User:Rjlabs/2012 JPMorgan Chase trading loss

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In April and May 2012, large trading losses occurred at JPMorgan's Chief Investment Office, based on transactions booked through its London branch. The unit was run by Chief Investment Officer Ina Drew, who has since stepped down. A series of derivative translations involving credit default swaps (CDS) were entered, reportedly as part of the bank's "hedging" strategy.[1] Trader Bruno Iksil, nicknamed the London Whale, accumulated outsized CDS positions in the market. An estimated trading loss of $2 billion was announced, with the actual loss expected to be substantially larger. These events gave rise to a number of investigations to examine the firm's risk management systems and internal controls.



In February 2012, hedge fund insiders such as Boaz Weinstein of Saba Capital Management[2][3] became aware that the market in credit default swaps was possibly being affected by aggressive trading activities. The source of the unusual activity turned out to be Bruno Iksil, a trader for JPMorgan Chase & Co. Heavy opposing bets to his positions had been made by traders, including another branch of JPMorgan, who purchased the derivatives that JPMorgan was selling in such high volume.[4][5] Early reports were denied and minimized by the firm in an attempt to minimize exposure.[6] Major losses of $2 billion were reported by the firm in May 2012 in relationship to these trades; on July 13, 2012, the total loss was updated to $5.8 billion with the addition of a $4.4 billion loss in the second quarter and recalculation of a loss of $1.4 billion for the first quarter. A spokesman for the firm projected total losses could be more than $7 billion.[7] The disclosure, which resulted in headlines in the media, did not disclose the exact nature of the trading involved, which remained in progress as of May 16, 2012 as JPMorgan's losses mounted and other traders sought to profit or avoid losses resulting from JPMorgan's positions.[8][9] As of June 28, 2012 JPMorgan's positions were continuing to produce losses which could total as much as $9 billion under worst case scenarios.[10] The trades were possibly related to CDX IG 9, a credit default swap index based on the default risk of major U.S. corporations[11][12] that has been described as a "derivative of a derivative".[13][14] On the company's emergency conference call, JPMorgan Chase CEO Jamie Dimon said the strategy was "flawed, complex, poorly reviewed, poorly executed, and poorly monitored".[15] The episode is being investigated by the Federal Reserve, the SEC, and the FBI.[16]


On February 2, 2012 at the Harbor Investment Conference, speaking to an audience of investors, Boaz Weinstein recommended buying the Markit CDX North America Investment Grade Series 9 10-Year Index, CDX IG 9.[17] This was a derivative which Weinstein had noticed to be losing value in a manner and to a degree which seemed to diverge from market expectations. It turned out that JPMorgan was shorting the index by making huge trades.[18] [19] JPMorgan's bet was that credit markets would strengthen; the index is based on 121 investment grade bonds issued by North American corporations.[17] Investors who followed Weinstein's tip did poorly during the early months of 2012 as JPMorgan strongly supported its position. However by May after investors became concerned about the implications of the European financial crisis the situation reversed and JPMorgan suffered large losses. In addition to Weinstein's Saba Capital Management, Blue Mountain Capital, BlueCrest Capital, Lucidus Capital Partners, CQS, and III are hedge funds which are known to have benefited from taking the other side of the trade to JPMorgan.[2] A separate unit of JPMorgan was also on the winning side.

The following is an overview of the trades that resulted in a multibillion-dollar loss.[9]

Trade #1[edit]

  • Put on in 2011
  • Bearish on global economy
  • Bet - Junk bonds will decline in value

Trade #2[edit]

  • Multi-leg order (Dwarfing trade #1 in size)
  • Put on 1Q2012
  • Intention - reduce above bearish stance
  • Bet - investment grade bonds will not default (IG9 index)

Trade #2- Leg #1

  • Sell CDS protection out to 2017

Trade #2-Leg #2

  • Buy CDS protection out through 2012

Trade #2 summary: Left 2012 neutral, 2013-2017 betting that investment grade bonds will not default.

Overall trade summary[edit]

If the economy improved

  • Credit spread would likely narrow
  • Junk would rise (loss on trade #1), but Quality would also rise (gain on trade #2)
  • Bet on Quality dwarfed the prior bet on the Junk
  • Neutral to win overall

But ... if the economy deteriorated

  • Credit spread would likely widen
  • Junk would fall (yielding a medium gain on that trade #1)
  • Quality would also fall (yielding a large loss on trade #2)
  • Neutral to loss overall.

The $2B loss came from three positions which partially offset each other. It occurred when the world's financial markets were in relative calm. Had quality spread curves twisted or worldwide economic distress been more pronounced the loss could have been much higher.

The Financial Times "Alphaville" analysis suggests that these positions were not volatile enough to account for the full losses reported.[20] They suggest that other positions are likely involved as well.[21]

Top-level risk management[edit]

DFA Enhanced Prudential Standard[edit]

Dodd-Frank established "Enhanced Prudential Standard" for banks with greater than $50 billion in assets.[22]

  • Must establish a board risk committee
  • Can't be housed within another committee
  • Must report directly to the board
  • Requires a formal written charter approved by the full board of directors
  • At least one member must be a risk expert
  • Must receive and review regular reports from the Chief Risk Officer

SEC proxy disclosure enhancements[edit]

SEC quantitative and qualitative disclosures about market risk[edit]

SEC Net Capital Rule[edit]

  • Source: 17 CFR Parts 200 and 240 Alternative Net Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities; Supervised Investment Bank Holding Companies; Final Rules
  • Amends Rule 15c3–1 2 (the ‘‘net capital rule’’) under the Securities Exchange Act of 1934 [selected quotes]
  • This alternative method permits a broker-dealer to use mathematical models to calculate net capital requirements [VaR] for market and derivatives-related credit risk. A brokerdealer using the alternative method of computing net capital is subject to enhanced net capital, early warning, recordkeeping, reporting, and certain other requirements, and must implement and document an internal risk management system.
  • The amendments should help the Commission to protect investors and maintain the integrity of the securities markets by improving oversight of broker-dealers and providing an incentive for broker-dealers to implement strong risk management practices.
  • The qualitative requirements, listed in paragraph (e)(1) of proposed Appendix E, would have required that:
    • The VaR models used to calculate deductions for market and credit risk be the same models used to report market and credit risk to the firm’s senior management and be integrated into the internal risk management system of the firm;
    • the VaR models be reviewed by the firm periodically and annually by a registered public accounting firm, as that term is defined in the Sarbanes- Oxley Act of 2002; 52 and
    • for purposes of computing market risk, the multiplication factor be determined based on quarterly backtesting of the VaR models used to calculate market risk and by reference to Table 1 of Appendix E.
  • Final rule Appendix E to Rule 15c3-1 -- Deductions for Market and Credit Risk for Certain Brokers or Dealers
  • The program is designed to reduce the likelihood that financial and operational weakness in the holding company will destabilize the broker or dealer, or the broader financial system. The focus of this supervision of the ultimate holding company is its financial and operational condition and its risk management controls and methodologies.
  • A broker-dealer shall submit the following information to the Commission with its application:
    • A comprehensive description of the internal risk management control system of the broker or dealer and how that system satisfies the requirements set forth in Rule 15c3-4
    • A description of the mathematical models to be used to price positions and to compute deductions for market risk, including those portions of the deductions attributable to specific risk, if applicable, and deductions for credit risk;
    • a description of the creation, use, and maintenance of the mathematical models;
    • a description of the broker’s or dealer’s internal risk management controls over those models, including a description of each category of persons who may input data into the models;
    • if a mathematical model incorporates empirical correlations across risk categories, a description of the process for measuring correlations
    • a description of the backtesting procedures the broker or dealer will use to backtest the mathematical model used to calculate maximum potential exposure; a description of how each mathematical model satisfies the applicable qualitative and quantitative requirements set forth in paragraph (d) of this Appendix E; and a statement describing the extent to which each mathematical model used to compute deductions for market and credit risk will be used as part of the risk analyses and reports presented to senior management;
    • A description of how the broker or dealer will calculate current exposure;
    • Comply with the provisions of Rule 15c3-4 with respect to an internal risk management control system [see separate section - Internal Risk Management Control Systems for OTC Derivatives Dealers] for the affiliate group as though it were an OTC derivatives dealer with respect to all of its business activities, except that paragraphs (c)(5)(xiii), (c)(5)(xiv), (d)(8), and (d)(9) of Rule 15c3-4 shall not apply;
  • To be approved, each VaR model must meet the following minimum qualitative and quantitative requirements:
    • The VaR model used to calculate market or credit risk for a position must be integrated into the daily internal risk management system of the broker or dealer;
    • The VaR model must be reviewed both periodically and annually. The periodic review may be conducted by the broker’s or dealer’s internal audit staff, but the annual review must be conducted by a registered public accounting firm, as that term is defined in section 2(a)(12) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.); and
    • On the last business day of each quarter, the broker or dealer must identify the number of backtesting exceptions of the VaR model, that is, the number of business days in the past 250 business days, or other period as may be appropriate for the first year of its use, for which the actual net trading loss, if any, exceeds the corresponding VaR measure

SEC rule internal risk management control systems for OTC derivatives dealers[edit]

  • Rule 15c3-4 [selected quotes]
  • An OTC derivatives dealer shall establish, document, and maintain a system of internal risk management controls to assist it in managing the risks associated with its business activities, including market, credit, leverage, liquidity, legal, and operational risks.
  • An OTC derivatives dealer shall consider the following when adopting its internal control system guidelines, policies, and procedures:
    • The sophistication and experience of relevant trading, risk management, and internal audit personnel;
    • The sophistication and functionality of information and reporting systems; and
    • The scope and frequency of monitoring, reporting, and auditing activities.
  • An OTC derivatives dealer's internal risk management control system shall include the following elements:
    • A risk control unit that reports directly to senior management and is independent from business trading units;
    • Periodic reviews (which may be performed by internal audit staff) and annual reviews (which must be conducted by independent certified public accountants) of the OTC derivatives dealer's risk management systems;
  • Written guidelines, approved by the OTC derivatives dealer's governing body, that include and discuss the following:
    • Quantitative guidelines for managing the OTC derivatives dealer's overall risk exposure;
    • The procedures for and the timing of the governing body's periodic review of the risk monitoring and risk management written guidelines, systems, and processes;
    • The process for monitoring risk independent of the business or trading units whose activities create the risks being monitored;
    • The performance of the risk management function by persons independent from or senior to the business or trading units whose activities create the risks;
    • The appropriate response by management when internal risk management guidelines have been exceeded;
    • The procedures authorizing specified employees to commit the OTC derivatives dealer to particular types of transactions;
  • Management must periodically review, in accordance with written procedures, the OTC derivatives dealer's business activities for consistency with risk management guidelines including that:
    • Risks arising from the OTC derivatives dealer's OTC derivatives activities are consistent with prescribed guidelines;
    • Risk exposure guidelines for each business unit are appropriate for the business unit;
    • The data necessary to conduct the risk monitoring and risk management function as well as the valuation process over the OTC derivatives dealer's portfolio of products is accessible on a timely basis and information systems are available to capture, monitor, analyze, and report relevant data;
    • Procedures are in place to enable management to take action when internal risk management guidelines have been exceeded;
    • Procedures are in place to identify and address any deficiencies in the operating systems and to contain the extent of losses arising from unidentified deficiencies;
    • Procedures are in place to authorize specified employees to commit the OTC derivatives dealer to particular types of transactions, to specify any quantitative limits on such authority, and to provide for the oversight of their exercise of such authority;
    • Personnel resources with appropriate expertise are committed to implementing the risk monitoring and risk management systems and processes; and
    • Procedures are in place for the periodic internal and external review of the risk monitoring and risk management functions.

