[Senate Hearing 113-96, Volume 1]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 113-96

                      JPMORGAN CHASE WHALE TRADES:
                     A CASE HISTORY OF DERIVATIVES
                            RISKS AND ABUSES

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               ----------                              

                             VOLUME 1 OF 2

                               ----------                              

                             MARCH 15, 2013

                               ----------                              

        Available via the World Wide Web: http://www.fdsys.gov/

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs



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                                                         S. Hrg. 113-96

                      JPMORGAN CHASE WHALE TRADES:
                     A CASE HISTORY OF DERIVATIVES
                            RISKS AND ABUSES

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               __________

                             VOLUME 1 OF 2

                               __________

                             MARCH 15, 2013

                               __________

        Available via the World Wide Web: http://www.fdsys.gov/

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                   Ricard J. Kessler, Staff Director
               Keith B. Ashdown, Minority Staff Director
                     Trina D. Shiffman, Chief Clerk
                    Laura W. Kilbride, Hearing Clerk


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan Chairman
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

            Elise J. Bean, Staff Director and Chief Counsel
                   Zachary I. Schram, Senior Counsel
                       Allison F. Murphy, Counsel
       Henry J. Kerner, Minority Staff Director and Chief Counsel
                    Stephanie Hall, Minority Counsel
                     Mary D. Robertson, Chief Clerk










                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator McCain...............................................     7
    Senator Johnson..............................................     9
Prepared statements:
    Senator Levin................................................    91
    Senator McCain...............................................    98

                               WITNESSES
                         Friday, March 15, 2013

Ina R. Drew, Former Head, Chief Investment Office, JPMorgan Chase 
  & Co., New York, New York......................................    10
Ashley Bacon, Acting Chief Risk Officer, JPMorgan Chase & Co., 
  New York New York..............................................    12
Peter Weiland, Former Head of Market Risk, Chief Investment 
  Office, JPMorgan Chase & Co., New York, New York...............    13
Michael J. Cavanagh, Head of JPMorgan Chase & Co. Management Task 
  Force Reviewing CIO Losses, and Co-Chief Executive Officer, 
  Corporate & Investment Bank, JPMorgan Chase & Co., New York, 
  New York.......................................................    28
Douglas L. Braunstein, Current Vice Chairman, Former Chief 
  Financial Officer (2010-12), JPMorgan Chase & Co., New York, 
  New York.......................................................    30
Hon. Thomas J. Curry, Comptroller of the Currency, U.S. 
  Department of the Treasury.....................................    61
Scott Waterhouse, Examiner-in-Charge, OCC National Bank 
  Examiners--JPMorgan Chase, Office of Comptroller of the 
  Currency.......................................................    62
Michael Sullivan, Deputy Comptroller for Risk Analysis, Risk 
  Analysis Department, Office of the Comptroller of the Currency.    63

                     Alphabetical List of Witnesses

Bacon, Ashley:
    Testimony....................................................    12
    Prepared Statement...........................................   108
Braunstein, Douglas L.:
    Testimony....................................................    30
Cavanagh, Michael J.:
    Testimony....................................................    28
    Prepared Statement...........................................   117
Curry, Hon. Thomas J.:
    Testimony....................................................    61
    Prepared Statement...........................................   129
Drew, Ina R.:
    Testimony....................................................    10
    Prepared Statement...........................................   101
Sullivan, Michael:
    Testimony....................................................    63
    Prepared Statement...........................................   129
Waterhouse, Scott:
    Testimony....................................................    62
    Prepared Statement...........................................   129
Weiland, Peter:
    Testimony....................................................    13
    Prepared Statement...........................................   111

                                APPENDIX

Report by the Permanent Subcommittee on Investigations Majority 
  and Minority Staff entitled ``JPMorgan Chase Whale Trades: A 
  Case History of Derivatives Risks and Abuses,'' March 15, 2013.   150

                              EXHIBIT LIST

 1. a. GGrowth of Synthetic Credit Portfolio, chart prepared by 
  the Permanent Subcommittee on Investigations...................   511
    b. GSynthetic Credit Portfolio Daily Profits and Losses, 
  chart prepared by the Permanent Subcommittee on Investigations.   512
    c. GSynthetic Credit Portfolio Aggregate Profits and Losses, 
  chart prepared by the Permanent Subcommittee on Investigations.   513
    d. GSynthetic Credit Portfolio Risk Limit Breaches, chart 
  prepared by the Permanent Subcommittee on Investigations.......   514
    e. GValue-at-Risk for the CIO (10Q VaR), chart prepared by 
  the Permanent Subcommitteeon Investigations....................   515
    f. GInaccurate Public Statements on April 13, 2012, chart 
  prepared by the Permanent Subcommittee on Investigations.......   516
    g. GSynthetic Credit Portfolio Internal Profits and Loss 
  Reports, January-May 2012, chart prepared by the Permanent 
  Subcommittee on Investigations.................................   517
    h. G2011 CIO Compensation vs. Investment Bank Comparables, 
  chart prepared by the Permanent Subcommittee on Investigations.   518
    i. GTimeline: Key Events in JPMorgan Chase Whale Trades, 
  chart prepared by the Permanent Subcommittee on Investigations.   519
 2. GJPMorgan Chase presentation slides, Chief Investment 
  Office--Organization, April 2012. [JPM-CIO-PSI 0001875-876, 
  879-880, 885]..................................................   522

Documents Related to Increasing Risk:

 3. GTestimony of Jamie Dimon, Chairman & CEO of JPMorgan Chase & 
  Co., before the Senate Committee on Banking, Housing and Urban 
  Affairs, June 13, 2012 (This strategy, however, ended up 
  creating a portfolio that was larger and ultimately resulted in 
  even more complex and hard-to-manage risks. This portfolio 
  morphed into something that, rather than protect the Firm, 
  created new and potentially larger risks.).....................   527
 4. GJPMorgan Chase/OCC internal email, dated July 2012, re: CIO: 
  Response to Regulator Requests on NBIA, Risk Tolerance and 
  Follow-up VaR model questions, attaching Chief Investment 
  Office New Business Initiative Approval Executive Summary. 
  [OCC-SPI-00081611 and Excerpt of OCC-SPI-00081631].............   531
 5. GJPMorgan Chase & Co. Audit Department Report, CIO Global 
  Credit Trading (Chief Investment Office (CIO) credit trading 
  activities commenced in 2006 and are proprietary position 
  strategies executed on credit and asset backed indices.). [JPM-
  CIO-PSI-H 0006022-023].........................................   553
 6. GJPMorgan Chase Summary of Positions (01/03/2011--$4 billion; 
  12/30/2011--$51 billion; 03/30/2012--$157 billion). [JPM-CIO-
  PSI 0037609]...................................................   555
 7. GJPMorgan Chase internal emails, dated January 2012, re: 
  International Credit Consolidated P&L 09 Jan-2012 (Let's review 
  the unwind plan to maximize p l. We may have a tad more room on 
  rwa. Pls schedule asap.). [JPM-CIO-PSI 0000075-078]............   556
 8. GJPMorgan Chase internal emails, dated January 2012, re: 
  Meeting materials for 11am meeting attaching J.P.Morgan Core 
  Credit Book Highlights, January 2012. (As of COB 16th January 
  2012 the CIO calculated Core Credit Book RWA was USD20.9bln; 
  This compares to average USD40.3bln RWA for December 2011 
  provided by QR). [JPM-CIO-PSI 0000098-101].....................   560
 9. GJPMorgan Chase internal email, dated January 2012, re: 
  Credit book Decision Table--Scenario clarification (The fourth 
  scenario is our Target scenario and the one we are hoping to 
  implement again by midyear.). [JPM-CIO-PSI 0000105-106]........   564
10. GJPMorgan Chase internal email, dated January 2012, re: 
  credit book last version, attaching J.P.Morgan Core Credit Book 
  Highlights, January 2012. (The trade that makes sense.). [JPM-
  CIO-PSI 0000159-173]...........................................   566
11. GJPMorgan Chase internal emails, dated January 2012, re: 
  update on core credit book (the only one I see is to stay as we 
  are and let the book simply die. That we should take some hits 
  because the markets might create noise in the P&L is a certain 
  reality. Yet, the control of the drawdown now is generating 
  issues that make the book only bigger than notional.). [JPM-
  CIO-PSI 0001223]...............................................   581
12. GJPMorgan Chase internal email, dated January 2012, re: 
  update on core credit book (. . . notionals become scary and 
  upside is limited unless we have really unexpected scenarios. 
  In the meantime, we face larger and larger drawdown pressure 
  versus the risk due to notional increases. Please let me know 
  the course of action I should take here.). [JPM-CIO-PSI 
  0001766].......................................................   582
13. GJPMorgan Chase internal email, dated January 2012, re: 
  hello, quick update in core credit . . . (. . . we can show 
  that we are not at mids but on realistic level. * * * I went I 
  to ISMG and advised that we set the book for long risk carry 
  the time for us to see whether we really need to fight in 
  mars.). [JPM-CIO-PSI 0001229]..................................   583
14. GJPMorgan Chase internal emails, dated January 2012, re: Core 
  book p&l drawdown and main exposures (The current strategy 
  doesn't seem to work-out. . . . the book doesn't behave as 
  intended.). [JPM-CIO-PSI 0000221-223]..........................   584
15. GJPMorgan Chase internal email, dated March 2012, re: 
  priorities (If we need to [a]ctually reduce the book, we will 
  not be able to defend our positions. . . . We need to win on 
  the methodology and then the diversification.). [JPM-CIO-PSI 
  0001219].......................................................   587
16. a. GJPMorgan Chase internal email, dated March 2012 re: CIO 
  Core Credit P&L Predict [20 Mar]: -$39,686k (dly) -$275,424k 
  (ytd). (. . . the lag in P&L is material ($600-800M).). [JPM-
  CIO-PSI 0016487-489]...........................................   588
    b. GJPMorgan Chase internal email, dated March 2012 re: 
  International Credit Consolidated P&L 20-Mar-2012 (. . . the 
  lag in P&L is material ($600-800M).). [JPM-CIO-PSI 0019474-486]   591
17. GJPMorgan Chase Transcript of Call, March 2012, between 
  Martin-Artajo and Iksil, (. . . that's why I tried sending this 
  P&L I sent also the comments it came from Julien but I wrote 
  it, where I said OK you know we take this loss, we are 
  maintaining long risk where we have to be, the rally is on IG 
  but guess what you know it's lagging so much that actually we 
  have to show loss, and I explained that this is a lag that 
  keeps going, that amounts to a potential of 800 bucks. . . .). 
  [JPM-CIO-PSI-H 0006392-400]....................................   594
18. GJPMorgan Chase internal email, dated March 2012 re: CIO Core 
  Credit P&L Predict [22 Mar]: +$82k (dly) -$276,990k (ytd). 
  (Today we sold protection. . . .). [JPM-CIO-PSI 0016499-501]...   603
19. GJPMorgan Chase internal emails, dated March 2012 re: I would 
  like to understand the increase in positions in credit (Ina is 
  freaking--really! Call me). [JPM-CIO-PSI 0000410-412]..........   606
20. GJPMorgan Chase transcript of instant message dated March 23, 
  2012 (Bruno Iksil: this year for the first time, achilles 
  started thinking i could be of use other than to make money . . 
  . just to protect the whole group but here is the loss and it 
  become too large and this is it. . . .). [JPM-CIO-PSI 0001240-
  246]...........................................................   609
21. GJPMorgan Chase transcript of instant message dated March 23, 
  2012 (Bruno Iksil: . . .I am going to be hauled over the coals 
  * * * you don't lose 500M without consequences . . .). [JPM-
  CIO-PSI-H 0006438, 450-464]....................................   616
22. GJPMorgan Chase internal email, dated March 2012 re: Tranche 
  Plan (Now that we have the new RWA increase, Ina would like to 
  discuss the forward plan for reduction. She does not want any 
  trades executed until we all discuss it.). [JPM-CIO-PSI 
  0001267].......................................................   632
23. GJPMorgan Chase internal emails, dated March 2012, re: 
  synthetic credit--crisis action plan (Clearly, we are in a 
  crisis mode on this.). [JPM-CIO-PSI 0001220-222]...............   633
24. a. G`London Whale' Rattles Debt Market, April 6, 2012, The 
  Wall Street Journal............................................   636
    b. GJPMorgan Trader's Positions Said to Distort Credit 
  Indexes, April 6, 2012, Bloomberg..............................   638
25. GJPMorgan Chase internal emaisl, dated April 2012, re: Credit 
  (A bit more than we thought). [JPM-CIO-PSI-H 0002276]..........   641
26. GJPMorgan Chase internal email, dated April 2012, re: Net 
  positions vs average trading volumes (The below table shows 
  that CDX.IG.9 net position for CIO is $82.2bio, which is 
  approximately 10-15 days of 100% of trading volume based on the 
  1m avg volume published by JPMorgan Research. ITX.9 net 
  position for CIO is $35bio, which is approximately 8-12 days of 
  100% trading volume based on the 1m avg volume.). [JPM-CIO-PSI 
  0001026-027]...................................................   642
27. GOCC internal emails, dated May 2012, re: CIO call with Mike 
  Brosnan (They took up a strategy to reduce their make believe 
  voodoo magic ``Composite Hedge.'' . . .). [OCC-SPI-00021602-
  604]...........................................................   644

