REPORT - JPMorgan Chase Whale Trades (3-26-13)1

UnitedStatesSenatePERMANENTSUBCOMMITTEEONINVESTIGATIONSCommitteeonHomelandSecurityandGovernmentalAffairsCarlLevin,ChairmanJohnMcCain,RankingMinorityMemberJPMORGANCHASEWHALETRADES:ACASEHISTORYOFDERIVATIVESRISKSANDABUSESMAJORITYANDMINORITYSTAFFREPORTPERMANENTSUBCOMMITTEEONINVESTIGATIONSUNITEDSTATESSENATERELEASEDINCONJUNCTIONWITHTHEPERMANENTSUBCOMMITTEEONINVESTIGATIONSMARCH15,2013HEARINGSENATORCARLLEVINChairmanSENATORJOHNMcCAINRankingMinorityMemberPERMANENTSUBCOMMITTEEONINVESTIGATIONSELISEJ.BEANStaffDirectorandChiefCounselALLISONF.MURPHYCounselZACHARYI.SCHRAMSeniorCounselELIZABETHV.BALTZANFormerCongressionalFellowERICS.WALKERFormerDetaileeHENRYJ.KERNERStaffDirectorandChiefCounseltotheMinorityBRADM.PATOUTSeniorPolicyAdvisortotheMinoritySTEPHANIEHALLCounseltotheMinoritySCOTTD.WITTMANNResearchAssistanttotheMinorityFERASSLEIMANLawClerkTODDPHILLIPSLawClerkADAMHENDERSONProfessionalStaffMemberMARYD.ROBERTSONChiefClerk3/26/13PermanentSubcommitteeonInvestigations199RussellSenateOfficeBuilding–Washington,D.C.20510Majority:202/224-9505–Minority:202/224-3721WebAddress::ACASEHISTORYOFDERIVATIVESRISKSANDABUSESTABLEOFCONTENTSI.EXECUTIVESUMMARY.................................................2A.SubcommitteeInvestigation..............................................2B.Overview.............................................................3(1)IncreasingRisk.....................................................3(2)HidingLosses......................................................5(3)DisregardingLimits.................................................7(4)AvoidingandConductingOCCOversight...............................8(5)MisinformingInvestors,Regulators,andthePublic........................10C.WhaleTradeCaseHistory...............................................14D.FindingsofFacts......................................................15(1)IncreasedRiskWithoutNoticetoRegulators.............................15(2)MischaracterizedHighRiskTradingasHedging..........................15(3)HidMassiveLosses.................................................15(4)DisregardedRisk...................................................15(5)DodgedOCCOversight..............................................15(6)FailedRegulatoryOversight..........................................16(7)MischaracterizedthePortfolio.........................................16E.Recommendations......................................................16(1)RequireDerivativesPerformanceData..................................16(2)RequireContemporaneousHedgeDocumentation.........................16(3)StrengthenCreditDerivativeValuations.................................16(4)InvestigateRiskLimitBreaches.......................................17(5)InvestigateModelsThatSubstantiallyLowerRisk.........................17(6)ImplementMerkley-LevinProvisions...................................17(7)EnhanceDerivativeCapitalCharges....................................17II.BACKGROUND..........................................................18A.JPMorganChase&Company............................................18B.ChiefInvestmentOffice.................................................21C.OfficeoftheComptrolleroftheCurrency..................................25D.CapitalRequirements...................................................27E.CreditDerivatives......................................................29III.INCREASINGRISK......................................................35A.OriginsoftheSyntheticCreditPortfolio...................................36B.PurposeoftheSyntheticCreditPortfolio:Undocumented,Unclear,andSubjecttoChange......................................................42iiC.SCPTrading..........................................................49(1)TheEarlyYears:2006to2010........................................49(2)2011SCPExpansion................................................50(3)2011SCPProfitFromBankruptcies....................................53(4)SCPSizeandRevenues..............................................56(5)SCPTraderCompensation............................................57(6)2012OpenswithOrdertoReduceRWA................................60(7)EastmanKodakDefault..............................................64(8)CreditMarketRallyDevaluesSCP.....................................65(9)FourOptionstoReshapetheSCP......................................67(10)DecisiontoGoLong................................................72(11)Adoptionof2012TradingStrategy.....................................73D.SCP’sIncreasingRiskandLosses.........................................75(1)January2012......................................................76(2)February2012.....................................................78(3)March2012.......................................................81(4)PhonesDown......................................................85E.UnmaskingJPMorganChase............................................90F.DismantlingtheSCP.....