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JPMorgan & the London Whale
Presented by Joey Froehlich and Laura Tack
● JPMorgan had a Synthetic Credit Portfolio (SCP) that experienced a lot of
growth from 2011 to 2012.
● For SCP, JPMorgan invested in both High Yield and IG investments.
● High Yields are high risk, IGs are low risk.
● Protection was purchased for both HY and IG.
● IG protection was sold and the proceeds were used to pay off the protection
Case Summary Cont.
● A lot of IG investments ended up performing poorly.
● Proceeds from HY investments could not make up for losses on IG.
● In response, metrics used to assess risks were adjusted.
● VaR and CSBPV limits were also adjusted to make it look like SCP was
● SCP was in a position where it could not back out, so it continued to grow.
Case Summary Cont.
● SCP growth:
■ $4 billion to $51 billion
● SCP proceeds and losses:
■ $1 billion in 2011 with $400 million in derivatives
● January: $100 million
● February: $69 million
● March: $40 million
● March 23, Ms. Drew ordered “Phones Down.”
Risk Management Framework
○ Estimates possible magnitude of decrease in value of financial instruments over a fixed time
○ Calculated with either historical market data or Monte Carlo simulation.
○ Useful for monitoring market risk.
■ Used to analyze credit indices.
■ Relies on analysis of correlation between underlying assets, which is subjective.
Risk Management Framework Cont.
○ Measures price sensitivity for each basis point change in credit spread.
○ Useful in estimating impact credit spreads have on small moves.
■ Cannot accurately account for convexity.
■ Not good for when large moves happen in the market.
○ Measures expected change in portfolio value if credit spread on each position is widened by
○ Useful for stress testing portfolios.
○ Trusted by Ms. Drew.
○ Not subject to limitations of other two metrics.
Appropriate type of Exposure
● For this case, Gross exposure is more appropriate:
○ “Indicates total exposure to financial markets, thus providing an insight
into the investment amount at risk from market fluctuations”
○ Can comprise value of short and long investments.
○ Useful because SCP uses both short and long investments.
○ Can provide important insight for risk management.
● Different types of derivatives should be regarded as separate RWAs.
● Multiple types of investments can have different levels of risk.
● These differing levels of risk can lead to diverse characteristics.
● Such diversity can lead to different effects on other assets.
● If each derivative has its own RWA, the risk of SCP can be assessed more
● Derivatives can be employed in this function.
● Cash management was not tempered by risk management function.
Mistakes Made by the CIO Team
● The CIO team emphasized maintaining profitability more than it emphasized
○ The profitable 2011 American Airlines bankruptcy incentivized the CIO team to maintain RWA
○ The CIO team executed trades that were speculative in nature
■ Bruno Iksil, the senior trader of the SCP, bought protection on riskier credit indices and
sold protection on the less risky credit indices
■ Abandoned the CIO’s traditional longer term, hedging-oriented investment approach
Mistakes Made by the CIO Team, cont.
● The CIO team responded to losses by doubling down on their losing strategy
○ Losses in the long IG protection could not be counterbalanced by the gains in the short HY
○ JPM could not reduce their exposure
■ Illiquid credit market
■ High investment in the market
○ The CIO team responded by increasing both long and short exposure
Mistakes Made by the CIO Team, cont.
● The CIO team engaged in unethical practices to hide their problems
○ Created a new VaR model that lowered both the stated risk and the RWA
■ Successfully fought to have the approval process inappropriately expedited
○ Did not adequately inform JPM senior management or regulators of the SCP’s problems
○ Departed from U.S. Generally Accepted Accounting Principles in order to account for their
derivatives more favorably
○ Dismissal of VaR and CSBPV metrics by management
■ Ina Drew, the Chief Investment Officer, ignored all metrics but the CSW10%
■ Higher management, such as Jamie Dimon, approved temporary bankwide metric limit
increases to end breaches caused by the SCP
○ Lack of limitation on the market value of the SCP
○ Utilize the CSW10% alongside other risk metrics and give them importance
○ Implement a limit on the market value of the SCP
○ Prevent individual employees from overriding policies
■ Risk metrics
■ U.S. GAAP
○ Inherent conflict of interest
■ Drew was responsible for both trading and risk management
○ Management did not exercise proper oversight of subordinates
■ Risk metric breaches and alterations
■ Accounting inconsistencies
■ Reports to management
○ Hire a more experienced Chief Risk Officer and give this position the responsibility for risk
○ Management should monitor the actions of subordinates more closely
● Citigroup has been buying risky derivatives in bulk
○ 2009 - Citibank, Citigroup’s primary banking subsidiary, had $32 trillion in derivatives (Eavis, 2015)
○ 2014 - Citibank had $70 trillion in derivatives (Eavis, 2015)
○ 2015 - Citigroup bought credit derivatives ($250 billion notional value) (Griffin & Voegeli, 2016)
○ 2016 - Citigroup bought credit derivatives ($380 billion notional value) (Griffin & Voegeli, 2016; Whittall, 2016)
● Experts say Citigroup does have the capital necessary to mitigate the risk associated with these
derivatives (Eavis, 2015)
● It appears that Citigroup’s motive in investing in these derivatives is profit-related
○ Citigroup’s investment bank has begun generating much higher profits than its consumer bank (Eavis, 2015)
○ Citigroup successfully lobbied to weaken aspects of the Dodd-Frank law that apply to derivatives (Eavis, 2015)
Citigroup Inc., cont.
● If Citigroup wishes to avoid a catastrophe such as the one experienced by
JPMorgan, it must:
○ Ensure its organizational structure does not create conflicts of interest
○ Ensure it does not purchase an unwieldy share of the credit derivative market
■ Many banks are currently shedding derivatives in order to conform with Basel III
■ Citigroup must be especially vigilant in monitoring how much of the market they own
○ Actively monitor its risk metrics
○ Ensure compliance with all governmental regulations and accounting principles related to
● Eavis, P. (2015). Citigroup’s Roaring Revival on Wall Street. The New York Times. Retrieved from
● Griffin, D. & Voegeli, J. (2016). Citigroup Said to Purchase CDS Portfolio From Credit Suisse. Bloomberg Markets.
● Investopedia. (2016). Gross Exposure. Retrieved from
● Wittall, C. (2016). Credit Suisse Sells Credit Derivatives Portfolio to Citigroup. The Wall Street Journal. Retrieved from