Documents Related to Hiding Losses:

28. GGrout Spreadsheet, March 12-16, 2012. [JPM-CIO-PSI-H 
  00002812]......................................................   647
29. GJPMorgan Chase internal emails, dated March 2012, re: update 
  on Core PNL (The divergence has increased to 300 now). [JPM-CIO 
  0003475].......................................................   648
30. GJPMorgan Chase internal emails, dated March 2012, re: 
  Synthetic Book--URGENT (Option B: we settle with the IB . . . 
  and have an impact on P/L that could be as large as -350MM.). 
  [JPM-CIO-PSI 0000416]..........................................   649
31. GJPMorgan Chase internal emails, dated April 2012, re: update 
  (. . . if we exclude very adverse marks to our book the 
  potential loss due to market moves or any economic scenario . . 
  . would not exceed . . . -200 MM USD. . . .). [JPM-CIO-PSI 
  0001429].......................................................   650
32. a. GJPMorgan Chase transcript of call between Julien Grout 
  and Bruno Iksil, dated March 16, 2012 (I can't keep this going, 
  we do a one-off at the end of the month to remain calm. * * * I 
  don't know where he wants to stop, but it's getting idiotic.). 
  [JPM-CIO-PSI-H 0003820-822]....................................   651
    b. GJPMorgan Chase transcript of instant message dated March 
  16, 2012 (it is 300 now 1000 for month end? ouch well that is 
  the pace). [JPM-CIO-PSI-H 0003815-819].........................   654
    c. GTranscript of Audio Recording Produced to the Permanent 
  Subcommittee on Investigations, call between Javier Martin-
  Artajo, Ina Drew, and Gina Serpico. Undated (likely April 2012) 
  (Ms. Drew: It's absolutely fine to stay conservative, but it 
  would be helpful, if appropriate, to get, to start getting a 
  little bit of that mark back.). [JPM-CIO-PSI-A 0000076.wav.....   659
    d. GJPMorgan Chase transcript of call between Javier Martin-
  Artajo and Alistair Webster, dated May 8, 2012 (So then when, 
  if we roll forward to March, if the front office marks had 
  migrated . . . to the aggressive side, most of them, not all of 
  them, to the aggressive side, but they've also migrated from 
  either mid to somewhere close to being at the, you know, the 
  bounds of the bid or offer.). [JPM-CIO 0003631-636]............   662
33. GJPMorgan Chase internal email, dated April 2012, re: CIO 
  Core Credit P&L Predict (10 Apr]: -$5,711k (dly) -$626,834k 
  (ytd) (Daily P&L: -$5,710,991 * * * Daily P&L: -$394,735,120). 
  [JPM-CIO 0003570-576]..........................................   668
34. a. GJPMorgan Chase internal emails, dated April 2012, re: 
  Credit Index and Tranche Book (. . . CIO FO marked their book 
  at the most advantageous levels. . . .). [JPM-CIO-PSI-H 
  0006636-639]...................................................   675
    b. GJPMorgan Chase internal emails, dated April 2012, re: 
  URGENT ::: Huge Difference for iTraxx & CDX (The desk marked 
  the book at the boundary of the bid/offer spread. . . .). [JPM-
  CIO 0003582-3587]..............................................   679
35. GJPMorgan Chase internal emails, dated April 2012, re: 
  Collateral Disputes (This isn't a good sign on our valuation 
  process. . . . I am going to dig further.). [JPM-CIO-PSI-H 
  0000108-109]...................................................   685
36. GJPMorgan Chase internal memorandum, dated May 2012, re: 
  Firm's review of the valuation of its CIO EMEA credit portfolio 
  in light of the current market conditions and dislocation that 
  occurred in April 2012. [JPM-CIO-PSI-H 0006730-747]............   687

Documents Related to Disregarding Limits:

Overview and Organization:

37. GJ.P. Morgan slide presentation, Market Risk Limits, March 
  2012. (Business Unit must take immediate steps toward reducing 
  its exposure to be within the limit, unless a One-off Approval 
  is granted by all Grantors and Grantees of limits) [OCC-SPI-
  00117682]......................................................   705
38. GDocument prepared by Bruno Iksil, including excerpts of 
  JPMorgan Chase internal emails December 2011-March 2012. [JPM-
  CIO-PSI 0021879-917]...........................................   709
39. GJPMorgan Chase internal emails, dated May 2012, re: 
  Information needed (. . . please find the CIO excessions 
  attached.). [JPM-CIO-PSI-H 0000627-636]........................   748

VaR Models and Limits:

40. GJPMorgan Chase internal emails, dated January 2012, re: JPMC 
  Firmwide VaR--Daily Update--COB 01/09/2012 (Pat's model is in 
  line with the 70 VAR and has a much better explanation for 
  these changes. Hopefully we get this approved as we speak.). 
  [JPM-CIO-PSI 0000093-097]......................................   758
41. GJPMorgan Chase internal emails, dated January 2012, re: 
  Breach of firm var (Below please find details of the VaR limit 
  breach. The VaR increase is driven by Core Credit (tranche) in 
  EMEA. The VaR has increased steadily since the end of December 
  as positions in CDX.HY on-the-run indices have been added to 
  the portfolio to balance the book, which has been taken longer 
  risk. . . .). [JPM-CIO-PSI 0000141-145]........................   763
42. GJPMorgan Chase internal email, dated January 2012, re:CIO 
  VaR (FYI. Dual plan . . . as discussed keep the pressure on our 
  friends in Model Validation and QR.). [JPM-CIO-PSI 0000151]....   768
43. GJPMorgan Chase internal emails, dated January 2012, re: CIO 
  VaR heads up and update (Importantly, for the same COB 26 
  January, the *new/full revaluation methodology* shows VaR 
  decreased ($1.3MM) from 70.8mm to 69.5mm. I estimate that this 
  would make CIO global VAR closer to $76MM vs. the currently 
  reported number >$115. We anticipate final approval on Monday 
  and that the *new methodology should become the official firm 
  submission from Monday, for 27 Jan COB.* Limit issues should 
  therefore cease beginning from Monday.). [JPM-CIO-PSI 0000177-
  179]...........................................................   769
44. GJPMorgan Chase internal emails, dated January 2012, re: 
  draft of the MRG review of the HVAR methodology for the CIO 
  core credit books (Operational Risk--The VaR computation is 
  currently done off spreadsheets using a manual process. Thus it 
  is error prone, and not easily scalable. * * * ACTION PLAN: CIO 
  should re-examine the data quality and explore alternative data 
  sources. For days with large discrepancies between dealer marks 
  and IB marks, the integrity of the data used for HVAR 
  calculation should be verified. * * * Please go ahead with the 
  implementation of the new HVaR methodology for the CIO credit 
  books.). [JPM-CIO-PSI 0000187-191].............................   772
45. GJPMorgan Chase internal emails, dated April 2012, re: CIO 
  VaR (FYI--we discovered an issue related to the VAR market data 
  used in the calculation which we need to discuss. This means 
  our reported standalone var for the five business days in the 
  period 10-16th April was understated by apprx $10mm.). [JPM-
  CIO-PSI 0001205]...............................................   777

RWA, CRM and Optimization:

46. GJPMorgan Chase internal emails, dated December 2011, re: 
  RWA--Tranche Book (The estimates of reductions will be: Model 
  reduction QR CRM (ackno[w]ledged already) 5 [billion] (Pat 
  estimate); Model reduction QR VAR 0.5 [billion] (Pat estimate); 
  Model Reduction QR Stress 1.5 [billion] (Pat estimate)). [JPM-
  CIO-PSI 0000032-034]...........................................   778
47. GJPMorgan Chase internal emails, dated March 2012, re: CIO 
  CRM results (We got some CRM numbers and they look like garbage 
  as far as I can tell, 2-3x what we saw before.). [JPM-CIO-PSI 
  0000338-339]...................................................   781
48. GJPMorgan Chase internal emails, dated March 2012, re: New 
  CRM numbers . . . (With their new model, QR is reporting that 
  we have a stand alone CRM of roughly 6bn. This is radically 
  higher than the worst loss we see at the same confidence level; 
  the loss we see is far below 2bn.). [JPM-CIO-PSI 0036342-344]..   783
49. GJPMorgan Chase internal emails, dated March 2012, re: CIO 
  CRM results (Based on our models, though, we believe that the 
  $3bn increase in RWA is entirely explained by a $33bn notional 
  increase in short protection (long risk) in your portfolio 
  between Jan and Feb. * * * The change in notional is not 
  correct and the CRM is therefore too high.). [JPM-CIO-PSI 
  0000371-372 ]..................................................   786
50. GJPMorgan Chase internal emails, dated March 2012, re: 
  Optimizing regulatory capital (To optimize the firm-wide 
  capital charge, I believe we should optimize the split between 
  the tranche and index books. * * * I don't think we should 
  treat this as regulatory arbitrage. Instead we should treat the 
  regulatory capital calculation as an exercise of automatically 
  finding the best results of an immensely arbitrary and 
  complicated formula.). [JPM-CIO-PSI 0011025-026]...............   788
51. a. GExcerpt from transcript of audio recording produced to 
  the Permanent Subcommittee on Investigations, call between Anil 
  Bangia and Patrick Hagan, dated March 21, 2012. [JPM-CIO-PSI-A 
  0000089].......................................................   790
    b. GExcerpt from transcript of audio recording produced to 
  the Permanent Subcommittee on Investigations, call between Anil 
  Bangia and Patrick Hagan, dated March 21, 2012. [JPM-CIO-PSI-A 
  0000090].......................................................   791
    c. GExcerpt from transcript of audio recording produced to 
  the Permanent Subcommittee on Investigations, call between 
  Peter Weiland and Patrick Hagan, dated March 22, 2012. [JPM-
  CIO-PSI-A 0000091].............................................   793
52. GJPMorgan Chase internal emails, dated April 2012 (We haven't 
  made the case of how this book runs off and whether risk can be 
  managed effectively. . . .). [JPM-CIO-PSI 0000497-498].........   794