FED required risk expert[edit]

Section 252.126 Fed rule requires banks “have at least one member with risk management expertise that is commensurate with the company’s capital structure, risk profile, complexity, activities, size and other appropriate risk factors.” Further, the NPR defines risk management expertise as follows:

  • An understanding of risk management principles and practices with respect to bank holding companies or depository institutions
  • Experience developing and applying risk management practices and procedures, measuring and identifying risks, and monitoring and testing risk controls with respect to banking organizations
  • The Federal Reserve Board issued detailed guidance to supervised banking companies maintaining significant trading accounts in 2009. SR 09-01 details modeling requirements for VaR models and changes to VaR models. It also requires formal approval of regulatory VaR models and changes. It is not clear who, if anyone, approved JPMC's VaR methodology, as the guidance requires.[23]

Risk Policy Committee charter[edit]

Selected quotes. see:

  • The Risk Policy Committee is responsible for oversight of the CEO's and senior management's responsibilities to assess and manage the corporation's credit risk, market risk, interest rate risk, investment risk, liquidity risk and reputational risk.
  • review benchmarks for and major financial risk exposures from such risks.
  • receive and review reports from management of the steps it has taken to monitor and control such exposures.
  • review management's performance against these policies and benchmarks.
  • approve and periodically review the corporation's Risk Appetite Policy, and review actual or forecast results exceeding risk appetite tolerances.

Board’s role in risk oversight[edit]

  • source 2012 JPM Proxy Statement
  • See also the section on key people: Board of Directors - Risk Policy Committee members
  • The Firm’s risk management is described in the Management Discussion and Analysis of the 2011 Annual Report starting at page 125. As stated there, risk is an inherent part of JPMorgan Chase’s business activities and the Firm’s overall risk appetite is established in the context of the Firm’s capital, earnings power and diversified business model. The Firm’s risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of the major risks taken in its business activities.

Risk appetite[edit]

  • source 2012 JPM Proxy Statement
  • The Firm employs a formalized risk appetite framework to clearly link risk appetite and return targets, controls and capital management.
  • The CEO is responsible for setting the overall risk appetite for the Firm, and the line of business (“LOB”) CEOs are responsible for setting the risk appetite for their respective LOBs subject to approval by the CEO and the Firm’s Chief Risk Officer.
  • The Risk Policy Committee approves the risk appetite policy on behalf of the entire Board of Directors.

Risk management framework[edit]

  • source 2012 JPM Proxy Statement
  • The Firm’s risk governance structure starts with each line of business being responsible for managing its own risks, with its own risk committee and a chief risk officer. Overlaying the line of business risk management are four corporate functions with risk management-related responsibilities.
  • Risk Management operates independently to provide oversight of firmwide risk management and controls, and is headed by the Firm’s Chief Risk Officer, who is a member of the Firm’s Operating Committee and reports to the CEO and is accountable to the Board of Directors, primarily through the Board’s Risk Policy Committee.
  • 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.
  • Legal and Compliance has oversight for legal risk.
  • Each LOB has a risk committee which includes in its mandate oversight of the reputational risks in its business.

Board oversight[edit]

  • source 2012 JPM Proxy Statement
  • The Board of Directors exercises its oversight of risk management’s principally through the Board’s Risk Policy Committee and Audit Committee.
  • The Risk Policy Committee oversees senior management risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks.
  • The Audit Committee reviews with management the system of internal controls that is relied upon to provide reasonable assurance of compliance with the Firm’s operational risk management processes.
  • The Compensation Committee is responsible for reviewing the Firm’s compensation practices and the relationship among risk, risk management and compensation in light of the Firm’s objectives.
  • Each of the committees oversees reputation risk issues within its scope of responsibility.
  • The Board of Directors also reviews selected risk topics directly as circumstances warrant.

Internal audit[edit]

JPMorgan Chase has launched its own internal investigation into the trading losses by involving its internal audit department, general counsel, and PricewaterhouseCoopers.[citation needed]

Valuation Control Group[edit]

  • source WSJ[24]
  • A material weakness in accounting control was deemed found in this business unit which required the restatement and re-issuance of corrected Q1 2012 financial statements.
  • In late 2011, Martin-Artajo and Iksil (see key people) were directed by executives to reduce a large position. They partially complied by selling more than $70 billion of derivatives. This new position only partially offset the risk of the first position, and went further in creating a large new exposure. The new exposure (above position #2) was a bet on the strength of a group of companies. JPM sold a massive amount of insurance that companies contained in that specified group, for a period of time, would not default.
  • the above $70b bet lost a massive amount of value in Q1 2012
  • weakness in accounting control included
    • having the trader who was responsible for the positions record the official accounting valuation
    • valuing esoteric and thinly traded instruments as if they were more marketable
    • failing to discount for lack of marketability. JPM had accumulated an extremely large position relative to typical trading volumes. see Business_valuation#Discount_for_lack_of_marketability
    • carelessly using outside pricing companies and brokers estimates of valuations on thinly traded instruments
    • blindly accepting outside pricing data which was egregiously wide, and failing to follow up
    • only independently verifying the valuation of positions once per month (including the $70b position in a single security)
  • Accounting rules dictate valuation at the best estimate of where positions might be reasonably liquidated.
  • See key people section (Martin-Artajo) for a discussion of changing initial valuations to conceal revealing losses.


  • PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York 10017
  • Fees paid to PricewaterhouseCoopers were $86.5 million in 2011
  • Appendix E to SEC Rule 15c3-1 The VaR model must be reviewed both periodically and annually. The periodic review may be conducted by the broker’s or dealer’s internal audit staff, but the annual review must be conducted by a registered public accounting firm

Outside counsel[edit]

SEC violations[edit]

  • William McLucas
    • Law firm: Wilmer Cutler Pickering Hale & Dorr LLP
    • head of SEC's enforcement division from 1989 to 1998

Retained by the board of directors[edit]

  • Robert Mundheim from Shearman & Sterling
    • Former Treasury Department General Counsel

Retained by JPM for the internal investigation[edit]

  • The internal investigation concluded in July 2012. It involved more than 1,000 people across the firm and outside law firm WilmerHale. [WSJ][25]
  • reviewed London CIO trading unit
    • thousands of emails
    • tens of thousands of recorded conversations
    • interviewed some of the traders

Key people involved at JP Morgan[edit]

Many points on Drew, Duersten, Macris & Tse referenced from - NY Times article[26] More points on key people referenced from WSJ Article.[27]

Board of Directors - Risk Policy Committee[edit]

  • [2012 proxy statement] provides oversight of the CEO’s and senior management’s responsibilities to assess and manage the Firm’s credit risk, market risk, interest rate risk, investment risk, liquidity risk, and reputational risk, and is also responsible for review of the Firm’s fiduciary and asset management activities.
  • [2011 MD&A] The Board of Directors exercises its oversight of risk management, principally through the Board’s Risk Policy Committee and Audit Committee. The Risk Policy Committee oversees senior management risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks.
  • James S. Crown - chair
  • Ellen V. Futter
  • David M. Cote
  • 2010 - "Certain directors were briefed then on a foreign-exchange-options bet that went bad, and were told that the trader responsible wouldn't be allowed to go overboard in the future"[27]
  • August 2012 - Timothy Flynn assigned to the risk committee. Cote expected to step down. Flynn (55) worked for 32 years at KPMG, and was chairman of that firm for four years.[Bloomberg][28]

Board of Directors - Audit Committee[edit]

  • [2012 proxy statement] provides oversight of the independent registered public accounting firm’s qualifications and independence; the performance of the internal audit function and that of the independent registered public accounting firm; and management’s responsibilities to assure that there is in place an effective system of controls reasonably designed to safeguard the assets and income of the Firm, assure the integrity of the Firm’s financial statements, assure compliance with the Firm’s operational risk management processes, and maintain compliance with the Firm’s ethical standards, policies, plans and procedures, and with laws and regulations. The Board of Directors has determined that Mr. Bell, Ms. Bowles and Mr. Jackson are audit committee financial experts as defined by the SEC.
  • [2011 MD&A] The Audit Committee is responsible for oversight of guidelines and policies that govern the process by which risk assessment and management is undertaken. In addition, the Audit Committee reviews with management the system of internal controls that is relied upon to provide reasonable assurance of compliance with the Firm’s operational risk management processes.
  • Laban P. Jackson, Jr. - chair
  • William H. Gray, III
  • James A. Bell
  • Crandall C. Bowles
  • meeting of audit committee just before the full board convened April 17, 2012 were informed "there was something wrong in the London office" and were told the matter "was being investigated."

Board of Directors - Special Investigation Committee[edit]

  • source [WSJ][29] and other JPM public filings including the 2012 proxy statement
  • On May 23, 2012 a board level vote was taken to establish this special investigation committee
  • This was 10 days after JPM disclosed on May 13 that multiple billions had been lost.
  • The committee will review and double-check management's special investigation
  • Management's special investigation concluded in July 2012
    • involved over 1,000 people
    • outside counsel was WilmerHale
    • concluded traders "may have been seeking to avoid showing the full amount of losses" by placing inaccurate prices on their positions.
  • Dimon's $23 million 2011 compensation, and 2012 compensation may be subject to claw back by this committee
  • Conclusion is expected late fall or early winter

Members (all current board members) of this special committee include

  • Lee Raymond (73) - Chairman of the Committee
    • Former chairman and chief executive of Exxon Mobil
    • Director since 2001, Director of J.P. Morgan & Co. 1987 to 2000
    • Presiding director – second most powerful under Dimon
    • Was asked by other directors including Dimon to stay on past the JPM board retirement age of 72
  • Laban Jackson
    • real-estate developer
  • William Weldon
    • Chairman Johnson & Johnson
    • Former CEO J&J
  • Outside special counsel is Robert Mundheim at Shearman & Sterling
    • Former Treasury Department General Counsel

Jamie Dimon[edit]

  • Chairman of the Board
  • Chief Executive Officer
  • Board Member, Federal Reserve Bank of NY
  • Direct Quotes about the trades
    • "flawed, complex, poorly reviewed, poorly executed, and poorly monitored"
    • "flawed, complex, poorly conceived, poorly vetted and poorly executed ... This should never have happened ... I can't justify it. Unfortunately, these mistakes were self-inflicted ... However, we also understand the need for rules and practices to ensure that hedging doesn't morph into something different. What this hedge morphed into violates our own principles."
  • Jamie Dimon
  • Dimon appeared before the House Financial Services hearing entitled “Examining Bank Supervision and Risk Management in Light of JPMorgan Chase’s Trading Loss” on June 19, 2012

Michael Cavanagh[edit]

  • Former Chief Financial Officer,
  • reported to Dimon

Douglas L. Braunstein[edit]

  • Chief Financial Officer
  • Chairman of Investment Committee and Member of Operating Committee, JPMorgan Chase & Co.
  • See SEC section for letters exchanged concerning what must be considered prop trading.

