22. By March 16, 2012, Iksil made it clear that he was using more favorable valuations for his positions. In a telephone conversation with Grout, he said:
I can’t keep this going…I think what he’s [their supervisor, Javier Martin-Artajo] expecting is a remarking at the end of the month…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 can be done, there’s no hope…The book continues to grow, more and more monstrous.
23. On March 23, Iksil estimated in an email that the SCP had lost $600 million using midpoint prices, but only $300 million using “best” prices. The SCP ended up reporting a $12 million loss that day.
24. For five days in March, a trader kept a spreadsheet tracking the difference between how much money traders reported they had lost using favorable valuations, and how much they would have reported had they been using normal, mid-point valuations. The conclusion: They had reported year-to-date losses of $161 million, but there was an additional $432 million that would have been reported had they been using mid-point prices. Drew said she never saw that “shadow P&L” document.
25. At the end of the first trading day after media reports on April 6, 2012, traders responsible for reporting were told to “let the losses flow.”
26. An email to Drew estimated that second-quarter losses wouldn’t exceed $200 million, assuming they “exclude[d] very adverse marks.”
27. A week later, Drew told traders to “[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.” She later explained to the Subcommittee that traders told her they were making “conservative” marks and she wanted them to be more “aggressive.”
28. JPMorgan’s Controller later conducted a special investigation into the mismarking. “The Controller validated the CIO’s quarter-end credit derivative marks as ‘consistent with industry practices’ and acceptable under bank policy, and offered no criticism of its valuation practices.”
Thwarting regulators
Our colleague Morgan Housel recently wrote, “Companies that have antagonistic relationships with their regulators probably want to engage in behavior that won’t benefit their long-term shareholders. Bear Stearns and Lehman Brothers fought hard for permission to use more leverage. It killed them.”
Here’s how JPMorgan thwarted its main regulator, the Office of the Comptroller of the Currency (OCC):
29. The report found that “Prior to media reports of the whale trades in April 2012, JPMorgan provided almost no information about the CIO’s Synthetic Credit Portfolio to its primary regulator, the OCC.”
30. In December 2010, the OCC sent a Supervisory letter to Ina Drew informing her that “risk management framework for the investment portfolios” lacked “a documented methodology” and “clear records of decisions” and requiring CIO management to “document investment policies and portfolio decisions.” Drew “sternly” criticized the OCC for 45 minutes for being overly intrusive. She complained the regulator was trying to “destroy” JPMorgan by taking away necessary flexibility, and said that Jamie Dimon was fully aware of their investment decisions.
31. According to the OCC examiner-in-charge at JPMorgan, it was “very common” for the bank to resist OCC findings and recommendations. One time bank executives yelled at OCC examiners and called them “stupid.” Another time, the most junior-level OCC examiner arrived for a one-on-one meeting and was “ambushed” by the heads of all JPMorgan Risk Divisions.
32. In January 2012, the CIO seems to have misled the OCC by saying it planned to reduce the Synthetic Credit Portfolio. Instead, it tripled the notional size of the SCP from $51 billion to $157 billion over the course of the quarter.
