. 

Response: On August 30. 2012. the Federal banking agencies published revisions to our market 

risk capital requirements, which apply to banking organizations engaged in significant trading 

activities. including trading in derivatives. The final market risk capital rule. which became 

effective on January I, 2013. substantially increases the overall capital requirements applicable to 

trading activities and adds other prudential requirements designed to improve risk management. 

Because the large majority of OTC derivatives traded by banks are capitalized using the market 

risk rules. this change will result in substantially more capital being held for derivatives activity. 

In addition. the U.S. agencies. in conjunction with the Basel Committee for Banking Supervision, 

currently are engaged in a fundamental review of the capital requirements for trading positions. 

In the second half of 2013. we expect the Basel Committee to publish a proposal for comment 

based on this fundamental review. 

Finally. in the Basel III rulemnking. which was published for notice and comment on the same 

day that the market risk capital rule was finalized. the Federal banking agencies proposed to 

revise the capital requirements applicable to derivatives activities that are not covered by the 

market risk rule. The proposed revisions generally would increase the capital requirements for 

OTC derivatives transactions and provide strong incentives for banking organizations to clear 

derivatives transactions through regulated central counterparties. 

As we work toward developing and implementing final rules to implement Basel III and the 

Volcker Rule. the OCC remains committed to reviewing and evaluating the issues and the 

comments received, including the recommendations from the PSI Repon. 

14. Did the oce have all the enforcement tools it needed to properly supervise JPMorgan Chase 

and the CIO when it traded in massive synthetic credit derivatives? If so, does the ace continue 

to believe that it has the tools to fulfill its mission appropriately? 

Response: The oce had the enforcement tools it needed to properly supervise the bank. The 

actions by the bank were unsafe and unsound and in violation of law and regulation. 

The OCC continues to believe that it has the tools to fulfill its mission appropriately. The acc 

issued a comprehensive cease and desist order that requires the bank to correct the unsafe and 

unsound practices and violations of law and regulation. If necessary. the OCC may enforce the 

cease and desist order through the federal couns or through the assessment of civil money 

penalties. The OCC may take further enforcement actions against the bank and individuals in the 

future. as warranted. 

12 

PS/-OCC-27-000014 
1128 

Federal Reglster/Vol. 63, No, 78/Thursd.y, April 23, 1998/Notlce. 20191 

PLACE: 999 E Street, N.w" Washington, 

D.C. 

STATUS: ThIs meeting will be closed to 

the public. 

ITEMS TO BE DISCUSSED: 

Compliance matters pursuant fa 2 

U.S.C. § 4378. 

Audits conducted pursuant to 2 

U.S.C. §437g. § 438(b). and TIlle 26, 

U.S.C. 

Matters concerning panlclpatlon In 

cJvU actions or proceedings or arbitration. Internal personnel rules and 

procedures or matters arrectlng a 

panlcular employee. 

DATE AND TIME: Wednesday. April 19. 

1998 al 10:00 a.m. 

PLACE: 999 E Street, N.W., Washington, 

D.C. (nInth noor). 

STATUS: ThIs hearing will be open to the 

public. 

MATTER BEfORE THE COMMISSION: Who 

Quallnes as a "Member" of a 

Membership Association. 

Federal Election CommiSSion, 

SunshIne Act NotIces for Meetings of 

April 28. 29. and 30. 1998. 

DATE AND TIME: Thursday. Aprll 30. 1998 

at 10:00 a.m. 

PLACE: 999 E Street. N.W .. Washington. 

D.C. (nInth floor). 

STATUS: This meeting will be open 10 Ihe 

public. 

ITEMS TO BE DISCUSSED' 

Correction and Approval of Minutes. 

AdvIsory Opinion 1998-6: Bacardl· 

Martini, USA. Inc. by counsel, Bobby R. 

Burchneld. 

Soli Money: Revised DraI\ Notice of 

Proposed Rulemaklng. 

Administrative Matters. 

PERSON TO CONTACT fOR INFORMAT10N' 

Mr. Ron HarTiS, Press Omcer. 

Telephone: (2D2) 219-4155. 

Motjorle W. Emmons, 

Sccrer.tyof,he CommlJs.on. 

IFR Do<. 98·10934 Flied 4-ZI-98: II:H oml 

IIfWNG COOl! 171 ...... 

FEDERAL FINANCIAL INSTITUTIONS 

EXAMINATION COUNCIL 

SuperviSOry Policy Statement on Investment Securilles and End·User 

Derivatives Activities 

AGENCY: Federal Flnanclallnslltutlons 

Examination CouncU. 

ACT1ON: Statemenl of policy. 

SUMMARY: The Board of Governors of the 

Federal Reserve System (FRB), the 

Federal Deposit Insurance Corporation 

(FDIC). the Omce of the Comptroller of the Currency (OCC). the Omce ofThrill 

Supervision (OTS), and the National 

Credit Union Administration (NCUA) 

(collectively referred (0 85 the agencies), 

under the auspices of the Federal FlnanclallnslituUons E)Camtnation 

Council (FFIEC), have approved the 

Supervisory Policy Statement on 

Investment SecurJtJes and End·User 

Derivatives Activities (1998 Stalement) 

which provides guidance on sound 

proctlc .. for managing the risks of 

Investment actlvltles. By this Issuance 

orthe 1998 Statement. the agenCies have 

rescinded the Supervisory Policy Statement on SccurlU($ Activities 

published on February 3.1992 (1992 

Slatement). Many elements of thai prior 

statement are retained In the 1998 

Statement. while other elements have 

been revised or eliminated. In adopting 

the 1998 Statemenl, the agencies are removIng the spccJnc constraints In the 

1992 Statement conceming lnvestments by Insured depository InStitutions In 

"high risk" mortgage derivative 

prOducts. The agencies believe that It Is 

e sound practice (or ,nsUlutions to 

understand the risks related to all their 

Investment holdings. Accordingly, the 

1998 Statement substitutes broader 

guidance than the speclflc pass/fall 

requirements contained In the 1992 

Statement. Other lhan (or the supervisory guidance contained In the 

1992 Statement. the 1998 Statement 

does not supersede any other requirements or the respectIve agencle,s' 

statutory rules. regulations. pollcles. or sUpervlsO<)' guIdance. Because Ihe 1998 

Statement does not retain the elements 

of the 1992 Statement addressing the 

reporting of securities activities (Section 

II orthe 1992 Statement), the agencies 

Intend to separately Issue supervisory 

guidance on the reponing or Invcstment securltles and end-user derivatives activities. Each agency may Issue additional guidance to assist Institutions In the Implementation of this slutement. 

EFFECTI'IE DATE: May 26. 1998. 

FOR FURntER INFORMAT10N CONTACT' 

FRB: James Emberslt, Manager. 

Capital Markets. (2D2) 452-5249. 

Charles Holm, Manager, Accounting 

PoliCY and Disclosure (202) 452-3502. 

Division of Banking SuperviSion and 

Regulation. Board of Covernors of the 

Federal Reserve System. For the hearing 

Impaired only, Telecommunication 

DeVice for the Deaf CroD). Dorothea 

Thompson. (202) 452-3544, Board of 

Govemors of the Federol Reserve 

System, 20th and C Streets. NW. 

Washington. DC 20551. FDIC: William A. Stark. Assistant 

Director. (202) 898-6972, Miguel D. Browne, Manager, (202) 898-618S.John 

J. Feld. Chief, Risk Management. (202) 

898-8649, Lisa D. Arquette. Senior 

Capital Markets SpeclaUst, (202) 898- 8633, DivisIon or Supervision; Michael 

B. Phillips, Counsel, (202) 898-3581. 

Legal DIvision, Federol De[lOSlt 

Insurance Corporation, 550 17th Street, 

N~C~a~~~W:i'he~~~!~~nalllank F..amlner, (202) 874-5670, J. Ray Diggs, 

National Bank E •• mlner, (202) 8H5670, Treasury and Market Risk; Mark J. 

Tenhundfeld, Assistant Director, (202) 

814-5090. Legislative and Regulatory 

Activities Division. Omce of the Comptroller of the Currency, 250 E Stree,. SW. Washington, OC 20219. 

OTS: Robert A. Kazdln, Senior ProJcct 

Manager. (202) 906-5759. Anthony G. 

Cornyn, Director, (202) 906-5727. Risk 

Management: Vem McKinley, Senior 

Attorney, (202) 906-6241, Regulations 

Bnd Legislation Division, Chl.f 

Counsel's Omce. Omce of Thrlfi 

Supervision, 1700 C Street. NW, 

Washington. OC 20552. 

NCUA: Daniel Cordon. Senior 

Investment Omcer, (703) 518-6360. 

Omce of Investment Services; Michael 

McKenna, Anorney, (703) 518-6540. 

National Credll Unton Admlnlstralian. 

1775 Duke Street. Ale.andrla. VA 

22314 -34 28. 

8UPPLEMENTARY INFORMATION: In 1992. 

the agencies Implemented the FFIEC's 

Supervisory Policy Statemenl on 

Securities Actlvliles (57 FR 4028. 

February 3, 1992). The 1992 Stalemen, 

addressed: (I) selection of securltl.s 

dealers. (2) portfolio policy and 

strategies (Including unsuitable 

Investment practices), and (3) 

residential monBage derivative products 

(MOPs). 

The Onal section of the 1992 

Statement directed Institutions to subJecl MOPs to supervisory t ..... to de1ennlne the degree or risk and the Investment portfolio eligibility of these 

Instruments. At that lime. the agencies believed Ihat many Institutions had 

demonstrated an lnsumclent undentandlng of Ihe risks associated 

with Investments In MDr •. This 

occurred. In parI. because most MOPs were Issued or backed by collateral 

guaranteed by government sponsored 

enterprises. The agencies were concemed that (he absence or 

significant credit risk on most MOPs 

had allowed Institutions to overlook the 

sJgnlncant interest rate risk present in cenain suuctures or chese instruments. 

In an effort to enhance the investment decision making process at financial Institutions. and to emphasize the Interest rate risk of highly price 

sensitive lnSINments. the agencIes 

implemented supervisory tests designed 

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20192 Federal Register I Vol. 63. No. 78/Thursday. April 23. 19981 Notices 

to Identify those MOPs with prIce and 

average life risks greater than a newly 

is5Ued residential mortgage pass· 

through security. These supervlsol)' tests provided a discipline that helped InstitutIons to 

betler understund the rlsks of MOPs 

prIor to purchase. The 1992 Statement 

generaUy provided that Institutions 

should not hold high risk MOPs In their 

Investment portfolios. I A high risk MOP 

was defined as a mortgage derivative 

security that failed any of three 

supervlsol)' lests. The three tests 

Included: an average life test. an average 

life sensitivity test. and • price 

sensitivity test.' These supervlsol)' tests. commonly 

referred to as the "high risk teslS." 

successfully protected Institutions from 

slgntncant 10 .... In MOPs. By requiring 

8 pre· purchase price sensitIvity analysiS that helped Institutions to better 

understand the Interest rate risk of 

MOPs. the high risk tests errectlvely 

precluded Institutions from Investing In 

many types of MOP, that resulted In 

large losses for other Investors. However. the high risk tests may have 

created unintended dlstonions of the 

investment decision making process. 

Many Institutions ellmlnated all MOPs 

from their investment choices. regardless of the rtsk versus return 

merits of such Instruments. These 

reactions were due. In part. to concerns about regulatol)' burden. such as higher 

than normat eKBmlner review of MOPs. 

By focusIng only on MOPs. the test and 

Its accompanying burden Indirectly 

provided Incentives for Institutions to 

acquire other types of securities with 

complex cash flows. often with price 

sensitivitIes similar 10 high risk MOPs. 

The emergence or the structured note 

market Is Just one example. The test may have also created the Impression that supervisors were more concerned with the type of Instrument Involved 

(I.e .. residential mongage products). 

rather than the risk characterlstics o( the 

instrument, since only MDPs were 

subject to the high risk test. The 

spectnc8tlon or tests on individual 

securities may have removed the incenUve ror some instUutlons to apply 

more comprehensive analytical 

1 The only e~pUort5 a.rarued were tor those- htsh fisk 1tCUl'IUn lhat eUher reduttd imelCSl rate rbk 

or Wtort plact'd In a trtd1na account. Fede~ll:rtdb 

unlona Waft' n01 pt'nnlUed lhese eJ{c.ptlons. 

1 Averap Life:; Weif;hled avohlp UCe of no more than 10 yean: Awrap WI!' Ser.1Uvlty: (a) wel&hted 

.wrap lUI! IDXk!ncb by not more than • )'NtS (300 

balls point paralkl shift In rates). (b) we1Jhtcd aYC!"P 11ft ahortenI by no men than 0 )'fars (300 

buls point parallel shift In rates); Prtce Sensitivity: ptlce does nat I:hanp by morothan 17 pefccnt 

(lncnase or dKreue) for .. 300 bas.Jt pow paraIJlll 

shift Inralil5. 

techniques at the ponrollo and 

lnsUtutionallevel. 

As a result. the agencies no longer 

beUeye that the pass/fan criteria or the 

high risk tests as applied to speclnc 

tnstruments constitutes effective supervision of investment activities. The agencies believe that an errectlve 

risk management program. through 

which an Institution identifies. 

measures. monitors. and controls the rlsk.s of Investment activities. provides a 

better framework. Hence. the agencies are eliminating the high risk tests as 

binding constraints on MOP purchases 

In the 1998 Statement. Effective risk management addresses 

risks across all types of InstrumentS on 

an Investment portfolio basis and 

Ideally. across the entire Institution. The 

complexity of many financial products. 

both on and off the balance sheet. has increased [he need (or B more 

comprehensive approach to the risk 

management of Investment activltJes. The rescission or the high risk tests as 

a constraint on an instttutton's Investment activities does not 5tHnal that MOPs with high levels of price risk 

are either appropriate or Inappropriate 

investments ror an InsUtuUon. Whether 8 security, MOP or otherwise. is an appropriate Investment depends upon a 

variety of factors. including the Instltutlon's capital level. the securlty's 

Impact on the aggregate risk or the 

ponfollo. and management's ability to 

measure and manage risk. The asenclcs continue to beUeve that the stress testing of MOP Investments. as well as 

other investments, has slsnificant value 

for risk management purposes. 

Institutions should employ valuation 

methodologlas that taka Into account all 

of the risk elemenrs necessary to price these Investments. The 1998 Statement 

states that the agencies believe. as a maner of sound practice. institutions 

should know the value and prlce 

sensitJvUy or their Investments prior to 

purchase and on an ong01ng basis. 

Summary o( Comments 

The 1998 Statement wes published for 

comment In the Federal Roglster of 

October 3. 1997 (62 FR 51862). The 

FFIEC received twenty·one comment 

letters from a varIety of insured 

deposltol)' Institutions. trade 

associations. federal Raserve Banks. and nnanctal services organizations. Overall. the comments were supportive 

or the 1998 Statement. The comments 

generally approved of: (I) the resCission 

o( the high risk test 85 a camlrainl on 

Investment choices In the 1992 Statement; (II) the establishment by 

insdtuUons o( programs to manage 

market. credit. liquldlty.legal. 

operational. and other risks of investment securities and end-user derivatives activities: (III) the 

implementation of sound risk 

management programs that would 

Include certoln board and senior 

managemen[ oversight and a 

comprehensive rIsk management 

process that errectlvely Identifies. 

mcusures. monitors. and controls riSks; 

and (Iv) the evaluation of Investment 

decisions at the portfolIo or Institution level. Instead of the focus of the 1992 

Statement on Umltlng an Institution's 

Investment decIsions concerning 

specific securities Instruments. 

The folloWing discussion provides a 

summary of slgntncant concerns or 

requests (or clarifications that were 

presented In the aforementioned 

comments. 

1. Scope 

The guidance covers a broad range or 

InstrumenlS Including all securities In 

held·to·maturlty and avallable-ror-sale 

accounts as defined In the Statement or Financial Accounting Standards No.115 

(fAS 115). certificates or deposit held 

(or investment purposes. and end .. user 

derivative contracts not held In trndlng 

accounts. 

Some comments focused on the 1998 

Statement's coverage o( "end~user 

derivatIve contractS not held In tradins 

accounts." According to these 

comments. the 1998 Statement appears to cover derivative conlraCl5 not trndltionaUy viewed as Investments 

Including: (I) Swap contracts entered 

Into when the deposltol)' losHtution 

makes a fixed rate loan but Intends to change the income stream (rom a nxed 

to fioatlng rate. (II) swap contracts that 

convert the interest rates on certificateS 

or deposit from fixed to noatlng rates or 

interest. and (tit) swap contracts used for other asset-liability management purposes. Those commenters objected to the necessIty of sddftlonalguldance for 

end-user derivaUves contraclS given current regulatol)' guidance Issued by 

the agencies with respect to derIvative 

contracts. 

The gUidance contained In the 1998 

Statement is consistent with existing 

agency guidance. The agencies believe 

that institutions should have programs 

to manage the market. credit. liquidity. 

legal. operational. and other risks of 

both 'nvestment securities and end·u.ser 

derivative activities. Gtven me Similarity or the riSks In those activities 

and the similarity or the programs needed to manage those risks, especIally when end-user derlvattves are used 8S 

Investment vehicles. the agendes believe that covertns both actIvities 

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Federal Relllster/Vol. 63. No. 78/Thursday. April 23. 1998/Notlces 20193 

within the scope of the 1998 Statement 

Is appropriate. 

2. Board OversIght 

Some commenters stated that the 

1998 Statement places excessive 

obligations on the board or directors. 

Specifically. commenll! Indicated that It 

Is unnecessary for an Institution', board or directors to: (I) Set limits on the 

amounts and types of transactlons authorized for each securities finn with 

whom the Institution deals. or (11) review and reconnrm the institution's 

list of authorized dealers, lnvestment bankers. and brokers at I.ast annually. 

These commenten sU88ested chat it may be unnecessary for the boardparticularly ror larger Instltutlons-to 

review and speclncally authorize each dealer. They Indicated that It should ba 

sumclent for senior management to ensure that the selection of securiUes nnns Is conststent with board approved 

poliCies. and that establishment or 

llmlll! ror each dealer Is a credit decision 

that should be Issued pursuant to credit 

policies. 

The agencies believe that the board of 

directors Is responsible for supervision 

and oversight of Investment portfollo 

and end·user derivatives activities. 

Including the approval and periodic 

review of pollctes that govern relationships with securIties dealers. 

Especially with respect to the 

manasement or the credit risk or 

securities settlements. the agencies 

encourage the board of directors or a 

subcommittee chaired by a director to 

actively participate In the credit 

decision proc .... The asenetes 

understand that Institutions will have 

various approaches to the credit 

decision process. and thererore that the 

board or directors may delesate the 

authority ror selecting dealers and establishing dealer limits to senior manaaement. The text of the J 998 

Statement has been amended to clarify 

the obligation or the board or directors. 

3. Pre-Pun:hase AnalysIs 

The mQjorlty of the commenters were 

In rull support or eliminating the 

specific conslfaints on investing In 

"high risk" MOPs. Some commenters 

expressed opposition with respect to the 

1998 Statement's guidance concerning 

pre-pun:hase analysis by Institutions or 

their Investment securities.. Those commenteri felt that neither pre- acquisition stress testing nor any 

spectnc Stress ,estlng methodology 

should be required ror Individual 

Investment decisions. Some 

commenters involved In the use of 

securities for collateral purposes emphasized the beneflts of pre-and POSIpurchase stress testing or Individual 

securitlcs. The agene1es Wish to stress that 

Institutions should have poliCies 

designed to meet the business needs of 

the Institution. These policies should 

specify the types or market risk analyses 

that should be conducted for various 

type. or Instruments. Including that 

conducted prior to their acquisition and on an ongoing besls. In addition. 

poliCies should specify any required 

documentation needed to verlry the 

analysis, Such analyses will vary with 

the type of Investment Instrument. As stated In Section V or the 1998 Statement, not aU Investment instruments need to be subjected to a pre-purchase analysis. Relatively simple 

or standardized tnstrumenlS. the risks or 

which are well known to the Institution. 

would likely requlr. no or slgnlnc.ntly 

less analysis than would more volatile. 

complex Instruments. For relatively 

more complex Instrumenll!. 1 ... ramlllar 

Instrumenll!. and potentially volatile 

Instruments. Institutions should rully 

address pre·purchase analysis In their 

poUcles. In valuIng such investments, 

Instltutlons should ensure that the 

pricing methodologies used 

appropriately consider all risks (ror 

e .. mple. caps and noors In adJustablerate instruments). Moreover. the 

a8encies do not believe that an Institution should be prohibited from 

making an investment based solely on 

whether that Instrument has a high 

price sensitivity. 

4. ldenllficat/on. Measuremenr. and 

ReportIng or RIsks 

Some commenters questioned 

whether proposed changes by tho 

agencies concerning Schodule RC-B or 

the Consolidated Reports or Condition 

and Income ("Call Reports") conflicted with the 1998 Slatement':J cUminalion 

of the high risk [cst (or mongase 

derivative products. The proposed 

changes to the Call Reporls would 

require the disclosure or mortgag'" 

backed and other securities whose price 

volatUity 'n re3ponse to speclnc Interest rate changes exceeds a specified threshold level. (See 62 FR 51715. 

October 2. 1997.) The banking agencies have addressed 

the concems presented In these comments withIn the normal process ror 

changing the Call Reports. For the 1998 Call reporl cycle. there will be no 

chanB"" to the high risk test reporting 

requirement In the Call Reports. 

5. Marker Risk 

lotal return. The agenCies agree thilt the concept o( total return can be a userul way to anllllyze the risk and return tradeorrs (or an Investment. This Is 

bccaase the analysis does not rocus exclusively on the stated yield to 

maturity. Total return analysts. Which 

includes income and price changes over 

a speclOed Investment horizon. is 

slmUar to scteSS test analysts since both examine a security under various Jnterest rate scenarios. The agencies' 

supervisory emphasis on str ... testing 

securities has. In ract. ImpliCitly 

considered total return. Thercrore. the 

agencIes endorse the use or total return analysts 8$ a uscrul supplement to price 

sensitivity analysis ror eva1uatln8 the returns ror on IndIVIdual security. the 

investment portfolio. or the enUre 

InsUlution. 

6. Measurement S)'5'lem 

One respondent .tated that the 

complexity and sophlstlcatlon or the 

risk mCiI5urement system should not be 

a ractor In determining whether pre- and 

post-acquisition me8$urement or Interest rate risk should be perrormed at 

the Individual Investment level or on an 

Institutional or portrollo basis, The 

agencies agree that this statement may be conruslng and ore amending the 

Market Risk section, The text or the Sl8lement or policy 

rollows. 

SUp<rvlsory Policy Statement on 

Investment Securities and End-User 

Oerlvatlvos Actlvltl .. 

I. Purpose 

This policy statement (Statement) 

provides guidance to flnanclal 

Institutions (Institutions) on sound 

practices ror managing the risks or . tnvestment securities and end .. 1,I$Of 

derivatives activities.' The FFIEC aGencies-the Board or Governors or the 

Federal Reserve System, the Foderal 

Deposit Insurance Corporation. the- Office of the Comptroller or the 

Currency. the Office ofThrlft 

Sup<rvlslon. and the National Credit 

Union Administration-believe that effective management or the risks assoclated wtth securities lind derivative Instruments represents an essential 

component or sare and sound practices. 