John J. Hogan[edit]

  • Chief Risk Officer
  • Reports to Dimon
  • since January 2012
  • Was Chief Risk Officer of the Investment Bank since 2006.
  • [2011 MD&A] 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.

Barry Zubrow[edit]

  • Former J.P. Morgan's chief risk officer
  • Reported to Dimon

Ina Drew[edit]

  • Chief Investment officer
  • Head of risk management
  • Resigned

Ina Drew was a high ranking executive on Wall Street. She was the Chief Investment Officer for J.P. Morgan and was forced to resign after the company suffered a trading loss of $2 billion in April/May 2012. She was one of very few high ranking female executives on Wall Street. "Until the loss was disclosed late Thursday [May 10, 2012], Drew was considered by some market participants as one of the best managers of balance-sheet risks. She earned more than $15 million in each of the last two years."[30] Her reported compensation for 2011 was $14 million. In 1993, she was profiled as one of Crain's New York "40 under 40."[31] She was CIO of JP Morgan Chase & Co. since February 2005. "Prior to that she was Head of Global Treasury [at JPM].[32] She earned a master's degree in international economics from the School of International and Public Affairs at Columbia University.[31]

  • Was employed by Chemical Bank, predecessor through merger to JPMC, in early 1980s[33]
  • solid performance of 2008 as other banks had huge loses
  • solid performance 2009 and 2010
  • had a steely resolve
  • On AM calls would insist traders
    • defend their positions
    • outline the risks they would face that day
  • solid track record during extremely difficult time led to strong trust by Dimon
  • fourth-highest-paid officer
  • moved from one floor above the trading desk, to senior executive section on 48th Fl
  • became much more confident, perhaps overconfident.
  • became much less hands-on with the trading floor and the trading book
  • 2010 diagnosed with Lyme disease and was frequently out
  • Two trading units (NY and London) became divisive and uncontrolled
    • Making riskier bets
    • AM conference calls devolved to shouting matches
    • Each unit was trying to obtain more responsibility over the other
  • Resigned rapidly after loss announced. Offered to surrender two years of pay and that was accepted.
  • Replaced by Matt Zames

Joseph Bonocore[edit]

  • Treasurer
  • Prior to this spot was CFO of the CIO for 11 years
  • Reviewed weekly the positions being taken at CIO
  • Raised general concerns about risks being taken by the London office[34]
  • Left abruptly for personal reasons October, 2011
  • now works for Citigroup Inc.
  • position open for 5 months
  • Replaced by Sandie O'Connor 3/5/2012

Irvin Goldman[edit]

  • CIO's Chief Risk Officer
  • Held position February 1 until May 14, the period of major loss
  • resigned week of 7/13
  • represented by a New York defense attorney
  • Former CEO of debt capital markets Cantor Fitzgerald LP
  • had no experience as a risk manager
  • Brother-in-law, Barry Zubrow, the bank's chief risk officer until early January 2012
  • recently replaced by Chetan Bhargiri
  • Reportedly Cantor Fitzgerald was fined $250k when he day-traded the same securities in both his personal and proprietary equities trading accounts. Hearing Board Decision: 10-ARCA-01

Peter Weiland[edit]

  • Former CIO's Chief Risk Officer
  • [in 2011] Peter Weiland, then the chief risk officer of the CIO, and some more junior executives became concerned that if J.P. Morgan chose to sell the positions, the bank might suffer deep losses [WSJ][35]
  • During a CIO management meeting late [2011] that included Ms. Drew, Mr. Macris and Mr. Weiland, the group discussed the size of the credit positions. They agreed that the positions needed to be reduced over time. [WSJ][35]
  • Even though everyone in the meeting was in agreement on what to do, the London office put on new trades [in 2012] that appeared to be at odds with the strategy ... Mr. Weiland was among those who became aware [in 2012] that the plan hadn't been followed [WSJ][35]
  • Mr. Weiland had begun a review [during the summer of 2011] of the CIO's risk limits and participated in a discussion about whether restrictions needed to be tighter and more specific ... But new limits were never agreed to [WSJ][35]
  • Late [January 2012], Mr. Weiland was replaced as the unit's head of risk by Irvin Goldman, a former trader who had no experience as a risk manager and happened to be the brother-in-law of Mr. Zubrow, the bank's chief risk officer until early January. [WSJ][35]
  • Hired a personal attorney to represent himself. [Reuters][36]
  • Reassigned by the bank to a new risk control team at the overhauled Chief Investment Office. [Reuters][35]
  • One of six people who have hired attorneys, all but Weiland have either been fired by the bank or left on their own accord. He resigned in October 2012, according to the JPMorgan Chase Task Force Report. [Reuters][35]

Achilles Macris[edit]

  • London
  • Greek national
  • joined in 2006, charged with overseeing the London office.
  • perceived to be a skilled trader but sometimes headstrong.
  • At Bankers Trust, where he was a currency trader in the 1990s, he was asked to resign because of concerns that he wouldn't get along with a new boss, said two people familiar with the events
  • Later at Dresdner Kleinwort Wasserstein, where he supervised proprietary traders, he left after losing a three-way battle for sole leadership of capital markets
  • spearheaded the strategy behind the losing bet
  • No one could really challenge his traders
  • gained more latitude to build and expanded trades from London
  • Size of his bets continued to grow
  • trades growing more complex, making them harder to exit when market conditions turned against the bank in 2012.
  • No one could sufficiently push him back, so he and Bruno could do what they wanted

Althea L. Duersten[edit]

  • New York
  • Head of the North American trading desk
  • raised objections to Mr. Macris’s outsize bets
  • was routinely shouted down by Mr. Macris during conference calls between London and New York
  • had been at JPMorgan for over 16 years

Irene Tse[edit]

  • Hired by JPM in 2011
  • formerly with Duquesne Capital Management a hedge fund
  • took over for Ms. Duersten as head of the North American trading desk.
  • less equipped to battle Macris as a newcomer
  • At one point, Ms. Duersten called one trader into her office at the New York headquarters and told him that he would report to her, instead of to Mr. Macris. The trader said, “Achilles hit the roof” upon hearing of the meeting. The trader added that he “didn’t know who to listen to.”

Javier Martin-Artajo[edit]

  • London
  • Reported to Macris, worked at Dresdner with him
  • Head of credit trading /credit-trading chief for the Chief Investment Office
  • Spaniard
  • Former Managing director and trader
  • Supervised Iksil[37]
  • No longer with the firm
  • Represented by
  • per WSJ[24]
    • often began weekly global strategy sessions by saying he had little to say—and then discussed global economies at length in his thick Spanish accent.
    • urged Iksil to adjust valuation prices higher to conceal losses
    • "We should not be showing a certain amount of losses from the trades until we see where the market is going"
    • "I'd prefer" that a higher price be put on certain positions"
    • [exasperated] "These marks just don't make sense" [referring to lower prices assigned by brokers as received by the Valuation Group 2012_JPMorgan_Chase_trading_loss#Valuation_Control_Group]
    • trading team had begun to doubt market prices and were convinced rivals were manipulating markets to the detriment of J.P. Morgan
    • "Hedge funds can't keep dictating these prices"
  • Sued by JPM [Reuters[39]], Martin-Artajo's Lawyer Greg Campbell asserts:
    • JPM so far has failed to provide sufficient evidence to support the allegations
    • " Martin-Artajo is deeply disappointed by the bank's unjustified assertion that he may have attempted to conceal the losses being suffered by the book ... There was no direct or indirect attempt by him at any time to conceal losses"

It was announced August 9, 2013, that federal authorities plan to arrest Martin-Artajo in London.[40] He and Julien Grout, a low level trader, are the two persons charged in the initial round of criminal complaints.[41][42]

Bruno Iksil a/k/a The London Whale, Voldemort[edit]

Bruno Iksil, nicknamed the London Whale[46] (for the size of his trades[47]) and Voldemort (for his supposed power on Wall Street)[47] is a French-born trader for the London office of JPMorgan Chase[47] who is held responsible for a $2 billion loss.[48] Reportedly he began working for JPMorgan in 2005 and lives in Paris, commuting to the City.[48] A private man, no public photographs of him are said to exist.[49] Iksil was so powerful and so bullish in early 2012[50] that his trades alone moved the index, according to New York magazine.[48] After "the disastrous $2 billion trading loss related to derivatives in the bank's chief investment office in London" became known in May 2012, he was "stripped of his trading responsibilities."[51][52] In August 2013 he was reported to be a cooperating witness for the government in a criminal investigation concerning fraudulent evaluations of the bank's losses.[53] On September 19, 2013 JPMorgan agreed to pay a $920M fine in the London Whale trading loss.[54]

Julien Grout[edit]

  • Junior trader who reported to Iksil
  • Remained at JPM after other traders involved in the whale trades were fired
  • Under investigation by U.S. authorities [Reuters][38]
  • Criminal complaint issued in August 2013[55] but reported to be in France at that time.[41]

JPM organizational structure, risk systems, accounting and internal control[edit]

Chief Investment Office[edit]

The trades occurred within the Chief Investment Office (CIO), where staff were reportedly "faithfully executing strategies demanded by the bank's risk management model". This unit is reported to have very wild latitude in otherwise unsupervised trading. The company had been without a treasurer for five months during the time of the trades and had a relatively inexperienced executive in charge of risk management in the CIO.[56]

  • In September, 2012 Craig Delany (41) was made head of this unit
    • was COO of the mortgage banking unit
    • reports Mr. Zames
    • was involved with
      • 2008 financial crisis
      • acquisition of Bear Stearns
      • mortgage division following the housing collapse

Risk management[edit]

[holding spot for the risk management - including "the model", the staff, the procedures, how the loss accumulated yet escaped attention until hitting the multibillion-dollar range.]