Credit Spread Risk Metrics and Limits:

53. GJPMorgan Chase internal email, dated January 2012, re: there 
  is more loss coming in core credit book (I reckon we have 
  another 50M coming from CDX IG9 exposure. The guys have a huge 
  skew trade on and they will defend it as much as we do.). [JPM-
  CIO-PSI 0001225]...............................................   796
54. GJPMorgan Chase internal emails, dated February 2012, re: 
  Csbpv limit--please read (We have a global credit csbpv limit. 
  It was set up at the initiation of the credit book. 
  Unfortunately we have been breaching for most of the year. * * 
  * I have no memory of this limit. In any case it need to be 
  recast with other limits.). [JPM-CIO-PSI-H 0002936]............   797
55. GJPMorgan Chase internal email, dated February 2012, re: CIO 
  Global Credit spread BPV limit breach-COB 02/09/2012 (Since 
  mid-January CIO has been in breach of its global csbpv limits, 
  driven primarily by position changes in the tranche book.). 
  [JPM-CIO-PSI 0001823-825, 832].................................   798
56. GJPMorgan Chase internal emails, dated April 2012, re: CIO 
  DAY 1 (CIO's 10% CSW by my group's model estimate is long 245mm 
  of risk; their own models (run by Weiland) quote $145mm. I 
  don't understand the difference in the models and don't know 
  how good a measure of risk 10% CSW is for their book. But I 
  spoke to Ashley and we agree that 10% CSW has been trending up 
  for CIO, by either their model or ours.). [JPM-CIO-PSI 0000449-
  451]...........................................................   802
57. GJPMorgan Chase internal email, dated May 2012, re: CSBPV 
  History (Early in 2012 net CSBPV increased dramatically as IG 
  positions were added and offset between HY and IG grew). [JPM-
  CIO-PSI-H 0000810-811].........................................   805

Documents Related to OCC Oversight:

58. GOCC internal email, dated January 2012, re: CIO Quarterly 
  Meeting (The MTM Book is decreasing in size in 2012.). [OCC-
  SPI-00004695]..................................................   807
59. GOCC internal emails, dated April 2012, re: CIO deck ([H]ave 
  you still been getting the CIO deck? I don't recall seeing it 
  lately.). [OCC-00004720].......................................   808
60. GJPMorgan Chase/OCC email, dated April 2012, re: materials 
  for Fed/OCC/FDIC call at noon today, attaching Synthetic Credit 
  Book Review for Briefing by CIO to OCC. [OCC-SPI-00009712-724].   809
61. GJPMorgan Chase/OCC emails, dated April 2012, re: CIO January 
  2012 valuation memo and metrics (Apologies for not distributing 
  the February valuation work. I just sent the February and March 
  reports.). [OCC-00004735-736]..................................   822
62. GJPMorgan Chase/OCC emails, dated April 2012, re: Quick 
  questions pp 4 and 5 of yesterday's presentation (I believe 
  there is modest long credit risk sensitivity to the portfolio 
  now.). [OCC-SPI-00023815]......................................   824
63. GOCC internal email, dated April 2012, re: JPM CIO / IG9 
  "whale" trade (JPM's CIO has been using a synthetic credit 
  (credit derivative) portfolio since 2007. It was initially set 
  up to provide income to mitigate other significant credit 
  losses that would surface under a broad credit stress 
  scenario.). [OCC-00012521-523].................................   825
64. GJPMorgan Chase/OCC emails, dated April 2012, re: CIO EMR? 
  (Does the CIO still produce an EMR? It wasn't included in the 
  January Treasury EMR, which is where I used to see it. I'm 
  looking for the balance sheet information that was in it.). 
  [OCC-00004723].................................................   828
65. GJPMorgan Chase/OCC emails, dated April 2012, re: Info on 
  VaR, CSBPV, and stress status and limits (We are working on a 
  new set of limits for synthetic credit and the current CS01 
  will be replaced by something more sensible and granular.). 
  [OCC-SPI-00022340-341].........................................   829
66. GOCC internal emails, dated April 2012, re: Weekly Market 
  Summary period ending 4/13 (The Whale Trade issue is considered 
  closed--email went out to Senior Management yesterday). [OCC-
  SPI-00023057-060]..............................................   831
67. GOCC internal email, dated April 2012, re: Weekly Market 
  Summary period ending 4/20 (For the second consecutive week, 
  CIO is breaching its $1.0bn stress limit. . . .). [OCC-SPI-
  00023753-755]..................................................   835
68. GOCC internal emails, dated May 2012, re: CIO Synthetic 
  Position (Doug Braunstein and John Hogan called to provide an 
  update on the CIO position. * * * Current losses are 
  approximately $1.6 billion.). [OCC-SPI-00021853]...............   838
69. GOCC internal email, dated May 2012, re: CIO information for 
  Wednesday (However I asked James to first, put in a request for 
  more granular daily P&L on the synthetic credit. . . . Bank 
  will likely object to this. . . .). [OCC-SPI-00013737].........   839
70. GOCC internal emails, dated May 2012, re: My opinion on 
  yesterday's meeting (I wasn't satisfied with the comments made 
  about valuation process and thresholds yesterday, and so we 
  have some followup here. * * * In addition to reserve, there 
  were likely problems with the thresholds themselves. * * * 
  Valuation was one of the things Hogan said they are looking 
  at). [OCC-00005302-304]........................................   840
71. GOCC internal emails, dated May 2012, re: J.P. Morgan Chase 
  (We received a lot of pushback from the bank, Ina Drew in 
  particular, regarding our comments. In fact, Ina called 
  Crumlish when he was in London and "sternly" discussed our 
  conclusions with him for 45 minutes. Basically she said that 
  investment decisions are made with the full understanding of 
  executive management including Jamie Dimon.). [OCC-00001746]...   843
72. GMorgan Chase/OCC emails, dated May 2012, re: CIO P&L 
  reporting (We'd like to get the synthetic credit P&L for the 
  past five weeks broken out on at least a weekly basis.). [OCC-
  00004759]......................................................   844
73. GOCC internal emails, dated May 2012, (Does not add up. 
  Collateral dispute of $700 mil versus a double digit reserves 
  amount?). [OCC-SPI-00009335]...................................   845
74. GOCC internal emails, dated May 2012, re: Not Getting CIO 
  daily P&L after only one day (I got one CIO daily P&L 
  distribution and then didn't yesterday.). [OCC-00004540].......   846
75. GOCC handwritten notes, dated May 2012, re: SBC Staff 
  Briefing (JPMC transactions at issue involved an effort to 
  hedge the bank's credit risk. Hedging credit risk is not 
  uncommon, and if done properly, reflects sound management 
  risk.). [PSI-OCC-10-000001]....................................   847
76. GOCC internal emails, dated May 2012, re: CIO call with Mike 
  Brosnan (I told Mike B that the Joe Sabatini emails with 
  selected position information were sent by the bank after 
  initial OCC and FRB enquiries. We concluded that this 
  information was pretty much useless, as it did not tell us what 
  was happening risk wise.). [OCC-SPI-00021628-631]..............   848
77. GOCC internal emails, dated May 2012, re: cio var change 
  (Here are a few comments from the days preceding the synthetic 
  credit VaR model change that became effective 1/27/12. Note the 
  reduction of CIO VaR by 44% to $57mm.). [OCC-SPI-00021932].....   852
78. GOCC internal emails, dated June 2012, re: 2nd Wilmer Hale 
  Call (I then followed with a question relating to what I 
  described as mismarked books to which Hogan forcefully stated 
  JPM books were not mismarked; leaving both Elwyn and me left 
  puzzled over how a collateral dispute could be resolved by 
  agreeing to the counterparties marks, without admitting your 
  own marks were incorrect.). [OCC-SPI-00071386].................   853

Documents Related to Misinformation to Investors, Regulators, and 
  the Public:

79. a. GJPMorgan Chase internal email, dated January 2012, re: 
  JPMC Firmwide VaR--Daily Update--COB 01/19/2012 (The impact of 
  the new VaR model based on Jan. 18 will be a reduction of CIO 
  VaR by 44% to $57mm.). [JPM-CIO-PSI 0002457]...................   856
    b. GJPMorgan Chase internal email, dated January 2012, re: 
  JPMC 95% 10Q VaR--Limit Excession Notification (COB 1/19/12) (. 
  . . reduction of CIO VaR by 44% to $57mm.). [JPM-CIO-PSI 
  0001890].......................................................   857
    c. GJPMorgan Chase internal email, dated January 2012, re: 
  APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval (. . . 
  reduction of CIO VaR by 44% to $57mm.). [JPM-CIO-PSI 0004660-
  661]...........................................................   858
    d. GJPMorgan Chase internal emails, dated January 2012, re: 
  APPROVAL NEEDED: JPMC 95% 10Q VaR One-Off Limit Approval (Jamie 
  Dimon: I approve.) [JPM-CIO-PSI 0001337-338]...................   860
    e. GJPMorgan Chase internal email, dated January 2012, re: : 
  JPMC Firmwide VaR--Daily Update--COB 01/26/2012 (. . . 
  reduction of CIO VaR by 44% to $57mm.). [JPM-CIO-PSI 0003346]..   862
    f. GJPMorgan Chase internal email, dated January 2012, re: : 
  JPMC Firmwide VaR--Daily Update--COB 01/26/2012 (. . . 
  reduction of CIO VaR by 44% to $57mm.). [JPM-CIO-PSI 0003715]..   863
    g. GJPMorgan Chase internal emails, dated January 2012, re: : 
  JPMC Firmwide VaR--Daily Update--COB 01/26/2012 (A CIO model 
  change is planed to go in this week-end. New VaR methodology 
  approved (and now the same methodology as IB) reduces 
  standalone Credit VaR by approx $30 mio.). [JPM-CIO-PSI-H 
  0001675].......................................................   864
    h. GJPMorgan Chase internal emails, dated January 2012, re: 
  JPMC Firmwide VaR--Daily Update--COB 01/27/2012 (The Firm's 95% 
  10Q VaR as of cob 01/27/2012 is $108mm of the $125MM limit, a 
  decrease of $53mm from the prior day's revised VaR, driven by 
  CIO (implementation of newly approved VaR model for synthetic 
  credit).). [JPM-CIO-PSI 0001339]...............................   865
80. GJPMorgan Chase internal email, dated February 2012, re: CIO 
  Business Review Materials. [JPM-CIO-PSI 0001940-942, 949-951, 
  958-961, 963]..................................................   866
81. GJ.P.Morgan Directors Risk Policy Committee--CIO 2012 
  Opportunities and Challenges, March 2012. [JPM-CIO-PSI 0015015-
  018, 023]......................................................   877
82. GJPMorgan Chase Audit Department Report, dated March 2012, 
  Audit Rating: Needs Improvement. [JPM-CIO-PSI 0009289-296].....   882
83. GJPMorgan Chase internal emails, dated April 2012, re: 
  Jamie's fine with this (Here are some revised points based on 
  your comments.). [JPM-CIO-PSI 0000543-544].....................   890
84. a. GJPMorgan Chase internal email, dated April 2012, re: CIO 
  (Post December as the macro scenario was upgraded and our 
  investment activities turned pro risk, the book was moved into 
  a long position.). [JPM-CIO-PSI 0000539].......................   892
    b. GJPMorgan Chase internal email, dated May 2012, (WHAT 
  HAPPENED?). [JPM-CIO-PSI 0001212-214]..........................   893
85. GJPMorgan Chase internal email, dated April 2012, re: 
  Synthetic Credit Summary (In Q4, we decided to neutralize the 
  risk profile of this book.). [JPM-CIO-PSI 0001588-589].........   896
86. GJPMorgan Chase internal emails, dated April 2012, re: 
  Deliverables for meeting tomorrow (Doug had the question of why 
  we just didn't reduce the HY position to reduce our risk rather 
  than going long the IG 9 (we discussed carry (ie associated 
  p&l). . . .). [JPM-CIO-PSI 0001646-647]........................   898
87. GJPMorgan Chase internal emails, dated April 2011, re: Credit 
  risk limits (This is the governance used in the IB to control 
  what is currently going on in CIO. We (obviously) need to 
  implement this in CIO as soon as possible.). [JPM-CIO-PSI 
  0001086].......................................................   900
88. GJPMorgan Chase internal emails, dated April 2012, re: Single 
  names CDS basis relative to IG 9 CDS--URGENT update (. . . the 
  market is quiet today. To[o] early to tell but so far about 
  flat P/L. The tension has stopped now. The bank's 
  communications yesterday are starting to work.). [JPM-CIO-PSI-H 
  0002340, 342]..................................................   901
89. GJPMorgan Chase internal email, dated April 2012, re: updated 
  (We are working on Jamie's request for Correlation of the 
  credit book against the portfolio. . . .). [JPM-CIO-PSI 
  0001077-078]...................................................   903
 90. GJPMorgan Chase internal email, dated April 2012, re: 
  synthetic credit information for April 13 earnings call, 
  including SCP P&L scenarios. [JPM-CIO-PSI 0001701-709].........   905
 91. GJPMorgan Chase internal email, dated April 2012, re: 
  Synthetic Credit Materials (The way that we at CIO have book-
  run the Core Book to balance the negative carry cost of High 
  yield Book overtime has been using Investment Grade strategies 
  that gave us some carry or buying optionality (or both). . . 
  .). [JPM-CIO-PSI 0001100-106]..................................   914
 92. GJPMorgan Chase internal email, dated April 2012, re: If 
  asked about London / CIO and Volcker (We do not believe that 
  our activity in any way goes against the law as passed by 
  Congress, nor the spirit or proposed rule as written.). [JPM-
  CIO-PSI-H 0002418].............................................   921
 93. GJPMorgan Chase internal emails, dated April 2012, re: CIO 
  (Doug and I asked that the first day. Answer was it most 
  "efficient" way to do it. I would say they just wanted to 
  improve the carry on the book by selling protection and taking 
  in some premium.). [JPM-CIO-PSI 0001753-757]...................   922
 94. GExcerpt from April 13, 2012, JPM--Q12012 JPMorgan Chase & 
  Co. Earnings Conference Call [JPM-CIO-PSI 0001151-160].........   927
 95. GJPMorgan Chase internal email, dated May 2012, re: 10-Q 
  call--Buyside and sellside comments (2) (Have a lot of contacts 
  in Washington who said this is going to be a big deal for 
  Volcker; need to manage this in DC because the hit there is 
  going to be a lot bigger than the hit on earnings). [JPM-CIO-
  PSI 0017754-758]...............................................   937
 96. GJPMorgan Chase & Co. (JPM) Business Update Call, 10-May-
  2012...........................................................   942
 97. GCorrespondence from Douglas L. Braunstein, Vice Chairman, 
  JPMorgan Chase & Co. to the Permanent Subcommittee on 
  Investigations, dated February 4, 2013 (. . . my statements on 
  April 13 regarding those hedging characteristics were 
  references to the portfolio's design and historical performance 
  as a hedge. I was not commenting on the hedging effectiveness 
  of the portfolio as of April 13.). [PSI-JPMC-35-000001]........   962
 98. GReport of JPMorgan Chase & Co. Management Task Force 
  Regarding 2012 CIO Losses, January 16, 2013....................   963
 99. GResponse provided by The Honorable Thomas Curry, Office of 
  the Comptroller of the Currency, to question raised at the 
  March 15, 2013 hearing.........................................  1095
100. a. GResponses to supplemental questions for the record from 
  Douglas Braunstein and Michael Cavanagh, JPMorgan Chase & Co., 
  with attachment................................................  1099
100. b. GSEALED EXHIBIT: Attachments to supplemental questions 
  for the record from JPMorgan Chase & Co........................     *
101. GResponses to supplemental questions for the record from The 
  Honorable Thomas Curry, Scott Waterhouse and Michael Sullivan, 
  Office of the Comptroller of the Currency, with attachments....  1113

                                VOLUME 2

102. GDocuments cited in footnotes to JPMorgan Chase Whale 
  Trades: A Case History of Derivatives Risks & Abuses, the 
  Report released in conjunction with the Subcommittee hearing on 
  March 15, 2013. A Document Locator List provides bates numbers 
  and document descriptions of the documents cited in the Report. 
  Not included are documents related to Subcommittee interviews, 
  which are not available to the public, and widely available 
  public documents...............................................  1304

 
                      JPMORGAN CHASE WHALE TRADES:
                     A CASE HISTORY OF DERIVATIVES
                            RISKS AND ABUSES