This guidance describes the practices 

that a prudent manag.er normally would 

rollow and Is not intended to be a checklist. ManaGement should establish practices and maintain documentation approprlate to the institution's 

~.tement doH not lIUpen.rdt any One commenter suggested that the other requlmnenll or the I'C'specUve 1188ncIH' 

agencies enhance the 1998 Statement by statUtory rules, rqrulatlons. poUc~es, or .upt' .... lJOry 

discussinG and endorsing the concept of ou"'"""', 

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20194 Federal Register I Vol. 63. No. 78/Thursday. April 23. 1998/NoUces 

individual circumstances. consIstent 

with this Statement 

II. Scope 

This guidance applies to all securities 

In held·ta-maturU)' and avallable·for· 

sale accounts as defined tn the Statement of Financial Accounting 

Slandards No.IIS (F AS 115). certlficat .. 

of depaoU held for Investment purposes. 

and end-user derivative contracts not held In trading aCCDunts. This guidance 

covers all securities used for Investment 

purposes. Including: money market 

Instruments. fixed·rate and noatlng.rate 

notes and bonds. structured notes. 

mortgage pass·through and other assetbacked securities. and mortgagederivative "",ducts. Similarly. this 

guidance covers all end-user derivative 

Instruments used for nontrading 

purposes, such as swaps. futures. and 

opllons.' This Statement applies to all 

federally-Insured commercial banks. 

savings banks. savings BSsoclBtJons. and 

federally chartered credit unions. As a matter of sound practice, 

Institutions should have programs to 

manage the market, credit. liquidity. 

legal. operational and other risk. of 

Investment securities and end-user derivatives activities (Inv .. tment 

activities). While risk management 

programs will dllTer among Institutions. 

there are certain elements that are 

fundamental to all sound risk 

management programs. These elements include board and senior management 

oversight and a comprehensive risk management process that effectively 

IdenUnes. measures, monitors, and 

controls rIsk. This Statement describes 

sound principles and practices for 

managing and conuolUn8 the risks associated wtth investment activities. InstitutlDns should fully understand 

and elTectlvely manage the risks Inherent In their Investment BCtlVlttes. 

Fatlure to understand and adequately 

manage the risks In these areas constitutes an unsafe and unsound 

practice. 

III. Board and SenIor Management 

Oversight 

Board of director and senior management oversight is an integral part 

of an effective risk management 

program. The board of directors I. 

responsible for approving major polldes 

for conductlns Investment activities. Includlns .he establishment of rIsk limits. The board should ensure .hat 

management hu the requisite skills to 

of Natural penon federll Credil wntons aft' 001 pc!'rmtttt:d 10 purchese non·rftld~kl manp", 1WC!1.backed It'('UrlC!es and IN)' paI1.klpaceo 1n 

dertVillve praarams only Ir luthonud by the 

NeUA. 

manage the risks associated with such 

activities. To properly discharge lis oven;lght responslblUties. the board 

should review portfolio activity and risk 

levels. and require management to 

demonstrate compliance with approved risk limits. Boards should have an 

adequate under.ltandlng of Investment 

activities. Boards .hat do no •• should 

obtain professional advice to enhance Us understanding of Investment activity 

oversight, so as to enable I[ to meet J(s 

responsibilities under this Statement. Senior management Is responsible for 

the dally management of an Inslltutlon's 

Investments. Management should establish and enforce polletes and 

procedures for conducting Investment activities. Sentor management should have an understanding of the nature and 

level of various risks Involved In the 

Institution's Investments and how such 

risks nt within the Institution's overall 

business strategies. Management should 

ensure that me rtsk management process 

Is commensurate with the size. scope. and COmPlexity of thelnstltutlon's holdings. Management should also 

ensure that the responsibilities for 

managing investment acttvities are properly segregated '0 maintain operational Integrity, Institutions with 

significant Investment activities should 

ensure that back~omce. settlement. Bnd 

transaction reconclUation 

responsibilities are conducted and 

managed by personnel who are 

Independent of those Initiating risk 

taking paoltlons, 

IV. Risk Managemenr Process 

An elTective risk management process 

for InveSlment activities Includes: (I) 

poliCies. procedure •• and limits: (2) the 

Ident,ncatlon, measurement. and reporting of risk expaoures: and (3) a 

system of internal controls. 

Pol/c/es, Procedures. and LImits 

Investment policIes. procedures. and 

limits prDvlde the structure to 

effecuvely manage Investment activltles. Pollel .. should be consIStent with the 

organization's broader business strategies. capital adequacy. technical 

expertise. and risk tolerance. Policies 

should Identity relevant investment obJectives. constraints. and guidelines 

for the acquisition and ongoIng 

management of securities and derivative 

Instruments, Potentia) Investment objectives Include: generating earnings. 

providing liquidity. hedging risk 

exposures. taking risk positions. 

modllYlng and managIng risk profiles, 

managing tax liabilities. and meeting 

pledslng requirements. If applicable. Policies should also identify the risk 

characteristics Df pennlsslble 

Investments and should delineate clear lin .. of responsibility and authority for 

investment actlvlUes. An Institution's management should 

understand the risks and cashnow 

character15t1cs or Its inveStments. Thls .5 

particularly Important for products that 

have unusual, leveraged, or highly 

varlabJe cashflows. An Institution should not acquire 8 material poslUon in an Instrument uruH scnlor management and all relevant personnel understand and can manage the risks 

associated with the prodUct. An Institution's Investment activities 

should be fully Integrated Into any 

Instltutlon,wlde risk limits, In so doing. 

:;j~~t~~:~~~t~llts~~hl1; ~~~ers may apply IImlls at the Investment 

portfolio, sub.portfollo. or Individual 

instrument level. The board and senior management 

should review. at leas( annually. the 

appropriateness of its investment 

strategies. policies. procedures. and 

limits, 

RIsk lden/lneatlon. Measummen! and 

Reporting 

InsUlUtlons should ensure that they 

Identify and me .. ure the risks 

aSSDcla.ed with IndiVidual tnmsactlons 

prior to acqUisition and periodically 

after purchase. Thls can be done at the 

Institutional. portfollD. Dr Individual 

instrument level. Prudent management 

of Investment activities enlatts examination of the risk prome of a 

particular Investment In light of Its 

Impact on the risk prDme of the Institution, To the extent practicable. 

Institutions should me8$ure exposures to each type Df risk and these 

measurements should be asgregatcd and 

Integrated with slmUar exposures arIsing from other business activities to 

obtain the Institution's overall risk 

prome. In measuring risks. insUtuUons should conduct their own in· house preacquisition analyses, or to the extent possible. make use of specific third 

party analyses that are Independent of 

the seller or counlerpany. Irrespective Df any responsibility. legal or otherwise, 

assumed by a dealer. counterpar[}'. or 

"nanclal advisor regarding a 

transaction. the acquiring institution is 

ultimately responsible for the 

appropriate personnel understand In. and managtng the risks or the 

transaction, 

Reports to the board of directors and 

sentor management should summarize the risks related to the institution's 

investment actlvntes and should address compliance with the Investment policy's obJectIVes, consuatnts, and 

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Federal Reglsler/Vol. 63, No, 78/Thursday, April 23, 1998/Notlces 20195 

legal requirements, Including any exceptions to established policies. 

procedures. and limits. Reports to 

management should generally reneet more detail than repons to the board of 

Ihe Institution, Reporting should be 

frequent enough to provide timely and 

adequate Infortnatlon to Judge lhe 

changing nature of the InsUtuUon's rhik 

prome and 10 evaluBle compliance with 

sialed policy objectives and constraints, 

Internal Controls 

An Institution's Internal control 

structure Is critical to the sate and sound functioning oflhe organization 

generally and the management of Inve3tment actlvltles In panJeular. A system of Internal controls promotes efficient operations. reUable nnanclal 

and regulatCHy reporting. and compliance With relevant IIIWS, 

regulBllons, and Institutional policies. 

An effective system of Internal controls 

Includes enfordng omclaillnes of 

authority, maintaining appropriate 

separation of duties, and conducting 

Independent reviews of Investment 

actIvIties. For Institutions with slgntncant 

Investment activities. Internal and 

extemalaudlts are IntelJl'lllto the 

Implementation of 8 risk management process to control risks in Investment 

activIties, An InstitutIon should conduCI 

perlodlc Independent reviews of Its risk 

management program to ensure tll integrity. accuracy. and reasonableness. Items that should b. reviewed Include: 

(ll Compliance with and Ihe 

approprIateness of Investment policies, 

procedures, and limIts: 

(2) The approprlatenes. of the 

institution's risk measurement system 

given Ihe nature, scope, and complexity 

of Its activities; 

(3) The timeliness, Integrity, and uurulness or reporlS to the board or dln:ctors and senior manl4gemenl. 

The review should note exceptions to 

policies, procedures. and limIts and 

sUBBest corrective actions. The nndlngs 

of such reviews should be reported to 

the board and corrective BCUons taken on a timely basis. The accounting systems and procedures used for public and 

regulalory reporting purposes are 

critically Important to the evaluation of 

an organIzation's rIsk pronte and the 

assessment of Its Rnonelal condItion and capital adequacy. AccordIngly, an 

Institution's policies should provIde 

clear guidelines "'gardlng the reportIng 

treatment ror all securities and derivatives holdings, This trealment 

should be consistent with the 

organi:zatlon's business obJectives. generally accepted accountln8 

prIncIple. (GAAP), and regulatory 

reporting standards. 

V. Tho Risks of Investment ActIvities 

Th. followlnu discussion Id.ntln.s 

panlcular sound practices ror managing the speelnc risks Involved In Investment 

activities. In addition to these sound 

practtces, InstItutions should follow any 

spectnc Buldance or requirements rrom their primary supervisor related to these 

activities. 

Market RIsk 

Market risk Is Ihe rIsk 10 an 

insUtutkm's nnanclal condition 

resultln8 from adve~ changes In the 

valu~ of Its holdIngs .rlslng from movements tn interest rates. rorelgn 

exchange rates, equity prices, or commodity prices. An Institution's exposure to market risk can be measured by assess)ns the effect or changIng rates and prices on eIther Ihe 

earnings or economIc value or an Individual Instrument, a portfolio, or 

the enUre instltutlon. For most Institutions. the most stsnlOc8nt market risk or Investment acHvlUes Is Interest 

rate risk, Investment activities may represent a slgntficant component of an Institution's overall Interest rale risk pronte. Ills a 

sound practice ror Institutions to mllnage Interest rate risk on an Institution-wIde basIs, ThIs sound 

practice Includes monitoring the price 

sensitivIty of Ihelnstltutlon', 

investment portfolio (changes In the 

hivestment portfolio's value over 

different Interest rate/yield curve 

scenarIos). Consistent with agency 

guidance. Instltutlons should specify 

Institutlon·wldc Interest rale risk limits 

th8tapproprlately account for the.., 

activitIes Dnd the strength of the 

Institution's capital position. These 

limits are generaUy established for economic value or earnl"p eKpo:!our"Cs. InsUtutlons may nnd It uSCruilO establish price sensItivity limits on their 

:~:~~~~:,o~~~~;"o;;t~~~I~~~, If established, should also be consistent 

with agency guIdance. It Is Q sourKI practice ror an Instltutlon's management [0 ruUy understand the markel risks associated 

with investment securities and 

derivative instruments prior to 

acquisition and on an ongoing basi •. 

Accordlngly,lnstltutlons should have appropriate policies to ensure such und ... tandln8, In panlcular, Institutions should have policies that specify the types of market risk analyses 

that should be conducted for various 

types or classes Df Instruments. IncludIng that conducted prior to their 

acquisition (pre·purchase analysIs) and 

on an ongotng basiS. PoliCies should also specify any reqUired documentalion needed to verify the 

analy.ls. 

It I. expected that the substance and 

form of such analyses will vary With the 

type of Instrument. Not all Investment 

Instruments may need to be subjected to 

a pre-purchase amdysls. Relatively 

simple or standardized instruments. the 

risks or which are well known to the Institution, would likely require no or 

slgnlflcandy less analysis than would 

more volatUe. complex Instruments. , 

170UO, S •• 62 FR 32881 (Juno 18,1987j. 

For relaUvely more complex hutnJments. less familiar Instruments. and potentially volatile Instruments, 

InstItutions should fully address prepurchase analyses In their policies. 

Price sensitivity analysis Is an errectlve 

way to perform the pre-purchase 

analy~ls of Individual Instruments. For example. a pre-purchase analysis should 

show the Impact of an ImmedIate 

paratlel shift In the yIeld curve of plus 

and minus 100,200, and 300 basis 

points, Where approprIate, such 

analysis should encompass a wIder range or scenarios. including non· parallel changes In the yield curve, A 

comprehensive analysis may also take Into account other relevant factors. such as changes In Interest rate volatility and 

changes In credit spreads. 

Vtlhen the Incremental effect of an Investment position Is IIkeJy to have a slgnlRcant errect on the rIsk proOle of 

Ihe Institution, It Is a sound practice to 

analyze the effect of such a position on 

the overall nnanclal condition of the 

Institution. 

Accurately measuring an institution's 

market risk requires timely lnrormatlon about the current carrying and market values of Its Investments, AccordIngly, 'nsUtutlons should have market rtsk 

measurement systems commensurate 

with the sIze and nature of the.e 

Investments. Instltutlons with sJgnlRcant holdings of highly complex 

Instruments should ensure that they have the means to value their positions. Institutions employing Internal models should have adequate procedures to validate the models and (0 periodically 

review all elements or the modeling 

process, Including Its assumptlons and 

risk measurement techniques. 

Managements relyln8 on thIrd parties for market risk measurement systems and analyses should ensure that they 

rully understand the assumptions and 

techntques used. 

~It unlont mld-I c:omplyWllhllw t~mtnl mofliforlJll ~qulmMnu 0112 C.F,A. 

§70no. ~62 FR 32989 (June 18. IW7J. 

PSI·OCC-27 ·000019 
1133 

20196 Federal Regisier/Vol. 63. No. 78/Thursday. April 23. 19981N0tlces 

Institutions should provide "'ports to their boards on the market risk exposures of their investments on a 

regular basis. To do so, the Institution 

may report the market risk exposure or 

the whole Institution. Altematively. 

repons should contain evaluations that 

assess trends In .sgregate market risk exposure and the perrormance or ponrollos In terms or established 

objectives and rtsk constralnls. They 

also should IdenUry compliance with 

board approved IimllS and Identlry any 

exceptions to established standards. 

Institutions should have mechanisms to detect and adequately oddress 

exceptions to IIml .. and guidelines. 

M8nagemenc reports on market risk should appropriately addre .. potential exposures to yield curve changes and other ractors pertinent to the Instltutlon's holdlnBs. 

Ctedll RIsk 

Broadly deOned. credit risk Is the rtsk 

that an I .. uer or counterpany will rail to perrorm on an obligation to the Instllutlon. For many nnancia) 

Institutions, credit risk In the Investment portrollo may be low relative 

to other areas. such as lendlns. However, this risk •• s with any other 

risk, should be errectively Idcntlned. measured. monitored. and controlled. An Institution should not acquire investments or enter Into derivative 

contnlClS Without ...... Ing the 

creciilWOnhlness or the Issuer or 

counterpany. The credit rlsk arisIng rrom these positions should be 

Incorporated Into the overall credit risk 

pronte or the Institution as 

comprehensively as practicable. 

Institutions are legally required to meet 

certain quality standards (I.e .. 

Investment Brade) ror security 

purchues. Many Institutions maintain and updBte ratings repons from one of 

the major raU"g services. For non·rated 

securities. Institutions should establish 

guidelines to ensure that the securities 

meet legal requir.monas and that the 

Institution rully understands the risk 

involved. Institutions should establish 

limits on individual counterparty exposures, Polides should also provide credit risk and concentration Hmits. 

Such IIml .. may denne concentrations 

relating to a single or related issuer or 

counterpany •• geographical area. or 

obligations with similar chantcteTlstlcs. In managing credit risk. Institutions 

should consider seulement and pre· 

senlement credit rtsk. These risks are 

the posslbUlty that a counterparty will 

rail to honor lIS obligation at or berore 

the tlmc of settlement. The selection of 

deniers. investment bankers. and brokers 15 panlcutarly imponont In 

errectlvely managing these risks. The approval process should Include 8 

revtew or each nrm's nnanclal statements and an evaluation of Its ability to honor Its commitments. An 

Inquiry Into the Benentl reputation or 

the dealer Is also appropriate. This 

Includes review or Inrormatlon rrum Slate or federal securities regulators and InduSlry selr.regulatory organizations such as the National Association or SecurJUes Dealers concerning any fonnal enforcement actions against the 

dealer. Its affiliates, or associated 

personnel. 

The board or directors Is responsible 

ror 5upervlslon .nd over.l'ght or Investment portfollo and end·user 

derivatives activities. Including the approval and periodic review or policies 

that govern relationships wllh securities 

dealers. Sound credit risk management 

requires that credit limits be developed 

by penonnel who are as Independent as 

practicable or the acquisition runclion. 

In authorl.lng Issuer and counterpany 

credit lines. these personnel should use 

standards that are conslstent with those used for other activIties conducted 

within the Institution and with the 

orBanlzatlon's over·aU policies and consolidated exposures. 

LIquidity Risk 

Liquidity rl5k Is the risk that an 

Institution cannot easily sell. unwind. or offset a panlcular position at B fair price because of lnad~uate market depth. In speclrylng perml .. lble 

Ins\rUmenls ror accomplishing established objectives. Institutions 

should ensure that they take Into 

accountthellquldUy oOhe market ror 

those-Instruments and the errect that such characteristics have on achieving 

their obJectives. The liquidity or cenaln types of Instruments may make them 

Inappropriate ror cenaln obJectives. Institutions should en.ure that they consider the errects that market rl5k can 

have on the IIqu Idlty or dlrrerent types 

of instruments under varIous scenaTiOS, 

Accordingly. Institutions should 

.nlculate clearly the liquidity 

characteristics or Instruments to be used In accomplishing institutional 

obJectives. tomplex and illiquid Instrumenls can 

often involve greater risk than actively 

traded. more liquid securities. 

Ortentlmes. this higher potential risk 

arising rrom illiquidity Is not captured 

by standardized Onanclal modeling 

techniques. Such risk Is panlcularly 

aCl"lte for instruments that arc highly 

leveraged or that are designed to benem 

rrom speclrtc, narrowly denned market 

shifts. If miuket prtces or rates do no' 

move 85 expected, the demand faT such Instruments can evaporate, decfCaslng the market value of the instrument 

below the modeled value. 

Operational (fransscllon) Risk 

Operational (transaction) risk Is the 

risk that denclencles In Inrormatlon 

systems or Internal CORll'Ois wUf mult In une>q>ected loss. Sources or operallng 

risk Include tnedequ8te procedUTCS. 

human error. system railure. or rraud. Inaccurately 8ssesslng or controlling 

operatlng risks 15 one of the more likely 

sources of problems facing Institutions 

Involved In InvestmentactlvlUes. 

EfTeetlve Internal controls are the first 

line or derense In controlling the operaUng rlsks Involved in an lnstitutlon's Investment activities. Of panlcular Imponance are Internal 

controls that ensure the separatJon of 

dulles and supervision or persons 

executing transactions rrom those 

responsible ror proce .. lnB contracts. 

connTmlng transactions, controlling various clearing accounts. preparing or 

postlnglhe accounting entries. approving the accounUng methodology 

or entries, and performing revaluatlons. 

Consistent with the opentUonal suppon or other activities within the nnanclallnstltutlon. securities operations should be as Independent as 

practicable from business units. Adequate resources should be devoted, 

such that systems and capacity are commensurate with the size and complexity or the institution's Investment actiVIties. EfTectlve risk management should also jnclude. at 

least. the rollowlng: 

• Valuation. Procedures should ensure independent portfolio pricing. For thinly tntded or illiquid securities. 

completely Independent prlctng may be 

dlmcult to obtain. In such cases, operational unlls may need to use prices 

provided by the ponrollo manager. For 

unique Instruments where the pricing 15 

being provided by a single source (e.g .. 

the dealer providing the Instrument). the Institution should review and understand the assumpUons used to 

price the Instrument. 

• Personnel. The Increasingly 

complex nature 0( securiUes avaUable In 

the marketplace makes it tmponant that 

openntonal personnel have strong technical skills. This will enable them 

to better understand the complex nnanclat structures of some lnvestment 

instruments. 

• Documentation. Institutions should dead)' denne documentation requirements for securities transactions, 

3avlng and safeguarding Imponant documents. as well 85 maintain Ins 

PSI-OCC-27-000020 
1134 

Federal Register IVol. 63, No. 78/Thursday, April 23, 1998lNotices Z0197 

possession and control of Instruments 

purchased. 

An Instttution's policies should also 

provide guidelines for confilclS of 

Interest for employees who are directly 

Involved In purchasing and ..,lIIng 

securities for the Institution from 

securities dealers. These guidelines 

should ensure that aU directors. omcers. 

and employ~ act in the best Interest of the Institution. The board may wish to 

adopt poliCies prohlbltlng the.e 

employees from ensaBlngln personal 

securities transactions with these same securities firms without spectRc prior 

board approval. The board may also 

wish to adopt a policy applicable to 

directors. officers. and employees 

restricting or problblUn8the receipt of 

811\1. grarulUes. or travel expenses from 

approved securities dealer nrms and 

their representatJves. 

LeBsI RIsk 

Legal risk Is the risk that contracts are 

not legally enforceable or documented 

correctly. InstltutlO1ls should adequately 

evaluate the en(orceabUlty of Its 

agreemenlS before Individual 

transactlons are consummated. 

Institutions should also ensure that the 

counterparty has authority to enter Into 

the transaction and that the terms of the 

agreement are legally enforceable. 

Instltutlons should funher ascenaln that 

netting agreements are adequately 

documented. executed properly. and are 

enforceable In an relevant jurisdictions. 

Institutions should have knowledge of 

re levant (8)! laws and InterpretatiOns 

governing the use of these InstrumenlS. 

Doted: April 17.1998. 

Keith J. Todd. 

AJ,S/Jtanl Executive SecretRry. Federal Flnanclellnsdtutlons EJtamJna"Dn Council. 

/FR Doc. 98-10744 Filed 4-2Z-98: 8:45 am) 

ItWNO CODD ",,: 8211»-01-1' ~ OTI: tnO-O~ 

.. ,fOU:: 171 .... '-fII ~. OCC: 4&tlJ-U .. .p .%. NCUA: 7UHf", WI' 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Office of the Soc"'lary 

Notice of Inte ... st Rate on Overdue 

Debts 

Section 30.13 of the Department of 

Health and Human Services' claims 

colloetlon regulations (45 CFR Part 30) 

provides that the Secretary sholl charge 

an annual rate or interest as nxed by (he 

Secretary or the Treasury arter tilking 

Into consideration private consumer 

rates or interest previlllIng on the date 

that HHS becomes entitled [0 recovery. 

The rate gener81ly C8nnOl be lower than 

the Department or Treasury's current 

value of funds rate Or the applicable rate 

determined from the "Schedule of 

Certified Interest Rates with Range of 

Maturities ... This rate may be revised 

quanerly by the Secretary of the 

Treasury and shaU be published 

quanerIy by the Department of Health 

and Human Services In the Federal 

Register. 

The Secretary or the Treasury has 

cenlned a rate of 14% for the quarter 

ended March 31. 1998. This Interest rale 

will remaIn In effect until such time a. 

the Secretary of the Treasury nottnes 

HHS of any change. 

Doted: April 16. 1998. 

c.a .... 5 .... d .... 

Deputy AJSlsfafll Sccrrtal)'. Finance. 

IFR Doc. 98-10790 Flied 4-2Z-98: 8:45 amI 

8Il.UNO COOl 4' ............ 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Agency fo, Health C .... Policy and 

Research 

Notice of Meeting 

In accordance wllh section IO(d) of 

the Federal Adylsory Commillee Act (5 

U.S.C .. AppendiX 2) announcement Is 

made of the following subcommillee 

scheduled to meet during the month of 

May 1998. 

s:::::~~~O~I~t;P:~~!!rlr:~~ ~:'~h Services DISle-rultlon Research". 

Dar .. ndTlme:May7-8.1998. 

Place: DoubJetree HCHel. 1150 RotkvUle 

Plkc. Monll'OH Room. Rackvtlle. Maryland 

Z085Z. Pu~: To ~lew and evaluate gnlnt 

appltcallom. 