May 10 Per Reuters[57]

  • Dimon announced loss of at least $2 billion through "egregious mistakes" in trading
  • Announced JPM's value-at-risk (VaR) model was changed
    • old model $129 million or more in a day during the first quarter an amount higher than during the 2008 crisis
    • new model $67 million
  • bank had tried the new model, and then reverted to the old one, which it had used for several years.
  • Banks sometimes refine their value-at-risk, or VaR, models but those commonplace changes do not by themselves produce such dramatically different results, said Christopher Finger, one of the founders of RiskMetrics Group, which pioneered VaR models and is now a unit of MSCI Inc.
  • Risk controls on traders in the CIO were eased last year without Dimon knowing, the Wall Street Journal reported on Friday, citing unidentified sources.

Accounting, internal audit, FASB 133[edit]

  • Internal Control System / Risk Management System
    • Design
    • Technical flaws
    • Compliance or circumvention by individuals and small groups
  • CFO Braunstein April 13, 2012 -- “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”
  • The JPMorgan Whale's Disastrous Trades Were No Hedges - The bank may now be calling the positions an "economic hedge" but, in hindsight, they look to me like a series of trades designed to generate income that spiraled out of control on incorrect or ignored risk information and lack of control over traders.[58]
  • FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
    • derivative must be highly effective at offsetting the risks being hedged
    • must designate and document the hedge relationship
    • not done here
  • Accountants in FASB 133 attempt to define what exactly is hedging. The distinction that and speculating are far from bright line, crystal clear. The distinction is almost as difficult as the division between prudent investing and mere gambling. There exists lack of uniform agreement on hedging vs. speculating across various informed sources including: FASB, SEC, FRB, OCC, FDIC etc. For example, note that the SEC asked the FASB to review accounting for hedging derivatives when counterparties change[59] See also Volcker Rule

Conference calls, news releases, 8-K filings[edit]


  • 8-K reports to the SEC must be filed for any of the following (only selected events listed here, many more events must be disclosed)
    • Director departs (if due to any disagreement must disclose the discord)
    • Result of operations and financial condition
    • Material impairments
    • SEC investigations and internal reviews
    • Changes in executive management, officer leaves, is hired, or fired
    • Amendments to company Governance Policies
      • Code of Ethics
      • Board Committee Governance Policies
    • Change in credit
    • Other material events
  • To search 8-K for JPM

Company press releases[edit]

Company issues press releases here

  • May 14, 2012 Press Release
    • Matt Zames succeed Ina Drew as Chief Investment Officer. Ina Drew retired.
    • Mike Cavanagh, CEO Treasury & Securities Services will coordinate the firmwide response to the recent losses ... largely dedicated to this project for the near future. Previously CFO the firm. This group will have about 24 members spanning the following functions:
      • technology
      • risk management
      • accounting functions

Earnings releases, analyst calls and presentations[edit]

Find webcast calls, replays and materials here

  • 2Q2012
    • 2Q2012 financial results and an update on CIO
    • July 13, 2012
    • Materials released at 7:00 a.m. Call and Q&A at 7:30 a.m. - 9:30 (Eastern)
    • web access or dial in 10 minutes prior to the start
      • (866) 541-2724 or (877) 368-8360 in the U.S. and Canada
      • (706) 634-7246 for international callers.
    • replay starting around noon Conference ID 87040825
    • (855) 859-2056 or (800) 585-8367 (U.S. and Canada)
    • (404) 537-3406 (International)

Impact on Volcker Rule implementation[edit]

The Volcker Rule, part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, bans high-risk trading inside commercial banking and lending institutions. The rule goes into effect on July 21, 2012.


Internal Investigations and Reports[edit]

Message From Jamie Diamon 9-16-2013 just ahead of $920m settlement [internal memo via FT][61]

  • Adjusting to the new regulatory environment will require an enormous amount of time, effort and resources. We fully intend to follow the letter and spirit of every rule and requirement.
  • As I said in my annual letter to shareholders earlier this year, our control agenda is priority #1.
  • On the business side, we have been asking our senior people to eliminate products and services that are not essential to serving our customers and are not core to our business. We recently announced that we will be exiting the student lending origination business and most of the physical commodities sales and trading business. Additionally, we no longer sell identity theft protection and credit insurance to customers.
  • We are conducting an in-depth review of our foreign correspondent banking business. While we will continue to focus on serving our clients properly around the world, we will strengthen our controls—particularly around "Know Your Customer" and transaction monitoring—to better protect our company and our country.
  • We have also taken tangible steps to improve our oversight of outside vendors. If a vendor or partner engages with our customers, we need to be as vigilant about their practices as we are about our own, particularly if they interact directly with customers. We are also proactively trying to decrease the number of vendors we have, which reduces complexity in our business and creates more jobs internally.
  • We will have increased the number of employees dedicated to our control efforts (Risk, Compliance, Legal, Finance, Technology, Oversight & Control and Audit) across the entire firm by 4,000 employees since the beginning of 2012 (including adding 3,000 in 2013 alone). We have increased our total spend on controls by about $1 billion this year.
  • For example, we have dedicated more than $750 million to address several of our consent orders and assigned close to 5,000 people to ensure we meet or exceed all that is expected of us.
  • We have 500 dedicated professionals and several thousand others contributing significantly to the resubmission of the Federal Reserve's capital stress test or Comprehensive Capital Analysis and Review (CCAR). These individuals working together developed and reviewed more than 100 new models and sub-models, conducted more than 130 independent assessments, and established new permanent functions and processes to enhance the firm's overall capital planning process.
  • We have built a state-of-the art control room in our corporate headquarters to provide streamlined data analysis and reporting capabilities of control and operational risk data across the firm.
  • In May and June, I held town halls for the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) Examiners in Charge and their teams. I personally meet with our banking examiners on a regular basis. I also hosted a town hall in June for several hundred senior leaders of the firm who regularly interact with regulators. We discussed our culture of transparency, stressing the necessity of fully and accurately reporting material issues to our regulators in a timely manner and responding promptly to their requests.These efforts come on top of our regular bi-weekly meetings with the FRB, OCC, FDIC and others—in the U.S. and around the world—to review progress and address open issues.
  • In the weeks and months ahead, members of the Operating Committee and I will provide periodic updates to you about our progress towards creating a best-in-class operating system.

Senate Banking, Housing and Urban Affairs Committee[edit]

Senate Committee on Homeland Security and Governmental Affairs - Permanent Subcommittee on Investigations[edit]

  • Background on Senate Committee on Homeland Security and Governmental Affairs
    • Chief oversight committee of the U.S. Senate
    • Formerly known as the Committee on Governmental Affairs
    • Assumed responsibility for the Department of Homeland Security in 2003
    • Has five subcommittees including the Permanent Subcommittee on Investigations
  • Permanent Subcommittee on Investigations - Investigation of JPM Trading loss [Bloomberg][63]
    • Carl Levin (D-MI) Chairman
    • Tom Coburn (R-OK) Ranking Member
    • Responsibilities include
      • Studying or investigating the efficiency and economy of operations of all branches of the Government;
      • Studying or investigating the compliance or noncompliance of corporations, companies, or individual or other entities with the rules, regulations, and laws governing the various governmental agencies and their relationships with the public;
      • Studying or investigating all other aspects of crime and lawlessness within the United States which have an impact upon or affect the national health, welfare, and safety including but not limited to investment fraud schemes, commodity and security fraud, computer fraud, and the use of offshore banking and corporate facilities to carry out criminal objectives;
    • The subcommittee has conducted numerous investigations including the 600+ page report in April 2011 Wall Street and the Financial Crisis: Anatomy of a Financial Collapse
    • "is seeking testimony from those who worked in or helped lead JPMorgan’s chief investment office" [Bloomberg][35]
    • Subcommittee is "unencumbered by many of the political restraints faced by other congressional committees" [Bloomberg][35]
      • the subcommittee is permanent, with Senators running for office only once every six years. They have "the resources and the appetite for spending months or years issuing subpoenas, interviewing witnesses and poring over documents."
      • "unique in Congress, the minority party’s staff is involved throughout the inquiry. Members from both parties tend to stick together when presenting conclusions."
  • A hearing sometime in 2012 is planned to unveil findings on JPM and the Volcker Rule[Bloomberg][60]
    • Committee is privately interviewing JPMorgan officials as well as OCC examiners and supervisors [Bloomberg][60]
      • Scott Waterhouse, OCC examiner-in-charge for JPMorgan
      • Julie Williams, OCC chief counsel
      • Thomas J. Curry, OCC Comptroller
    • 5-17-2012 letter sent by Levin & Merkley to five key regulators regarding Volker rule: “Last fall’s proposed rule ignored the clear legislative language and clear statement of congressional intent and allowed for so-called ‘portfolio hedging,’ ... Now, in recent days, we’ve seen exactly what ‘portfolio hedging’ might mean. This ’JPMorgan Loophole’ is big enough to drive a ’London Whale’ through.” [Bloomberg][60]
  • Report of findings expected March 15, 2013 [NYT][64]
    • Failure of JPM to disclose material facts to regulators. Allowed bets to build and concealed information required to be disclosed (OCC is the primary regulator)
    • Failure of JPM to disclose material facts to JPM investors (SEC regulates what information must be disclosed to investors )
    • Executives failed to properly react
    • Regulators failed to properly react (JPM reported a new risk model was installed that "cut the measured risk in half." Regulators failed to investigate.)
    • Emphasis on senior executives in the U.S., what they knew, the timing of when they knew it, and how they reacted.
    • Finding section of the report is nearly complete, but the recommended policy changes, focusing on stricter public disclosures, is currently subject to ongoing partisan debate. Levine and staff are leading the democratic side with McCain and staff leading the republican viewpoint
    • A hearing is currently planned but the date and details are unsettled.
    • January 2012 Iksil emailed a senior trader advising against increasing the bet, as the size of the trades were becoming “scary”. Advised take the “full pain” now.
    • February 2012 Iksil instructed a jr trader to halt trading. A superior however later reversed that decision.  
    • April 2012 Braunstein (CEO) informed investors on an earnings conference call that the bank was “very comfortable with our positions.” The senate report investigates in some detail if those disclosures were in fact misleading.
  • Hearing Scheduled JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses, March 15, 2013 [direct][65]
    • The Subcommittee will examine matters relating to credit derivative trades made by the JPMorgan Chase Chief Investment Office. The Subcommittee expects to issue a Subcommittee staff report in conjunction with the hearing summarizing its investigative findings and recommendations. Witnesses will include representatives from JPMorgan Chase and the Office of the Comptroller of the Currency.
    • From JPMorgan Chase Bank NA
      • Ina Drew, Former Chief Investment Officer
      • Ashley Bacon, Acting Chief Risk Officer
      • Peter Weiland, Former Head of Market Risk - Chief Investment Office
      • Michael J. Cavanagh, Co-Chief Executive Officer - Corporate & Investment Bank
      • Douglas L. Braunstein, Current Vice Chairman
    • From OCC
      • Thomas J. Curry, Comptroller of the Currency
      • Scott Waterhouse, Examiner-in-Charge - OCC National Bank Examiners - JPMorgan Chase
      • Michael Sullivan, Deputy Comptroller for Risk Analysis - Risk Analysis Department