                              ----------                              


                         FRIDAY, MARCH 15, 2013

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:33 a.m., in 
room SD-G50, Dirksen Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, McCain, and Johnson.
    Staff present: Elise J. Bean, Staff Director and Chief 
Counsel; Mary D. Robertson, Chief Clerk; Zachary I. Schram, 
Senior Counsel; Allison F. Murphy, Counsel; David H. Katz, 
Counsel; Feras Sleiman, Law Clerk; Todd Phillips, Law Clerk; 
Elizabeth V. Baltzan, Former Congressional Fellow; Eric S. 
Walker, Former Detailee; Brian Egger, Detailee (GAO); 
Christopher Reed, Congressional Fellow; Combiz Abdolrahimi, Law 
Clerk; Aaron Fanwick, Law Clerk; Adam Goldberg, Law Clerk; Gigi 
Good, Intern; Alex Harisiadis, Law Clerk; Henry J. Kerner, 
Staff Director and Chief Counsel to the Minority; Stephanie 
Hall, Counsel to the Minority; Brad M. Patout, Senior Policy 
Advisor to the Minority; Scott D. Wittmann, Research Assistant 
to the Minority; and Rachael Weaver (Sen. Johnson).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good morning, everybody. Let me first begin 
by extending a special welcome to the new Ranking Member of 
this Subcommittee, a dear and longtime friend, Senator McCain. 
It is not the first time that we have worked side-by-side. He 
has been a longtime Member of the Subcommittee and was formerly 
Ranking Member on the Senate Armed Services Committee, and he 
has brought great energy and a bipartisan spirit to our work 
together, and we want to just welcome him as our new Ranking 
Member here.
    We also welcome Senator Johnson, as a new Member on our 
Subcommittee. Unlike Senator McCain who has been a Member of 
this Subcommittee for years, Senator Johnson has now joined us. 
We welcome him.
    In April 2012, Americans were confronted with a story of 
Wall Street excess and the derivatives disaster, now known as 
the ``JPMorgan Chase whale trades.'' The largest U.S. banks 
today are deep into derivatives, which are complex financial 
instruments that derive their value from other assets. The 
derivatives behind the JPMorgan whale trades were part of a so-
called Synthetic Credit Portfolio (SCP), that made outsized 
bets on whether particular financial instruments or entities 
were creditworthy or would default during specified time 
periods. The bets were made by traders in the London office of 
the U.S. banking giant JPMorgan Chase. Their trades--meaning 
their bets--grew so large that they roiled the $27 trillion 
credit derivatives market, singlehandedly affected global 
prices, and finally attracted a media storm aimed at finding 
out who was behind them.
    That is when the media unmasked JPMorgan's Chief Investment 
Office (CIO), which, until then, had been known for making 
conservative investments with bank deposits. At first, 
JPMorgan's Chief Executive Officer (CEO) Jamie Dimon claimed 
the April media reports about the whale trades were a ``tempest 
in a teapot.'' But a month later, the bank admitted the truth: 
That their credit derivative bets had gone south, producing not 
only losses that eventually exceeded $6 billion, but also 
exposing a litany of risk management problems at what had been 
considered one of America's safest banks.
    JPMorgan Chase is the largest financial holding company in 
the United States. It is also the largest derivatives dealer in 
the world and the largest single participant in world credit 
derivatives markets. It has consistently portrayed itself as a 
risk management expert with a ``fortress balance sheet'' that 
ensures taxpayers have nothing to fear from its extensive 
dealing in risky derivatives. But that reassuring portrayal of 
the bank was shattered when whale trade losses shocked the 
investing public, not only with the magnitude of the losses, 
but because the financial risk had been largely unknown to bank 
regulators.
    The Subcommittee meets today after 9 months of digging into 
the facts behind the whale trades. To learn what happened, the 
Subcommittee collected nearly 90,000 documents, conducted over 
50 interviews and briefings, and has issued a 300-page 
bipartisan report. While the bank and its regulators have 
cooperated with our investigation, four key former JPMorgan 
employees directly involved in the derivatives trading declined 
to cooperate, and because they reside overseas, they remain 
beyond the Subcommittee's subpoena authority.
    Our findings open a window into the hidden world of high-
stakes derivatives trading by big banks. It exposes a 
derivatives trading culture at JPMorgan that piled on risk, 
that hid losses, that disregarded risk limits, that manipulated 
risk models, that dodged oversight, and that misinformed the 
public.
    Our investigation brought home one overarching fact: The 
U.S. financial system may have significant vulnerabilities 
attributable to major bank involvement with high-risk 
derivatives trading. The four largest U.S. banks control 90 
percent of U.S. derivatives markets, and their profitability is 
invested, in part, in their derivatives holdings, nowhere more 
so than at JPMorgan.
    The whale trades demonstrate how credit derivatives, when 
purchased in massive quantities with complex components, can 
become a runaway train barreling through every risk limit. The 
whale trades also demonstrate how derivative valuation 
practices are easily manipulated to hide losses, and how risk 
controls are easily manipulated to circumvent limits, enabling 
traders to load up on risk in their quest for profits. Firing a 
few traders and their bosses will not be enough to staunch Wall 
Street's insatiable appetite for risky derivative bets or stop 
the excesses. More control is needed.
    Among the most troubling aspects of the whale trades case 
history is that JPMorgan traders, who were required to book the 
value of their derivative holdings every business day, used 
internal profit/loss reports to hide more than half a billion 
dollars in losses in just 3 months. Eventually, those 
misreported values forced JPMorgan to restate its earnings for 
the first quarter of 2012. But to this day, JPMorgan maintains 
that the mismarked values did not, on their face, violate bank 
policy or generally accepted accounting principles. But if 
derivative books can be cooked as blatantly as they were in 
this case without breaking the rules, then the rules need to be 
revamped. And given how much major U.S. bank profits remain 
bound up with the value of their derivatives, derivative 
valuations that cannot be trusted are a serious threat to our 
economic stability.
    The whale trades also demonstrate how easily a Wall Street 
bank can manipulate and avoid risk controls. The financial 
industry assures us that it can prudently manage high-risk 
activities because they are measured, monitored, and limited. 
But as the Subcommittee report demonstrates in detail, JPMorgan 
executives ignored a series of alarms that went off as the 
bank's Chief Investment Office breached one risk limit after 
another. Rather than ratchet back the risk, JPMorgan personnel 
challenged and re-engineered the risk controls to silence the 
alarms. It is difficult to imagine how the American people can 
trust major Wall Street banks to prudently manage derivatives 
risk when bank personnel can readily game or ignore the risk 
controls that are meant to prevent financial disaster and 
taxpayer bailouts.
    The whale trades also provide another example of a major 
Wall Street bank's misstatements and concealment. In fact, in 
January 2012, the bank told the Office of the Comptroller of 
the Currency (OCC), inaccurately, that the portfolio was 
decreasing in size, when it was not. Most troubling of all, 
when the media spotlight hit, senior bank executives 
mischaracterized to investors and the public the nature of the 
whale trades and the extent of risk management and regulatory 
oversight, gambling apparently that the portfolio's bad bets 
would recover before anyone took a closer look.
    Well, we took a closer look, and it is not pretty: a 
massive derivatives portfolio riddled with risk; a runaway 
train of derivatives trading blowing through risk limits; 
hidden losses; bank executives downplaying the bad bets; 
regulators who failed to act.
    Together, these facts are a reminder of what occurred in 
the recent financial crisis. We just cannot rely on a major 
bank to resist risky bets, honestly report derivative losses, 
or disclose bad news without a strong regulator looking over 
its shoulder, backed by laws that require transparency, risk 
limits, capital buffers against losses, and consequences for 
misconduct.
    That is the big picture, and here are some of the detailed 
findings from our investigation.
    First, JPMorgan's Chief Investment Office rapidly amassed a 
huge portfolio of synthetic credit derivatives, in part using 
federally insured depositor funds, in a series of risky, short-
term trades, disclosing the extent of the portfolio only after 
intense media exposure.
    Now, in just a few months during 2011, as shown on Exhibit 
1a\1\--and I think we can get Chart 1 up over here--the Chief 
Investment Office's Synthetic Credit Portfolio grew from a net 
notional size of $4 billion to $51 billion, and then tripled in 
the first quarter of 2012 to $157 billion. That exponential 
growth in holdings and risk occurred with virtually no 
regulatory oversight.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1a, which appears in the Appendix on page 511.
---------------------------------------------------------------------------
    Second, once the whale trades were exposed, JPMorgan 
claimed to regulators, investors, and the public that the 
trades were designed to hedge credit risk. But internal bank 
documents failed to identify the assets being hedged, how they 
lowered risk, or why the supposed credit derivative hedges were 
treated differently from other hedges in the Chief Investment 
Office. If these trades were, as JPMorgan maintains, hedges 
gone astray, it remains a mystery how the bank determined the 
nature, size, or effectiveness of the so-called hedges and how, 
if at all, they reduced risk.
    Third, the Chief Investment Office internally concealed 
massive losses in the first several months of 2012 by 
overstating the value of its synthetic credit derivatives. It 
got away with overstating those values within the bank, even in 
the face of disputes with counterparties and in the face of two 
internal bank reviews.
    As late as January 2012, the CIO had valued its credit 
derivatives by using the midpoint in the daily range of bids 
and asks offered in the marketplace. That is the typical way to 
value derivatives. But beginning in late January, the traders 
stopped using midpoint prices and started using prices at the 
extreme edges of the daily price range to hide escalating 
losses. In recorded phone conversations, one trader described 
these marks as ``idiotic.''
    At one point, traders used a spreadsheet to track just how 
large their deception had grown by recording the valuation 
differences between using midpoint and more favorable prices. 
In just 5 days in March, according to the traders' own 
spreadsheet, the hidden losses exceeded $400 million. The 
difference eventually exceeded $600 million. Counterparties to 
the derivative trades began disputing the CIO's booked values 
involving hundreds of millions of dollars in March and April.
    Despite the obvious value manipulation, on May 10--the same 
day JPMorgan announced that the whale trades had lost $2 
billion--the bank's controller concluded a special review and 
signed off on the CIO's derivative pricing practices as 
``consistent with industry practices.'' JPMorgan leadership has 
continued to argue that the values assigned by its traders to 
the Synthetic Credit Portfolio were defensible under accounting 
rules.
    Yet in July 2012, the bank reluctantly restated its first 
quarter earnings. It did so only after an internal 
investigation listened to phone conversations, routinely 
recorded by the bank, in which its traders mocked their own 
valuation practices.
    Now, their mismarked values were not wrong simply because 
the traders intended to understate losses; they were wrong 
because they changed their pricing practices after losses began 
piling up, stopped using the midpoint prices that they had used 
up until January, and they began using aggressive prices that 
consistently made the bank's reports look better. Until 
JPMorgan and others stop their personnel from playing those 
kinds of games, derivative values will remain an imprecise, 
malleable, and untrustworthy set of figures that call into 
question the derivative profits and losses reported by our 
largest financial institutions.
    Fourth, when the CIO's Synthetic Credit Portfolio breached 
five key risk limits, rather than reduce the risky trading 
activities, JPMorgan either increased the limits, changed the 
risk models that calculated risk, or turned a blind eye to the 
breaches.
    As early as January 2012, the rapid growth of the Synthetic 
Credit Portfolio breached one common measure of risk, called 
``Value-at-Risk'' (VaR), causing a breach not just at the CIO, 
but for the entire bank. That 4-day breach was reported to top 
bank officials, including CEO Jamie Dimon, who personally 
approved a temporary limit increase, and voila, the breach was 
ended. CIO employees then hurriedly pushed through approval of 
a new VaR model that overnight dropped the CIO's purported risk 
by 50 percent. Regulators were told about that remarkable 
reduction in the CIO's purported risk, but raised no objection 
to the new model at the time.
    The credit derivatives portfolio breached other risk limits 
as well. In one case, it exceeded established limits on one 
measure, known as ``Credit Spread 01 (CS01),'' by 1,000 percent 
for months running. When regulators asked about the breach, 
JPMorgan risk managers responded that it was not a ``sensible'' 
limit and allowed the breach to continue. When still another 
risk metric, called ``Comprehensive Risk Measure,'' projected 
that the Synthetic Credit Portfolio could lose $6.3 billion in 
a year, a senior CIO risk manager dismissed the result as 
``garbage.'' It was not garbage; that projection was 100 
percent accurate, but the derivatives traders thought they knew 
better. Downplaying risk, ignoring one risk warning after 
another, and pushing to re-engineer risk controls to 
artificially lower risk results flatly contradict JPMorgan's 
claim to prudent risk management.
    Fifth, at the same time the portfolio was losing money and 
breaching risk limits, JPMorgan dodged the oversight of the 
OCC. It omitted CIO data from its reports to the OCC; it failed 
to disclose size, risk, and losses of the Synthetic Credit 
Portfolio; and it delayed or tinkered with OCC requests for 
information by giving the regulator inaccurate or unresponsive 
information. In fact, when the whale trades first became 
public, the bank offered such blanket reassurances that the OCC 
initially considered the matter closed. It was only when the 
losses exploded that the OCC took another look.
    The failure of regulators to act sooner cannot be excused 
by the bank's behavior. The OCC also fell down on the job. It 
failed to investigate multiple, sustained risk limit breaches; 
it tolerated incomplete and missing reports from JPMorgan; it 
failed to question the bank's new value-at-risk model that 
dramatically lowered the CIO's risk rating; it accepted 
JPMorgan's protests that the media reports about the portfolio 
were overblown. It was not until May 2012, after a new 
Comptroller of the Currency took the reins at the OCC, that the 
OCC officials instituted their first intensive inquiry into the 
Synthetic Credit Portfolio.
    Again, with the lessons of the 2008 financial crisis so 
painfully fresh, it is deeply worrisome that a major bank 
should seek to cloak its risky trading activities from 
regulators and doubly worrisome that it was able to succeed so 
easily for so long.
    And, finally, when the whale trades went public, JPMorgan 
misinformed regulators and the public about the Synthetic 
Credit Portfolio. JPMorgan's first public response to the April 
news reports about the whale trades was when its spokesperson, 
using prepared talking points approved by senior executives, 
told reporters on April 10 that the whale trades were risk-
reducing hedges that were known to regulators. A more detailed 
description came in a conference call held on April 13 with 
investment analysts. During that call, Chief Financial Officer 
(CFO) Douglas Braunstein made a series of inaccurate statements 
about the whale trades, and that is shown in Exhibit 1f.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1f, which appears in the Appendix on page 516.
---------------------------------------------------------------------------
    He said the trades had been put on by bank risk managers 
and were fully transparent to regulators; he said the trades 
were made on a very long-term basis; he said the trades were 
essentially a hedge; he said the bank believed the trades were 
consistent with the Volcker Rule which prohibits high-risk 
proprietary trading by banks. Those public statements on April 
13 were not true. As late as May 10, bank CEO Jamie Dimon 
repeatedly described the synthetic credit trades as hedges made 
to offset risk, despite information showing the portfolio was 
not a hedge.
    The bank also neglected to tell investors the bad news that 
the derivatives portfolio had broken through multiple risk 
limits, losses had piled up, and the head of the portfolio had 
put management of the portfolio into ``crisis mode.''
    It was recently reported that the eight biggest U.S. banks 
have hit a 5-year low in the percentage of deposits used to 
make loans. Their collective average loan-to-deposit ratio has 
fallen to 84 percent in 2012, down from 87 percent a year 
earlier and 101 percent in 2007. JPMorgan has the lowest loan-
to-deposit ratio of the big banks, lending just 61 percent of 
its deposits out in loans. Apparently, it was too busy betting 
on derivatives to issue the loans needed to speed economic 
recovery.
    Based on its investigation into the JPMorgan whale trades, 
our report makes the following recommendations:
    First, when it comes to high-risk derivatives, Federal 
regulators need to know what major banks are up to. We should 
require those banks to identify internal investment portfolios 
that include derivatives over a specified size, require 
periodic reporting on derivative performance, and conduct 
regular reviews to detect undisclosed derivatives trading.
    Next, when banks claim they are trading derivatives to 
hedge risks, we need to require them to identify the assets 
being hedged, how the derivatives trade reduces the risk 
associated with those assets, and how the bank tested the 
effectiveness of its hedging strategy in reducing risk.
    Next, we need to strengthen how derivatives are valued to 
stop inflated values. Regulators should encourage banks to use 
independent pricing services to stop the games; require 
disclosure of valuation disputes with counterparties; and 
require disclosure and justification when, as occurred at 
JPMorgan, derivative values deviate from midpoint prices.
    Next, when risk alarms go off, banks and their regulators 
should investigate the breaches and take action to reduce risky 
activities.
    Next, Federal regulators should require disclosure of any 
newly implemented risk model or metric which, when implemented, 
materially lowers purported risk, and investigate the changes 
for evidence of model manipulation.
    Next, 3 years ago, Congress enacted the Merkley-Levin 
provisions of the Dodd-Frank Act, also known as the Volcker 
Rule, to end high-risk proprietary betting using federally 
insured deposits. Financial regulators ought to finalize the 
long-delayed implementing regulations.
    Next, at major banks that trade derivatives, regulators 
should ensure the banks can withstand any losses by having 
adequate capital charges for derivatives trading. It is way 
past time to finalize the rules implementing stronger capital 
bank standards.
    The derivatives trading that produced the whale trades 
damaged a single bank. But the whale trades expose problems 
that reach far beyond one London trading desk or one Wall 
Street office tower. The American people have already suffered 
one devastating economic assault rooted largely in Wall Street 
excess. They cannot afford another. When Wall Street plays with 
fire, American families get burned. The task of Federal 
regulators, and of this Congress, is to take away the matches. 
The whale trades demonstrate that task is far from complete.
    Senator McCain.

