33. As losses grew from January through April 2012, the bank began providing the OCC less and less data.
34. Dimon ordered the bank to omit critical CIO performance data from its standard reports to the OCC. No one told the OCC why the data was halted. Dimon later explained to the Subcommittee that he didn’t feel the OCC needed the data.
35. Dimon “raised his voice in anger” at CFO Douglas Braunstein for agreeing to resume sending the OCC the reports.
36. When the OCC found out about the whale trade in the newspapers and requested more information, the CIO gave them incomplete tables that the OCC called “useless” and “absolutely unhelpful.”
37. According to the Subcommittee, “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.” It told the OCC the whale trades helped manage bank risk and gave different excuses for breaking risk limits. Then, “for nearly three weeks, the bank did not call, email, or otherwise update the OCC about any aspect of the SCP’s worsening status.” By that point, losses had reached $1.6 billion.
Speculation
According to a yet-to-be-implemented piece of the 2010 financial reform legislation known as the “Volcker Rule,” banks are likely to be prohibited from speculating with their funds. While banks have managed to delay the rule’s implementation, in the meantime, they’ve been keen to present themselves to investors, regulators, and the public as out of the speculation business.
Although banks will be able to continue placing hedging trades to help manage risk — and that’s what JPM asserted it was doing — that doesn’t appear to be what happened here.
38. The original derivatives positions came from a discontinued unit called “Proprietary Positions Book,” and the portfolio used to be part of something called the “Discretionary Trading Book” that was renamed the “Tactical Asset Allocation Portfolio” — jargon that suggests speculation.
39. The SCP was supposedly created with a hedging function, but the bank was unable to provide documentation over the next five years detailing SCP’s hedging objectives and strategies; the assets, portfolio, risks, or tail events it was supposed to hedge. One OCC examiner referred to it as the “make believe voodoo magic ‘composite hedge.'” Even Dimon acknowledged that the portfolio “morphed into something that rather than protect the firm, created new and potentially larger risks.”
40. JPMorgan representatives admitted to the Subcommittee that calculating the size and nature of the hedge was “not that scientific” and “not linear.” According to Drew, it was an “estimate.”
41. Compensation history for SCP traders shows that the bank rewarded them for financial gain and risk-taking more than for effective risk management.
42. In late 2011, the SCP bankrolled a $1 billion bet that produced a gain of $400 million. This was known as the caveman trade. Iksil said the gains were massive and the company called them “windfall gains.” The OCC would later characterize the trade as “pretty risky” and completely dependent on timing. Drew responded by telling her traders to try and repeat their performance the following year.
43. In 2011, the SCP net notional size jumped from $4 billion to $51 billion, a more than tenfold increase. In the first quarter of 2012, the net notional size increased to $157 billion. By end of March 2012, the SCP held more than 100 different credit derivative instruments — JPM personnel described it as “huge” and of “perilous size.”
Investor communication
Once the London Whale trades became public, JPMorgan’s executives worked to reassure investors, markets, and the public that the whale trades were a hedge (as opposed to speculation) and that the bank had things under control. The Subcommittee was skeptical of how truthful JPMorgan’s management has been with investors and the public.