July 27, 2012, OCC downgraded JPMorgan's management rating[edit]

  • [Quote from PSI Report] 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. [10/26/2012 memorandum from Sally Belshaw, OCC, to Mike Brosnan, OCC, “Surrounding Losses at CIO and Lessons Learned,” PSI-OCC-13-000001 (Sealed Exhibit)]. As a result, in July 2012, OCC downgraded the bank’s CAMELS management for its “lax governance and oversight in the Chief Investment Office,” as well as other “oversight deficiencies.” [7/27/2012 OCC Supervisory Letter JPM-2012-33, “JPMorgan Chase Bank, N.A. Management Rating,” PSI-OCC-17-000003 (Sealed Exhibit)][66]
  • 3 Rating in CAMEL (M)anagement assigned to JPM[67]
    • A 3 rating in management indicates that either operating performance is lacking in some measures, or some other conditions exist such as inadequate strategic planning or inadequate response to supervision. Management is either characterized by modest talent when above average abilities are needed or is distinctly below average for the type and size of the entity. Thus, management's responsiveness or ability to correct less than satisfactory conditions is lacking to some degree.(M)-3-Rating

Summary of hearing. Transcript of final few minutes[edit]

start time code about 06:10 on recorded webcast

Levin: Mr. Curry you took office as Comptroller not even a year ago, just as these whale trade stories broke and since then the OCC has conducted an intense review of the whale trades. Were you surprised at the level of the problems uncovered?

Curry: I was certainly taken aback by the press stories and as we delved into it, how complex and serious the situation was.

Levin: Have you given thought as to tackle how to detect undisclosed derivative portfolios, above a certain 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 these do not create a major problem down the line?

Curry: I think this is an area where we need to do considerably more work. I think we have already learned through some 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.

Levin: We have gone into the concerns 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'd like to ask have you have found safety and soundness problems in the following areas during your inquiries?

Levin: First, have you found safety and soundness problems in the CIO's derivative valuation controls?

Curry: yes and that's a provision of our Order as well,

Levin: Have you found safety and soundness problems in the CIO risk management?

Curry: Yes

Levin: Have you found safety and soundness concerns in the VaR model risk management?

Curry: Yes

Levin: Have you found safety and soundness problems in the model approvals in the RWA? [Risk weighted assets]

Curry: Yes

Levin: And have you found them in JPMorgan's management?

Curry: Yes we have

Levin: Would you agree that the whale trades were not just a problem caused by rogue traders but was a problem of management weakness at the bank?

Curry: we identified serious weaknesses throughout the entire firm, and they became particularly evident in the CIO office.

Levin: Am I correct that the next step relative to the C&D Order is to evaluate the compliance when the time comes, and to then make decisions as to any penalties?

Curry: That is an accurate statement senator.

Levin: We have seen today a very disturbing picture, which raises questions not just about JPMorgan but about derivatives in general. How they are valued? How they are disclosed or not disclosed? How they are managed to limit risk, or not managed to limit risk?

Levin: The OCC has already lowered JPMorgan's management rating, (see "M " in CAMEL) they have issued a supervisory letter, more than one, the OCC has issued a Cease and Desist order but I believe Mr. Curry you and your colleges have a challenge to get America's biggest bank back on the straight and narrow and keep our banks on the straight and narrow, and that is exacerbated when we have the world of derivatives, particularly those derivatives which are synthetic.

House Financial Services Committee[edit]

  • Spencer Bachus (R-AL) Chairman
  • Barney Frank (D-MA) Ranking Member
  • "The Financial Services Committee will hold a hearing on the public policy implications of this trading loss, but we will not rush into a hearing simply to chase headlines. This will give the committee and the regulators time to gather all the facts, do our homework and then have a serious hearing on this subject."
  • Hearing entitled “Examining Bank Supervision and Risk Management in Light of JPMorgan Chase’s Trading Loss” was held June 19, 2012 10:00 AM
    • Thomas Curry, Comptroller of the Currency, OCC
    • Mary Schapiro, Chairman, SEC
    • Gary Gensler, Chairman, CFTC
    • Martin Gruenberg, FDIC
    • Scott Alvarez, General Counsel, FED
    • Panel II Jamie Dimon, Chairman and CEO, JPM

The June 19 hearing, as it relates to regulatory shortcomings, is best summed up by this testimony

Stevan Pearce (R-NM) - Mr Alvarez [FED] if we look at derivative trading and especially overseas derivative trading, and we are going to prioritize the risks that these major firms face, would that particular activity be in the middle or at the top? Is that a scary, risky thing, or is it kind of not very risky? What priority should we be looking at when we consider derivatives trades?
Scott Alvarez (FED) - So, I’m not sure what priority congress wants to assign, but regulators….
Pearce (R-NM) - No, no! I am saying you are in charge! We [congress] simply oversee! You are in charge of risk. That is what you say. [referring to the FED written testimony].
Alvarez (FED) – So, I think from our prospective, we are taking two high priority approaches. One is we think its important for firms to have good risk management around….
Pearce (R-NM) - No, my question is not that, my question is, derivative trading itself, is it very high risk?
Alvarez (FED) - It can be if it…
Pearce (R-NM) - O.K. so it can be that’s all I’m trying to establish.

[Brief exchange between Pearce and committee chair Bachus omitted.]

What I’m going to go to next is, you guys are the supervisors in charge, that’s the consolidated supervisory charge of all the people who are regulating the activities. And so I see Mr. Curry says he has people, 65 people on location. These are not regular people. These are people with 20 or more years of experience, skills in key risk areas, teams of PhD economists. He then identifies in the next paragraph - the examination teams have three objectives, one of which is the key risks.
Derivatives would be a key risk; they are very, very problematic. So, my question is with these 65 regulators on site, would you know the name of the one who monitors trading of derivatives? You are the guy in charge, you! The Federal Reserve. You say so in your testimony
Alvarez (FED) - No we are not the one in charge of the OCC. We are the consolidated supervisor. We supervise the unregulated portions of the holding company and its roll up of its consolidated activities but the specific activities in the national bank, those 65 examiners you are talking about I’m afraid …
Pearce (R-NM) - Mr. Curry [OCC] would you have the name of whoever is in charge of the derivatives?
Thomas Curry (OCC) - We operate the supervision policy where we have a resident examiner in charge of the institution. That individual will allocates responsibility for individuals to examine into particular areas of the bank. That can change over time. It can also be the result of someone being brought in extra….
Pearce (R-NM) - Do you have a name of who was in charge, at the time you were discussing earlier, during that time of early April?

[Background – On April 6 major news (Bloomberg) broke revealing that JPM had taken extremely large risks in the derivatives market. All regulators via testimony this day stated they became aware of the extremely large derivatives portfolio held by JPM as of that date. Earnings were officially released on April 13. At a conference call that day with shareholders and investment analysts, open to the public, Dimon downplayed any risk involved. The CFO assured all on the call that all positions and transactions were fully transparent to regulators.]

Curry (OCC) - Not at the moment, who was in charge of looking at the derivatives portfolio.
Pearce (R-NM) - Mr. Chairman, my point is, we’ve got 65 gee-whiz people. I mean these are top-notch people according to your testimony. We have this stuff going on! They’re on the site in order to pay attention, and yet I hear from Mr. Alvarez that we are concerned with the changes in the portfolio, during that period of time. What are they doing? Are they sitting here watching? That’s what they were supposed to be doing!
The SEC and CFTC, were sitting there with MF Global, while they were taking money out of customer accounts! They weren’t watching! They weren’t saying a word! They weren’t raising an alarm!
And here y’all are saying that you are starting an investigation. I thought that’s the reason you have people on location – in order to watch what is going on! You have 65 people. You say in your testimony that key risks are what you’re monitoring, and yet Mr. Alvarez finds out ooh! You all didn’t call him and tell him! He is alarmed with the changes!
I’m just thinking, what are we doing here? Why do you have these people on location? Mr. Gruenberg, he at least admits, they at least they were finally worried “we are seeing recent losses”. That’s revealing. That’s bringing. It reveals certain risk. I mean, the entire nation is aware of risks, [vial news stories.] I’m just sitting here saying you know, what are we doing? You are supposed to be regulating. We are all supposed to be out there. You have got on-site teams! And now we are starting an investigation? The investigation should be that you are talking to your people who were on location and finding out if they are doing their job or sitting there with their feet on the desk drinking coffee. From this side of the table we ask you all to do this and yet I come here and read all this testimony and it’s all, just kind of just angling towards the same thing. Nobody is really in charge. Nobody is really supervising. We are finding out after the fact, through press releases, or whatever. Thing gets very frustrating from our point of view.
Curry (OCC) - I understand Congressman that’s part of our review process is to do a post mortem to see what went wrong in this particular case, and how the OCC can better perform its duties

United States Justice Department / FBI investigation[edit]

FBI NY field office conducted an investigation

  • Jonathan Polonitza, Special Agent with the FBI led the investigation
    • In 2009 Polonitza reported to the SEC [2] that he was a 10%+ owner of Itex a firm that promotes cashless business transactions using its own coined digital currency called ITEX dollars to exchange goods and services.

Justice Department opened a federal inquiry

Complaints [13 MAG 1975] were filed August 9, 2013, sealed, and then made public later in August 2013 (see below)

  • complaints consisted solely of sworn charges by Jonathan Polonitza, Special Agent, FBI
  • Judge hearing the complaints was Sarah Netburn, United States Magistrate Judge
  • United States magistrate judges are appointed to assist United States district court judges in the performance of their duties

Incitements [13 CRIM707] were filed on September 16, 2013

  • filings were by magistrate judge Hon. Henry Pitman
  • Indictments were heard by a Grand Jury and signed by a Foreperson (chair and spokesperson for the grand jury)
  • Indictments were conducted before Hon. Lorna G. Schofield [contact][4], United States District Judge
    • On April 25, 2012, President Obama nominated Schofield to her position.