              OPENING STATEMENT OF SENATOR MCCAIN

    Senator McCain. Thank you, Mr. Chairman, and let me begin 
by saying what an honor it is to serve on this Subcommittee, 
which has a long history of bipartisanship and a celebrated 
legacy of uncovering waste, fraud, abuse, and outright 
corruption. And before I move forward, I want to express my 
gratitude to you and the members of your staff for your 
unyielding and dedicated efforts in this investigation.
    I would also like to recognize the work of my predecessor 
on the Subcommittee, Senator Coburn, for his contributions 
prior to my arrival. This investigation into the so-called 
whale trades at JPMorgan has revealed startling failures at an 
institution that touts itself as an expert in risk management 
and prides itself on its fortress balance sheet.
    The investigation has also shed light on the complex and 
volatile world of synthetic credit derivatives. In a matter of 
months, JPMorgan was able to vastly increase its exposure to 
risk while dodging oversight by Federal regulators. The trades 
ultimately cost the bank billions of dollars and its 
shareholders value. These losses come to light not because of 
admirable risk management strategies at JPMorgan or because of 
effective oversight by diligent regulators. Instead, these 
losses came to light because they were so damaging that they 
shook the market and so damning that they caught the attention 
of the press.
    Following the revelation that these huge trades were coming 
from JPMorgan's London office, the bank's losses continued to 
grow. By the end of the year, the total losses stood at a 
staggering $6.2 billion.
    This case represents another shameful demonstration of a 
bank engaged in wildly risky behavior. The ``London Whale'' 
incident matters to the Federal Government because the traders 
at JPMorgan were making risky bets using excess deposits, 
portions of which were federally insured. These excess deposits 
should have been used to provide loans for Main Street 
businesses. Instead, JPMorgan used the money to bet on 
catastrophic risk.
    Through an extensive bipartisan investigation, this 
Subcommittee has uncovered a wealth of new information. 
Internal emails, memos, and interviews reveal that these trades 
were not conducted by a group of rogue traders, but that their 
superiors were well aware of their activities.
    Traders at JPMorgan's Chief Investment Office, the CIO, 
adopted a risky strategy with money they were supposed to use 
to hedge, or counter, risk. However, even the head of the CIO 
could only provide a `guesstimate' as to what exactly the 
portfolio was supposed to hedge. And JPMorgan's CEO Jamie Dimon 
admitted that the portfolio had ``morphed'' into something that 
created new and potentially larger risks. In the words of 
JPMorgan's primary Federal regulator, it would require ``make-
believe voodoo magic'' to make the portfolio actually look like 
a hedge.
    Top officials at JPMorgan allowed these excessive losses to 
occur by permitting the CIO to continually breach all of the 
bank's own risk limits. When the risk limits threatened to 
impede their risky behavior, they decided to manipulate the 
models.
    Disturbingly, the bank's primary regulator, the OCC, failed 
to take action even after red flags warned that JPMorgan was 
breaching its risk limits. These regulators fell asleep at the 
switch and failed to use the tools at their disposal to 
effectively curb JPMorgan's appetite for risk.
    However, JPMorgan actively impeded the OCC's oversight. The 
CIO refused to release key investment data to the OCC and even 
claimed that the regulator was trying to ``destroy'' the bank's 
business.
    After these losses were uncovered by the press, JPMorgan 
chose to conceal its errors and, in doing so, top officials at 
the bank misinformed investors, regulators, and the public. In 
an April 2012 earnings call, then Chief Financial Officer 
Douglas Braunstein falsely told investors and the public that 
the bank had been ``fully transparent to regulators.''
    The deception did not end there. During the same earnings 
call, Mr. Dimon tried to downplay the significance of the 
losses by infamously characterizing them as ``a complete 
tempest in a teapot.'' The truth of the matter is that $6 
billion, some of which is federally insured, is an inexcusable 
amount of money to be gambled away on risky bets. This 
investigation potentially reveals systemic problems in our 
Nation's financial system. The size of the potential losses and 
the accompanying deception echo the misguided and dishonest 
actions that the banks took during the financial crisis 4 years 
ago.
    Let me be clear: JPMorgan completely disregarded risk 
limits and stonewalled Federal regulators. It is unsettling 
that a group of traders made reckless decisions with federally 
insured money and that all of this was done with the full 
awareness of top officials at JPMorgan. This bank appears to 
have entertained--indeed, embraced--the idea that it was ``too 
big to fail.'' In fact, with regard to how it managed the 
derivatives that are the subject of today's hearing, it seems 
to have developed a business model based on that notion--the 
notion that they are too big to fail.
    It is our duty to the American public to remind the 
financial industry that high-stakes gambling with federally 
insured deposits will not be tolerated. In 2012, the ``London 
Whale'' trades resulted in a $6 billion loss. What if it was 
$60 billion? Or $100 billion? Does JPMorgan operate under the 
assumption that the taxpayer will bail them out again? What 
place does taxpayers' underwriting of the big banks' disregard 
for ``moral hazard'' have in the proper operation of a truly 
free market?
    I look forward to hearing from our witnesses today as we 
examine what went wrong at JPMorgan.
    Senator Levin. Thank you very much, Senator McCain.
    Senator Johnson, do you have an opening comment or 
statement?

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. I really do not have anything prepared, 
but I think what is interesting about this whole process is 
what Senator McCain just pointed out, that JPMorgan appears to 
have developed its business model around the fact that they are 
too big to fail. And I have always said that the fact that we 
have institutions that simply are too big to fail shows how 
regulation already failed us. We had regulation in place that 
probably should have prevented that years ago.
    So, again, I am looking forward to hearing the testimony 
just to really highlight the fact that regulators in general 
are very incapable of preventing all these things, and I am 
really looking forward to the recommendations in terms of how 
we can get regulation up to speed so we can prevent these 
things in the future.
    Senator Levin. Thank you very much, Senator Johnson.
    Now we will call on our first panel of witnesses, but 
before we do that, let me make a comment about the procedures 
here today. We are anticipating a long hearing, and so we are 
going to call the first panel, witnesses with the most 
firsthand knowledge of the whale trades that are the central 
concern of the hearing. And then after taking their testimony 
and asking questions of them, there will be a very short break. 
We are going to return then and broaden the panel by adding two 
senior executives from the bank--one who was responsible for 
public disclosures about the trades, and the other who led the 
management postmortem review.
    And then when that panel, that extended panel, concludes, 
there will be another very short break, and we will then hear 
from the final panel with representatives from the Office of 
the Comptroller of the Currency.
    So now I will call our first panel of witnesses. It is Ms. 
Ina Drew, the former Chief Investment Officer at JPMorgan; 
Ashley Bacon, the Acting Chief Risk Officer, JPMorgan; and, 
finally, Peter Weiland, the former head of market risk for 
JPMorgan's Chief Investment Office.
    We appreciate all of you being with us here this morning. 
We look forward to your testimony.
    Pursuant to Rule VI of this Subcommittee, all witnesses who 
testify are required to be sworn, so I would ask each of you to 
please stand and raise your right hand. Do you swear that the 
testimony that you are about to give to this Subcommittee will 
be the truth, the whole truth, and nothing but the truth, so 
help you, God?
    Ms. Drew. I do.
    Mr. Bacon. I do.
    Mr. Weiland. I do.
    Senator Levin. We will be using a timing system today. 
About 1 minute before the red light comes on, you will see the 
light change from green to yellow. It will give you an 
opportunity to conclude your remarks. And your written 
testimony, of course, will be printed in the record in its 
entirety. We would appreciate your limiting your oral testimony 
to no more than 5 minutes.
    Ms. Drew, if you have a prepared statement, we will have 
you go first, followed by Mr. Bacon, finish up with Mr. 
Weiland, and then we will turn to questions.
    So, Ms. Drew, please proceed. You can keep your microphones 
on, if you would.