A,end.: The open session ot the mel:ltnss 

wtll be devoted to business cDverlna 

admlntsuollvo malten and reports. Durlns 

the closed sessions. the SubcommlUecs will 

be rtlvlewing and dlSC\.lsslns grant appUcations dealing with health Hf'Vitt's 

research issues.. In accordance wtth the 

Federal Advisory Committee Act. &«Hon 10(d) 015 U.S.C .• Appendl. Z ilnd 5 U.S.C .• 55Zb(c)(6). the Administrator. AICflC)' tor Heallh Clre Policy and Research. has made 

I tormal determination that these latter 

sessiON wUl be closed because the 

disc:U5Stons arc Ukely to reveal persolla) 

lnrormatlon concerning IndiViduals assoctated wllh the amnl applications. ThIs informaUon II cJCCtnpt rrom mandatory 

dl5clO.:llure, Anyone wishing to obtatn a raster of 

members. minutes or lhe mft1lna. or other relevant Information should contact Mrs, 

Shena Simmons. Commlnee Manapment Officef". OITtce of SclentJOe Affairs. AFncy 

for Heaith Cart' Policy and Re$t:arch. 2101 East Jefferson Street. Suite 400, Rockville. 

Maryland Z085Z. TelephQIW (301) 594. 

145Z.16Z7. 

Asenda items tor th,s m~tln8 Rrt> SUbject 

10 chanle IS prlorlltes dlctot~< 

Doted: April 14, 1998. 

John M. Elsenbe'1. 

AdmlnlsualOT. 

/FR Doc. 98-IOn7 Flied 4-ZZ-98: 8:45 ami 

.. LUNQCooe ............ 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

[Announcement 98037) 

Centera for Dloeo.e Conlrol and 

Prevention 

Initiative. by Organizations To 

Strengthen NaUonal Tobacco Control 

Actlvllielin the Unltod Slat.,; Notice 

of Availability of FundI for FI,cal V •• r 

1998 

IntroductlDn 

The Centers for DI.ea.e Control and 

Prevention (CDC) announces the 

avallablUty of funds for fiscal year (FY) 

1998 for cooperative aoreemenlS With 

nilttonill organtzations that .serve one or 

more of the following special targeted 

populations: Afrlcan.Amerlcans. 

HlspanlcslLatlnos. Aslans/Paclnc 

Islanders. and youth. especially males 

(ages 12-24). The purpose of the awards 

15 to improve or Initiate tobacco conrrol 

programs that are culturally appropriate 

to reduce nicotine addiction and other 

health related problems ... ociated with 

the consumpUon or tobacco, wllh the 

ultimate goat or tobacco use reduction. CDC Is cornmlUed to achleylng the 

health promotion and disease 

preyentlon objectives of Healthy People 

2000. a national activity to reduce 

morbidity and mortality and Improye 

the quality of lire. This announcement 

is related to the prtorlty area or Tobacco. 

(For ordering a copy of Healthy People 

2000 • ..,. the section Where To Obtain 

Addltlonallnrormatlon.) 

AuthOrity 

ThIs program Is authorized under 

section 317(1<)(2) and 311(1<)(3) 14Z 

U.S.C. 247b(k)(Z) and Z47b(l<)(3)J of the 

Public Health Service Act. as amended. 

Smoke-Free Workplace 

CDC strongly encourases an grant 

reclplenlS to provide a "",oke·free 

workplace and to promote the nonuse or 

aU tobacco products. and Public Law 

103-227. the Pro·Chlldren Act or 1994, 

prohlbllS smoking In certain facilities 

that receive Federal funds In which 

eduuHon. library. day care. health care, 

and early childhood deyelopment 

services are provided to children. 

PSI·OCC-27·00002t 
1135 

PPM 5310-10 

POLICIES & PROCEDURES MANUAL 

Sacllon: Enforcement and Compliance 

TO: All Examining Personnel 

PURPOSE 

Subject: Guidance to Examiners in Securing 

Access to Bank Books and Records 

The purpose of this issuance is to provide guidance to examiners when they encounter situations 

where a bank resists or retuses their requests to interview bank stott or review the bank's books 

and records. It discusses the acc's statutory authority tor access to bank intormation Bnd 

records, reviews tactics that are sometimes used to obsllUct examinations, sets forth the procedure to be followed when a "red flag" is identified, and lists remedies that examiners have when 

they encounter potential obstruction of an examination. Finally, it answers some commonly 

raised questions. 

REFERENCE 

Statute (12 USC 481). (See allached appendix.) 

SCOPE 

This issuance applies to all examining personnel. 

POLICY 

While national banks are generally torthcoming and cooperative in providing examiners access 

to books and records or other information needed to carry out their supervisory responsibilities, 

occasionally, a bank will rcsist or refuse such requests. When this happens, the bank's rationale 

for nOl complying with the request may be based on the alleged disruption or burden involved, or 

similar concerns. In some cases, however, the resistance or refusal may be based on the bank 

management's desire 10 conceallhe true condition of the institution or to prevenl discovery of 

Dale: January 7, 2000 Page 1 of 8 

PSI.OCC·27 ·000022 
1136 

PPM531G-10 

improper conduct. It is imponant in all such situations for examiners to assure that they have 

access to the inf9rmation they believe is necessary for them to carry Qut their"responsibilities, and 

to understand clearly the elttent of their authority to obtain access to needed information. 

By statute (12 USC 481), examiners arc entitled to prompt and unrestricted access to a bank's 

books, records, and staff. From time to time, examiners have encountered situations where bank 

management is reluctant or unwilling to give them such access. In some cases. this occurs due to 

a lack of understanding of the relevant legal authority on the part of bank management. Such 

problems can often be quickly resolved by having the examiners review the OCC's statutory 

authority with bank management as soon as the issue arises. However, in other cases, bank 

management's reticence may be an attempt to conceal fraud. derogatory information. or insider 

abuse. Resistance from bank management may be most likely to occur in an institution that may 

be in a worse condition than current CAMELS ratings indicate. Examiners should be alert to 

such behavior. regard it as a "red flag" indicating potentially serious problems, and follow up 

accordingly. 

Statutory Authority 

Under 12 USC 481, ace examiners have complete and unfettered access to a bank's books and 

records during an examination. In some circumstances. examiners moy also review the books 

and records of bank affiliates and subsidiaries. In addition. examiners have access to the books 

and records of bank service companies, and to the books and records of independent servicers 

that penain to the services that are subject to the Bank Service Company Act. 12 USC 1867. 

(However, if a bank affiliate or subsidiary is "functionally regulated" by the Securities and 

Exchange Commission. the Commodities Futures Trading Commission. or a state insurance 

department. certain restrictions apply on the acc's examination authority with respect to thai 

entity. Examiners should consult with their district counsel before attempting to access books 

and records of such an affiliate or subsidiary.) 

Where appropriate, examiners should remind bank management that the acc may use its 

enforcement tools (e.g .• cease and desist and temporary cease and desist orders, and civil money 

penalty assessments) to obtain management's compliance with these access provisions. 

Concealment of the bank's books and records from an eltaminer is also grounds for a conservatorship or a receivership. 12 USC 1821(c)(S)(E). Furthennore, examination obstruction may 

subject individuals to criminal prosecution. (See 18 USC 1517.) 

Red Flags 

An unwillingness or resistance to allow examiners access to bank information may be an 

indicator that the bank is attempting to conceal evidence of violations of law or unsafe or 

unsound practices, or prevent examiners from discovering the bank's true financial condition. 

Examiners should learn to recognize the "red flags" and respond appropriately as described 

below. 

0.,.: January 7, 2000 Page 2 of 8 

PS,·QCC·27·000023 
1137 

PPM 531Q-10 

The following are examples of some "red flags": 

Delay Tactics. Sometimes, banks do not provide requested information within a 

reasonable time period. For example, the examiner is told that the only staff member 

who knows where the records are is unavailable at that moment and will continue to be 

unavailable indefinitely. Or, the examiner is told that the particular computer with the 

necessary records is urgently needed for other pUllloses and cannot be made available to 

the examiners. Another example is if the examiner is told that the requested records are 

located off-site and there will be a lengthy delay in obtaining them. While examiners 

shoUld always use judgment in evaluating the credibility of bank management's assertions, in cases where the examiner suspects obstruction, his or her re~ponse should be 

polite but firm: Unreasonable delays will not be tolerated. 

Screening Tactics. Banks may try to prescreen the documcnts that examiners need to 

conduct the examination. The bank may insert a screening agent, e.g., bank counsel, 

requiring that the examiner request documenlS in advance, and in some detail, through the 

agent. While in some cases it is appropriate for bank counsel to review the documents in 

advance, e.g., where legitimate privilege issues are raised, in other cases the bank's intent 

may be to sanitize requested documents before the examiner sees them. (See Alteration 

of Records.) This tactic is also unacceptable. 

Access to Relevant Third·Parly Records. Banks may try to prevent examiners from 

acCessing directly relevant books and records that are maintained for the bank off-site by 

third parties, such as servicers. If a bank tries to block access to relevant documents 

maintained by third parties, the examiner should consider whether this is being done to 

prevent the examiner from obtaining information that is important to the examination, or 

to otherwise conceal the bank's true condition. 

Alteration of Records. Banks or bank employees may attempt to alter records prior to 

the examiners' review to prevent the examiners from discovering significant losses, 

fraud, or insider abuse. They may also remove key documents from files, destroy 

records, or create required records (also known as "file stuffing"). These tactics are 

illegal and subject to criminal prosecution. 

Removal of Records. Bank management may remove important documents from bonk 

offices and hide them from examiners off-sile. This conduct will only be discovered 

when examiners remain alert to the fact that it may be occurring, and persistently follow 

up on staff comments and cross references to missing documents in other materials. This 

conduct could violate several criminal statutes. 

Attacks on Examinen' Credibility. Banks have attempted to neutralize negative 

findings by attacking the credibility of individual examiners. The best defense to this 

tactic is prevention. Use good judgment, comply with policy, always maintain a professional tone and demeanor, have another examiner present during important or potentially 

Oa .. : January 7, 2000 Page 3 of 8 

PSI-OCC-27-DDOO24 
1138 

PPM 5310·10 

hostile meetings with institution staff, and document the outcome of such meetings. 

Firmness should be accompanied by a tactful and balanced - but persistent - manner. 

The OCC will not tolerate attempts to intimidate its examiners. 

PROCEDURE 

Whenever an e1t&miner encounters situations like those noted above, the examiner should 

immediately discuss, the problem with his or her EIC, ADC or deputy comptroller, and district 

counsel to seek a quick resolution to what could be a simple misunderstanding. The examiner 

should explain to bank management the statutory authority for gaining access to the bank's 

books and records. (A list of the legal authorities governing examiner access to information, 

which can be shared with bank management, is attached) If access is not secured, or the 

situation is not resolved, then the examiner, together with his or her ElC, ADC or deputy 

comptroller, and district counsel should consider the remedies listed below. Other divisions of 

the Law Department will become involved as appropriate. 

The examiner should fully document all instances Where the bank's resistance or refusal to 

provide access to its books, records, or staff has become an impediment to conducting the 

examination. 

Remedies 

There are several tools available for a prompt and complete remedy. The right response depends 

on the specific facts relating to the conduct that the examiner' encounters. The available remedies 

include: ' 

Reviewing the applicable statutes compelling prompt and complete access with the 

bank's management and board and politely, but firmly insisting on compliance. This 

might involve arranging a meeting of the board with the EIC, ADC or deputy comptroller, and district counsel present. 

Delivering a letter instructing the bank to comply promptly with examiner requests for 

information, or face formal enforcement action. 

Serving an administrative subpoena on the bank requiring production of the requested 

documents and, if necessary, enforcing the subpoena in U.S. district court. 12 USC 481, 

1818(n), and 1820(c). 

Issuing a temporary cease and desist order requiring that inaccurate or incomplete records 

be brought immediately to a complete and accurate state. 12 USC 18IS(c)(3)(A). 

Where appropriate, and in conjunction with the remedies listed above. filing a suspicious 

activity report for obstructing the examination (IS USC 1517), conspiracy to defraud the 

0.18: January 7, 2000 Page 4 of 8 

PSI·OCC·27·000025 
1139 

PPM 5310-10 

United States by obstructing the examination (18 USC 371), or making false entries and 

statements to defraud the institution or deceive the regulators (18 USC 1001 and 1005). 

In extreme cases, appointing a conservator or receiver based on the institution's concealment of records and obstruction of the examination. 12 USC 1821(c)(5)(E). 

Also in extreme cases, or where other remedies have been exhausted, revoking the bank's 

charter if the bank refuses to provide information required in the examination of an 

affiliate, or refuses to permit such an examination. 12 USC 481. 

QUESTIONS and ANSWERS 

Question: What should an examiner do if a bank refuses to provide him or her with direct 

access to any records? 

Answer: The examiner should inform bank management that 12 USC 481 explicitly 

stlltes that examiners are appointed by the Comptroller and, as such, are authorized to 

conduct a thorough examination of a bank's affairs. Therefore, bank management must 

provide the examiner with prompt and complete access. If bank management still refuses 

to do so, the examiner should consult with his or her EIC, ADC or deputy comptroller, 

and district counsel. 

Question: What should an examiner do if bank management tells the examiner that the 

docuinents that he or she requested are inaccessible because they are in remote storage off-site? 

Answer: The examiner should inform bank management that that they must advise the 

examiner of the documents' specific location and retrieve them promptly. 12 USC 481. 

Question: What should an examiner do if a bank tells him or her that it has no underwriting 

records on a loan? 

Answer: The examiner should inform bank management that the bank may be cited for 

an unsafe or unsound banking practice, and proceed with a more thorough review of this 

asset. The examiner should remain alen to the possibility that the documents exist, but 

are being withheld. Staff comments or documents in other files might indicate the 

missing records actually were created. Like withholding documents, failure to create and 

maintain critical documents is a "red flag" indicating possible fraud, insider abuse, or 

financial manipulation. The examiner should keep his or her EIC, ADC or deputy 

comptroller, and district counsel closely apprised of the mailer. 

Question: What should an examiner do if he or she requests documents during a targeted 

examination and is denied access because it is not a regularly scheduled, full-scope examination? 

Dale: January 7, 2000 Page 5 of 8 

PSI·QCC-27-000026 
1140 

PPM 5310-1 0 

Answer: The e"aminer should inform b;ll1k management that, under 12 USC 481, the 

bank is required to give any examiner - including safety and soundness, compliance, 

trust, and information systems examiners - prompt and complete access to all bank 

records and personnel during any examination. The authority is not,limited to examinations of a specific length, scope, or type. 

Queation: What should an examiner do if he or she requests accounting records on a particular 

transaction, and is denied access by a bank's auditor based on an assertic;m of accountant-client 

privilege? 

Answer: The examiner should inform bank management that no such privilege is 

recognized under federal law . Prompt and complete acceas to the documents must be 

provided. The examiner should notify his or her EIC, ADC or deputy comptroller, 

district counsel, and the chief accountant because this may be an ethical or contractual 

breach by the auditor. Recognized privileges which may be asserted include the attorneyclient and attorney work-product privileges. Whether or not one of these privileges 

appJiea in any given situation requires a legal and factual analysis. If the bank. asserts a 

privilege claim, the examiner should consult with his or her EIC, ADC or deputy 

comptrolle~, district counsel, and the director of the Litigation Division. 

Queation: What should an examiner do if a bank. deniea his or her request outside of an 

examination for access to the documents necessary to perform a status update on a large, troubled 

loan? 

Answer: The examiner should inform bank management that he or she is working to 

determine the condition of the bank in the course of supervision. The bank must provide 

prompt and complete access to all relevant documents and records of any type. 

Queation: What should an examiner do if bank management states that the examiner may 

review copies of loan files maintained on its computer, but may not review originals, because the 

originals are stored off-site in a remote facility for safekeeping and cannot be retrieved without 

considerable expense? 

Answer: The examiner should consider whether this is an unacceptable screening tactic. 

The examiner has not received assurances that the copies are exactly the same as the 

originals. or that the originals have all the required disclosures and signatures. Further, 

the examiner has no assurances that the originals ever existed, or still exist. Additionally, 

the bank's computer may be tracking which documents the examiner is retrieving, 

permitting the bank to review and "correct" any problems with the originals before the 

examiner sees them. Under 12 USC 481, the bank must provide the examiner with 

prompt and complete access to all relevant documents of any type (including originals) 

wherever those documents may be. 

0.. •• : January 7, 2000 Page 6 of 8 

PSI·OCC-27-000027 
1141 

PPM5310-10 

Question: What should an examiner do if a bank's board of directors refuses to allow him or her 

to observe their meetings, citing reasons such as highly confidential merger discussions, 

personnel issues, or the like? 

Answer: The examiner should inform the directors that the bank is obligated to allow the 

examiner to attend the meeting. Additionally, the examiner may remind the directors 

that, as an examiner, he or she is prohibited from disclosing or permitting the disclosure 

of proprietary or confidential bank information obtained through the acc's examination 

and supervisIon functions. (See 18 USC 1905 and 1906, and 12 CPR Part 4.) 

Question: What should an examiner do if a bank designates a particular employee to help the 

examination team to find and locate documents, but that individual is frequently unavailable to 

assist? 

Answer: The examiner should inform bank management that it may be appropriate for 

the institution to designate an individual to assist the examination team, as long as the 

arrangement provides the examiner with prompt and complete access to records and starr. 

Thc examiner should insist upon access to information within a reasonable time period. 

In some circumstances. a "reasonablc" time period may require immediate access to 

information. 

Question: What should an examiner do if a bank (a) requires that outside counsel review 

requested documents for privilege before producing them for the examiner's review, or (b) insists 

that an attorney be present when he or she wishes to interview an employee? 

Answer: In both cases, the examiner should alert his or her EIC, ADC or deputy 

comptroller, and district counsel. With respect to (a), the examiner should insist that 

counsel's review be conducted quickly and without unreasonably delaying the examiner's 

access to the documents. If documents are withheld based on claims of privilege, the 

examiner should discuss the issue with his or her district counsel and the director of the 

Litigation Division. While, under 12 USC 481, examiners have complete access to the 

bank's books and records, there are some situations where the bank may assert valid 

privileges with respect to its documents. Whether or not the bank has a valid privilege 

claim can only be determined on a case-by-case basis. after considering the specific facts 

at hand. With respect to (b), depending on the circumstances, this may be an unacceptable restriction on the examiner's access to information. The examiner should consult 

with his or her ErC, ADC or deputy comptroller, and district counsel. 

Question: What should an examiner do if a bank wants to tape record meetings and conversations with the examiner? 

Answer: Audiotaping or videotaping meetings and conversations is often used as un 

intimidation technique. An examiner should not agree to have his or her meetings and 

Dat.: January 7, 2000 Page 7 of 8 

PSI·QCC·27·000028 
1142 

PPM 531D-10 

conversations Dudiotaped or videotaped unless it has been discussed and approved by the 

examiner's EIC, ADC or deputy comptroller, and district counsel. 

Question: What should on examiner do if he or she suspects that the examination team's 

conversations are being secretly recorded or subjected to electronic eavesdropping by bank 

employees or officials? 

Answer: The non consensual recording of 0 person's conversations, and electronic 

eavesdropping, are both serious, and potentially illegal, invasions of privacy that should 

not be tolerated. The eltaminer should immediately bring the mailer to the attention of 

his or her EIC, ADC or deputy comptroller, and district counsel. 

Question: What should an examiner do if he or she is subjected to abusive behavior on the part 

of bank employees or officials? 

Answer: The OCC will not tolerate the abuse of its employees. If on examiner is 

subjected to abuse by a bank employee or official, the euminer should document the 

incident, and immediately report the matter to his or her EIC. ADC or deputy comptroller, and district counsel. 

Emory W. Rushton 

Senior Deputy Comptroller 

for Bank Supervision Policy 

Attachment 

Oal., January 7, 2000 Page 8 of 8 

PSI-OCC-27-DDD029 
1143 

PPM 5310·10 

Appendix 

Institutions are required to give e1taminers prompt, full access to all records and staff 

during any examination. 

Twelve USC 481 states: "The Comptroller of the Currency ••. shall appoint euminers 

who shall e1tamine every national bank as often as the Comptroller of the Currency shall 

deem necessary. The e1taminer making Ihe examination of any national bonk sholl have 

the power to make a thorough examination of all the affairs of the bank and in doing so 

he shall have power to administer oaths and to examine any of the officers and agents 

thereof under oath and shall make a full and detailed report of the condition of said bank 

to the Comptroller of the Currency." 

Euminers have access to the records and staff of service providers: 

Twelve USC 1867(a) provides that the OCC may examine and regulate services performed by a bank service company "10 the same extent as its principal investor." Twelve 

USC 1867(c) states that the OCC may regulate and e1tamine the performance of services 

by independent servicers "to the same e1ttent as if such services wen: being performed by 

the bank itself on its own premises." 

[Note that the OCC's authority to e1tamine servicers is limited if the servicer is a subsidiary or affiliate of the bank that is "functionally regUlated" by the Securities and Exchange Commission, the Commodities Futures Trading Commission, or a state insurance 

department,) 

Obstructing an eumination is a felony: 

Eighteen USC 1517 states: "Whoever corruptly obstructs or attempts to obstruct any 

e1tamination of a financial institution by an agency of the United States with jurisdiction 

to conduct an eumination of such financial institution shall be fined under this title, 

imprisoned not more than five years, or both." 

PSJ-OCC-27-000030 
Derivatives Basics 

and Bank 

Supervision 

A,Qiscussion by Michael Kirk, Large Bank Supervis

Produced in collaboration with Continuing Ed

and Communications 
The contents of this discussion are 

segmented into three areas: 

Basic Definitions 

Risk Measures 

Risk Management 

Each segment can be viewed separately 
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Objectives 

• Develop skills for supervising complex produ

and businesses 

• Describe basic definitions 

• Identify the Risk Measures 

• Identify Risk and Risk Management Techniq
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PSI-OCC-27-000034 
What.are deriv.atives? 

• A derivative ;isa: 

• contract between ·two parties. 

• theva·lue of tlliis contract is a function of 

(derived frorn) the level of one or more 

underlying variables. 

• the variables themselves do not need to be 

tradable. 

• Can be OTC or exchange traded. 
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What are derivatives - continued

• The variables do not need to be market 

based but must be measurable. Exampl

are: 

• Financial prices (interest rates, equity price

credit,; FX etc). 

• Commodities (precious metals, energy, bas

metals, 

• Weatttier (temperatu:re, rainfall level etc.). 

• Economicc(inflation, GOP etc.). 

• Derivatives can range from being simple 

extremely complex contracts. 
Why are so importan

• Hedging-using a derivative to offset or reduce ris

• One of the earliest examples: agricultural futures 

• e.g. corn farmer expects harvest in six months, has to in

money now to grow crop but is worried about prices falli

---> sells corn forward on futures market to lock in price 

• Speculation-taking an open position with a view 

making money 

• Derivatives can be attractive v. cash market 

• Little or no immediate cash outlay, so large potential leve

• Can use options to speculate; potential loss limited to pre

amount 
Why are derivatives so importan

• Arbitrage-IQck in "riskless" profit by 

simultaneou,s purchase and sale of offsett

instruments 

• Arbitrage specialists look for mispricings betw

different markets and products 

• Access - to markets not otherwise availabJ

(could be regulatory circumvention) or ove

expensive to tap ,directly 

• Leverage 
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PSI-OCC-27-000040 
1154 

PSI-OCC-27-000041 
Futures 

• A standardized, transferable, exchange-trade

contract that requires: 

- delivery of a commodity, bond, currency, 

stock, or index (financially settled), at a 

specified price, 

- on a specified future date. Unlike options, 

futures convey an obligation to buy/sell. 
FuluJes-co.ntinue,d 

• Futures contracts are: 

- forward contracts, meaning they represent a pled

to make a certain transaction at a future date. 

- The exchange of assets occurs on the date spec

in the contract. 

- Futures are distinguished from generic forward 

contracts in thatthey contain standardized terms

trade formal exchange, are regulated by 

overseeing agencies, and are guaranteedsy 

clearinghouses. 
Futures 

- continued 

• In order to insLJre that payment wHloccur, fLJtL

have a marg.in requirement thatmLJst be settl

daily; Initial margin is placed LJPon a trade an

variation margin. is placed/received with 

f1LJctLJations in the market. 

• By making an trade, taking delivery

goods, or for exchange of goods

fLJtLJres contracts can be closed. 

• Hedgers often trade fLJtLJres for the PLJrpose o

mitigating price risk. 

• SpecLJlators often trade fLJtLJres to obtain 

leveraged exposLJre to an asset or liability. 
Forwards 

• Can be thought of as Gustomizedfutures. 

