What happened?
In 2012, the Synthetic Credit Portfolio (SCP) run from the London office of JPMorgan Chase’s Chief Investment Office (CIO) lost at least $6.2 billion on enormous credit-derivative positions. One trader’s market footprint became so large that he was nicknamed the “London Whale,” and the trades became known by the same name.
The U.S. Senate Permanent Subcommittee on Investigations spent nine months examining the episode. It collected nearly 90,000 documents, reviewed more than 200 recorded calls and instant-message exchanges, conducted more than 25 interviews with bank and regulatory personnel, and received more than 25 briefings.
This article focuses less on the headline loss and more on the operational details preserved in the report: additional trading while losses mounted, conversations among traders, treatment of risk models, revisions to communications talking points, and the response of the bank’s regulator.
Eleven passages that stood out
Page references use the Senate report’s printed pagination. The full PDF has 307 pages; the numbered report ends on p.301, and printed p.1 is physical PDF page 7.
While losses mounted, the CIO added $40 billion. The OCC later called it “doubling down”
In March 2012, with the SCP already losing money, the CIO added another set of large long positions.
It acquired $8 billion in IG17, $14 billion in IG18, and $18 billion in an iTraxx series, increasing notional size by $40 billion in a matter of weeks.
The OCC later characterized the March trades as “doubling down” on a losing strategy.
The report also says Bruno Iksil explained that he switched to newer index series in part to be “less noticeable” to the rest of the market.
The order was “put phones down.” On March 23, the CIO chief told the traders to stop
On March 23, CIO head Ina Drew ordered the SCP traders to stop trading.
The phrase recorded in the report was “put phones down.”
Trading stopped, but the report says problems with using favorable marks for the portfolio continued afterward.
The London head wrote that he had “lost confidence” in his team and was in “crisis mode”
A week after the trading halt, on March 30, London CIO head Achilles Macris emailed the bank’s Chief Risk Officer asking for help with the synthetic credit book.
Macris wrote that he had “lost confidence” in his team and said, “clearly, we are in crisis mode on this.”
By then, the report says, multiple major SCP risk limits had already been breached.
A trader called the situation “idiotic” and the book “more and more monstrous” while a side spreadsheet showed more than $400 million in unreported losses
In a recorded March 16 call, Bruno Iksil said he did not know where his supervisor wanted the marking adjustments to stop and called the situation “idiotic.”
He also described the portfolio as “more and more monstrous.”
At the same time, a separate spreadsheet kept by Julien Grout showed $432 million to $498 million in losses that would have appeared if midpoint prices had been used.
The report says the comments indicate that the traders themselves were uncomfortable with the marks being booked.
The trader estimated a $300–600 million loss that day. The internal report showed about $12.5 million
On March 23, the day trading was halted, Bruno Iksil told his supervisor that the SCP had lost about $300 million even using the most favorable available prices, and about $600 million using midpoint prices.
The SCP nevertheless ended the day reporting an internal daily loss of only about $12.5 million.
The Senate report treats the gap as one example of the portfolio’s marking problems.
The first estimate was a $6 million loss. Less than 90 minutes later it was $395 million
April 10 was the first trading day after press reports brought the London Whale trades into public view. The first SCP P&L estimate that day showed a loss of about $6 million.
A dispute then broke out among the traders over the marks.
Less than 90 minutes later, a second estimate put the loss at about $395 million — more than 60 times the first estimate.
The bank’s final internally recorded loss for the day was $415 million.
Risk limits and advisories were breached more than 330 times in four months. One CS01 limit was exceeded by over 1,000%
The report identifies five major risk metrics and limits used around the SCP: VaR, CS01, CSW10%, stress-loss limits, and stop-loss advisories.
From January through the end of April 2012, CIO risk limits and advisories were breached more than 330 times.
The CS01 limit was exceeded by 100% in January, 270% in early February, and more than 1,000% by mid-April.
The Subcommittee concluded that many breaches did not trigger an in-depth review or immediate risk reduction and were instead ignored or ended by raising limits.
A risk model projected a $6.3 billion annual loss. A CIO risk manager called the result “garbage”
The Comprehensive Risk Measure (CRM) was designed to estimate potential losses over a year under stressed conditions.
At the end of February 2012, the SCP’s CRM projected that the portfolio could incur $6.3 billion in annual losses.
A key CIO risk manager described the result as “difficult for us to imagine” and “garbage.”
He later told the Subcommittee that “garbage” meant he considered the calculation unreliable, not that he rejected it simply because the number was bad. The SCP ultimately lost at least $6.2 billion.
A new VaR model cut the risk number by 50%. Later reviews found manual inputs, an unapproved component, and calculation errors
On January 30, 2012, the CIO received approval to use a new VaR model.
The new model immediately cut CIO VaR from $132 million to $66 million — a 50% reduction.
JPMorgan Chase told the Subcommittee the model change was not motivated by a desire to give the traders more room to take risk.
Later reviews found that key trading data had to be uploaded manually each day, that the model contained a component that had not been tested or approved by the Model Risk Group, and that calculation errors affected hazard rates and correlation estimates. An OCC examiner later called the implementation “shocking” and “absolutely unacceptable.” The bank returned to the prior model four months after the new one was activated.
The communications draft said regulators were “fully aware.” “Fully” was removed, and the CEO replied “Ok”
On April 5, before Bloomberg and the Wall Street Journal published stories about the SCP, JPMorgan Chase’s head of communications sent senior executives proposed talking points.
The draft said the CIO’s activities were for hedging purposes and that regulators were “fully aware” of those activities.
Later that day, the talking points were revised after comments from firm executives.
The word “fully” was removed from the statement about regulatory awareness, and Jamie Dimon replied “Ok” to the revised talking points.
The Subcommittee viewed the revisions as evidence that the bank understood the original characterizations of hedging and transparency to regulators were not entirely accurate.
The OCC learned the scale of the problem from the press, then considered the matter closed by the end of April
Beginning in January 2012, the bank regularly sent OCC risk reports that included multiple risk-limit breaches.
The Subcommittee found no evidence that the OCC reviewed those reports when received, analyzed the breach data, or asked what trading activity was causing the breaches.
When the April 6 press stories exposed JPMorgan Chase’s role in the whale trades, the OCC asked the bank for more information.
The OCC said the data it initially received were so limited, and the bank’s reassurances so broad, that by the end of April it considered the matter closed.
The report says the OCC did not learn about the serious problems surrounding the SCP until May, only days before the bank had to disclose about $2 billion in losses.
What the report says about the background
The Subcommittee did not present the London Whale episode as the failure of a single trader. It traced the outcome across the rapid expansion of the SCP, valuation practices, responses to risk-limit breaches, changes to risk models, reporting to senior management, OCC supervision, and statements to investors, regulators, and the public.
The report says the SCP grew from $51 billion to $157 billion in the first quarter of 2012 and ultimately lost at least $6.2 billion. This article focuses instead on the recorded calls, emails, risk reports, model changes, and supervisory decisions that show how the episode unfolded inside the bank and its regulator.
Corrections to this article
The total was corrected from 300 to 307 physical PDF pages. The numbered report ends on printed p.301, and printed p.1 is physical PDF page 7. The introduction now distinguishes the two counts; note references and the existing PDF page mapping are unchanged.