  TESTIMONY OF INA R. DREW,\1\ FORMER HEAD, CHIEF INVESTMENT 
        OFFICE, JPMORGAN CHASE & CO., NEW YORK, NEW YORK

    Ms. Drew. Good morning, Chairman Levin, Ranking Member 
McCain, and Members of the Subcommittee. My name is Ina Drew. 
Thank you for the opportunity to provide my perspective on the 
losses incurred in the Synthetic Credit Portfolio of the Chief 
Investment Office. As you know, I have submitted a written 
statement discussing many details which I find important.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Drew appears in the Appendix on 
page 101.
---------------------------------------------------------------------------
    I would like to take a moment, though, to talk about my 
career. I spent over 30 years at JPMorgan and its predecessor 
institutions in the field of asset and liability management. I 
joined shortly after receiving a B.A. from the Johns Hopkins 
University and a Master's degree from Columbia University.
    Over the course of my career, I had the privilege of 
working for truly great CEOs, such as Walter Shipley, William 
Harrison, and most recently, Jamie Dimon. During this time, I 
helped build what I believe to be a world-class asset and 
liability management organization.
    I am very proud of the many successes we had in protecting 
the bank's balance sheet, offsetting risk, and investing 
prudently. I had wonderful mentors who helped me grow and 
develop my leadership skills, and to them I am very grateful. 
This was my life's work.
    Through at least seven mergers and many financial crises, I 
always tried to do my best and what was right for the Firm in a 
thoughtful, diligent manner. I loved the work and the 
institution and gave it my all while raising a family, 
balancing my home life, charitable and educational board work, 
and many other demands.
    On Friday night, May 11, 2012, I walked into the office of 
Mr. Dimon, with whom I had a close and respectful relationship. 
I told him of my decision to resign from JPMorgan. It was a 
devastating and very difficult decision for me. It marked the 
end of three decades of hard work at an institution I loved. We 
talked about the decision and how important I believed it was 
to let the company move forward with new leadership. I accepted 
responsibility for the events that happened on my watch in one 
of the portfolios in my division. My overwhelming sadness and 
concern was extended to the 400 people who worked for me, many 
for more than 20 years. It also went to my colleagues 
throughout the Firm who are now leading the company going 
forward.
    There were many people from the front office, Risk, 
Finance, and Quantitative Research (QR) who worked on and 
analyzed the Synthetic Credit Portfolio. In particular, I 
relied on the experts, Achilles Macris and Javier Martin-
Artajo, to vet and supervise trading in that book and elevate 
important concerns to me.
    Ultimately, my oversight of the synthetic credit book was 
undermined by two critical facts that I have come to learn only 
recently based on the company's public statements: First, the 
company's new VaR model was flawed and significantly 
understated the real risks in the book that were reported to 
me; and, second, some members of the London team failed to 
value positions properly, and in good faith, minimized reported 
and projected losses, and hid from me important information 
regarding the true risks of the book.
    Throughout these events, I did what I tried to do at all 
times during my career: Face difficult issues with dignity and 
integrity. I have had many months to think long and hard about 
what happened. I do not have all the answers. But what I can 
tell you is that I always tried to do my best. I tried at all 
times to approach the issues presented to me thoroughly, 
thoughtfully, and transparently.
    Clearly, mistakes were made. The fact that these mistakes 
happened on my watch has been the most disappointing and 
painful part of my professional career.
    I thank you for the opportunity to appear today, and I will 
be happy to answer any questions you may have.
    Senator Levin. Thank you very much, Ms. Drew.
    And now we will call on Mr. Bacon.

   TESTIMONY OF ASHLEY BACON,\1\ ACTING CHIEF RISK OFFICER, 
            JPMORGAN CHASE & CO., NEW YORK, NEW YORK

    Mr. Bacon. Good morning, Chairman Levin, Ranking Member 
McCain, and Members of the Subcommittee. My name is Ashley 
Bacon, and I am the Acting Chief Risk Officer of JPMorgan. I 
have been at JPMorgan for 20 years and have spent 6 years in 
the Firm's Risk Management function.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bacon appears in the Appendix on 
page 108.
---------------------------------------------------------------------------
    I appreciate the opportunity to come before you today as 
part of your inquiry into the CIO Synthetic Credit Portfolio 
and tell you what I observed after being asked in late April to 
independently assess the CIO trades. Let me first start by 
expressing the entire Firm's commitment to the importance of 
effective risk management.
    And turning to the CIO portfolio at issue, at the request 
of senior Firm management, I was brought in from outside of the 
Chief Investment Office in late April 2012, along with other 
individuals from the Investment Bank, to lead a team of 
professionals conducting a detailed assessment of the Synthetic 
Credit Portfolio. The purpose of that review was to understand 
the persistent losses being experienced and to help chart a 
course forward. The team worked long hours and reported back to 
senior Firm management at least on a daily basis. After initial 
reports, we were asked to take over responsibility for the day-
to-day management of the Synthetic Credit Portfolio--a 
responsibility that we held until a new CIO management team 
took over.
    The Firm also requested that my colleague Michael Cavanagh 
lead a Task Force to investigate these trades. Later today, I 
believe Mr. Cavanagh will speak in some detail about that 
effort and to the remedial steps identified by the Task Force 
in response. I will simply discuss a few key steps we have 
taken as a Firm to improve our Firm-wide risk management and 
risk management within CIO.
    First, the Firm appointed a new Chief Risk Officer for CIO 
in May 2012. Additionally, the Firm took steps to ensure Risk's 
independence and the appropriateness of staffing levels. The 
new CIO Chief Risk Officer's actual reporting practices now 
conform to his functional reporting line. He reports to me. His 
compensation and career advancement are controlled by Risk, 
with input from the business and others about his performance, 
as appropriate.
    Second, the Firm has overhauled the CIO Risk Committee. The 
committee now meets on a weekly basis, and attendees include 
other members of senior management, from within and outside of 
CIO. It has been reconstituted as the CIO, Treasury, and 
Corporate Risk Committee to reflect its broader 
responsibilities and increased participation.
    Third, CIO implemented numerous new or restructured risk 
limits covering a broad set of risk parameters. What remained 
of the Synthetic Credit Portfolio was transferred to the Firm's 
Investment Bank, where it is subject to appropriate oversight 
and detailed analysis.
    Last, JPMorgan has conducted a comprehensive self-
assessment of the Risk organization, and as a result, we are 
implementing a series of improvements both Firm-wide and within 
our lines of business. In addition to working to improve model 
development, review, approval, and monitoring, the Firm is 
reaffirming and, where appropriate, revising its market risk 
limits across all of its lines of business. We have introduced 
additional granularity and portfolio-level limits, and will 
continue to do so as appropriate. We have strengthened 
processes for limit excessions to provide for more rapid 
escalation and more effective review. We have established a 
Firm-wide Risk Committee, improved the operation of the Risk 
Operating Committee and the Risk Governance Committee, and 
enhanced our reporting to the Board of Directors' Risk Policy 
Committee.
    A risk organization must constantly look for ways to 
improve. The steps I have described reflect our fundamental 
belief in how the Firm's risk profile should be overseen with 
effective challenge and with the right level of information 
available to address risk issues effectively.
    Thank you for the opportunity to appear before you today, 
and I welcome any questions you have.
    Senator Levin. Thank you very much. Now, Mr. Weiland.

  TESTIMONY OF PETER WEILAND,\1\ FORMER HEAD OF MARKET RISK, 
 CHIEF INVESTMENT OFFICE, JPMORGAN CHASE & CO., NEW YORK, NEW 
                              YORK