• Distinguished from futures in that they are no

standardized contracts, terms are negotiable

They do not trade 'on a formal exchange (the

trade in the over "the counter [OTC] market). 

• Represent a pledg,e to make a certain 

transaction at a future date. The exchange o

assets occurs on the date specified in the 

contract. 

• Are unregulated. 
Forwards-continued 

• Are not guaranteed by clearinghouses and 

therefore have credit risk (futures do nofhav

credit risk). 

• Margjn may notbe required. 

• Hedgers and speculators use forwards, in a 

sim'ilar manner as futures. 

• Simple example is FRA. Receive/Pay a fixed 

rate and Pay/Receive a floating rate. 
Forward Example 

Floating 3 month interest rate 

NationaL Bank 

NationaL Bank B 

A 

Fixed'interest rate 

For period of 3 months 

Give example & Why someone would do this. 
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PSI-OCC-27-000048 
Swaps 

• A contractual exchange of streams of 

payments over time according to specif

terms. The most common type is an 

interest rate, in which one party agrees 

pay a fixed interest rate in return for 

receJving a floating rate from another 

pa;rty. 
Swaps-continued 

• TY;'fJes of swafJs are usually; just a funct

of the underly;ing: 

-IFlterestRate (thiFlk oras a portfolio of FRA

- Credit (credit default swaps). 

- Commodity. - Asset & Liability. 

- Total ReturFl. 

- Catastrophic eveFlts. 

- Debt-Equity. 
Swaps-continued 

• "Flavors": 

- Vanilla= a fi*ed stream of payments vs. a floating 

stream of payments. 

- Basis= Floating vs. Floating. Similar asset but te

or credit quality differs (e*amples 3m Libor vs. 6m 

Libor, CP vs. 3M Libor, Prime vs. 3m Libor). 

- Structured= Packaged to be a structured bond lo

like. Also known as synthetic swaps. This type o

swap can contain complex, perhaps exotic, cash 

flows, and typically entails optionality. 
Swaps-conti n ued 

• "Flavors": 

- Exotic= Cash flows from one or both legs o

swap are driven by cutting edge complex 

derivative products and modeling. techniqu

Usually contain embedded correlation 

exposure. 

- Quanto= Currency of the underlying refere

asset differs from the currency of payments

Examples USD Fixed Rate vs. USD 3m Li

but paid in EUR. 
Swaps-continued 

• Like Forwards, swaps are customizable. 

• Margin mayor may not be required. 

• Contain both credit and price risk. 

• Used by both hedgers and speculators. • Can be highly leveraged depending upon ma

(if any). 

• Not regulated by an exchange. 

• Payment not guaranteed by clearing houses. 
Corporate 

5 Yr. Fixed 

interest rate 

5 Yr. 

Bond 

Issue 

Swap Example 

Floating 3 month interest rate 

20 resets 

Cash 

(Bond 

Proceeds) 

Fixed interest rate 

5 year rate 

National Bank 

The top part of the diagram 

essentially shows that a swap 

isa portfolio offorwards. In 

this example a 5 year swap is 

20 forward contracts (4 

quarters times 5 years). 
Credit Default Swap 

CDS 5-year spread 

Insurance 

Ar .• National Bank 

Company 

(if default event occurs) 

Bond coupon 

Corporate Bond 

with 5-year maturity 
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PSI-OCC-27-000056 
Options 

-Each option has a buyer, called the holder, a

a seller, known as the writer. 

-Option holders have a rig ht to exercise, optio

writers have contractual obl.igations to fulifill i

notified of the buyers exercise. 

- If the option cOintract is exercised, the·writer 

responsibleforfulfHling the terms of the cont

by delivering or taking delivery of the underly

(or cash if financially settled) to the holder. 
Options-continued 

• For the holder, 

price paid to acquire the, option. Upside is 

unlimited for Raiders of calls and limited; to 

holders of puts. 

• Options have anasymmetrtcal payoff pattern

futures have symmetrical payoffs. 

• Options are most frequently used for leverag

investments or protection. 

• When an option is not exercised, it expires 

worthless. 
Options Terminology 

• Call- The right, but not the obligation, to buy a spec

amount of a given stock, commodity, currency, inde

bond, at a specified price (the strike price) during/at 

specified period of time or times. 

• Put- The right, but not the obligation, to sell a specif

amount of a given stock, commodity, currency, inde

bond, a1 a specified price (the strike price) during/a

specified period of time or times. 

• Strike- The specified price in an option contract at w

the contract may be exercised; a price at which a ca

option buyer can buy the underlying or a put option 

buyer can sell the underlying. 
Options Terminology 

(Continued) 

• Plterrli.wm- Price paid to tne option seller to 

acquire tne rights conveyed in an option 

contract. -

• Expiration date- If in tne money, the date tne 

contract takes effect; else the day it "matures

wortnless. 

• Exercise date- Tne date (s) an option rignt m

beexecwted. 

• Underlying. Tne reference item tnat tne rign

bwy or sell is referring to. 
Call Profiles 

--Long caLL payoff --Short caLL payoff 

100 

80 

60 

40 

20 

0 

(20) (40) -, 

OTM ITM 

(60) 

(80) 

(100) 

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 
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PSI-OCC-27-000062 
Options 

• Options can be exchange traded or OTC. 

• Exchange Traded Options [ETOJcare 

standardized, transferable contract that requ

detiveryof a commodity, bond, currency, sto

or index (financially settled), or cash if 

financially settled, at a specified price, on a 

specified future date. Unlike futures, options 

convey a right to. the buyer and an obligation 

the seller if the buyer exercises the option. 
Options 

• ETO are regulated by overseeing agencies, an

by clearinghouses; OTC optio

are not. 

• In order to insure that payment will occur for 

ETOs, they a margcin m

be settled daily. Initial ,margin (Generally, the 

option premium) is placed upon a trade and 

variaUon margin is placed/received with 

fluctuations in the market. OTC options mayo

may not have margin provisions. 
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More on Options 

• By making an offsetting trade ETO contracts c

be closed. OTC options generally can be 

assigned (novated} or closed out with the write

(See example). 

• Hedgers often trade options for the purpose of 

mitigating price risk. (See example). 

• Speculators often trade options for the purpose 

leveraged exposure to an asset or liability. (Se

example). 
Closing of an OTC option position 

Example of Close Out. 

• originally purchased an option from pa

BJor$10. 

• Party A's option is now worth $25 due to 

chal7lges in reference asset. Therefore has a 

mark to market gain of $t5.00 

• Party A can close out the trade with Party B if 

Party B. and Party A agree on a.price, say $15
Example of Assignment 

(Novation) 

• If Party A and: Party B cannot agree on a price, or ·if P

B is unwillinglunable to close out the contract, Party A 

can ask Party Bifthe contract can be assigned. 

• If Party B allows assignment, Party A can go to the 

market place to find a buyerfor Party A's optiol7l;cont

If a suitable price is obtained (say $25), Party A sells 

option contract to Party C, with the understanding tha

the option writer is being assigned and known to be 

PartyB. 

• If assignment is not possible Party A can offset the 

option position with a new option trade with an other 

market participant. 
Novation 

Confirmation Process 

• Party A sends counterparty B written notification of 

assignment of Party A's rights to Party C. Party A se

a confirmation to Party C inclusive of the contract de

and information pertaining to contract writer- Party B

• Party A is now out of the contract and the contract is 

between Party B and Party C. 

• Party C will affirm and confirm trade with Party A. Pa

C will confirm assignment and contract details with P

B. Party B will issue a revised confirmation to Party 

recognizing cQunterparty assignment (original 

confirmation was between Party A and Party B). Par

will send written notification to Party A acknowledgin

assignment to Party C. 
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PSI-OCC-27-000070 
Hedging Price Risk 

Example 

• An investor owns 100 shares of JPMC stock at a 

purchase price of $25. The current market price is $45

• The investor is believes that the stock can rise further

but wants to lock in part of the profits. 

• The investor purchase a 1 Month Put option with a str

of $42.50 for $1.50 

• For the next month the investors profit is locked in at a 

minimum of $1,600. «strike - premium)- cost basis o

stock position) * 100 shares (($42.50-$1.50)-25) * 100

• The investors profit is not limited by this strategy, 

however the upside gain is reduced by the premium 

spent for the option hedge. 
$ $ $ $ 

$ 

$ 

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(5 $ () 

); $ 

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Hedging Price Risk Example 

Numerical Exam;ple 

P&L per P&Lp

option option 100 shares 100 sha

Market Price CosVshare strike premium with hedge wlo he

10.00 $ 25.00 $ 42.50 $ 1.50 $ 1,600.00 $ (1,500.00

15.00 $ 25.00 $ 42.50 $ 1.50 $ 1,600.00 $ (1,000.00

20.00 $ 25.00 $ 42.50 $ 1.50 $ 1,600.00 $ (500.00

25.00 $ 25.00 $ 42.50 $ 1.50 $ 1,600.00 $ 

30.00 $ 25.00 $ 42.50 $ 1.50 $ 1,600.00 $ 500.00 

35.00 $ 25.00 $ 42.50 $ 1.50 $ 1,600.00 $ 1,000.00 

45.00 $ 25.00 $ 42.50 $ 1.50 $ 1,850.00 $ 2,000.00 

50.00 $ 25.00 $ 42.50 $ 1.50 $ 2,350.00 $ 2,500.00 

60.00 $ 25.00 $ 42.50 $ 1.50 $ 3,350.00 $ 3,500.00 

70.00 $ 25.00 $ 42.50 $ 1.50 $ 4,350.00 $ 4,500.00 
Hedging Price Risk Example 

$5,000.00 $4,000:00 $3,000.00 

$2,000.00 

Q. $1,000.00 

$-

$(1,000. $(2,000. L_ 

Hedging Numerical Exarl1Jle 

Ma rket' Pri ce 
Options for speculative levera

Exa'mple 

• If a speculator is bullish on!he pric:e of JPM stock, the specu

can choose between numetous methods of expressing that v

• The simplest is an outrightpufchase of a JPM shares. 

• HoWe\ler,that can be expensive as the speculator would ne

. outlay the entire purchase price to settle tbe trade. 

• Or, the speculator could purchase call options on JPM. 

• In our previous example the market price for JPM was $45. 

month call options struck at $50.00 cost only $0.30. (30 cen

• In this. example, per hundred shares, the cash outlay would b

$4,500 for the outright purchase and only $30.00 for the $50 

purchase. 

• With an option purchase, the speculator risks ohly $30, but c

enjoy unlimited gains should the price of JPM ralry above $5

• In an outright purchase the speculator is subject to liquidatio

market risks, and therefore the entire purchase price is at ris
Options for speculative leverag

Numerical Example 

Alt#1 AH.#2 AH#2 P&L per 

Stock purchase Buy Call Buy Call 

Stock purchase option option 100 shares 

Market Price CostJshare strike premium Alt#1 

$ 20.00 $ 45.00 $ 50.00 $ 0.30 $ (2,500.00) $ 

$ 25.00 $ 45.00 $ 50.00 $ 0:30 $ (2,000.00) $ 

$ 30.00 $ 45.00 $ 50.00 $ 0.30 $ (1,500.00) $ 

$ 35.00 $ 45.00 $ 50.00 $ 0.30 $ (1,000,00) $ $ 40.00 $ 45.00 $ 50.00 $ 0.30 $ (500.00) $ $ 45.00 $ 45.00 $ 50.00 $ 0.30 $ $ 

$ 

$ 60,00 $ 45.00 $ 50,00 $ 0,30 $ 1,500.00 $ 

$ 70.00 $ 45.00 $ 50.00 $ 0.30 $ 2,500.00 $ 1

$ 80.00 $ 45.00 $ 50,00 $ 0,30 $ 3,500.00 $ 2

$ 90.00 $ 45.00 $ 50.00 $ 0,30 $ 4,500.00 $ 3

$ 100.00 $ 45.00 $ 50.00 $ 0.30 $ 5,500.00 $ 4
Speculative Leverage 

$6,000.00 $4,000.'00 

Speculative Leverage 

08 $2,000.00 --Stock Purcha

£L --Options Purc

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Market Price 

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IPSI-OCC-27-000077 
Generic Option Types 

- European= Can only be exercised on the 

expiration date. 

- American=Can be exercised at anytime pri

to expiration. 

- Bermudan= Can be thought as a special ca

of an American option; they can be exercis

at specific points in time (more than one) 

between the time the option is written and 

expiration. 
Generic Option Types-continue

- Asian=Underlying price is calculated as an averag

price of the reference asset over some period of t

Note: the averaging time period does not have to 

the same as the time period to expiration. 

- Barrier= A trigger point that can cause an option 

be to take effect. Examples are Kno

In. options and Knock· Out Barrier can .als

be specified as One touch,multiple touch, or brea

Knock In options are options that become effectiv

barriertisqctuated; Knock OuVoptio

terminate when the barrier is actuated. Barrier 

options often are.usedto redLtCe the cost of 

purchasing a moretraditionalbption. 
Generic Option Types 

( Co,ntin ued) 

- Exotic= Could contain correlation,' may invo

path dependency such as a look back optio

- Cornpound= Options on 

as Power Options. 

- Option= Also known asDiff Options

These are options on the differenc¢ betwee

twodisti n ctreferen ce assets/l iabil 

- Quanto=Referenced Underlying Asset is in 

currency other than the currency exchange

upon exercise for financially settled options
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The Greeks 

• Terminology can vary by market and by the organization. Howe

most shops measure most of the following "greeks" depending 

referenced product (not all greeks relate to all products). Delta, 

Gamma, Rho, & Theta are fairly universal accepted terminology

The others may vary by market ahdemployer. 

• Oelta- 1 st order change in price with respect to the referenced a

• Gamma - 2nd order change in price with respect to the referenc

asset. 

• Vega-1 st order change in option price with respect to the volatilit

the referenced asset. 

• Alpha- 2nd -order change in option price with respect to the vola

of the referenced asset. 
The Greeks-continued 

• 1 st order change in option price with respect t

time. 

• Rho-"1 storder change in option price with respect to 

discount rate. 

• Mu- 1 storder change in option price with respect to 

dividends. 

• Phi- 1 st order change in option price with respect to 

correlation. 

• OOeIV- Cross derivative between changes in the 

underlying and the impact upon Vega. In other word

change in delta given change in volatility_ 
Delta 

• Delta represents the change in price of a derivative f

every change in the price of the underlying reference

asset. 

• Delta iSHlso called the "hedge ratio" as it is used to 

hedge the 1st order effect of the underlying assets pr

exposure. 

Delta- considered to ,be one minimum risk exposure 

measure, regardless of the product and institution 

sophistication level. 

• All derivatives have a delta. As delta measures the m

basic exposure, change in the price of the derivative 

resulting from a change in price of the underlying. 
Delta 

{Conti:n ued) 

• The delta of a swap is analogous to tl';1e sura

ofa bons, and similarly the gamma of a swca

analogous to tl';1e convexity of a bons. 

• Tl';1e cdelta of a forward contract is essent;ially 

(in reality itis less tl';1an 1 because it is 

discounted bya discount factor, like one wou

caJculate for cdetermining tl';1e presentvalue o

futu re casl';1 flow.). 

• Delta's -of options are by 0 and 1 , w

deep in tl';1e money options cl';1avinga delta cof 

and deep out of tl';1e money options l';1aving a 

delta of o. 
Delta 

(Continued) 

• At the money [A'TMlcoptions'(options where the=priG

the referenGe asset eC;1uals th'estrike), have delta's o

0.5. 

• Example: If a dealer purGhases 100 ATMGalis on a 

partiGular5'year US bond from a Glient

wants to have a market neutral position, the dealer 

wquld imimediately sell 50 of that 5 year US Governm

bond. 

• When dealers are referring to theirposition in the fT!a

plaGe, they are general,ly r:eferring to their delta ,posit

Their delta position is the summation of all of the delt

resulting from their derivatives portfolio and all 

their Gorresponding underlying hedges. 
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PSI-OCC-27-000087 
GAMMA 

• Since many derivatives are non +inear, one needs to 

measure higher order effects. 

• Non-linear derivatives valuation changes are not at a 

constant proportion with changes in the levekof the 

referenced asset. 

• Non linear derivatives risk exposures are therefore a

non-linear. 

• Gamma measures the change in the derivatives delt

per given change in the referenced asset price. 

• Gamma is largest when an option is ATM 

• Gamma increases as time decreases, so very short 

dated options have also have high gamma. 
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PSI-OCC-27-000089 
VEGA 

• Vega is the rate of change of the option value with respect t

implied volatility 

• Volatility of the underlying referenced'asset is not constant 

(although the BS option pricing model assumed implied vola

is constant). 

• Option prices change due to changes in implied volatility. 

• The higher the implied volatility the greater the future disper

of referenced asset prices and this generally results in high

option prices. 

• High Vega means the option is very sensitive to changes in 

• Low Vega means the option is not very sensitive to change

vol. 
Vega 

(Continued) 

• Long dated options have higher Vega as 

there ismoretitnefoT volatHUy to have an 

effect on the ,payout of the option 

• Vega is higher for ATM options as a chang

in vol can take the option in or out of the 

money. 

• If a derivative has Vega exposure, then 

volatility skew/smile is a risk component as 

well. 
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Discussion on Volatility Measure

- ImpUed Volatility- forward looking 

-Historical Volatility- backward: I.ooking 

-RealizedVolatiHty-What has occurred 

d'uring the holding period. 
Discussion on Volatility Measure

(Cant) 

• Implied Volatility- Is the markets "best guess" 

the degree of future variability of a referenced 

asset for a particular time period. It can be al

thought of as the market price of risk. The lev

of imptied volatiility'is generally the only 

unobserved variable; therefore it is dete;rmine

by suppJyanddemand forthe option in the 

market place. 

• Historical Volatilit;y is the measured volatility o

referenced asset over a specific previous time 

frame. 
Discussion on Volatility Measure

(Cant) 

• Realized Volatility is the volatility of the 

referenced asset from the time a party acquir

aderivative instrument to the-time the instrum

matures/expires or the party liquidates the 

instrument. 

• Profi;taiDility of the participants that trade optio

on a delta is driveniDy the dispa

iDetween realized volatility and impHed volatiU
ALPHA 

• the second derivative 'of an opt

wiith respect to changes in 

'lola,tHity. 

• Therefore, measures the change 

an Vega Risk given changes in 

volatilities. 

• It is analogous to Gamma ,which measu

the change in the delta per 

change in the reference asset. 
DDelV 

• DDelV is a cross derivative. 

• It measures the change in a delta position per chang

in volatility. 

• Participants .who run large complex books that conta

numerous strikes (particularly for a long datedbobk 

contains many OTM positions) find this risk measure 

helpful. 

• Often times implied volatility changes are driven by 

changes in the referenced asset prices. Therefore, i

one knows· the likely short term relationship' between 

impHedvolatilityand the referenced asset one can.bposition themselves for changes in the delta position 

to changes in implied volatilities driven by market mo

in the referenced asset: 
THETA 

• Theta is<the rate the option value wit

respect to time. It is often' referred to as time deca

because it measures the options decay in vcilue o

time. 

• Theta generally increases as time to expiry increa• Theta is usually negative for purchased options; a

the time to expiration decreases options become 

valuable. 

• Theta is largestfor ATM. 

• If Theta is large in absolute terms either Delta or 

Gamma must be large. 
THETA 

(Cont.) 

• For traders there is a risk return trade off between 

theta positions and their gamma and vega positio

• Theta measures what an option will make/lose ov

time. From an options vega position one can 

calculate the degree of market variability priced in

the market. 

• If the realized market volatility is higher than impli

by an option's vega a trader should be able to tra

the resultant gamma positions to recapture theta 

losses and make further gains. 
RHO 

• Rho is the rate of change of the option value with respect to chang

interest rates. 

• Rho is managed on a portfolio basis. 

• Rho is usually small with respect to Delta, Gama, andVega. 
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PSI-OCC-27-000101 
PHI 

• Phi is the change in price given a change in implied 

correlation. 

• As with volatility, there is implied, historical and realiz

correlation. They are typically NOT equal. 

• Phi risk is very difficult to hedge, as correlati0n based 

products tend to have asymmetrical supply and dema

characteristics. 

• In asym.metrical situations"assumptions used in pricin

become critrcal; model risks and valuation risks must 

closely monintdred, and book sizes must bec·monitdre

relation to liquidity. 
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PSI-OCC-27-000103 
Market Risk Grid 

Counter Party 

Credit Delta Gamma Vega Alpha DDelV Theta Rho Mu 

Future ,/ 

Forwards ,/ ,/ ,/ 

Generic Bond ,/ ,/ 

Complex Bond ,/ ,/ ,/ ,/ ,/ ,/ ,/ Maybe 

Stock ,/ 

Currency ,/ ,/ 

Commodity Maybe ,/ 

Generic Swap ,/ ,/ ,/ ,/ 

Complex Swap ,/ ,/ ,/ ,/ ,/ ,/ ,/ ,/ Maybe 

Options Maybe ,/ ,/ ,/ ,/ ,/ ,/ ,/ Maybe 

Exotics ,/ ,/ ,/ ,/ ,/ ,/ ,/ ,/ Maybe Hybrids ,/ ,/ ,/ ,/ ,/ ,/ ,/ ,/ Maybe 

Structure Products Maybe ,/ ,/ ,/ ,/ ,/ ,/ ,/ Maybe 

• special case, interest rate futures contain these elements 
Hedging Market Risks 

Partially Partially Non Hedgeable Non Hedgeable 

Hedgeable Hedgeable Diversifiable Diversifiable . Non Diversifiable 

Delta ., 

Gamma 

Vega 

Skew/Smile 

Alpha 

DDelV 

Theta * 

Rho 

Mu 

Phi 

., 

., 

., 

., ., ., 

., 

., 

., 

., ., 

., 

*In practice Theta is not hedged as doing so will 

alter the desired portfolio, therefore it is accepted. 

.t 

., 
Market Risk Measures 

Where do they come from? 

• Some measures of risk are "derived" directly from the 

models. These are often referred to as closed form 

formulas, as they can be directly solved for. An exam

would be the delta of a European option; it can be so

in a closed form equation supplied in Black & Schole

1971. 

• Other measures cannot be solved for directly so 

numerical techniques are used. An example of solvi

for a risk numerically is by bumping a node on binom

tree up and down by a fixed quantity to determine the 

gamma of an American style option. 
Market Risk Measures 

-continued 

Where do they come from? 

• Not all models are created equally, 

mathematical assumptions (distributions of 

underlying assets, drift processes and 

assumptions can be, and often are, different)

This creates a challenge for risk measureme

and consolidation. 

• So, what do risk professionals do? They rely 

upon numerous techniques including, derived 

risk measures, statistical techniqbles ('tAR) a

stress tests. 
Generi""cMarket RisklVleas"ure

• Generic risk measures are those that can be 

applied across aU assets. 

• VAR and Stress are two techniques. 

• VAR is a statistical techniques that atte'mptst

capture the maximum loss a portfolio (of eithe

liike or unlike" assets) is likely to suffer. 

• There are two common techniques. Historica

simulated VARand hypotheti.cal simulated VA
VAR 

- The historical simulation method is used to forecast:t

expected worst loss' from the distribution of 1 years w

(typically) of daily, historical, marketreturns for the 

portfolio at a 990/0 confidence interval. 

- Technique requires the maintenance of data for each 

reference asset and components of valuation (credit 

spreac;js, volatilities, correlations, etc.). 

-Hypothetical simulated,method does not use historica

data, but instead relies upon either a standardized se

of assumptions, or a Monte Carlo technique. 
VAR-continued 

• Both methods are based upon statisticaJ 

assumptions and are probabmstic. 

• VAR distributions assumptions are often 

violated. Empirical evidence shows daily retu

typically not normally djstributed and 

substantialkurtosis exists (daily losses are 

larger and more frequent than those predicted 

by the distribution [Fat Tails]). 
Stress 

• This technique will revalue a portfolio of assets unde

adverse conditions in order to forecast a loss. 

• Has the advantage of being easily understood. 

• Adverse conditions can either be hypothetical, or 

historical. 