Levin statement on settlement and penalties in JPMorgan “London Whale” trades 9-19-2013 [Levin Press Release][68]

  • The size of the penalties is testimony to the great damage risky derivatives bets can do, and that’s important. However, the whole issue of misinforming investors and the public is conspicuously absent from the SEC findings and settlement. Our PSI investigation showed that senior bank executives made a series of inaccurate statements that misinformed investors and the public as the London Whale disaster unfolded. Other civil and criminal proceedings apart from this settlement are continuing, so there is still time to determine any accountability on that matter.


Criminal complaints were issued in August 2013 in the United States District Court for the Southern District of New York charging Javier Martin-Artajo [complaint][42] a trading supervisor, and Julien Grout [complaint],[55] a lower level trader, with four counts each of breaking U.S. Federal Law:

  1. conspiracy
  2. false books and records
  3. wire fraud
  4. making false statements to the Securities and Exchange Commission.

The investigation continues and additional defendants may be named.[41][42][55][69]


  • U.S. v Martin-Artajo et al., U.S. District Court, Southern District of New York, No. 13-cr-00707.
  • Documents available through registration and login on the Pacer system (.10 per page, max $3/document, up to $15 free usage per quarter. From login: NY Southern > Document Filing System > * [Top ribbon] Query > Search on case number > check which case / cases to search > search > History/Documents section.
  • Violations
    • Title 15, United States Code, Section 78m(a)
    • Title 15, United States Code, Section 78m(b)(2)(A)
    • Title 15, United States Code, Section 78m(b)(5)
    • Title 15, United States Code, Section 78ff
    • Title 15, United States Code, Section 78jb
    • Title 17, Code of Federal Regulations, Section 240.10b-5
    • Title 17, Code of Federal Regulations, Section 240.13a-11
    • Title 17, Code of Federal Regulations, Section 240.13a-13
    • Title 17, Code of Federal Regulations, Section 240.13b2-1
    • Title 18, United States Code, Section 371
    • Title 18, United States Code, Section 1343
    • Title 18, United States Code, Section 1349
    • Title 18, United States Code, Sections 2

Request for Special Council[edit]

  • A request was made to the Attorney General by, a watchdog group in Washington D.C., that a Special Council be appointed to independently oversee the Department of Justice investigation.
  • The United States Attorney General is a member of the Cabinet and as head of the Department of Justice is the top law enforcement officer and lawyer for the government.
  • Appointment is necessary and appropriate under the applicable statue and regulations because (1) a criminal investigation of the mater is warranted, (2) an investigation by the Department of Justice "would present a conflict of interest for the Department or other extraordinary circumstances," and (3) it would be in the public interest to appoint an outside Special Counsel to assume respectability for the investigation. 28 C.F.R SS 600.1(a),(b)

Federal Reserve Board investigation[edit]

  • Ben Bernanke, Chairman
  • Lee C. Bollinger Chairman FRB NY
  • Sarah J. Dahlgren, Executive Vice President FRB NY - Financial Institution Supervision
    • Christopher Whalen of Risk Analytics interviewed his father, Richard Whalen (senior advisor in both the Nixon and Reagan administrations, author, former writer for Fortune) and Roger M. Kubarych (former economist for Federal Reserve Bank of New York, the NYSE. Currently Chief US Economist at HypoVereinsbank and author Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis) wrote an extensive article on Dahlgren reproduced at Nakedcapitalism: "Technically Incompetent" NY Fed Examiner of Biggest Banks Pre Crisis Promoted for Blowing Up the Economy
      • Going back in time now and remembering the period before the crisis, Dahlgren typified the arrogance and refusal of Fed officials to acknowledge warnings from various members of the financial community that the subprime mortgage market was melting down after years of unsafe and unsound lending and underwriting practices by the largest banks.
      • For more on the Fed's (and Dahlgren's) refusal to acknowledge the subprime mortgage crisis see Fed Chairmen and Presidents: Roundtable with Roger Kubarych and Richard Whalen on Nouriel Roubini's site.
      • “It makes me so mad to think back how ignorant, arrogant, and dismissive she was with people who knew what they were talking about pre-crisis,” one former Fed colleague told The Institutional Risk Analytics. Dahlgren was running the AIG show for the FRBNY. She ignored the recommendations from the Fed’s own advisors and the Board of the FRBNY that AIG counterparties be forced to take haircuts. For her to ignore good advice on AIG and then deliberately take steps to hide that decision from the Congress and the public, and then be rewarded with a promotion, is quite disheartening.”
      • See also: Sarah Dahlgren: "The Spin Doctor"
  • The Division of Banking Supervision and Regulation is responsible for the oversight of U.S. banking holding companies, foreign banking organizations operating in the U.S., and state-chartered member banks of the Federal Reserve System. The Division develops and implements safety and soundness and other regulations for these entities under Board direction and in collaboration with Reserve Banks and other domestic and international regulatory authorities
  • Federal Reserve / JPM Connection
  • Dimon sits on the board of the FRB NY
  • The Treasury Secretary of the United States (himself a former Chairman of the NY Fed) stated that Fed bank board members have zero role in:[70]
    • Writing of the rules
    • Supervision
    • Decisions about how to respond to the financial crisis
  • The Treasury Secretary is a former Chairman of the FRB NY
  • Dimon was thought to be a candidate to become Chairman of the FRB NY
  • The FRB NY Chairman is the second most powerful position in the Federal Reserve under the general Chairman. They operate as "second in command" at the Federal Open Market Committee FOMC in setting interest rates in the U.S. FRB NY implements the decisions of the FOMC in the actual marketplace on a daily basis.
  • GAO Report on manage conflicts of interest involving Reserve Bank directors
    • Federal Reserve Bank Governance - Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency
    • take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors
    • make key governance documents, such as such as board of director bylaws, committee charters and membership, and Federal Reserve Board director eligibility policy and ethics policy, available on their websites or otherwise easily accessible to the public.
    • help enhance economic and demographic diversity and broaden perspectives among Reserve Bank directors who are elected to represent the public ...
  • On January 14, 2013 Federal Reserve Board issued a Cease and Desist Order against JPM indicating it must take corrective action

JPMorgan Chase & Co. to pay $200 million for oversight, management, and controls deficiencies 9-19-2013 [Fed][71]

  • The consent Order of Assessment of a Civil Money Penalty against JPMC cites the failure by JPMC to appropriately inform its board of directors and the Federal Reserve of deficiencies in risk-management systems identified by management.

Treasury investigation[edit]



SEC investigation[edit]

  • Mary Shapiro, Chairman

Senate Banking May 22, 2012 [5]

  • Proxy Disclosure Enhancements (Established by SEC within past couple of years.)
  • Quantitative and Qualitative Disclosures about Market Risk
  • Net Capital Rule
  • Rule Internal Risk Management Control Systems for OTC Derivatives Dealers
  • Value At Risk (VaR) specifics
    • must disclose material limitations ... what the VaR model is not telling about the risks
    • changes to the VaR model and its characteristics must be publicly disclosed
    • VaR is used in the marked risk deduction from net capital. If they have large losses we make them back test and tell us why their estimates of risk were so far off. [see above transcript at roughly minute 91 and above here: Net Capital Rule and Internal Risk Management Control Systems for OTC Derivatives Dealers]

House Financial Services June 19, 2012 [6]

  • S-K Item 303 (17 CFR 229.303.) Management’s Discussion and Analysis of Financial Condition and Results of Operations [7]
    • requires a discussion of known trends, events, demands, commitments, and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance ... This disclosure should highlight issues that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating performance or of future financial condition. This provision would mandate disclosure, for example, if a company was experiencing trading losses that are different from past experience, and, as a result, its current year results are likely to be materially adversely impacted compared
  • S-K Item 305 (17 CFR 229.305) Quantitative and qualitative disclosures about market risk[8]
    • Disclosure is required on an annual basis about market risk as of the end of the company’s fiscal year ... calls for qualitative disclosure about the company’s primary market risk exposures and how the company manages such market risks ... Like the quantitative disclosure, this disclosure is required annually, with material changes reported quarterly.
  • S-K Item 402(s) (17 CFR 229.402(s)) Executive Compensation [9]
    • This is a very new SEC item. JPM will likely be a test case as the regulation here is weakly formed.[72]
    • To the extent that risks arising from the registrant's compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the registrant, discuss the registrant's policies and practices of compensating its employees, including non-executive officers, as they relate to risk management practices and risk-taking incentives ... (more at [10])
    • the term reasonably likely was lobbied in. Research indicates that no firms have actually made this disclosure.
    • Quoting from [11] The general standard of materiality, set forth in TSC Industries, Inc. v. Northway, Inc.,68 is whether there is a “substantial likelihood that the disclosure of [an] omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Further, in Basic Inc. v. Levinson,70 the Supreme Court adopted the TSC Industries standard of materiality for the anti-fraud context,71 and applied a “probability/magnitude” balancing approach to determine materiality in the case of contingent or speculative information or events.72
      • 68 426 U.S. 438 (1976).
      • 69 Id. at 449 (holding that “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote”); see also SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45150 (Aug. 19, 1999) (stating that misstatements that have the effect of increasing management’s compensation may well render material a relatively small misstatement of a financial item).
      • 70 485 U.S. 224 (1988).
      • 71 Id. at 232.
      • 72 Id. at 238–39 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2nd Cir.1968)) (holding that where information or events are speculative, such as in the merger negotiation context, 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’”).
    • If the SEC doesn't prevail in the JPM case S-K Item 402(s) will likely need to be revised to have any effect.
  • S-K Item 503(c) (17 CFR 229.503(c)) Risk Factors Disclosure Requirement [12]
    • requires companies to describe the material risks they face and how particular risks affect the company
    • the test here will be knew, or should have known, about a material risk, and then failed to disclose
  • Exchange Act 1934 - Rule 12b-20 (17 CFR 240.12b-20) Additional Information [13]
    • This is a catch all requirement likely to be applied to the tempest in a teapot and other comments made during the Q1 earnings conference call.
    • In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading.
  • Regulation 14A Solicitation of Proxies (17 CFR 240.14a)
    • This area was discussed prior by the SEC in the prior Senate Hearing. See above on Risk Management disclosures in the Proxy statement, Risk Committee of the Board of Directors, and Executive Compensation 17 CFR 229.402(s).
  • GAAP FASB 133, 161 (FASB ASC 815-10-50) Derivatives and Hedging GAAP
    • Generally accepted account principles for derivatives and hedging will be examined in depth. The financial statements notes and disclosures in this area have highly specific requirements, as determined by the Financial Accounting Standards Board. JPMs annual financial statement was audited by outside CPAs. After an extensive and expensive audit those CPAs opined that the financial statement was in conformance with GAAP. This means that they too will share some responsibility for any departures from GAAP should have been caught during the audit.