• has the advantage of known quantifiable 

and impacts upon multiple markets, but suf

from the disadvantage of c;hanging markets, changin

'behavior of participants, products. Example

include Crash of 1987 , Russian Debt Crisis and 

collapse of L TCM in 1998. 
Stress-continued. 

• Hypothetical has the advantage of simplicity, 

sOffers from the limits of our imagination. 

Typically, severe market disruptions occur in 

manners which were unpredictable. The 

imaginable is often already hedged against, s

by definition the unimaginable is what occurs. 

• Recent credit crunch although predictable wa

ignored in many scenarios due to bubble man
• 

• 

• 

Market Risk "Management" 

Control function related to the governance of risk taking. 

Risk Management is generally regarded as an independentfunction th

monitors, and controls the risk taking by front office professionals. 

However qualified they are, this group is generally not actively managi

risk. They advise prior to, during;" and after risk events. But they d6nb

generally manage risk (exceptinthe case of initiating a overall 

management hedge to protect the bank from an adverse market 

environment). 

Front office professionals and senior management initiate and manage 

market risk. 

• Therefore, Risk Management's function is to create the "rules of the ga

jointly with senior management based upon loss tolerances. 
Effective Risk Management 

• Effective risk management is a tremendous to

that cannot be summarized in a few slides. 

• Entails: 

- Highly qualified (in the field of risk management as 

well as highly knowledgeable on the products/mar

overseen), assertive, and communicative individua

- Sound, practical, and operationally efficient limit 

structure. 

- Multipl'e disciplines (not only market risk, there's 

model risk, operational risk, valuation risk etc.). 

- Flexibility. - Strong stomach. 
Effective Risk Management 

(Cont.) 

• Limits in clw de: 

- Non statistical (i.e.delta, .basis, termcstructure). - Statistical (VAR). 

- Stress. 

• Limits showld captwre all the core elements of 

business, yet not be so a tra

cannot determine where the portfolio is-- vers

the limits-- throwghout the course of a volatile 

ahd bwsy trading day. 

• Limits showld not be so large that they are ne

breached, and should not be too small, reswlt

in overly freqwent breaching. 
Effective Risk Management 

(Cont.) 

• Limits design should encourage diversification

and realization of profits. 

• R'evenue projectionsshoula be determined 

together with li'mits, taking into consideration 

senior managements risk tolerances. 

• Limits, revenue projections, and business pla

(including th:e"anr:lual plan and new business 

plans) are interrelated and should be determi

as such. 
Effective Risk Management 

(Cont. ) 

• Is more than just limit setting and 

monitoring. Examples include: 

- Model risk management. - Valuation Risk- inputs, models, parameters

- Operational Risk 

• Is an ongoing process. 
1231 

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PSI-OCC-27-00011 B 
Risk Oversight 

• Risks stemming from derivatives are numerous and involve mu

disciplines. 

• Complexity of business necessitates a multi-pronged strategy o

mitigation. 

Silo approach 

• Market Risk • Credit Risk 

• Valuation • Model • Operational 

Multi ,disciplined approach. 

• Business Control Committees (involve CFO, Front & Back Offices, Ma

Risk, Model Research, Model Control, Valuation, Accounting, Legal, e

• Internal Audit. - Perform regular (annual) audits of high risk areas. 

• Critical Self Assessments. To be done at least semi-annually. 
" 2! 

6 

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Risk Oversight 

(Cant.) 

• Communication & Culture is critical 

- Is senior mana@ement actively involved? - Are all facets of the or@anization 

communicatin@ with each other effectively? 

• Transparency of risks 

-Is,information readily available? 
Other Risks 

• COiunterparty defautt risk 

• Settlement Risk 

• ModielRisk • Vailuation Risk 

• Operational Ris.k • Reputation Risk 
Credit Risk 

• The risk to a whereby a counterparty fails to 

perform per contractual terms in a derivative transact

is referred to as counterparty default (credit) risk. 

• In large complex banks, this risk is overseen by a 

speGialized group of individuals in credit risk 

management. Smaller banks may combine this func

with market risk management. 

• Can be mitigated with (by): 

- Initial margin + variation margin (stronger if one way). 

- Legal documentation stipulating nettirlg, default procedures, 

- Credit default swaps. - CP exposure limits. 
Credit Risk 

• Credit exposure of derivative is always uncer

• Depends on direction of movement of underly

market variable( s) 

• Depends on amount of movement (a function 

its volati lity) 

• Can be very complex to predict (i.e. value of 

equity option ,dependent not Jwst on share pri

bwtalso volatility, interest rates, dividends, et

• Usually a fraction of the trade notional. Bwt, 

unlike a loan it can sometimes be greater tha

the notional amount! 
Credit Risk Measures/Terminolog

• Peak and average exposures are both estimates oJ 

future Mark to Marketexposure but use differenf leve

of conservatism. Peak exposure: Is the "near worst c

expostlre" that could arise during the life of the trade 

- Peak is generally used in gross thresholds 

- Average exposure: Is the expected exposure of the derivativ

during the life of the trade 

• This is a "best estimate" ofthe exposure 

• Calculated as probability weighted average MTM over all poss

future market scenarios 

• Average used to calculate credit charge (Le. the minimum 

profitability to cover credit risk) 

- Derivative Risk Equivalent ("ORE"): Is a calculation of the 

amount of loan that would give the same credit risk capital a

that derivative 
DRE 

• That is, ORE is a measure that allows a fair compari

with a loan exposure (so approving$50mm of ORE 

derivative anda $50mm loan should be comparable 

risks) 

• ORE is a risk adjusted function of average exposure

equals Average Exposure plus an add-on for the 

variability of .exposure of the derivative, adjusted for 

riskiness of the counterparty 

• It is a stress based measure at some high confidenc

level (generally 97.50/0). 

• ORE is generally used for counterparty credit lines a

approvals as well as Net Threshold 

• Peak is always ORE > average. Typically ORE is 

around half of Peak. 
M"odel Risks 

• The, risk to,a bank that results from a model not adequately 

capturing all of the relevant drivers of valuation in all' adverse m

environments. 

• Risks that new models are developed supplanting existing mod

but produce material impacts upon valuations. 

• . Complex products and associated models evolve through time. 

Improve'ments take time to be developed and implemented. 

• Adverse market environments will demonstrate model weaknes

• How mitigate: 

Large complex banks employ independent model reviewers that re

models produced by derivatives research model developers. 

• Ensure sufficiently, documented, so can be replicated upon staff turnov

• Error checking. • Testing for model effectiveness- does it measure what it purports to 

measure? Do risk measures account for changes in valuations? Test 

limitations across reasonable input range. Back test against actual res

Place limitations and market exposure upon use until concerns alle
Valuation Risk 

• Like many risks, valuation risk is not an island. It is, 

closely related to market risk and model risk. 

• This is the risk that considerable uncertainty surroun

the valuation ofaccderivative contract. 

• Could result from: 

- Lack of information (illiquid markets). 

- Lackofctransparency (deals occur but there is a multi- tiered 

market. More significant risk for smaller players). 

- Product complexity - Model simplicity or complexity (model short comings) 

- Unobservable parameters (correlations, prepayment speeds
;)l 

is 

-;< 

8 

N 

'" 

Valuation Risk 

(Cant.) 

• Valuation Risk is mitigated by: 

- Independent Valuation Managers-separate and independ

from line of business. This function may reside in either Fin

or Market Risk. 

Independent market prices-preferably not broker quotes. 

- Random market polling. 

Reserves and adjustments to income. 

Limitations on growth of business in complex illiquid produc

until senior' management is comfortable with control' : 

environmenUor acceptable risks. 

Ensuring Accounting Policy group is consulted wh.en develo

policies and procedures. 
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Operational Risk 

• Operational risk is defined as the risk of loss resulting from inadequat

failedintemal processes, people and systems, or from extemal event

• Like all of the previous risks (credit, model, valuation) operational risk

significant: .. 

• Operational risks result from the failure of the bank to perform accord

its responsibilities. 

• Could result in: 

- Opportunities for fraud by insiders who are aware of lack of operational co

- Penalties f6rfailure to report, perform, or otherwise. 

- lnterest,charges for late·payments. 

Inadvertent default. 

Failure to exercise a contract, thus losing its value. 

- Failure to execute a confirmation, thereby creating a potential legal out fo

counterparty who has an adverse financial position with the bank. 

Endless opportunities for economic loss, the possibilities for errors to cost 

bank sometimes seem without boundary. 
"tl 

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Operational Risk 

(Cant.) 

• How is operational risk controlled? 

- MIS and metrics provided to senior manageme

- Internal Audit High risk areas are audited annu

- Operational Risk committees. 

- Critical Self Assessments. - Independent Operational Risk Managers, perfo

functions similar to independent risk managem

valuations,and models, but related to operation

aspects of the organization. 
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Operational Risk 

(Cant.) 

• Settlement Risk is a form of operational risk. 

OCCUF;S when one party makes": a payment {sa

on a swap) and the other party fails to do so

- Risk is difficult to control. Operations needs to h

strong controls surrounding wire transfers, and b

communication with associated credit personnel. 

- Netting is one form of mitigation. 

- Cross product and legal entity netting is another 

of mitigation. 
Internal Audit 

• Needs to be completely independent. 

• Needs to have sufficiently qualified personnel. 

• Needs to have significant stature in the organization 

There should be an audit committee at the board lev

that has the support of the Board Chairman). 

• Should perform annual audits of high risk areas. 

• Should test controls, procedures and adherence to 

policy. 

• Should be evaluating all of the aforementioned risk 

functions. 

• Should ensure outstanding findings are corrected by 

verifying completion of action plans resulting from th

findings. 
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PSI-OCC-27-000133 
Bank Examiners should look 

• How transparent is risk taking? What reports do the banks mo

senior managers receive? Do those reports provide sufficient 

details to understand most salient risks? 

• Daily P&L results 

• Risk positions (if possible obtain daily (ideally), weekly, or at le

monthly). 

- Try to relate P&L to market events and position reports. 

- Know what the largest risk positions are by line of business. 

• Performance reports. 

- Client, proprietary, and portfolio revenues 

- Revenue to risk measures. 

• Limits: Structure, annual creation & affirmation process, report

and monitoring. 

- Documentation surrounding breaches - Temporary excession allowances and reasons why. g 

... '" 
" 

6 

o 

Bank Examiners should look 

(Co'nt.) 

• Risk Committee? 

- Is there one? - Obtain Risk Committee report package and meeting min

• Critical Self Assessments 

• Business Control Committee reports and meeting 

minutes 

• Model Reviews and adequacy of documentation 

• Valuation metrics 

- Reserves & associated triggers. 

- Valuation adjustments & associated triggers. 

- Independent pricing coverage %s (and sources). 
" 

Bank Examiners should look 

(Cont.) 

• Operational Metrics 

- Confirmation statistics - Nostro breaks (and aging) - % of Straight Thru processing. 

- P&L and Risk Explain 

- Error Trends. 

• I nternal Audit Reports. 

• Management structure & Governance 

• Business plans and new business initiative

• New business post implementation review

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Market Risk VAR Trends 

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SZIIlorJn, or S23mm higherlllan SopIl!mbe{s $191"

priln<riy drI""'byl}lncn!ssed""""' .... in CnI<il PottroIiO (acCrual Iaans} and C

_ 01 ... 18",",,0 '-"""'"Y"'*" agg

VAR ioae ....... p;riaIty o/f5eI by change

es&Cummdes. 

5 days, howeverln Novembef of 2001 new' UmIl

200 1 •• ••••••••••••••• " •• 11 •••• " •••••• gaieVAAlhres.hdd. 

l15; 

"'j' 125, 

100 ! 

" 

Dee feb 

'" of October 2007 

(USOMM's) 

FIXed Income 

Foreign Exchange Equjlies 

Commodities and Other 

less: Portfolo DiversifltaUon 

ToWlrad1"ll VAR 

CredllPllrtfotioVAA(a) 

less: Portfaio Diversificallon 

Tolalle Trading & CP VAR 

/lfK .Jun Aug Oct 

Odober and has trended dowrIlIfards sl.nce Septem

going _ belrq .....,hlo _10 mIOIy Ix4

decline of approximately S18mm in VAR term$ aflftf tem

return series kw' CMJP (8 hodge rmd por1foao) to a more 1::omHalOO iOOex 1iI):some posIQon mfudion In 

sltl;epenefswhic.hatsa c:onIrIbutedto a 0Yer.JII decline InVAR. and tv) redudton oJ the macrohedge overl:aywNehwss8 drWerdMN VAR. 

1402007 (quarter-krdate) Total Trading and CF'G aventge VAR as of Odoberha, been iWUCrtg compa

... __ ",0I2007 .. __ !l1ncr ... ed, ""'"'Y .... 10 Eq.i6e$bomg Iong

against the rate st8epanet"lii & 5hort Cted'II po!lltiom in PosllMing, 

ExfemallyOisclosed Trading VAR - .. ......... """" ...... - r-;;.,-;;;;;

4OT02001 TllftmonthsendeclOclobtr:J1 • .200T '., 

Mi!J!.mJ!!n. mz YTI!.QL ' lllm 

lle.B lle.B lle.B futriru! futriru! .. , -"'"_ .. , I Iilill I II

I ! '! t i ! 

$\IB.O 110·4.4 598.0 $75.0 " • 

30.0 30,0 26,6 24,0 41.5 35.4 35,0 26.0 41.0 34,0 i r uJ

(93.0) NM NM (72,0) (71.0) 1" ! 

595.0 581.6 510S.8 5112.0 5101.0 • • a 1! 

26.0 22,3 30.0 I 11,0 15,0 II' . 1 . 

(23,0) NM NM (22,0) (16,0) 

5SB.0 5au 117.7, 5\01.0 5100.0 ! 

.. 

, Aggegale VAA includes OVA VAA reIaIed 10 Ihe Credit Partfofo business, 
VAR History 

Externally Disclosed Average Trading & Credit Ponfolio VAR - October 2007 (1

40)6 ,Q07 .2QOi 30e7 OdC7 

ISVARlby __ l 

Fo>e<\l_ 6:ti 00.5 n.! Q7S '5.a 

242 20.' lB.O 20.0 22.0 J.2.t 

Eq<JIUe. 32.4 as..:! 42..1 &15 351 

CormlodItiH &. Other 46.'1 <4.7 34.3 404 2!l4 2Q.O 

1.4 .. : Portfolio (62.3) (sas, (13.2) (70 I) (1'3.2) 

T 010' IS Trodlng VAR 93.0 B:2.a SIB 1115 114.1 ¥4.7 

CoodhP_VAR 14.3 14.9 13.5 11.5 16.9 25.0 

1.4 .. ,_60Div __ (IO.3) (12.0) (lU) (23.7) (22.3) 

ta<.alVAA 98.S e7.4 832 110.3 107'.Z Qa.2 

" (J) (5 Frmcipal Trnnsacbons SZ,217 SJ.120 S2.179 54P3 

() 

2 ",-pal T"",,,,,,,,,,,,,, per Total A_ VAA IS Ac!IJal) 51UQ S946 S6.5!1 (S2.e4j $SOl 

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PSI-OCC-27-00014S 
1259 

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PSI-OCC-27-D00146 
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PSI-OCC-27-000147 
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PSJ-OCC-27-000148 
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Fixed tnco;ffi,e Markets R:evenue 

Hi'" .""'" IIood Origioal'" 

Tu..£.ump! Qrpttal MndJ 

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StntegicSolvfi,Qn$ 

StroctunxlCrcdit 

s_ 

Oplioes. GovtIAgm::y/Frtq Borrowers 

IOj 

(4L7) 

52.2 

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21.1 ·(6') 

(1.,.1) (311.4) 

111.7 

(18.4) II <Hl) (0.0) (0.0) (0.0) 

(12.7) (160.'1 (1272) 

22 21 (51) 
1263 

PSI-OCC-27-000150 
1264 

I I $ A 1 V 11 V ~ S I ~ ~ n 3 A l ~ Z 1, ,\ 3 1 

PSI·QCC·27·000151 
Reserves 

GloballB Pricing & Fair Value Adjustments - October 2007 (inSmillions) 

Prkmg A4un'rmnt FilII' V:due MlIStmerd Credit! Oeb;tAdjumment 

...,del Price PricJogAtij ?ar.wrUI{9( Fair" Value! OVA Debit 

umtIIionTes!ing Tola! Cmtcenlr350n 11iar..Bdit} Unwir'>d Uncer*.aintv TaI.ll CVA OVA lItiquidit!f Ad! Total 

kome E;ur.lc!i & Hybrids- 2!!' 21 305 :rr _los ,4, ",., 77!J 0, [251l) 32 (rTF) 

412 ,- 431 71 07 54 !21>'1 "" (2001 

'" ,. 71 140 ." (142) " {1rn ""' ....... (2l (1) 12 17 

c..diI""""'" 10 10 '" '" 32 ,.., 

...... 

(39, 20 (1.) ,5 " "" 12 12 CftlditPort'oIio (0) " ,. 21 5l) _ ('&1) •• 207 Ertmging MarliRts 11 ., "" 39 (t33) 11 (77) SPCUriIibd Ptaducls 1") (0) m 41 ., p-- (0) I1lt .. 3D 13 (1) 2 

-U 

(f) 

8 

-.2 751 21. 47. 1.141 I.""" 9Di (1<350) 17.ot (!to) 

n 

" $2,591mm 

N 
Q&A 

• ? 

. 

• Can't think of any now, email me later. 

• Mike.Kirk@occ.treas.gov • 212-789-4764 
1267 

PSI-OCC-27 -000154 
1268 

Attachments - Questions 2 & 3 

• FFIEC Supervisory polley Statement on Investment Securities and End-User Derivatives Activities 

• PPM 5310-10: Guidance to Examiners in Securing Access to Bank Books and Records 

• Derivatives Basics and Bank Supervision 

Attachments - Question 5C 

• PPM 5310-3 (REV): Enforcement Action Policy 

• PPM 5310-5 (REV): Securities Activities Enforcement Policy 

• Matters Requiring Attention Memorandum 

PSI-OCC-27-000155 
1269 

PPM 5310·3 (REV) 

POLICIES & PROCEDURES MANUAL 

Comptroller of the Currency 

Administrator of National Banks 

5ecUon: Bank Supervision Operations SUbJe<t: Enforcement Action Policy 

TO: Deputy Comptrollers. Department and Division Heads. District Counsel and all Examining 

Personnel 

PURPOSE AND SCOPE 

This PPM describes the OCC's policy for taking appropriate enforcement action in response to 

violations oflaw, rules, regulations, final agency orders and/or unsafe and unsound practices or 

conditions. It revises PPM 5310·3 (REV) July 30. 2001, and supersedes Supplemcnt I to PPM 

5310·3(REV), November 10,2004. This PPM also supersedes OTS Examination Handbook 

Section OSO, Enforcement Actions, July 18,2008, with respect to federal savings associations. 

This PPM is applicable to alllYpes of national banks, federal branches and agencies of foreign banks, 

and federal savings associations (collectivcly. "banks"). This PPM is also applicable to enforcement 

actions that the OCC may take against bank service companies under 12 USC 1861 and service 

providers under 12 USC 1464(d)(7)(D). Actions may take the form of informal enforcement actions; 

formal enforcement actions under 12 USC 181S; prompt corrective action directives under 12 USC 

IS310; safety and soundness orders under 12 USC IS31 p·1 ; or some combination thereof. This PPM 

does not address civil money penalty actions against persons under 12 USC ISIS(i) (see Civil Money 

Penalties Policy, PPM 5000-7, Revised, June 16. 1993); prohibition or removal actions, or personal 

cease and desist orders against individuals, under 12 USC ISIS(e) or (b); actions taken to enforce the 

various securities laws and regulations (see OCC's Securities Activities Enforcement Policy, PPM 

5310-5, Revised, February 8,2001); or actions under the International Lending and Supervision Act 

(see 12 USC 3909). 

These policies and procedures provide internal OCC guidance. They are not intended, do not, and 

may not be relied upon to create rights, substantive or procedural. cnforceable at law or in any 

administrative proceeding. 

This PPM also is not intended to supersede or limit the applicability of any other PPM that may 

provide more explicit guidance and direction, or establish supplemental procedures, applicable to 

compliancc-related violations or treatment of supervisory issues arising from the various specially 

areas (i.e., compliance, fiduciary. and asset managcment, or information technology). 

September 9,2011 Page I of26 

PSI-OCC-27-000156 
1270 

PPM 5310-3 (REV) 

TABLE OF CONTENTS 

Overview and General Policy ........................................................................................................... 3 

Types of Enforcement Actions .......................................................................................................... 4 

A. Informal Enforcement Actions .......................................................................................... 4 

B. Formal Enforcement Actions ............................................................................................. 4 

I. Enforcement Actions under 12 USC ISIS(b) .............................................................. 5 

2. PCA Directives and Related Actions ........................................................................... 5 

a. More Stringent Treatment based on other Supervisory Criteria ............................ 6 

b. Discretion to Impose Additional Restriclions ........................................................ 6 

3. Orders Requiring Compliance with Safety and Soundness Standards ........................ 7 

Determining Severity of Enforcement Actions ............................................................................... 7 

A. General ............................................................................................................................... 7 

B. I-Rated and 2-Rated Banks ............................................................................................... S 

C. 3-Rated Banks .................................................................................................................... S 

D. 4-Rated and 5-Rated Banks ............................................................................................... 9 

E. Significant or Substantial Problems or Weaknesses .......................................................... 9 

Early Resolution ................................................................................................................................. 9 

Procedures for All Enforcement Actions ....................................................................................... II 

A. Responsibilities and Decision Authority ......................................................................... 11 

B. Support for Decisions ...................................................................................................... 12 

C. Timeliness of Enforcement Actions ................................................................................ 12 

D. Content of Enforcement Action Documents .................................................................... 13 

E. OCC Responsibilities Following Completion of All Enforcement Actions .................... J 3 

F. Assessing Compliance with Enforcement Actions .......................................................... 14 

G. Termination of Enforcement Actions .............................................................................. J 5 

H. Enforcement Action Tracking System and Decision Documentation ............................. 15 

Public Disclosure of Enforcement Actions .................................................................................... 15 

A. Disclosurcs Required by Law .......................................................................................... 15 

B. Discretionary OCC Disclosure ........................................................................................ 16 

C. Requirements for Disclosure by Banks ........................................................................... 16 

Oversigbt ................................................................................................................................... 16 

Appendix A - Informal and Formal Enforcement Actions Against Banks ................................ 18 

Informal Actions ............................................................................................................................. 18 

Commitment Letter ................................................................................................................ IS 

Memorandum of Understanding ............................................................................................ IS 

Sarcty and Soundness Plan .................................................................................................... IS 

September 9, 20 II Page 2 or26 

PSI-OCC-27-0001S7 
1271 

PPM 5310-3 (REV) 

Formal Actions ............................................................................................................................. 18 

Orders under 12 USC 1818 .................................................................................................... 18 

Consent Orders ................................................................................................................ 18 

Cease and Desist Orders .................................................................................................. 19 

Temporary Cease and Desist Orders ............................................................................... J 9 

Formal Written Agreements .................................................................................................. 19 

PCA Directives ...................................................................................................................... 20 

Safety and Soundness Orders ................................................................................................ 20 

Capital Directives .................................................................................................................. 21 

Appendix B - Mandatory and Discretionary Provisions Under PCA ......................................... 22 

All Insured Institutions .......................................................................................................... 22 

Adequately Capitalized Banks ............................................................................................... 22 

Undercapitalized Banks ......................................................................................................... 22 

Significantly Undercapitalized Banks ................................................................................... 23 

Critically Undercapitalized Banks ......................................................................................... 2S 

Appendix C - Specific Actions Required by Statute or Other Legal Source ............................. 26 

OVERVIEW AND GENERAL POLICY 

Effective bank supervision requires clear communications between the OCC and the bank's 

senior management and board of directors. The OCC uses a variety of enforcement actions to 

communicate problems or weaknesses and to require corrective measures by banks. Once 

problems or weaknesses are identified and communicated to the bank, the bank's senior 

management and board of directors are expected to promptly correct them. Whenever possible, 

OCC enforcement actions should deal with problems or weaknesses at an early stage, before 

they develop into more serious supervisory issues or adversely affect a bank's performance and 

viability. This may mean taking action well before problems or weaknesses are reflected in a 

bank's financial condition. 

An OCC Report of Examination ("Report") documents the OCC's findings and conclusions 

with respect to its supervisory review of a bank. The actions a bank takes or agrees to take in 

response to its Report are importailt factors in determining whether the OCC will take 

enforcement action and the severity of that action. Although enforcement actions may be 

initiated liS a result of findings contained in a Report, taking such actions are not necessarily 

correlated with the completion ofthe Report. In some cases, enforcement action may be 

warranted prior to the completion or transmittal of the Report to obtain correction of significant 

problems or weaknesses liS quickly as possible. This policy provides guidance in selecting the 

action o.r combination of actions best suited to accomplish corrective or remedial measures. 

The poltcy also promotes consistency while preserving flexibility for specific circumstances. 

Thc OCC's long-range strategy for a bank that is experiencing difficulties is an important 

factor in determining what enforcement action to take. Long-term strategy takes into 

consideration not only the measures needed to address the bank's problems currently but also 

what measures will be needed in the future if the bank's problems develop into serious 

September 9, 20 II 

PSI.OCC.27.!i'QCaJ of26 
1272 

PPM 5310·3 (REV) 

supervisory issues threatening the bank's viability. Certain types of enforcement action also 

may provide better transitions to more severe supervisory responses later if the condition of the 

bank warrants, including requiring the bank to raise capital, or other resolution options such as 

requiring the sale, merger, dissolution, or liquidation of the bank, or appointing a receiver or 

conservator. This policy provides guidance on this aspect of selecting enforcement actions. It 

also provides guidance on the long-term strategy aspects of documentation for enforcement 

actions. The documentation of earlier enforcement actions, of failure to comply, and of the 

consequences for the bank of that failure is an important part of establishing the record for 

more severe subsequent action. 

TYPES OF ENFORCEMENT ACTIONS 

Enforcement actions fall into two broad categories: informal and formal. (See Appendix A for 

definitions of types of enforcement actions.) 

A. Informal Enforcement Actiolls 

Whcn a bank's overall condition is sound, but it is necessary to obtain written commitments 

from a bank's board of dircctors to ensure that identified problems and weaknesses will be 

corrected, the acc may use inJormal enforcement actions. These enforcement actions provide 

a bank with more explicit guidance and direction than is normally contained in a Report. 

Agreement 10 an informal action can be evidence of the board's commitment to correct 

identified problems before they adversely affect the bank's performance or cause further 

decline in the bank's condition. 

Informal enforcement actions include commitment letters, memoranda of understanding, and 

approved safety and soundness plans submitted pursuant to the part 30 and part 170 safety and 

soundness process. (See Appendix A for a more complete description of informal enforcement 

actions.) 

B. Formal Ellforcement Actlolls 

The oee may use a wide variety ofJormal enforcement actions to support its supervisory 

objectives. Unlike most informal actions, formal enforcement actions are authorized by statutc 

(mandated in some cases), are generally more severe, and are disclosed to the public. Also, 

formal actions are enforceable through the assessment of civil money penalties and, with the 

exception of formal agreements, through the federal court system. 

For purposes of this PPM, formal actions against a bank include: orders and formal written 

agreements within the meaning of 12 USC JSI8(b); capital directives under 12 USC 3907; 

Prompt Corrective Action (PCA) directives under 12 USC 18310; and safety and soundness 

orders under 12 USC 1831 p-1. (See Appendix A for a morc complete description of formal 

enforcement actions and Appendix B for a description of mandatory and discretionary actions 

under PCA. Also, r;fer to Banking Circular 268, Prompt Corrective Action, February 25, 

1993). 

1. Enforcemellt Actions Imder 11 USC IBIB(b) 

September 9, 2011 Page 4 of26 

PSI-OCC-27-0001S9 
1273 

PPM 5310-3 (REV) 

Formal enforcement actions under 12 USC ISIS(b) include cease and desist orders and 

formal agreements. These types of actions are available when a bank violates a law, 

rule, or regulation; engages in an unsafe or unsound banking practice; or violates a 

written condition imposed by the OCC in connection with the granting of an 

application. A cease and desist order can also be issued, by consent of the bank I or 

following an administrative hearing, for violating the terms of a formal agreement. In 

addition to requiring a bank to takc corrective measures to remedy a violation of law or 

an identified problem or weakness, formal enforcement actions under 12 USC ISIS(b) 

include, under certain circumstances, the authority to require a bank to: (i) make 

restitution or provide reimbursement; (ii) restrict asset growth; (iii) dispose of a loan or 

other asset; (iv) reseind an agreement or contract; (v) cmploy qualified officers or 

employees; and (vi) take other action the OCC determines to be appropriate. 

As discussed below, the presumption for formal action under 12 USC ISIS is 

particularly strong, rcgardless of a bank's composite CAMELS rating or capital levels , 

when it is experiencing significant problcms or weaknesses in its systems and controls; 

serious insider abuse; substantial violations of law or serious compliance problems; 

material noncompliance with prior commitments to take corrective action; or failure to 

maintain satisfactory books and records or provide examiner access to books and 

records when, as a result, the OCC is unable to determine the bank's true financial 

condition. 

2. peA Directives and Related ActlOllS 

PCA actions are triggered by a bank's capital category as defined in 12 USC JS310, 12 

CFR 6, and 12 CFR 165 Depending on a bank's PCA capital category, certain 

restrictions and actions arc lIutomatically imposed by operation of law. Discretionary 

PCA actions include the issuance of directives that impose actions or restrictions 

permitted or otherwise required under 12 USC IS310, 12 CFR 6, and 12 CFR 165. 

Except in rare instances, the OCC provides prior notice of intent to issue a PCA 

directive. Unlike some other enforcement actions, there is no provision for an 

administrative hearing prior to the issuance of PCA dircctives. (See Appendix B for a 

full description of PCA provisions.) 

For banks that are in the undercapitalized, signijicafllly undercapilalized. or critically 

undercapitalized categories, the supervisory office should consider using a PCA 

directive in preference to a section 1818 enforcement action. In particular, PCA 

directives are preferred when there are concerns that the bank's problems may develop 

into serious supervisory issues thllt threaten viability, lind the supervisory office 

anticipates that it may be necessary to exercise an early resolution option in the future. 

A PCA directive can enhance the OCC's use of resolution options later because failure 

to submit or implement a capital restoration plan rcquired in a PCA directive is a 

ground for receivership. Thus, a PCA directive should be used in such situations, unless 

action under section ISI8 clearly would better achieve the purposes of prompt 

corrective action. Similarly, PCA directives may be appropriate in cases where the 

need for prompt action is present. 

I A cease and desist order issued with consent oflhe bank through ils board of directors is termed a "eonsent 

order." Cease and desist orders and consenl orders are legally indistinguishable in their effecls . 

. September 9. 20 II Page 5 of26 

PSI-OCC-27-0001S0 
1274 

PPM 5310-3 (REV) 

When an undercapitalized, significanJly undercapitalized, or critically undercapitalized 

bank is already subject to a fonnal enforeement action under section 1818, the acc 

may elect to: (i) modify the section 1818 document to renect any additional 

requirements deemed necessary in view of the bank's condition and capital category; 

(ii) replace the document with a PCA directive; or (iii) impose a PCA directive while 

also maintaining the formal enforeement action against the bonk. Whatever option is 

choscn, mandatory PCA restrictions applicable to such banks will apply automatically. 

The acc may also impose more severe limitations than a bank's PCA capital category 

would otherwise permit or require if it is determined that the bank is in an unsafe or 

unsound condition or engaging in an unsafe or unsound pmctice; or it is determined, 

with rcspect to undercapilalized or significantly undel'capitalized banks thaI the use of 

more severe measures is necessary to carry out the purposes of PCA. 

The acc will consider imposing these discretionary PCA actions whenever it is 

consistent with the PCA's purpose, which is to "resolve the problems of problem 

institutions at the least possible long-term cost to the deposit insumnce fund." 

B. More Siringeni Trealmelll based all otller Supervisory Crileria 

Under 12 USC I 8310(g), if the acc determines, after written notice and an 

opportunity for an informal hearing (See 12 CrR 19.221 and 12 CrR 165.8), 

that a bank is in an unsafe or unsound condition or is cngaging in an unsafc or 

unsound pmctice, the acc may: 

• reclassify a well-capitalized bank as an adequately capl/a/ized bank; 

• require an adequately capitalized bank to comply with one or more 

requirements applicable to an undercapitalized bank, except thc 

requirement to have a capital restoration plan; or 

• require an undercapitalized bank to take onc or more actions applicable 

to significantly undercapitalized banks. 

b. Dlscretioll 10 Impose Addilional Reslriclions 

The acc may apply corrective measures to undercapitalized or significantly 

undercapitalized banks otherwise only available under the next lower PCA 

category if the DCC determines that such measures are necessary to carry out 

the purposes of prompt corrective action. See 12 USC I 8310(e)(5) and (f)(S). 

In addition, for significantly undercapitalized banks and undercapitalized banks 

that fail to submit and implement an acceptable capital restoration plan, the 

acc may also require any other action the acc determines will better carry 

out the purposes of prompt corrective action. See 12 USC I 83Io(f)(2)(J). The 

actions required under the authority of section 18310(f)(2)(J) should address the 

unsafe and unsound pmctices that are of concern and be commensumte with the 

bank's overall condition. 

September 9,2011 Page 60f26 

PSI·OCC-27-000161 
1275 

PPM 5310-3 (REV) 

3. Orders Requiring Compliance with Safety and Soundness Standards 

Under 12 usc 1831 p·l, when a bank fails to comply with any established safety and 

soundness standard (sec 12 CPR 30 and 12 CPR 170) the oce may issue a Notice of 

Deficiency. The Notice of Deficiency requires the bank to submit to the oee a plan to 

correct the deficiency, and the oee must approve the plan. If the bank does not file a 

timely, acceptable plan, or fails in any material respect to implement it, the oee must 

issue an order requiring thc bank to correct the deficiency cited in the notice. A 

determination that the bank is not in compliance with an approved plan should be based 

on a finding that the bank has failed in a material respect to implement the plan. This 

failure must be substantial enough to jeopardize or preclude achieving the objective of 

the plan. The oee may also order the bank to take any additional action that the oee 

determines will better carry out the purposes of12 USC 18310, provided such actions 

are consistent with deficiencies cited in the notice. The oee muSl also take certain 

additional action against a bank that has not corrected a deficiency if the bank 

experienced extraordinary growth over the past 18 months, or commenced operations 

or underwent a change in control within the past 24 months. 

Unlike peA, which is triggered by capital categories, the safety and soundness process 

is designed so that the oee can require banks to address problems in their operations 

regardless of the balik's capital levels. 

DETERMINING SEVERITY OF ENFORCEMENT ACTIONS 

A. General 

Enforeement actions should be specifically tailored to the institution, and designed to correct 

deficiencies and return the bank to a safe and sound condition as soon as possible. The 

severity of the enforeement action is based on several factors. 

Determining whether an informal action is the appropriate response, and deciding upon which 

informal action to use, will depend on: (i) the overall condition of the bank (both current and 

projected); (ii) the nature, extent, and severity of the bank's problems and weaknesses; and 

(iii) whether the bank's board and management demonstrate the commitment and ability to 

correct the identified problems and weaknesses within an appropriate time frame. 

Unlike other informal enforeemcnt actions, thc safety and soundness order process provides 

the oce with the ability to issue a formal action (safety and soundness order) based solely on 

the bank's failure to comply with the informal action (approved safety and soundness plan). 

However, like other informal enforeement actions, the safety and soundness order process 

should generally only be used when the problems or weaknesses are narrow in scope and 

correctable, and we are confident in the board and management's commitment and ability to 

correct the problems or weaknesses. 

In situations where a bank fails to achieve compliance with an informal enforeement action 

within a reasonable period oftime as defined in the action, absent strong justification, the 

supervisory office should promptly proceed with a formal enforcement action to address the 

outstanding deficiencies or concerns. 

September 9, 2011 Page 70f26 

PSI-OCC-27-000162 
1276 

PPM 5310-3 (REV) 

Fonnal enforcement actions may also be the appropriate initial action based on the rating of the 

bank and the severity ofils problems. When deciding whether a fonnal enforcement action 

should be used and which one is appropriate, it is important to consider: (i) the bank's 

composite CAMELS rating; (ii) the severity of the bank's problems and weaknesses; (iii) the 

commitment and ability of management to correct the identified deficiencies; and (iv) the 

existence of previously identified, but unaddressed problems or weaknesses. 

In situations where a bank has failed to achieve compliance with a fonnal enforcement action, 

there is a strong presumption for the use of additional enforcement actions, such as the 

assessment of civil money penalties against the board of directors and bank management, 

enforcement of the action in federal court, or commencement ofa new enforcement action, 

including, in certain cases, a requirement for the sale, merger, or voluntary liquidation of the 

bank. 

D. J·Rated and 2·Rated Bunks 

For banks with a composite rating of I or 2, examiners should obtain affirmative commitments 

from the bank's senior managemcnt and board of directors to correct problems and 

weaknesses. This includes commitments to address problems identified in Reports of 

Examination or otherwise brought to the bank's attention. Such commitments generally need 

not take the form of an enforcement action if the examiner-in-charge (EIC) and assistant 

deputy comptroller (ADC) consider other measures (e.g., oral or written assurances, responses 

to Matters Requiring Attention (MRAs) and to Matters Requiring Board Attention (MRBAs), 

correspondence, or action already taken) adequate to address the acc's criticisms. When 

confidence in the board or management is low, especially in situations where the risk profile is 

increasing, corrective measures generally should increase in scope and severity. The decision 

to recommend stronger nclion is the responsibility of the EIC and ADC and the type of action 

should be based on the seriousness of the deficiencies and the commitment and ability of the 

bank's management and board to correct them. 

C. 3·Rated Banks 

When considering corrective measures for a 3-rated bank, the EIC and ADC need to assess the 

overall condition and outlook for the bank; risk profile trends; record of compliance with 

prcvious criticisms or supervisory actions; and the degrce of confidence in the ability and 

willingness of management and the board to correct all identified deficiencies in a timely 

manner and return the bank to a safe and sound condition. A bank with strong management and 

a generally positive assessment can be considered for an informal enforcement action, if 

circumstances suggest that the remedial measures are immediately forthcoming. There is a 

presumption for use of a formal enforcement action for a bank with weak management or a less 

than satisfactory management rating, and where there is uncertainty as to whether management 

and the board have the ability or willingness to take appropriate corrcctive measures. In 

addition, if the 3 rating continues for two consecutive examinations following the bank 

entering into the informal enforcement action, a formal action nonnally should be taken unless 

the bank is in compliance with the infonnal enforcement action and no new grounds exist for 

taking a formal action. 

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D. 4-Rated and S-Rated Banks 

While the capability, cooperation, integrity, and commitment of management, the board of 

directors, or ownership arc factors in deciding the content of an enforcement action, because a 

4- or S-rated bank has serious problems and is more likely to fail, there is a strong presumption 

in favor of using a cease and desist order, or PCA directive if legally supportable. Usc of an 

informal enforcement action for a 4-rated bank, or an action other than a PCA directive or 

cease and desist order for a S-rated bank, must be specifically approved by the appropriate 

senior deputy comptroller for Bank Supervision Operations. 

E. Slgnljlcant or S"bstantlal Problems or Weaknesses 

Separate and apart from a bank's overall rating, financial condition, or past cooperativeness of 

management or their ability, there is a presumption in favor offormal enforcement action 

when: 

• The bank is experiencing serious problems or weaknesses in its systems, controls, 

internal audit programs, operating policies, methods of operations, or management 

information systems (i.e., operating in an unsafe or unsound manner), even if these 

problems have not yet resulted in a change of rating or have not been rcflected in 

the bank's financial performance or condition; 

• There is serious insider abuse involving members of senior management or the 

board, whether or not the bank is immediately harmed; 

• Therc are serious compliance problems or substantial violations of law; 

• The bank has disregarded, refused or been unable to appropriately respond to prior 

supervisory efforts to correct previously identified serious problems or weaknesses; 

• The bank has failed, refused, or been unable to satisfactorily maintain its books and 

records, has attempted to place unrcasonable limitations on how, when, or where 

the examination is conducted, or has imposed limits or restrictions on examiner 

access to bank personnel, books, and records, and as a result, OCC examiners are 

unable to determine the bank's true condition; or 

• There is noncompliance with specific commitments received in response to serious 

problems or weaknesses identified in a Report of Examination, with an informal 

enforcement action, or with a less severc formal enforcement action. 

EARLY RESOLUTION 

The OCC has the authority to place a bank into receivership when the bank is insolvent or has 

tangible equity capital of less than 2 percent. Once a bank's tangible equity capital has 

dropped below 2 percent, the provisions of 12 USC 18310(h) operate to subject the bank to all 

restrictions and limitations applicable to critically undercapitalized banks, including the 

provisions of 12 USC 18310(h)(3) rcquiring that the bank be placed into receivership or 

conservatorship. 

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The OCC also has the authority to initiate an early resolution by placing a bank into 

receivership, conservatorship, or requiring its sale, merger, or liquidation while the bank still 

has tangible equity capital or more than 2 pereent in certain cin;umstanees. Such action may 

help resolve a problem bank at the least long-term cost to the deposit insurance runds. Early 

resolution can reduce or limit losses that might otherwise result if the bank is allowed to 

remain open until its tangible equity capital has dropped below 2 pereent or has been 

exhausted. Early resolution can be considered, for example, when a bank: (i) is losing capital; 

(ii) has no realistic prospects for recapitalization; (iii) is engaging in practices likely to increase 

losses in the future; (iv) is engaging in unsafe and unsound practices that have a substantial 

negative effect on the bank; or (v) suffers from other critical management failures identified in 

the receivership statutes. 

When a bank first becomes undercapitalized or when a bank begins to show substantial safety 

and soundness weaknesses or other critical management railings, even if the bank is not yet 

undereapitalized, supcrvisory offices should develop an early resolution contingency plan 

involving a merger, sale, voluntary liquidation, conservatorship, or receivership. Planning for 

these potential future developments is a factor in selecting which enforeement actions to use in 

the near-term. Although enforecment action is primarily aimed at rehabilitation of the bank, 

using particular enforeement tools at the rehabilitation stage can enhance the OCC's position 

for early resolution later, if the need arises. For example, for an undereapitalized bank, the 

failure to submit and implement an acceptable capital restoration plan when required under a 

I'CA directive is a ground for receivership. It may also be a basis to require the bank to be sold 

or merged into anothcr institution. Similarly, when addressing substantial safety and 

soundness weaknesses or other critical management failings. a section) 818 order might be 

preferred because a willful violation of a final section 1818 order is itself a ground for 

rcccivership. In addition, PCA, section 1818, and the safety and soundness ordcr process all 

hove provisions authorizing the OCC to rcquire a bank to take any action the OCC determines 

will bener resolve the bank's problems. In appropriate cases, this authority could be used to 

include a requirement that the bank have a contingency plan to sell itself or liquidate if it does 

not remedy its problems within a specified time period. Thus, supervisory offices must take 

into account the long-range strategy for the bank in deciding which enforcement action to use. 

I f the problems at the bank persist, then supervisory offices should consider whether early 

rcsolution action would be appropriate. This would be the case, for example, when a bank has 

reached the point beyond which additional enforcement Dction is not likely to prevent 

continued deterioration and failure or reduce costs associated with such failure. Once a 

decision is made to adopt an early resolution approach, OCC resources should be focused on 

the best available option at the least cost to the deposit insurance funds. All OCC officcs with 

carly resolution responsibilities, including bank supervision. licensing, and legal offices should 

be apprised ofthe possible need for an early resolution. Examiners should consult with these 

units regarding options available and what record is needed to support them. 

The facts and reasons on which the receivership or other early resolution is based must be well 

supported and documented. In most instances, prior enforcement actions will have addressed 

these matters at an earlier stage (e.g., when the bank first became undercapitalized or when the 

bank was required to remedy unsafe and unsound practices in an enforcement action). The 

record prepared for those actions will later be a part of documenting the receivership grounds. 

Additional documentation of the continuation and worsening of problems, and ofa substantial 

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negative impact on the bank's assets, earnings, and/or ability to conduct business, will be 

needed. 

PROCEDURES FOR ALL ENFORCEMENT ACTIONS 

A. Responsibilities and Decision A IItl,orlty 

The Senior Deputy Comptrollers for Midsize and Community Bank Supervision and for Large 

Bank Supervision ("Senior Deputy Comptrollers") have the primary responsibility to use the 

OCC's enforcementauthority under 12 USC 1818, PCA authority under 12 USC 18310, and 

safety and soundness authority under 12 USC 1831 p-I as necessary to accomplish the OCC's 

supervisory objectives. In many cases the authority to initiate, negotiate, execute, modifY, and 

terminate enforcement actions covered by this PPM has been delegated. Current delegations of 

authority are maintained by the Special Supervision Division (SPSU) and are posted on the 

SPSU page in the OCCnet (UUUhtlp:/loccnet.occI2SpeciaISuoervisionOfficeView.asp). Any 

authority delegated by the appropriate Senior Deputy Comptroller may not be sub-delegated 

without that offICial's express written approval. 

Generally, the EIC is responsible for initially recommending the use of an enforcement action 

to address problems and concerns identified in assigned banks. While ADCs may approve the 

use of certain informal enforcement actions on 1- and 2-rated banks, District, Midsize and 

Large Bank deputy comptrollers are responsible for deciding most enforcement action 

recommendations against banks under their supervision. 

To assist with these decisions, thc Senior Deputy Comptrollers will, on an annual basis, 

appoint a Washington Supervision Review Committee (WSRC) chaircd by the deputy 

comptroller for Special Supervision and approve its written charter and operating proccdures. 

In addition, each district and Midsize deputy comptroller will, on an annual basis, appoint a 

DistriclfMidsize Supervision Review Committee (DSRC) and establish its written charter and 

operating procedures, subject to the review and approval of the Senior Deputy Comptroller for 

Midsize and Community Bank Supervision. The Washington or district/midsize supervision 

review committee's (SRC) role is to help ensure that OCC bank supervision and enforcement 

policies are applied effectively and consistently, and is to advise the Senior Deputy 

Comptrollers or the deputy comptrollers on bank supervision and enforcement cases by 

providing recommendations on supervisory strategies and enforcement actions. With a fcw 

exceptions as outlined in the delegations of authority matrix, SRC reviews and adviscs the 

decision maker on the initiation of all enforcement actions. WSRC reviews all nondelegated 

enforcement actions, all enforcement actions against bank service companies (12 USC 1861 ct 

seq.) and all proposed referrals to FinCen, FEC, DOJ, HUD, CFPB, and SEC. WSRC may also 

be asked to advise on cases that are unique or highly visible. 

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B. S/lpporl for Decisiolls 

A person presenting a case to SRC will prepare a presentation package, which includes a 

memorandum summarizing the supervisory history, history of previous enforcement actions, 

the facts in the current case, an objective analysis of the facts, the recommended enforcement 

action, legal support for the recommended action, the supervisory strategy, and any other 

relevant issues. Minutes of the committee's deliberations, recommendations, and the final 

decision should be documented in the OCC's electronic supervisory databases. 

C. Timeliness of Ellforcemenl ACliolls 

The OCC will toke enforcemc;nt actions as soon as practical once the need for such action has 

been identified. including during an examination when circumstances warrant. Enforcement 

actions should be taken within the following maximum time periods whenever possible. 

The appropriate SRC should recommend and the decision maker should decide whether to 

initiate an enforcement action, or to change or modify an existing enforcement action, 

including the form and content of the action, within 15 calendar days following: 

• A final Report of Examination or other written supervisory analysis that determines 

whether the bank is experiencing one or more of the significant or substantial 

problems or weaknesses listed in the Determining Severity of Enforcement Actions 

section above; 

• A final decision to assign or retain a composite CAMELS rating ofJ, 4, or 5; 

• A final Report of Examination or other written supervisory analysis that determines 

whether a bank is undercapitalized, significantly undercapitalized, or critically 

undercapitalized; 

• A final Report of Examination or other written supervisory analysis that determines 

whether an undercapitalized bonk has failed to submit an acceptable capital 

restoration plan or has failed in some material respect to implement it; or 

• A final Report of Examination or other written supervisory analysis that determines 

whether a bank has violated a safety and soundness standard (See 12 CFR 30 and 

12 CFR 170». 

Por nondelegated enforcement actions (see delegations matrix) involving delegated banks, the 

appropriate Washington legal division should present the case to WSRC no later than the third 

weekly WSRC meeting following the receipt of the recommendation from the OSRC. 