SEC / JPM letters - 6/15/2011 - 2/17/2012 made public 12/11/2012 [Reuters][73]

  • Between CFO Braunstein, and Suzanne Hayes, assistant director of corporation finance at the SEC
  • Hayes questioned the extent of what needs to be disclosed as prop trading
  • Braustein asserted the holding company's investment bank was the only entity engaged in prop trading. This included prop trading on the equities, fixed-income and commodities desks to exploit short term movements in prices.
  • Braustein further asserted CIO unit did not engage in prop trading. CIOs activities were asserted to merely to protect the firm's long-term capital. The investment horizon was long-term, over entire economic cycles. The activity concentrated on interest rates and foreign currency risks. [CIO also heavily engaged in trading credit default risks.] As such the activities were not to be deemed prop trading.
  • SEC questioned those distinctions and was clearly focused on JPMs proprietary trading disclosures well ahead of the large loss.

SEC Charges Two J.P. Morgan Traders With Fraudulently Overvaluing Investments to Conceal Losses Aug 14, 2013 [SEC][74]

  • complaint 13 CV 5677 Securities and Exchange Commission v. Martin-Artajo, 13-cv-05677, U.S. District Court, Southern District of New York (Manhattan).
  • Brought by Andrew M. Calamari, Regional Director, New York Regional Office SEC.
  • Violations
    • 15 U.S.C. §§ 78j(b) [Section 10(b)]
    • 15 U.S.C. §§ 78m(b)(5)[Section 13(b)(5)]
    • 17 C.F.R. 240.10b-5(a) [Rule 10b-5(a)]
    • 17 C.F.R. 240.10b-5(a) [Rule 10b-5(c)]
    • 17 C.F.R. 240.13b2-1 [Rule 13b2-1]
    • 15 U.S.C. §§ 78m(a) [Section 13(a)]
    • 15 U.S.C. §§ 78m(b)(2)(A) [Section 13(b)(2)(A)
    • 17 C.F.R. 240.12b-20 [Rule 12b-20]
    • 17 C.F.R. 240.13a-11 [Rule 13a-11]
    • 17 C.F.R. 240.13a-13 [Rule 13a-13]

JPM to pay at least $750m [Bloomberg][75]

  • Chief Financial Officer Marianne Lake told investors last week [week of 9/15/2013] that the quarter’s addition to legal reserves would “more than offset” about $1.5 billion of consumer reserve releases."
    • In some prior accounting periods JPM recognized a large future legal expense for its retail business operations ($1.5b). A charge against income was made (reducing reported income) and a liability was established on the balance sheet for the estimated costs to settle those claims.
    • JPM will reverse that (correcting the initial overestimation) at this particular time. That transaction will boost current income.
    • Simultaneous to the above JPM will recognize legal expenses related to the Whale trades that are substantially higher than have been estimated to date. Absent the above "reversal" transaction, this second transaction would result in a large reduction to current income.
    • Due to the "serendipitous" release of the prior retail legal reserve, the current recognition of greatly increased expenses related to the Whale trades, will not result in a decrement to reported income. Given the prior retail reserves were very large, their reversal at this particular time may actually result in a sizable increment to reported income.
    • The two transactions, each timed to occur in exactly the same accounting quarter, will mean that income is smoothed out, and future five year results charts will show a more linear (vs. sawtooth) income trend pattern.
  • The Wall Street Journal, citing people close to the situation, reported Aug. 27 that the penalties were expected to total $500 million to $600 million. [Bloomberg today ups this amount to $750m]
  • Federal and State Attorneys may later levy separate penalties against JPM (in addition to the two employees who were indited.)

JPMorgan may make some admissions while settling with the SEC, such as conceding that it erred in how it oversaw the traders and their unit 9-17-2013 [Bloomberg][76]

SEC seeks admission of wrongdoing from JPMorgan in ‘London Whale’ case [WP][77]

  • U.S. District Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included neither-admit-nor-deny language. More at v. Citigroup
  • In June 2013 SEC Chairman Mary Jo unveiled the standard that demands an admission of misconduct in certain types of civil settlements vs. just paying fines without acknowledging liability.
  • JPM is also battling shareholder lawsuits that allege that it failed to exercise adequate oversight of risky activities in its chief investment office.
  • Since the Rakeoff Citigroup case a handful of other judges have also voiced discomfort with allowing defendants to pay fines without admitting liability.

JPMorgan said it anticipates $6.8 billion in future legal costs in excess of the money it has already set aside to handle litigation. 9-16-2013 [WP][78]

  • While SEC Commissioner Mary Jo White has aggressively pushed for an admission of wrongdoing in some civil cases, she did not take part in the JPMorgan deal, people familiar with the case said.
  • Federal policy prohibits White and the SEC’s co-director of enforcement, Andrew Ceresney, from weighing in because both had represented JPMorgan in the past year, when they were partners at the law firm of Debevoise & Plimpton in New York

JPMorgan Chase & Co. has agreed to admit wrongdoing and pay a $200 million penalty to the SEC 9-19-2013 [SEC Statement via WSJ] [79]

  • Official statement by George Canellos, co-director of the Securities and Exchange Commission’s division of enforcement
  • Last month, when we filed fraud charges against JPMorgan’s former traders, Javier Martin-Artajo and Julien Grout, we said these traders exploited massive shortcomings in JPMorgan’s internal controls infrastructure.
  • Today’s action makes clear that JPMorgan’s control breakdowns went far beyond the CIO trading book.
  • JPMorgan’s senior management broke a cardinal rule of corporate governance: inform your board of directors of matters that call into question the truth of what the company is disclosing to investors. Here, at the very moment JPMorgan’s management was grappling with how to fix its internal control breakdowns and disclose the full scope of its CIO trading disaster, the bank’s Audit Committee was in the dark about the extent of these problems.
  • the SEC required JPMorgan to admit the facts in the SEC’s order – and acknowledge that it broke the law – because JPMorgan’s egregious breakdowns in controls and governance put its millions of shareholders at risk and resulted in inaccurate public filings.
  • The $200 million penalty against JPMorgan is unprecedented for an internal controls case and is one of the largest penalties in the history of the SEC. The penalty reflects the SEC’s assessment of the gravity of the control failures and the risks to which they exposed the firm and investors.
  • The $200 million will be placed in a fund for compensation of investors harmed by JPMorgan’s inaccurate financial reports.
  • Although today’s settlement resolves claims against JPMorgan relating to this matter, our investigation is continuing as to individuals.

JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges [SEC Official Release][80]

  • SEC Order: JPMorgan Chase & Co.
  • Statement on SEC Enforcement Action Against JPMorgan
  • the Sarbanes-Oxley Act of 2002 established important requirements for public companies and their management regarding corporate governance and disclosure. Public companies such as JPMorgan are required to create and maintain internal controls that provide investors with reasonable assurances that their financial statements are reliable, and ensure that senior management shares important information with key internal decision makers such as the board of directors. JPMorgan failed to adhere to these requirements, and consequently misstated its financial results in public filings for the first quarter of 2012.
  • The trading losses occurred against a backdrop of woefully deficient accounting controls in the CIO, including spreadsheet miscalculations that caused large valuation errors and the use of subjective valuation techniques that made it easier for the traders to mismark the CIO portfolio.
  • As a result of the findings of certain internal reviews of the CIO, some executives expressed reservations about signing sub-certifications supporting the CEO and CFO certifications required under the Sarbanes-Oxley Act.
  • Senior management failed to adequately update the audit committee on these and other important facts concerning the CIO before the firm filed its first quarter report for 2012.

Chuck Grassley (R-IA) on Government Settlement Over “London Whale” Trades 9-16-2013 [Press Release][81]

  • The SEC’s number one job is looking out for investors, including pensions, mutual funds and small, individual investors. While the settlement includes penalties for internal control failures, I’m concerned that it doesn’t focus more on the firm’s reported misrepresentations to the public and shareholders. The Senate report concluded that those misrepresentations occurred. The SEC says it’s still investigating individuals in this case. Maybe we’ll see more enforcement action on how the bank communicated with investors. A firm is required by law not only to stay on top of its finances, but also to tell the truth about its finances to the investing public.

U.S. Senator John McCain (R-AZ) letter to the Chair of the SEC urging individual accountability 9-19-2013[Senator Letter][82]

  • The Subcommittee’s investigation exposed, among other things, that top management at JPMorgan was aware of the risky trading positions, but defied oversight by actively withholding information from the Bank’s regulators and the public.
  • I believe that the government must hold accountable those individuals who compromised the integrity of our nation’s financial markets. The government’s incomplete enforcement actions to date fail to achieve that goal.
  • As the Subcommittee’s investigation revealed, top management at JPMorgan felt entitled to decide for itself what information to release to the bank’s regulators. At one point in August 2011, CEO Jamie Dimon ordered that the investment bank withhold daily profit and loss (P&L) reports from the OCC because he believed that the regulators did not need the information. He, in fact, reacted angrily when the bank’s CFO, Douglas Braunstein, resumed sending the information to regulators. Even the powerful CEO of one of our nation’s largest banks does not get to make his own rules and decide which regulations are worthy of compliance.
  • Given the seriousness of these events and my continued interest in this matter, please provide responses to the following questions.
  1. Did the SEC consider requiring admissions of wrongdoing on the part of any individuals within the bank as part of the settlement negotiations? What factors led to the decision to not address individual misconduct in today’s settlement?
  2. Does the global settlement agreement preclude either civil or criminal enforcement action against individuals at JPMorgan? Why or why not?
  3. Has anyone within your agency referred any individuals to the DOJ for criminal prosecution? If so, please explain.
  4. Please describe how each of the following were considered, determined, and structured in the settlement.
    • Penalties
    • Fines
    • Disgorgement
    • Compensatory damages and/or restitution
    • Admissions of wrongdoing

CFTC investigation[edit]

  • Releases
  • Gary Gensler, Chairman
  • testified to Senate Banking on May 22
  • CFTC rules on Price Manipulation
    • Rule 180.1 modeled after Section 10(b) and Rule 10b-5 SEC Act 1934 - broadly prohibits fraud and fraud-based manipulation.
    • Rule 180.2 codifies Section 6(c)(3) of the Commodity Exchange Act- unlawful for any person directly or indirectly to manipulate or attempt to manipulate the price of any swap or commodity in interstate commerce.
    • According to the Wall Street Journal, CFTC subpoenaing internal bank emails to determine if JPMorgan officials made deceptive statements to manipulate price

CFTC will assert reckless manipulation of the markets [WSJ][83]

  • New powers granted from the Dodd-Frank Act lowers the bar for charges.
    • reckless manipulation of the markets (under DFA) vs.
    • traders intended to manipulate prices (prior)

Resolution with many regulators is expected the week of September 16, 2013 but won't likely include the CFTC [FT][61]

  • Fines of $800m are expected
  • IG9 (description) index manipulation is a key CFTC issue
  • CFTC is seeking a fine and an admission by the bank that it manipulated the index
  • The bank has balked at the admission, derailing current settlement talks.
  • CFTC plans to fine the bank later this year [NYT][84]

CFTC and JPM failed to reach a deal. May actually litigate. [NYT][85]

  • the nation’s commodities trading regulator, which is investigating whether the London losses manipulated the market, warned that it intended to file an enforcement action against the bank after settlement talks broke down. The agency wanted a $100 million fine, people briefed on the matter said, and an acknowledgment of wrongdoing, a demand that the bank balked at.
  • The agency is pushing JPMorgan to admit that the London trading manipulated a corner of the derivatives market — an accusation that it disputes and one that it is fighting tooth and nail. Such an admission could set a precedent that threatens some of the bank’s current trading businesses. But without the acknowledgment, the trading commission is pursuing a lawsuit against JPMorgan, which could cast a darker cloud over the bank.