Within 15 calendar days following the final decision to take an enforcement action that 

requires the signature orthe bank's board of directors (commitmentleller, memorandum of 

understanding, formal agreement, cease and desist order), a copy of the proposed action should 

be provided to the board, or its duly authorized representative, and a date established within the 

next three weeks for a meeting with the board of directors to present the document and obtain 

its execution. If the enforcement action is not executed by the board and a Notice of Charges 

for Issuance of a Cease and Desist Order is not served, the decision maker or authorized 

September 9, 201 1 Page 12 of26 

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representatives shall have 30 days to negotiate the execution of the document or serve a Notice 

of Charges. Recommendations to use a less severe action require the same approval process as the initial action. 

For enforcement actions that involve the service of a notice ofintent (PCA Directivc) or notice 

of defiCiency (Safety and Soundness Order), such notice should be served within I S calendar 

days following the final decision to take such action. 

Any time frame exceptions should be documented in the OCC's electronic supervisory 

databases. 

D. Content of Enforcement Action Documents 

Enforcement action documents should address all substantive supervisory problems. Each 

action should clearly list any prohibited or restricted activities, prioritize remedial measures to 

be taken, and assign the timc frames in which the board of directors or management must act. 

EnForcement action documents should also explicitly state what action is expected ofthose 

parties subject to the document. 

Enforcement actions should be drafted using as guidance any standard language provided from 

time to time by the Director for Enforcement and Compliance, as well as articles used in 

previous enforcement actions that are tailored to the specific concerns to be addressed. 

Articles may be modified and new articles created, as necessary, to sufficiently address 

specific concerns in each individual bank. These articles should be drafted in consultation 

with, and input from, the District Counsel in the case of delegated banks and the Enforcement 

and Compliance Division in the case of non delegated banks. 

E. OCC Responsibilities Following Completion of All Enforcement Actions 

Early assessment and written feedback on a bank's efforts 10 comply with a new enforcement 

action are critical to helping management and the board understand the requirements of the 

document, and achieve timely compliance. Therefore, the EIC and ADC are encouraged to 

perfonn an on-site assessment oFthe bank's compliance with the enforcement action shortly 

after the document has been entered into. In all cases they must perfonn an on-site assessment 

within 60 days of the latest due date in the action. Most articles in an enforcement action 

require corrective action within a specified time period after the effective date of the document. 

For example, if the latest due date is 90 days, then the on-site assessment of compliance with 

the document would commence within 60 days after the expiration of the 90-day period. 

Articles requiring cessation of specific activities usually rcquire immediate action and should 

be assessed on-site shortly after the enforcement action becomes effective. IF all articles in a 

documentrequire immediate action, on-site assessment of compliance would commence 

shortly after the enforcement action becomes effective and no later than 60 days from the 

completed date of the enforcement action. 

The success or failure of the bank in complying with the enforcement action, and the impact on 

the bank of the continuation of the problems should be thoroughly documented. 

Noncompliance with the enforcement action will be part of the support for a more severc 

enforcement action and, in appropriate cases, early rcsolution actions. The findings of this 

assessment and any recommendation to take further action, modify the document, or amend the 

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supervisory strategy must be presented to WSRC or OSRC, which will advise the decision 

maker (see delegations matrix). Minutes of the deliberations, recommendations, and the 

decision maker's final decision should be documented in the OCC's electronic supervisory 

databases. 

Atieast every six months thereafter, while the enforcement action remains outstanding, the 

EIC and AOC will assess the bank's compliance with the document and present the findings 

and any recommendation to take further action, modify the document, or amend the 

supervisory strategy, to WSRC or OSRC which will advise the decision maker (see delegations 

matrix). At least one assessment must be on-site as part of a full scope examination, the other 

assessment may involve on-site activities as deemed necessary by the EIC and AOC, consistent 

with the supervisory strategy for the bank. Minutes of the WSRC or OSRC deliberations, 

recommendations, and the decision maker's final decision should be documented in the OCC's 

electronic supervisory databases. 

F. Assessillg COn/pllallce with Elr/orcen/ellt ActlollS 

A rating of compliance can be achieved on a particular article in an enforcement action only 

after the bank has adopted, implemented, and adhered to all of the corrective actions set forth 

in the article, the corrective actions are effective in addressing the bank's problems, and OCC 

examiners have verified through the examination process that this has been accomplished. A 

bank should not be considered in compliance with an article in an enforcement document 

simply because it has made progress or a good faith effort toward complying with the article. 

Articles for which the bank has not achieved compliance fall into two categories: 

• Those articles where the bank has adopted and begun the implementation of all of 

the corrective actions required by the article but sufficient time has not passed to 

verify that the actions have been fully implemented, are being adhered to, and arc 

effective in addressing the bank's problems. In these situations management and 

the board must continue to monitor and test the bank's progress to ensure that 

corrective actions are fully implemented, adhered to, and arc effective. 

• Those articles where additional action on the part of the bank, its board, and 

management is required. This includes, but is not limited to: where the bank has 

failed to adopt policies, procedures, and systems within required time frames; 

where adopted policies, procedures, and systems fail to address all required items in 

the article; where the bank has failed to comply with immediately effective 

requirements; where the bank has failed to cease activities prohibited by the article; 

where the bank has failed to fully implement or adhere to corrective actions. In 

these situations there is a strong presumption to talre more severe action (i.e., 

formal action if the current action is informal; civil money penalties against the 

board 0" management if the current action isformal; or if the action is aformal 

agreement. the use of a stronger formal action). The decision maker (sec 

delegations matrix) may grant in writing reasonable extensions of time to comply 

with articles that require the development and implementation of policies, 

procedures, systems, and controls. Support for such extensions should be fully 

documented in writing. 

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For those articles with which the bank has not achieved compliance (both categories), the 

Report of Examination or other written communication to the bank must identity why the 

article is not in compliance, and what must be done to achievc compliance. 

G. Termination of Enforcement Actions 

The decision to terminate an enforcement action is the responsibility of the decision maker (sec 

delegations matrix) and generally follows the same review process through SRC as is 

applica~le to new enforcement actions. Usually the EIC or ADC recommends, through SRC, 

termination based on the assessment of compliance contained in a Report of Examination. An 

enforcement action should not be terminated until the bank has complicd with all of the articles 

in the document. However, there may be some limited exceptions where termination of on 

enforcement action before the bank achieves compliance with all articles in the document may 

be appropriate. This may occur in cases where a bank has complied with all of the material 

requircments, and the articles in noncompliance have become outdated or irrelevant to the 

bank's current situation, or in cases where the current document is being replaced by a 

different enforcement action (e.g., a Consent Order is replacing a Formal Agreement). 

Minutes of the committee's deliberations, recommendations, and the linal decision should be 

documented in the acc's electronic supervisory databases. 

H. Enforcement Action Tracking System and Decision Documentation 

The appropriate supervisory office is responsible for ensuring that the enforcement actions 

application in the OCC's electronic supervisory databases is current and accurately documents 

the enforcement action process from the date an enforcement action is recommended, 

presented to SRC, initiated, completed, and finally terminated. 

PUBLIC DISCLOSURE OF ENFORCEMENT ACTIONS 

A. DlsciosllTes Required by Law 

The OCC is required by 12 USC 1818(u) to publicly disclose certain types of agency actions. 

The acc must publicly disclose all final orders entered into pursuant to 12 USC 1818(b), civil 

money penalties (including those for late or inaccurate call reports), removal orders, capital 

directives, and any modification andlor termination of such actions. The acc must also 

publicly disclose all formal agreements under 12 USC 1818(b) and any conditions imposed in 

writing in connection with any application, notice, or other request, which are enforceable 

under sectionI818(b). The OCC must also disclose any final PCA directives under 12 USC 

18310 or safety and soundness orders issued pursuant to 12 USC 1831 p-I (e). Under certain 

very limited circumstances, the OCC may delay mandatory .public disclosure for a reasonable 

period of time. 

There is no legal requirement for the acc to publicly disclose temporary orders to cease and 

desist or any informal enforcement actions. 

Once a month, the OCC's Communications Division publishes a list of formal enforcement 

actions that includes the name of the person or bank involved, the type of action, and the date 

of the action. The enforcement actions are posted and available through the acc's public 

Septcmber 9, 2011 Page 15 of26 

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PPM 5310·3 (REV) 

Internet Web site and may also be obtained in hard copy through the Communications Division 

upon request. 

B. Discretiollary Dee Disclosure 

The OCC will consider public disclosures beyond those required by law on a case-by-case 

basis, where the OCC believes disclosure would be in the public interest. 

The OCC will publicly disclose enforcement actions taken to remedy violations of the federal 

securities laws andlor related OCC regulations in accordance with provisions of PPM 5310·5, 

which sets out the Securities Activities Enforcement Policy. 

c. Require/llelltsfor Disclosure by Ballks 

Disclosures described in paragraphs A and B above refer only to the OCC's required or 

discretionary disclosures. Nothing in either paragraph is intended to relieve any bank, or, 

where applicable, its holding company, of independent obligations to make required 

disclosures under the various securities laws and related regUlations, or any other relevant 

statutes or obligations. 

OVERSIGHT 

On a monthly basis, the Special Supervision Division, under the supervision of the deputy 

comptroller for Special Supervision, prepares a Problem Bank Report (PBR) with input from 

the various district and field offices. The PBR includes all banks supervised by the Special 

Supervision Division and all other banks with a composite CAMELS rating of 3,4, and 5. 

Quarterly, the final "Watch List" will be attached as part of the PBR (see PPM 5000-34). For 

each bank, current performance, rating and enforcement action information is identified. 

Narrative sections discuss problems, supervisory strategy, current status, and any necessary 

additional background information. The PBR also provides problem-bank trend information, 

lists all outstanding enforcement actions, and includes information on enforcement action 

trends and distribution by ratings and supervisory office. 

The PBR is distributed to the Comptroller, all Executive Committee members, Midsize nnd 

Community Bank deputy comptrollers, and Large Bank deputy comptrollers, and other senior 

officials within the OCC. The Senior Deputy Comptrollers utilize the PBR as well as the 

quarterly National MIS Report prepared by the Supervisory Information Division to oversee 

and monitor compliance with the OCC's enforcement policy lind this PPM. 

Michael L. Brosnan 

Senior Deputy Comptroller, Large Bank Supervision 

Jennifer C. Kelly 

Senior Deputy Comptroller, Midsize and Community Bank Supervision 

September 9, 20 I I Page 16 of26 

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Attachments 

Appendix A 

Appendix B 

AppendixC 

September 9,20 II 

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J>age 17 of26 

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Appendix A 

Informal and Formal Enforcement Actions Against Banks 

INFORMAL ACTIONS 

Commitment Lener 

A Commitment Leller is a document signed by the bank's board of directors on behalf of the 

bank and is acknowledged by an authorized OCC official, renecting specific wrinen 

commitments to take corrective actions in responsc to problems or concerns identified by the 

OCC in its supervision of the bank. The document may be drafted by either the OCC or the bank. 

A Commitment Leiter is not a binding legal document. However, failure to honor the 

commitments provides strong evidence of the need for formal action. 

Memorandum of Understanding 

A Memorandum of Understanding (MOU) is also a bilateral document signed by the bank's 

board of direetors on behalf of the bank and an authorized OCC representative. An MOU is 

drafted by the oee and in form and content looks very much like a formal OCC enforcement 

action. It legally has the same force and effect as a Commitment Leiter. 

Safety and SOllndness Plan 

Under 12 USC 1831 p-I, 12 CFR 30, and 12 CFR part 170, the oce issues to the bank a 

determination and notification of failurc to meet safety and soundness standards and requires the 

submission of a safety and soundness compliance plan (collectively ealled a Notice of 

Deficiency). At a minimum, the plan ("Safety and Soundness Plan") must include a description 

of the steps the bank will take to correct the deficiencies and the time within which these steps 

arc to be takcn. If the Safety and Soundness Plan is approved, it functions as an informal 

enforcement action. However, if the bank fails to submit an acceptable Safety and Soundness 

Plan or fails in any material respect to implement an approved Plan, the OCC must, by order (see 

Safety and Soundness Order under Formal Actions), require the bank to correct the deficiencies. 

The OCC may, by order, require the bank to take any other action that the OCC determines will 

better carry out the purposes of 12 USC 1831 pol. 

FORMAL ACTIONS 

Orders under 11 USC 1818: 

B. Consent Ortlers 

Consent Order is the title given by the OCC to an Order to Cease and Desist, which is entered 

into and becomes final through the board ofdireetors' execution on behalfofthe bank ofa 

Stipulation and Consent document.2 Consent Orders are also signed by an authorized OCC 

official. Like all Orders to Cease and Desist, the Consent Order is an order issued pursuant to I, 

USC 1818(b). Its provisions are set out in articleobyoarticle form and prescribe those 

, Pnorto July 21, 2011, orders issued by the OTS pursuontto 12 USC 1818(b) wen: genemlly titled Orders to Cease ond 

Desist. regardless or whether the bank consented by stipulation. 

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Appendix A 

restrictions, corrective and remedial measures necessary to correct deficiencies or violations in 

the bank and return it to a safe and sound condition. Violations of a Consent Order can provide 

the legal basis for assessing civil money penalties (CMPs) against directors, officers and other 

institution-affiliated parties. A Consent Order may also be enforced through application to a 

U.S. district court. Moreover, a willful violation of a final Consent Order is itself grounds for 

reccivership under 12 USC IS21(c)(5)(D). In addition, violation of substantial safety and 

soundness articles in a Consent Order can help establish the unsafe or unsound practices or 

condition that is an element of several other receivership grounds under 12 USC IS21(c)(5)(8), 

(C) and (H). 

b. Cease and Desist Orders 

Aside from its title, a Cease and Desist Order is identical in form and legal effect to a Consent 

Order. However, a Cease and Desist Order is imposed on an involuntary basis after issuance of 

a Notice of Charges, hearing before an administrative law judge, and final decision and order 

issued by the Comptroller. Any such Cease and Desist Order is reviewable by a U.S. court of 

appeals. Cease and Desist Orders can be used to order affirmative corrective action including 

the power to order restrictions on the growth of the bank, disposal of assets, or the imposition 

of,requirements or prohibition of payments on contracts that the bank has with third parties. 

Moreover, a willful violation of a final Cease and Desist Order is itself grounds for receivership 

under 12 USC IS21(c)(5)(D). In addition, violation of substantial safety and soundness articles 

in a Cease and Desist Order can help establish the unsafe or unsound practices or condition that 

is an element of several other receivership grounds under 12 USC 182I(c)(5)(8), (C) and (H). 

c. Temporary Cease and Desist Orders 

A Temporary Cease and Desist Order is an interim order issued by the OCC pursuant to its 

authority under 12 USC ISIS(c) and is used to impose measures that are needed immediately 

pending resolution of a final Cease and Desist Order. Such orders are typically used only when 

immediately necessary to protect the bank against ongoing or expected harm. A Temporary 

Cease and Desist Order may be challenged in U.S. district court within 10 days of issuance, but 

is effective upon issuance and remains effective unless overturned by the court or until a final 

order is in place. 

Formal Written Agreements: 

A formal written agreement ("Fonnal Agreement") is a bilateral document signed by the board 

of directors on behalf of the bank and an authorized OCC official.) Like a Consent Order. its 

provisions are set out in artiele-by-article form and prescribe those restrictions, corrective and 

remedial measures necessary to correct deficiencies or violations in the bank and return it to a 

safe and sound condition. It is a legally recognized document issued pursuant to the OCC's 

enforcementauthority under 12 USC ISIS(b). Violations ofa Formal Agreement can provide 

the legal basis for assessing civil money penalties (CMPs) against directors, officers and other 

institution-affiliated parties. However, unlike a Consent Order, Formal Agreements are not 

enforceable through the federal court system. Another important difference between a Formal 

J Prior to July 21.20 I I. the OTS generally used tile title "Supervisol')' Agreement" for its formal written agreements with 

banks. 

September 9, 2011 Page 19 of26 

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Appendix A 

Agreement and a Consent Order is that willful violation of a Consent Order may be used as 

grounds for appointment of a receiver while a Fonnal Agreement may not. The decision to 

utilize a Fonnal Agreement instead of a Consent Order is largely driven by negotiation strategy 

and the discretion of the delegated decision-making official. Often the semantic title difference 

is significant to many boards of directors, who will agree to enter into a Fonnal Agreement 

where they would otherwise fight a Consent Order. However, in some cases, the OCC's longtenn strategy for the bank may require use of a section 18 J 8 order rather than a Fonnal 

Agreement. 

peA Directives: 

Under 12 USC 18310, 12 CFR 6, and 12 CFR 165 (Prompt Corrective Action or PCA) insured 

banks are subject to various mandatory and discretionary restrictions and actions depending 

upon the bank's PCA capital category. Mandatory restrictions and actions are effective upon 

the bank being noticed that it is in a particular PCA capital category. Discretionary restrictions 

and actions are imposed on the bank through the issuance of a PCA Directive. If circumstances 

warrant, the OCC may issue a PCA Directive that is immediately effective. Otherwise, the 

nonnal process for issuing such a PCA Directive begins with the issuance of a Notice of Intent 

to Issue a Directive. The Notice identifies the bank's PCA capital category and various capital 

measures, describes the proposed actions, which would be included in the directive and the 

time frame for complying with the proposed actions. The bank is given an opportunity to 

rcspond to the Notice of Intent, explaining why the proposed directive is not necessary or 

offering suggested modifications to the proposed directive. After considering the response, the 

OCC may issue a PCA Directive, or detennine that no action is necessary. A PCA Directive 

essentially has the same force and effect as a Cease and Desist Order. If a bank is 

undercapitalized (or lower), a PCA Directive is preferred when the supervisory office 

anticipates the bank may become an early resolution candidate in the future. A PCA directive 

can enhance the OCC's use of resolution options later because, e.g., failure to submit or 

implement a capital restoration plan required in a PCA directive is a grounds for receivership. 

Safety alld SOllndness Orders: 

Under 12 USC 1831p-I, 12 CFR 30, and 12 CFR 170, the OCC issues to the bank a 

determination and notification offailure to meet safety and soundness standards and requires the 

submission ofa safety and soundness compliance plan (collectively called a Notice of 

Deficiency). I f the bank fails to submit an acceptable plan or fails in any material respect to 

implement an approved plan, the OCC must, by order, require the bank to correct the 

deficiencies, and the OCC may, by order, require the bank to take any other action that the OCC 

determines will better carry out the purposes of 12 USC 1831 p-I. The OCC must also take 

certain additional action against a bank that has not corrected a deficiency if the bank has 

experienced either extraordinary growth over the past J 8 months, or within the past 24 months 

commenced operations or underwent a change in control. If circumstances warrant, the OCC 

may issue an order that is immediately effective. Otherwise, the nonnal process for issuing such 

an order begins with the issuance of a Notice of Intent to issue an order. The notice identifies the 

safety and soundness deficiencies, describes the proposed actions which would be included in the 

order and the time frame for complying with the proposed actions. The bank is given an 

opportunity to respond to the Notice of Intent, explaining why the proposed order is not 

necessary or offering suggested modifications to the proposed order. After considering the 

September 9,2011 Page 20 of26 

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PPM 5310-3 (REV) 

Appendix A 

response, the OCC may issue a Safety and Soundness Order, or determine that no action is 

necessary. A Safety and Soundness Order has essentially the same force and effect as a Cease 

and Desist Order. However, unlike Cease and Desist Orders, a willful violation of a Safety and 

Soundness Order is not itself grounds for receivership. But violation of substantial safety and 

soundness articles in a Safety and Soundness Order can help establish the unsafe or unsound 

practices or condition that is an element of several rcceivership grounds under 12 USC 

1821 (c)(5)(8), (C) and (H). 

Capital Directives: 

A Capital Directive is an order issued under the OCC's capital regulations, 12 CFR 3, and 12 

CFR 167. Under these procedures, Capital Directives may be issued without a hearing before 

an administrative law judge. However, such directives are exclusively designed for 

establishing and enforcing capital levels for a given bank and for taking certain actions relating 

to capital. Since most banks with deficient capital have other problems that are nonnally dealt 

with through other fonnal enforcement actions, Capital Directives are rarely used. However, 

where capital adequacy is the overriding consideration and other problems do not rise to the 

level where a fonnal enforcement action is needed, imposing a Capital Directive can be a 

u~eful alternative. A Capital Directive, once issued, has essentially the same effect and legal 

status as a final Cease and Desist Order. However, unlike Cease and Desist Orders or failure to 

submit and implement an acceptable capital restoration plan under PCA, a willful violation of, 

or other failure to meet, a Capital Directive is not itself grounds for receivership. 

September 9, 2011 Page 21 of26 

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PPM 5310·3 (REV) 

Appendix B 

Mandatory And Discretionary Provisions Under PCA 

ALL INSURED INSTITUTIONS 

No Cuplful Dlslriblltlon 

All banks arc prohibited from making any "capital distribution" (cash or dividends), if after making 

the distribution the bank would be undercapitalized. However, the OCC may pennit a bank to 

repurchase shares if the repurchase is made in connection with an olTering of equal value, and if it 

will reduce the bank's obligations or otherwise improve its financial condition. 

MUllagemeni Fees Restricted 

All banks are prohibited from paying management fees to any person having control of the bank for 

provision of management services or advice to the bank or related overhead expenses, including 

payments related to supervisory, executive, managerial, or policy making functions, other than 

~ompcnsation to an officer or employee of the bank, if after making the payment the bank would be 

undercapitalized. This restriction does not apply to payments for data processing, trust activities, 

mortgage servicing, audit, or property management. 

ADEQUATELY CAPITALIZED BANKS 

Brokered Deposits Restriction 

Under 12 CFR 337.6 (Brokered Deposits), adequately capitalized banks are prohibited from 

accepting or renewing brokered deposits unless the bank obtains a waiver from the Federal Deposit 

Insurance Corporation (FDIC). Thc prohibition also includes the payment of exeessive interest rates 

on deposits. 

UNDERCAPITALIZED BANKS 

Close MOllitoring/Capital Restoration Plall (CRP) Required 

Any bank determined to be undcrcapitalized will be subject to close monitoring and will be required 

to submit a capital restoration plan within 45 days specifying: 

• How it will restore capital to adequate levels within certain statutorily prescribed time limits. 

• The levels of capital to bc attained during each year of the plan. 

• How the bank will comply with the statutory restrictions against asset growth and acquisitions. 

• The types and levels of activities in which the institution will engage. 

• Any other information the OCC may require. 

September 9,2011 Page 220f26 

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Holding Company Guaralltee 

PPM 5310-3 (REV) 

Appendix B 

In addition, the OCC may not approve a capital restoration plan submitted by a bank unless each 

company that controls tile bank provides a guarantee that the bank will comply with the plan. (This 

guarantee is limited by statute to the lesser ors percent of the bank's total assets at the time it 

became undercapitalized or the amount which is necessary 10 bring the bank into capital 

compliance.) The guarantee must be in writing and provide adequate assurance of performance. 

Asset Growtl, Restrictions 

Undercapitalized institutions are also subject to asset growth restrictions unless the OCC has 

accepted the bank's capital plan and has determined that the growth will not impair the bank's ability 

to become adequately capitalized. 

No Acquisitions, No New Branches, No New Lines 01 Bllslness 

Moreover, undercapitalized institutions may not make any acquisition of any bank or company, 

establish or acquire a branch or engage in any new line of business unless the bank is implementing 

an approved capital plan and the OCC determines the proposed action will further the achievement of 

the plan, or the FDIC board determines that the proposed action will further the purposes of PCA. 

Discretionary Appllcatloll 01 Certain Restrictiolls Otl,erwlse Only Available lor Sig/lijica/ldy 

Undercapitali1.ed Ba/lks 

Pursuant to the provisions of 12 USC 18310(e)(S), the OCC may also apply any of the restrictions 

available under 12 USC 18310(1)(2) applicable to significantly undercapitalized banks, ifneccssary 

to carry out the purposes of PCA. 

Brokered Deposits Prohibited 

Under 12 CFR 337.6 (Brokered Deposits) undercapitalized or worse banks are prohibited from 

accepting or renewing brokered deposits. The prohibition also includes the payment of excessive 

interest rates on deposits. 

SIGNIFICANTL Y UNDERCAPITALIZED BANKS 

(And Undercapitalized Banks thllt have failed to submit or implement an Acceptable CRP) 

Reqlliri/lg recapltalh,atlo/l by one or more of the following: 

• Requiring the bank to sell shares sufficient to make the institution adequately capitalized. 

• Requiring that the shares be voting shares. 

• Requiring the bank to be acquired by a holding company or to combine with another insured 

bank ifone or more grounds exist for appointment ofa conservator or receiver of the 

undercapitalized or significantly undercapitalized bank. 

September 9, 20 II Page 23 of26 

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PPM 5310-3 (REV) 

Appendix B 

Restricting affiliate trallsactlOlls between banks thai are 80 percent or more controlled by the same 

company, notwithstanding 12 USC 371c(d)(I). 

Re.vtricting illterest rates a bank pays on deposils to the prevailing mte paid in the region where the 

bank is located. 

NOTE: The statute sets ap a presllmptioll that the OCC will take the above actions IInless ti,e OCC 

determines that the actlolls wollid not I"rther the purposes 01 prompt corrective action. 

Restrict/ilK asset growth or requiring the bank to reduce its total assets. 

Restricting risky activities by the bank or its subsidiaries; requiring the bank to alter, reduce or 

terminate any activity thai the DCC determines 10 pose excessive risk to Ihe bank. 

improvillg mallagemelll and ti,e board by ordering a new election for the bank' s board of directors; 

requiring the bank to dismiss directors or senior executive officers (dismissal is not a section 1818 

removal action); or requiring the bank to hire qualified senior executive officers (who may be 

subject to approval by the DCq. 

Prollibiting ti,e acceptallce 01 deposits from correspondent banks. 

Restrictillg capital distrlblltions by prohibiting any bank holding company from making any capital 

distribution without the prior approval of the FRB. 

Reqllirillg divestiture through one or more of the following actions: 

• Requiring the bank to divest its interest in or to liquidate a subsidiary if it is determined that the 

subsidiary is in danger of becoming insolvent and poses a significant risk to the institution, or is 

likely to cause a significant dissipation of the bank's assets or earnings. 

• Requiring the company that controls the bank to divest itself of or to liquidate any nonbank 

affiliate of the bank ifi! is determined that the affiliate is in danger ofbceoming insolvent and 

poses a risk to the bank or is likely to cause a significant dissipation of the institution's assets or 

earnings. 

Requiring the company that controls the bank to divest itself of the bank if it is determined that 

divestiture would improve the bank's financial condition and future prospects. 

Restrictlolls all Sellior executive Officer Compellsatioll 

Significantly undercapitalized banks and undercapitalized banks thai fail 10 submit or implement an 

acceptable capital restomtion plan are required to oblain prior written approval by the DCC before 

paying any bonus or increasing the compensation of a senior executive officer. The DCC may not 

griml approval to any bank that has failed 10 submit an acceptable CRP. 

September 9,2011 Page 24 of26 

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Additional Restrictions 

PPM 5310-3 (REV) 

Appendix B 

Under 12 USC 18310(f)(2)(J) and (1)(5), the acc has the discretion to impose any other action 

including the additional restrictions otherwise available only for critically undercapitalized banks 

under section 18310(i), if the acc determines that this would bettcr carry out the purpose ofPCA. 

CRITICALLY UNDERCAPITALIZED BANKS 

Receiverslllp or Conservatorslrlp II, 90 Days 

The acc is required to place a critically undercapitalized bank in receivership or, with the 

concurrence of the FDIC, conservatorship within 90 days after the bank becomes critically 

undercapitalized. 

Exceptions: The acc may take some other action in lieu of conservatorship or receivership, but 

only if it determines, in writing, with the concurrence of the FDIC, the action would "better 

achieve" the purposes of this section. The decision to take some action other than appointment of 

a conservator or receiver ceases to be effective after 90 days and a new determination is requircd. 

Limits on Otl,er Actions 

Ifother actions (including conservatorship) fail to restore capital within 270 days after the bank 

became critically undercapitalized, the acc is required to appoint a receiver, unless it determines, 

with the concurrence of FDIC, that: 

• The bank has positive net worth; 

• The bank has been in substantial compliance with its capital plan; 

• The bank is profitable or has an upward trend in earnings; 

• The bank is reducing the ratio of nonpcrforming loans to total assets; and 

• The Comptroller of the Currency and the Chairperson of the FDIC certify in writing that the bank 

is viable and is not expected to fail. 

Critically Undercapitalized Banks mllst obtain FDIC's Prior Written Approval before: 

• Entering into any material transaction; 

• Extending crcdit for highly leveraged transactions; 

• Amending bank charter or bylaws; 

• Materially changing accounting methods; 

• Engaging in covered transactions; 

• Paying excessive compensation or bonuses; 

• Paying high interest rates on deposits; or 

• Making payments on subordinated debt (generally prohibited 

September 9, 20 II Page 25 of26 

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PPM 5310·3 (REV) 

Appendix C 

Specilil: Adions Required by Statute or Other Legal Source 

MOlletary Trallsactioll Record Keepillg alld Reporting 

Whenever a bank fails to establish and maintain a Bank Secrecy Act (BSA) compliance program, as 

required by 12 CFR 21.21, or 12 CFR 163.1770r fails to correct any problem with its BSA 

compliance program that was previously cited in a report of examination (ROE) or other supervisory 

correspondence, the OCC must issue an order to cease and desist requiring the bank to correct the 

violation or program deficienl:ies (12 USC 1818(s)(3». Also, the OCC will report such actions to 

the Financial Crimes Enforeement Network (FinCEN). 

(For further information, refer to bulletin OCC 2004.50, "Enfol'l:Cment Guidance for BSAlAntiMoney Laundering (AML) Program Deficiencies," dated November 10, 2004.) 

Equal C,'edlt Opportullity Act (ECOA) 

If the OCC has reason to believe that a creditor has engaged in a pattern or practice of discouraging 

or denying applications for credit in violation of ECOA, the OCC must refer the matter to the 

Attorney General (Department of Justice (DOJ» (15 USC 1691 e(g». 

If the OCC has reason to believe (docs not require a pattern or practice determination) that an ECOA 

violation has occurred that also would be a violation of the Fair I-lousing Act (FH Act) (42 USC 3601 

el seq.) and docs not refer the matter to the Attorney General, the OCC must: 

• Notify the Secretary of Housing and Urban Development (HUD) of the violation, and 

• Notify the applicant that the Sccretary has been notified of the alleged violation and that remedies 

for the violation may be available under the FH Act (15 USC 1691 e(k». 

Fair Housing Act (FH Act) 

If the OCC has information "suggesting a violation" of the FH Act, the OCC must: 

• Notify HUD, and 

• Forward the information to DOJ if it indicates a possible pattern or practice of discrimination 

(ExCl:utive Order No. 12892). 

Flood Illsurallce Reqlliremellf.f 

I f the OCC finds that a lender has engaged in a pattern or practice of violations of certain 

requirements under the Flood Disaster Protection Act (FOP A), the OCC must assess civil money 

penalties against the lender in an amount not to exceed $385 per violation and $135,000 per calendar 

year (42 USC 4012a(I). 

September 9, 201 I Page 26 of26 

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c) PPM 5310-5 (REV) 

POLICIES & PROCEDURES MANUAL 

Com ptroHer or the Currency 

Administrator of National Banks 

Section: Bank Supervision SubjeCl: Securities Activities Enforcement Policy 

TO: Deputy Comptrollers, Department and Division Heads. District Counsel. and all 

Examining Personnel. 

PURPOSE 

This issuance discusses the OCC's use of administrative enforcement authority in securities 

enforcement actions. It replaces PPM 53 I !)"5 (REV), dated February 8,2001. This PPM is 

applicable to all types of national banks, federal branches and agencies of foreign banks. and 

federal savings associations (collectively. "banks"). This policy is designed to provide firm. 

prompt, and fair action on matters involving use ofOCC enforcement authority. The policy 

serves the additional function of ensuring protection of the investing public, compliance with 

applicable laws, and the safety and soundness of the national banking system. The OCC's 

securities activities enforcement policy is separate from the agency's general enforcement policy 

contained in PPM 531!)"3. 

This policy and these procedures are internal guidelines for the use of the OCC and do not create 

any substantive or procedural righlS enforceable at law or in any administrative proceeding. or 

affect the authority of other governmental agencies. 

REFERENCES 

• National Bank Act. 12 USC I, et. seq. 

• Enforcement Action Policy. PPM 5310-3 (REV), dated September 9. 2011 

• Securities Activities Enforcement Policy, PPM 5310-5 (REV). dated February 8. 2001 

• Securities Exchange Act of 1934 (Exchange Act). 15 USC 78a, et. seq. 

• Gramm-Leach-Bliley Act (Pub. L. No. 106-102, 113 Stat. 1338 (1999» 

• Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111·203. 124 

Stat. 1376 (2010) 

12 CFR Chapter! 

• Prompt Corrective Action, 12 USC 18310 

Novemher 30. 2011 Page I of6 

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PPM 5310-5 (REV) 

POLICY AND SCOPE 

Authority 

The OCC uses a number of tools to carry out its obligations to enforce the federal securities laws 

as they apply to banks and individuals who are subject to the jurisdiction ofthe OCC.' The OCC 

has the power to institute enforcement proceedings under the federal securities and banking laws 

for violations oflaw, including violations offederal securities laws. The OCC may bring actions 

for violations of the Securities Exchange Act of 1934 (Exchange Act) registration, reporting, and 

disclosure provisions, and provisions governing (i) bank municipal securities dealers, (ii) bank 

government securities brokers and dealers, and (iii) bank transfer agents, and (iv) other 

applicable provisions of the Exchange Act Actions also may be based on violations of the 

OCC's securities offering disclosure rules, 12 CFR part 16 and part 197, and other laws and 

regulations governing the securities activities of banks. 

Policy 

The OCC's securities enforcement policy is designed to serve the following purposes: I) to 

respond appropriately to violations of law, 2) to be a deterrent, 3) to be remedial/corrective, and 

4) to be disciplinary. These purposes are often related and are not meant to be mutually 

exclusive. The OCC uses a range of enforcement remedies, including civil money penalties, 

cease and desist orders, injunctions, censures, suspensions, bars, removals, limitations, and a 

variety of other remedies depending on the nature of the violation. Depending upon the particular 

circumstances, one or more of the purposes listed above may be more significant than others. 

The OCC will respond promptly and firmly to actual or potential violations of law by an 

individual bank or group of banks, or by persons associated with the institution (associated 

person) or an institution-affiliated party or parties. (An "associated person" is not necessarily the 

same as an "institution-affiliated party," although some overlap may exist. An "institutionaffiliated party" generally encompasses a wider range ofindividuals.) 

The OCC enforces the federal securities laws as they relate to the securities activities of banks in 

a manner generally consistent with the discipline and treatment accorded similarly situated 

nonbank entities and their associated persons. The OCC consults, as appropriate, with other 

securities regulators (such as the Securities and Exchange Commission (SEC) and state securities 

regulatory authorities), as well as self-regulatory organizations (such as the Financial Industry 

Regulatory Authority) in instances in which administrative enforcement action is being 

considered. Consultation concerning the appropriateness of bringing an action and the severity of 

proposed sanctions is intended to ensure that remedies sought by the OCC generally are 

consistent with those required by other securities regulators in like circumstances, unless 

alternate remedies are more appropriate. The ace may pursue enforcement actions available 

I The DCC conducts its securities enforcement activities with n:speet to functionally n:gulaled entities consistent 

with the provisions of the Gramm-l,each-Bliley Act (Pub. L. No. 106-102, 113 Stat. 1338 (1999)) and the Dodd· 

frank Wall Stn:et Refonn and Consumer Protection Act (Public Law 111-203, 124 Stat. 1376 (2010». 

November 30, 20 II Page 20f6 

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PPM 5310-5 (REV) 

under federal banking laws for securities law violations, when such actions better achieve the 

purposes of the occ's securities enforcement policy. 

Formal Enforcement Actions 

The OCC pursues formal securities enforcement actions in cases involving: 

• violations of the antifraud provisions of the federal securities laws, and rules promulgated 

thereunder;2 

• misuse of customer funds or securities; 

• customer abuse; 

• other deceptive or unfair practices; 

• serious and/or repetitive violations oflaw; 

• significant internal controls breakdowns; or 

• the existence of a likelihood of future violations, ifformal enforcement action is not taken. 

Formal enforcement actions may be initiated based on the above factors, even where corrective 

action already has been taken, is being Iaken, or can be reasonably expected to be taken. Formal 

enforcement actions also may be initiated to address other situations involving violations of the 

federal securities laws. In all cases, the purposes underlying the acc's securities enforcement 

policy will guide the response undertaken by the ace. 

The aec has the discretion to seek remedies for securities law violations under either the federal 

securities laws or federal banking laws depending on the circumstances of a particular case.) The 

oee recognizes the desirability of equality of securities law enforcement among securities 

regulators, but also remains mindful that, in certain circumstances, banking law may provide the 

most efficient and effective avenue to address securities law violations. 

Mitigating Factors 

The presence of mitigating factors is not a defense against any enforcement action, but may be 

considered in determining appropriate sanctions. However, the oec intends to pursue a vigorous 

securities enforcement policy to safeguard the investing public. Among the mitigating factors the 

oee may consider in determining the appropriate sanction are: 

• the willingness and commitment of bank management, the board of directors, and/or 

ownership to correct the problems, including the extent to which meaningful corrective 

action has been or will be taken; 

• the absence of fraud, scienter,4 or deliberate deception of the public; 

l For example. the OCC has authority to initiate an action 10 ",move an institution-amliated party pursuanlto 12 

USC I 818(e) for violations of the antifmud provisions of the federal securities laws. 

) Most enforcement actions under the federal banking laws will be taken pursuant to 12 USC 1818. 

• The Supreme Court defines "scienter" as "a mental state embracing jntentlO deceive. manipulate or defraud." 

Courts or appeal. have concluded that scienter includes some degree or recklessness. 

November 30. 2011 Page 3 of6 

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PPM 5310·5 (REV) 

• the limited extent or gravity of violations; 

• the lack of public exposure to risk or harm, and; 

• a bank's or individual's favorable record of compliance. 

PROCEDURES 

Autbority for Initiating Enforcement Actions 

The Senior Deputy Comptrollers for Midsize and Community Bank Supervision and for Large 

Bank Supervision ("Senior Deputy Comptrollers") are primarily responsible for authorizing 

administrative actions necessary to accomplish supervisory objectives. They retain for all banks 

or individuals the authority to initiate, negotiate, execute, modilY, or terminate enforcement 

actions undertaken to enforce the securities laws. 

To carry out this responsibility, the Senior Deputy Comptrollers appoint a Washington 

Supervisory Review Committee (WSRC). The WSRC will consider referrals made by 

supervisory or enforcement staff and recommend appropriate securities enforcement action to the 

appropriate Senior Deputy Comptroller. The director of the Securities and Corporate Practices 

Division (SCP) is a member of the WSRC for purposes of voting on securities enforcement 

actions. 

Support for Decision 

Decisions about whether to proceed with an enforcement action, and about the nature and 

severity of the action should be fully supported in decision memoranda by the agency's 

enforcement staff or designee, and made a part of the bank's permanent file. Individuals 

presenting cases to WSRC are responsible for preparing II presentation package that includes a 

memorandum summarizing the supervisory history, the facts in the current case, an objective 

analysis of the facts, enforcement action recommendations, and any other relevant issues. In 

addition, enforcement documents should contain clear statements regarding any prohibited or 

restricted activities, remedial measures to be taken, and the time in which the bank, its board of 

directors, or management must IIct. The documents should clearly state what action is expected 

of those parties subject to the terms of the document. I f a decision to initiate a formal 

enforcement action is made, the appropriate supervisory office is responsible for reporting the 

action in Examiner View (EV). 

Each partY or individual charged with responsibility under this policy shall ensure that 

appropriate procedures are established to ensure that the acc' s enforcement policies are applied 

promptly, fairly, and consistently. 

Terminlltion of Enforcement Actions 

The acc may terminate or modilY a securities enforcement action brought under the federal 

securities laws or the federal banking laws, if, in the judgment of the appropriate Senior Deputy 

Comptroller such action is deemed appropriate. The decision to terminate or modify an IIction 

November 30, 20 II Page40f6 

PSI-OCC-27-000185 
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PPM 5310-5 (REV) 

must be supported by full and sustained compliance with the enforcement action in place. In 

addition, such actions should be fully supported in decision memoranda prepared by the agency's 

enforcement staff or designee and made a part of the bank's permancnt me. The appropriate 

supervisory office is responsible for reporting the decision to terminate or modify an action in 

EV. 

Securities enforcement actions brought under the federal securities laws or the banking laws 

result either in sanctions that are self-executing, such as censures, are of a limited duration, such 

as suspensions for periods of less tllan one year, or are of an ongoing nature, such as tile 

imposition of continuing obligations to institute affirmative remedial or corrective measures, or 

obligations to refrain from certain activities. In cases resulting in ongoing sanctions or limitations 

of activities, the OCC may provide relief from certain continuing obligations (e.g., by granting 

permission to re-enter the securities business, witll certain conditions, to persons previously 

barred), if requested. Tile OCC will consider such rcquests on a case·by-case basis, in light of all 

relevant circumstances. Termination of actions resulting in self-executing sanctions, however, is 

not appropriate. 

Referrals to Other Agencies 

The OCC makes referrals as appropriate to the SEC and other regulatory agencies, and 

cooperates with such agency's investigation and prosecution. Tile OCC will also provide tile 

SEC or other regulatory agency with access to relevant information collected and maintaincd by 

tile OCC in appropriate situations, provided that such agency agrecs to mllintain appropriate 

confidentiality with regard to any relevant OCC information. 

Similarly, the OCC receives referrals from the SEC and othcr federal authorities of possible 

violations of the federal securities laws that fall under the OCC's jurisdiction. In the event of 

such a referral, the OCC shall take all necessary steps to maintain appropriate confidentiality 

with regard to the information forwarded. 

PUBLIC DISCLOSURE OF ENFORCEMENT ACTIONS 

Administrative enforcement actions initiated in accordance with this issuance are made public at 

their inception, unless tile Comptroller, in his or her discretion, determines it is in the public 

interest that such proceeding be private. Thus, a Notice of Charges or a Notice or Assessment or 

Civil Money Penalty with respect to a securities violation is public liS of its tiling. This approach 

is consistent witll the practice of otller agencies charged with enforcing federal securitics laws. 

Pursuant to 12 USC 1818(u), hearings on the record with respect to a notice of charges issued by 

the OCC in a banking enforcement action pursuant to 12 USC 1818 shall be open to tile public, 

unless the Comptroller, in Ilis or Ilerdiscretion, determines that Ilolding an open Ilearing would 

be contrary to the public interest. In addition, the OCC is required to publicize and make 

available to the public any final order or formal agreement issued with respect to any 

administrative enforcement proceeding initiated under 12 USC 1818 or any other provision of 

law. as well as any modification andlor termination of sucll orders or formal agreements. The 

November 30,2011 Page S of6 

PSI-OCC-27-0001 Be 
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PPM 5310-5 (REV) 

DCC must also disclose any final Prompt Corrective Action directives under 12 USC 18310 or 

safety and soundness orders issued pursuant to 12 USC I 83Ip-l. Under certain very limited 

circumstances, mandatory disclosure may be delayed for a reasonable period of time. 

The Dec's Communications Division publishes a list of enforcement actions monthly that 

includes the name oflhe individual or bank involved, the type of action, and the date of the 

action. The Communications Division maintains a file of all final fonnal enforcement actions 

and provides copies of these documents upon request. 

Nothing contained above is intended to relieve a bank of its independent obligations to make 

required disclosures under the various securities laws and related regulations. 

Please direct questions or comments to the director for Securities and Corpomte Practices 

Division at (202) 874-5210, or to Large Bank Supervision at (202) 874-4890, or to Midsize and 

Community Bank Supervision at (202) 874-5020. 

Michael L. Brosnan 

Senior Deputy Comptroller, Large Bank Supervision 

November 30, 2011 Page 60f6 

PSI-OCC-27-000187 
1301 

() MEMORANDUM 

To: 

From: 

Date: 

large Bank Supervision 

Washington, DC 20219 

Large Bank Examiners 

Grace E. Dailey, Joseph H. Evers, Delora Ng Jee 

Deputy Comptrollers, Large Bank Supervision 

AugustB,2005 

lBS 2005 - 01 

Subject: Matters Requiring Attention (MRAs) 

This memorandum is to ensure our philosophy and practices with respect 

to Matters Requiring Attention (MRAs) are understood and consistent. 

MRA's are conditions or issues that we expect management to change or 

correct. To be consistent with principles contained in the Large Bank 

Supervision Handbook, MRAs include practices that: 

• Deviate from sound governance, internal control and risk 

management principles which may adversely impact the bank's 

earnings or capital. risk profile, or reputation if not addressed. 

Or 

• Result in substantive noncompliance with: 

o laws and regulations 

o intemal policies, controls or processes 

o OCC supervisory guidance, or 

o supervisory conditions imposed in interpretive letter or licensing 

approvals 

Going forward. it is our practice to include weaknesses meeting the above 

criteria as a MRA in a Report of Examination or other supervisory 

communication to a large bank when discovered. This includes 

PSI-DCC-27-000188 
1302 

documenting MRAs in Supervisory Information Systems for Large Banks 

(SIS LB). Examiners should not defer listing these weaknesses as MRAs, 

pending bank managemenfs effort to address such. Nor should we 

employ a graduated process where we first address an issue meeting the 

MRA criteria as a recommendation, then, if not addressed, as aMRA. 

Going forward, examiner recommendations should be clearly distinguished 

from MRAs. In this regard, recommendations do not require follow-up by 

ecc examiners or specific action by bank management, whereas MRAs 

are Issues that require action by bank management. As recommendations 

do not require specific action and follow-up by bank management or 

examiners, they should not be included in SIS LB. 

When composing. documenting and tracking MRAs in SIS LB the examiner 

should provide specific details regarding: 

• description of MRA 

• contributing factors or root cause to the MRA 

• description of management actions taken and/or planned to correct or 

address the MRA 

• time frame and person(s) responsible for corrective action 

• final resolution of MRA including date cleared 

To be preventative and effective in our supervision. it is important when 

discussing MRAs that we are very clear with bank management and. as 

necessary. the Board of Directors as to our supervisory concerns and 

expectations. You should impress upon large banks that it is their 

responsibility to ensure remedial actions with regard to MRAs are effective 

and implemented within a reasonable period of time. This means that each 

large bank should have a process for following up on MRAs. Likewise, we 

should include in individual large bank strategies plans to follow up on 

MRAs. 

Please contact the Large Bank Deputy Comptrollers with any questions 

pertaining to MRAs. 

-2-

PSI-OCC·Z7 .000189 
1303 

Æ 

APPENDIX 

December 1 S, 2005 

LBE1Cs, 

This is to provide clarification on the MRA guidance (LBS 200S-{)1). The correct 

interpretation 01 the guidance is as foUows: MRA's are the only items that should 

require bank follow.up actions and should be communicated to the bank via 

supervisory leiter or ROE. These issues should be included and tracked In SIS·LB 

until they are resolved. Under this interpretation Recommendations. if any. may still be 

included In an offiCial communication to the bank but EIC should not require the 

bank to respond with corrective action nor should the issues be Includedltracked In 

SIS·LB. 

Thanks, 

Oelora, Grace and Joe 

.J. 

PS!-OCC-27-000190