Office of the Comptroller of the Currency investigation[edit]

  • Motto: "Ensuring a safe and sound national banking system for all Americans"
  • Administrator of National Banks
  • Thomas Curry, Comptroller
  • The agency responsible for investigating and prosecuting acts of misconduct committed by institution-affiliated parties of national banks, including officers, directors, employees, agents and independent contractors (including appraisers, attorneys and accountants)
  • The OCC participates in interagency activities in order to maintain the sanctity of the national banking system. By monitoring capital, asset quality, management, earnings, liquidity, sensitivity to market risk, information technology, consumer compliance, and community reinvestment, the OCC is able to determine whether or not the bank is operating safely and soundly, and meeting all regulatory requirements
  • OCC testified to Senate Banking on June 6, 2012
  • The Office of the Comptroller of the Currency and the Federal Reserve already have legions of staff posted permanently in the nation’s largest banks with authority to halt any practice they deem “unsafe and unsound”. If the supervisors didn’t react to JPMorgan’s whale, there is little reason to believe that giving the same people more rules to enforce would help. from Richard Breeden, SEC chairman from 1989 to 1993
  • As of December 2012 the OCC is reported to be preparing a cease-and-desist order "requiring the largest U.S. bank to fix internal risk controls that contributed to its wrong-way bet on credit derivatives". According to Jamie Diamond, CEO, the environment around the derivative trades involved “errors, sloppiness and bad judgment.” [Reuters][86]
    • Cease and Desist Order
      • No fine
      • Halt an activity (cease) and do not take it up again later (desist) or else face additional, presumably strong, legal action. For example, in 2012 a $500 million civil penalty was assessed by OCC against HSBC Bank based on violations of the Bank Secrecy Act. The fine was substantial. Just two years earlier HSBC had been subject to a formal cease and desist order for similar violations. A cease and desist order can operate as a permanent injunction.
      • Taken against a bank for violating specific statutes and underlying regulations
      • Requires the bank to take comprehensive corrective actions to improve compliance
      • Reports deficiencies with respect to internal controls and other activities.
      • Bank agrees to the order - executes a Stipulation and Consent to the Issuance of a Consent Order
      • Requires things such as a special compliance committee of Board, officer assigned to submit all reports, plan with timelines (60 days), progress plan (90 days), independent consultant, formal audit (track remediation efforts, evaluate and test new internal controls, insure prompt management response to exceptions, etc.)
      • Will be announced and available here
  • On January 14, 2013 OCC issued its Cease and Desist Order against JPM. Found deficiencies related to the credit derivatives trading practices conducted by the CIO:
    • inadequate oversight and governance to protect the bank from material risk
    • inadequate risk management processes and procedures
    • inadequate control over trade valuation
    • inadequate development and implementation of models used by the bank
    • inadequate internal audit processes
    • See also Federal Reserve Board C&D order issued today at the holding company level

OCC Assesses $300 Million Civil Money Penalty Against JPMorgan Chase, N.A., Related to Derivatives Trading Activity [OCC][87]

  • Consent Order
  • The OCC found that the bank’s controls failed to identify and prevent certain credit derivatives trading conducted by the CIO that resulted in substantial loss to the bank, which has exceeded $6 billion. The OCC has conducted several targeted exams which found the following deficiencies related to the credit derivatives trading practices conducted by the CIO: inadequate oversight and governance to protect the bank from material risk, inadequate risk management processes and procedures, inadequate control over pricing of trades, inadequate development and implementation of models used by the bank, and inadequate internal audit processes.

Federal Deposit Insurance Commission investigation[edit]

  • Martin Gruenberg, Acting Chairman
  • ·Ensures the safety and soundness of the national banking system
  • Is the agency responsible for investigating and prosecuting acts of misconduct committed by institution-affiliated parties of national banks, including officers, directors, employees, agents and independent contractors (including appraisers, attorneys and accountants)
  • The OCC participates in interagency activities in order to maintain the sanctity of the national banking system. By monitoring capital, asset quality, management, earnings, liquidity, sensitivity to market risk, information technology, consumer compliance, and community reinvestment, the OCC is able to determine whether or not the bank is operating safely and soundly, and meeting all regulatory requirements.
  • Testified to Senate Banking on June 6, 2012

Consumer Financial Protection Bureau investigation[edit]

Financial Conduct Authority (UK)[edit]

JPM to pay 137,610,000 pounds (approximately $220,000,000) fine to Financial Conduct Authority 9-19-2013 [WSJ][79] Director of enforcement for Britain’s Financial Conduct Authority, Tracey McDermott statement:

  • “When the scale of the problems at JPMorgan became apparent, it sent a shock-wave through the markets. Maintaining the integrity of markets is a key part of our wholesale conduct agenda. We consider JPMorgan’s failings to be extremely serious such as to undermine the trust and confidence in UK financial markets.
  • This is yet another example of a firm failing to get a proper grip on the risks its business poses to the market. There were basic failings in the operation of fundamental controls over a high risk part of the business. Senior management failed to respond properly to warning signals that there were problems in the CIO. As things began to go wrong, the firm didn’t wake up quickly enough to the size and the scale of the problems. What is worse, they compounded this by failing to be open and co-operative with us as their regulator.
  • Firms must learn the lessons from this incident and ensure that they have business practices, values and culture to control the risks in their businesses.”

JPMorgan Chase Bank N.A. fined £137,610,000 for serious failings relating to its Chief Investment Office’s “London Whale” trades [FCA][89]

  • the firm’s response to breaches of relevant risk limits was to assume the numbers indicating a breach were unreliable or to doubt the accuracy of the methodology for risk measurement, and to approve temporary limit increases without adequate analysis of the root cause of the breaches.
  • JPMorgan’s traders sought to conceal them by mismarking positions and through misconduct in the market in which the losses were occurring. Mismarking went undetected in 2012 owing to flaws in valuation controls, some of which had existed since 2007.
  • JPMorgan’s failings extend to its senior management’s response to the problems
  • The firm’s senior management gave insufficient weight to inconsistencies raised in the information in its possession, especially in light of the context provided by the scale of the losses in the SCP. Firm senior management did not take sufficient steps to ensure that all crucial information reached the appropriate decision makers; findings made by Internal Audit were not escalated to senior management and therefore not considered as part of the review. In addition, the firm’s senior management did not involve key parts of the firm’s overall control framework in the review.
  • The Group filed a statement of its earnings in the US on 10 May 2012 which over-valued the SCP’s positions. It subsequently filed a restatement on 13 July 2012. More effective analysis of the information available as at 10 May 2012 may have prevented the need for this restatement.
  • JPMorgan also failed to meet its obligations in respect of its relationship with the FCA*. During the first half of 2012, JPMorgan failed to be open and co-operative with the FCA in that it concealed the extent of the losses as well as numerous serious and significant issues regarding the situation in the SCP.
  • JPMorgan’s failings were extremely serious and undermined trust and confidence in UK financial markets.
  • JPMorgan agreed to settle at an early stage of the FCA’s investigation. JPMorgan therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without the discount the fine would have been £196,586,000.


  • House Agriculture Committee (swaps) - Frank Lucas

Lobby Efforts and Government Relations[edit]

Bloomberg News, Robert Schmidt identified several people at JPM involved the lobbying and government relations response[90]

Peter Scher[edit]

  • oversees government relations globally
  • former Clinton administration official
  • (not using too many outsiders) “We wanted to take ownership of this and use our own people”

Mel Martinez[edit]

  • former Republican senator
  • regional chairman for the bank
  • called up from FL

Nate Gatten[edit]

  • former Fannie Mae lobbyist
  • called in from JPMorgan’s London office

Naomi Camper[edit]

  • former senior staff member, Senate Banking Committee Chairman Tim Johnson
  • head of JPMorgan’s Washington office

Robert F. Bennett / BennettGroup[edit]

  • Hired by JPM
  • run by ex-Utah Republican Senator Robert F. Bennett.
  • Bennett is still barred from lobbying
  • Partner P. Michael Nielsen will work directly on behalf of JPM
    • former senior policy adviser on the Senate Banking Committee
    • Republican
    • Helping draft formal responses to lawmaker queries

Rick Lazio[edit]

Tom Koonce[edit]

  • JPM internal lobbyist
  • formerly a legislative director for Brad Miller (D-NC) member House Financial Services Committee

Collins Lionel / Jones Walker[edit]

Nicholas Leibham / K&L Gates[edit]

Bart Gordon / K&L Gates[edit]

Political contributions and lobby efforts[edit]

  • Lobby Firms 2011 fees paid
    • $350k McBee Strategic Consulting
    • $250k K&L Gates
    • $240k Fierce, Isakowitz & Blalock
    • $130k Glover Park Group
    • $90k Monument Policy Group
    • $90k Walter Group
    • $80k Capitol Tax Partners
    • $80k Jones, Walker
    • $80k Lawrence J Romans
    • $80k LTD Group
  • Political Contributions

Class Action[edit]

See also[edit]

References and sources[edit]

  1. ^ "JPMorgan discloses $2B in losses in 'flawed' hedging strategy". NBC. 10 May 2012. Retrieved 17 August 2012. 
  2. ^ a b Azam Ahmed (May 26, 2012). "The Hunch, the Pounce and the Kill: How Boaz Weinstein and Hedge Funds Outsmarted JPMorgan". The New York Times. Retrieved 5 May 5013.  Check date values in: |access-date= (help)
  3. ^ Celarier, Michelle (16 May 2012). "The man who beached 'Moby Iksil'". The New York Post. Retrieved 16 May 2012. 
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  20. ^ FT Alphaville High-Yield Tranche
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  22. ^ DFA Section 165(h) - See section VI in [1]
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Category:Derivatives (finance) Category:Systemic risk Category:Rogue traders