    Mr. Weiland. Good morning, Chairman Levin, Senator McCain, 
and Members of the Subcommittee. My name is Peter Weiland, and 
I was head of Market Risk Management for the Office of the CIO 
from 2008 to 2012. I am here today to help explain some of the 
facts surrounding the events in question to the best of my 
knowledge and recollection.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Weiland appears in the Appendix 
on page 111.
---------------------------------------------------------------------------
    Senator Levin. Thank you very much.
    Let me start with you, Ms. Drew. If you would take a look 
at Exhibit No. 81,\2\ which is in front of you.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 81, which appears in the Appendix on page 877.
---------------------------------------------------------------------------
    We will have 12-minute rounds, if that is OK. We will have 
probably more than a round or two with this first panel. We 
will switch after 12 minutes from me to Senator McCain and then 
Senator Johnson and any others who may show up.
    Do you have Exhibit No. 81?
    Ms. Drew. Yes.
    Senator Levin. This is a presentation which you gave to 
your Board of Directors' Risk Policy Committee on March 20, 
2012, about the CIO. On page 1, you provided a chart listing 
nine investment portfolios at the CIO, and you indicated 
whether they had longer or shorter investment horizons.
    Now, where is the SCP on that chart?
    Ms. Drew. The SCP is on the right side, on the bottom, 
where it is noted that the portfolio was being reduced, 
reducing capital-intensive credit securities positions.
    Senator Levin. All right. So it is at the shorter end of 
the investment horizon. Is that correct?
    Ms. Drew. At that time, that is correct. It was in the 
process of being reduced.
    Senator Levin. I am not asking you whether it was being 
reduced at that time. I am asking you whether or not it was at 
the shorter end of the investment horizon. Is that correct?
    Ms. Drew. That is correct.
    Senator Levin. OK. So that in 2012, the Synthetic Credit 
Portfolio was being actively traded, right? Every week, 
sometimes every business day, CIO traders were buying and 
selling credit derivatives on behalf of the portfolio. Is that 
correct?
    Ms. Drew. Yes.
    Senator Levin. And if the portfolio grew from $51 to $157 
billion, is it correct that by the time of your presentation by 
the Board of Directors on March 20, 2012, most of the positions 
would have been purchased during the first quarter?
    Ms. Drew. That is correct.
    Senator Levin. So these were not investments that were made 
on a very long term basis.
    Your horizon here is a shorter investment horizon, and they 
were bought and sold regularly and frequently. Is that correct?
    Ms. Drew. That is correct; however, the core position in 
the book, which was a short, high-yield position, was a long-
term position that had been held for many years, and the 
intention was to be held longer.
    Senator Levin. All right. But when this portfolio grew in 
the first quarter from $51 to $157 billion, I take it most of 
those positions had been purchased during that quarter. Is that 
correct?
    Ms. Drew. They had.
    Senator Levin. Is that correct?
    Ms. Drew. That is correct.
    Senator Levin. And these trades were made out of London, 
but when there were losses, for instance, that $6.2 billion in 
losses that took place over 2012, that affected JPMorgan's 
balance sheet and its earnings. Is that correct? Those losses, 
even though the trades were made in London----
    Ms. Drew. Yes, certainly it did.
    Senator Levin. OK. Did the London traders have to get 
approval of the CIO risk managers like you to put on positions?
    Let me ask Mr. Weiland that question. Did the London 
traders get the approval of CIO risk managers like you to put 
on these positions?
    Mr. Weiland. Not for individual trades. The traders in 
London worked within a set of delegated limits.
    Senator Levin. All right. And so they did not get approval 
from you for the positions they were putting on?
    Mr. Weiland. Not individual trades. As long as they were 
working within their limits.
    Senator Levin. Is that what you call ``positions? ''
    Mr. Weiland. Is what I call ``positions? '' Sorry.
    Senator Levin. The individual trades, the positions they 
were taking, they did not get your approval. Is that correct?
    Mr. Weiland. Not one by one, no.
    Senator Levin. On January 30, 2012, the CIO met with the 
OCC at their standard quarterly meeting to discuss the CIO's 
upcoming plans. The CIO's chief financial officer, John Wilmot, 
represented the bank at the meeting with the OCC.
    Now, Ms. Drew, take a look, if you would, at Exhibit No. 
58.\1\ Exhibit No. 58 is the OCC's summary of that January 30 
meeting, and in interviews both the OCC examiner, Mr. Berg, who 
attended the meeting and wrote the summary, and Mr. Wilmot, who 
attended, confirmed to the Subcommittee that the notes were 
accurate.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 58, which appears in the Appendix on page 807.
---------------------------------------------------------------------------
    About two-thirds down that page, Exhibit No. 58, the OCC 
reports what it was told by JPMorgan: ``The MTM book''--that is 
the mark to market book, consisted primarily of the Synthetical 
Credit Portfolio--``is decreasing in size in 2012. It is 
expected that the risk-weighted assets (RWA) will decrease from 
$70 billion to $40 billion.''
    Do you see that note two-thirds down the page on Exhibit 
No. 58 where it says, ``The MTM book is decreasing in size in 
2012? '' Do you see that?
    Ms. Drew. Yes.
    Senator Levin. OK. Now, Ms. Drew, in fact, the SCP was 
rapidly increasing in size in the first quarter of 2012. Is 
that correct? You can see on the chart over here, Exhibit No. 
1a.\2\ Is that correct?
---------------------------------------------------------------------------
    \2\ See Exhibit No. 1a, which appears in the Appendix on page 511.
---------------------------------------------------------------------------
    Ms. Drew. In the first quarter, that is correct.
    Senator Levin. So, again, this meeting took place January 
31, and the OCC was told that the book was decreasing in size. 
In fact, it was increasing in size.
    Now, also in the first quarter of 2012, the CIO stopped 
sending standard data to the OCC that might have alerted the 
agency to the portfolio's growth. For 4 key months, from 
January to April, the CIO did not send to the OCC its Executive 
Management Report with its financial data. In February and 
March, it did not send to the OCC its Valuation Control Group 
reports with verified profit/loss data for the Synthetic Credit 
Portfolio.
    Is that true, Ms. Drew? Those reports were not sent during 
those months. Is that true?
    Ms. Drew. I do not know, Senator. I had no part of reports 
being sent to any regulators. Certainly, if I had known they 
were not being sent, I would have considered that is the wrong 
thing to do.
    Senator Levin. All right. So you do not know whether they 
were sent or not?
    Ms. Drew. I do not.
    Senator Levin. And if they were not sent, you do not know 
why.
    Ms. Drew. I do not.
    Senator Levin. And who was in charge of getting those 
reports to the OCC that suddenly were missing during February 
and March?
    Ms. Drew. It is my understanding that both Risk and Finance 
are----
    Senator Levin. People. Give us the names of people, if you 
would. Who would have been in charge of that?
    Ms. Drew. I do not have a specific person, but within the 
Risk and the Finance organizations, any and all contact was 
made with the OCC.
    Senator Levin. Mr. Weiland, do you know the answer to that 
question?
    Mr. Weiland. I do not.
    Senator Levin. Do you know why those reports suddenly were 
not sent?
    Mr. Weiland. I do not know why they were not sent, no.
    Senator Levin. Who was in charge of sending them?
    Mr. Weiland. I do not know the people who were responsible 
for sending the reports to the regulators, the individual 
people. My understanding is that normally that is part of the 
Finance function.
    Senator Levin. OK. Maybe we can find out later from our 
next witnesses as to why reports suddenly were not being sent 
to the OCC during those critical months.
    Mr. Weiland, take a look at Exhibit No. 47,\1\ would you?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 47, which appears in the Appendix on page 781.
---------------------------------------------------------------------------
    Mr. Weiland. Sure.
    Senator Levin. This is an email dated March 2, 2012. It was 
sent to you by one of the quantitative analysts at the bank, 
Mr. Krug, talking about CIO ``comprehensive risk measure (CRM) 
results.'' The OCC now requires all national banks to use this 
risk measure to calculate how much money could be lost in a 
year in a worst-case scenario. It was not a requirement in 
2012, but it was about to become a requirement. And in 
anticipation of that, when this email was written, JPMorgan had 
already begun requiring its offices to start calculating their 
comprehensive risk measure. So that was in part because the OCC 
was also going to, and now does, require banks to use their CRM 
results to calculate their capital requirements--in other 
words, how much money has to come from shareholders and 
retained earnings.
    Now, Mr. Weiland, on March 2, you received this email--
again, Exhibit No. 47--notifying you at the bottom of the first 
page that ``CRM numbers have increased significantly'' at the 
CIO. And you responded: ``These results, if I understand them, 
suggest that there are scenarios where the CIO tranche book''--
another name for the Synthetic Credit Portfolio--``could lose 
$6 billion in 1 year.''
    You then forwarded the email to Javier Martin-Artajo in 
London, who is the head of credit trading, and you called the 
result ``garbage.'' You wrote: ``We got some CRM numbers. They 
look like garbage, as far as I can tell, 2 to 3 times what we 
saw before.''
    You and your colleagues in the CIO complained about the CRM 
analysis to the head of Quantitative Research for the whole 
bank, a man whose full name is Mr. Venkatakrishnan, known as 
``Mr. Venkat.'' If you look at Exhibit No. 49,\2\ which 
includes an email dated March 7 at the bottom of the page from 
Mr. Venkat to all three of you, and others, explaining that the 
CIO's portfolio had gotten $33 billion bigger in January and 
February, which is why the risk of losing so much money also 
shot up.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 49, which appears in the Appendix on page 786.
---------------------------------------------------------------------------
    Now, here is what he wrote, which is at the bottom of that 
page on Exhibit No. 49: ``Based on our models, though, we 
believe that the $3 billion increase in RWA''--which was 
referenced to the CRM--``is entirely explained by a $33 billion 
notional increase in short protection (long risk) in your 
portfolio between January and February.''
    ``Peter Weiland and your mid-office confirm this $33 
billion notional increase in long index risk.''
    Mr. Weiland, since the SCP portfolio increased in size by 
about $33 billion in January and February, the SCP was not 
decreasing, as the CIO told the OCC on January 30. It was 
increasing. Is that correct? And Ms. Drew has already indicated 
that. Do you agree with that, it was increasing?
    Mr. Weiland. Yes, they were purchasing long positions.
    Senator Levin. But the portfolio was also increasing. Is 
that correct?
    Mr. Weiland. Yes.
    Senator Levin. Mr. Weiland, the bank's quantitative experts 
said the portfolio's comprehensive risk measure, numbers shot 
up to $6 billion in large part because its portfolio shot up in 
size. I understand that you had questions about that 
explanation at the time. Do you now believe that the analysts 
had it right, especially since the portfolio actually did lose 
$6.2 billion in a year? You now acknowledge that they got it 
right.
    Mr. Weiland. Yes, I acknowledge it now with all the 
information we have today that was correct.
    Senator Levin. All right. And do you think it was a 
coincidence that the CRM predicted a $6 billion loss in a year 
in a worst-case scenario and then that is what happened? Do you 
think that is a coincidence?
    Mr. Weiland. It is hard to believe that it was complete 
coincidence. I do not know the details of the scenarios that 
generated the number at the time, but it certainly agrees with 
the way things unfolded.
    Senator Levin. Senator McCain.
    Senator McCain. Mr. Chairman, if it is OK, Senator Johnson 
has to go, so could I yield to him?
    Senator Levin. Of course.
    Senator Johnson. Thanks, Mr. Chairman and Senator McCain.
    Mr. Bacon, seeing as you were brought in kind of to assess 
what happened here and do the postmortem, I would like to ask 
you a question. Did the management of JPMorgan and people at 
the trading desk, was there basically a pervasive attitude that 
JPMorgan was too big to fail and they could drive up their risk 
portfolio?
    Mr. Bacon. I do not believe that played a part at all. I 
think this was a set of egregious mistakes that are much 
regretted and not at all placing reliance on too big to fail, 
no.
    Senator Johnson. Do you believe that the Dodd-Frank Act 
either ended too big to fail or has any chance of ending too 
big to fail?
    Mr. Bacon. Yes, I think the work that is going on should 
end up in that place, and I think it is to the benefit of 
JPMorgan and the system generally if we do end up in that 
place.
    Senator Johnson. So do you believe it has already ended too 
big to fail or has the potential of ending it?
    Mr. Bacon. I think it has potential. I do not know whether 
it has ended it. I believe the work is ongoing, but I am not 
the individual working on that process most knowledgeably from 
JPMorgan.
    Senator Johnson. Do you have quite a fair amount of contact 
with bank regulators yourself in your position?
    Mr. Bacon. A fair amount.
    Senator Johnson. Do you believe bank regulators are really 
up to the task of understanding the complexity of these 
transactions and understanding the limited?
    Mr. Bacon. I think the answer is generally yes, but when 
something like this occurs, and we do not understand it 
ourselves, I think it makes it incredibly difficult for them to 
understand the details and the context.
    Senator Johnson. OK. Well, Mr. Chairman, my time is short, 
but I guess I would just like to sum up by saying that I think 
the fact that we are even having this hearing would be evidence 
that we have not ended too big to fail, that we are still 
concerned about the activities of banks that could pose a 
systemic risk and danger.
    I think the goal of Congress should be to get the American 
taxpayer off the hook for what happens at the banks. I think 
the only people that should worry or, care at all whether 
JPMorgan lost $5 or $6 billion on their London trading desk 
would be JPMorgan management and JPMorgan shareholders, and not 
Members of Congress. So I am certainly hoping that, these types 
of hearings and this type of investigation can get to the 
bottom of it so that we can actually end too big to fail.
    Thank you for your indulgence.
    Senator Levin. Thank you very much, Senator Johnson. 
Senator McCain.
    Senator McCain. Thank you, Mr. Chairman.
    Mr. Weiland, you said you did not know who was responsible 
for the reports that were supposed to be made to the OCC?
    Mr. Weiland. That is correct. I do not know who sends the 
reports.
    Senator McCain. Do you know the office that was responsible 
for sending these reports?
    Mr. Weiland. As I said, my understanding is that the 
financial function, part of the CFO function, is responsible, 
the primary responsibility for interaction with the regulators.
    Senator McCain. But you do not know who that individual 
might have been?
    Mr. Weiland. I do not.
    Senator McCain. JPMorgan is just so big that you really do 
not know who would have a very serious responsibility to make 
required reports to the OCC. Is that correct?
    Mr. Weiland. That is correct.
    Senator McCain. Well, do you know the individual who should 
have been responsible. You do not know who that is.
    Mr. Weiland. I do not know.
    Senator McCain. Ms. Drew, your former boss, Jamie Dimon, 
criticized the performance of the SCP saying, quote, made a 
terrible egregious mistake, no excuse for it, we knew we were 
sloppy, we know we were stupid, we know there was bad judgment.
    Do you share your former boss' assessment of the SCP?
    Ms. Drew. Now that I understand all that transpired during 
that time, including deception and risk control issues, yes, I 
do agree.
    Senator McCain. You have maintained that the SCP existed to 
hedge risk, but in a Subcommittee interview, you could only 
provide a ``guesstimate'' when asked exactly what the portfolio 
was designed to hedge. Do you stand by that statement as well?
    Ms. Drew. Well, certainly that was not the best word I 
could have chosen. I would say that in a $2.5 trillion balance 
sheet, macro hedges, which are fluid as the balance sheet 
changes, do change. And that is why in the response to Senator 
Levin I said the positions go up and down. They have to. It is 
a dynamic process. So it was a poor choice of words, but I 
would not know the exact amount per se of each individual hedge 
versus the balance sheet. All I know is that any hedges were 
limited to the balance sheet and its components.
    Senator McCain. Mr. Weiland, you indicated in an interview 
with the Subcommittee that it was not your job to enforce the 
risk limits, even though you were the senior risk officer at 
the SCP. Well, then, whose job was it, then, to enforce the 
risk limits?
    Mr. Weiland. I saw the way that was written in the report. 
It is not my recollection that I said those words. Certainly it 
was my job to enforce the risk limits in cooperation and 
partnership with the other senior management of the business. 
We did not--I did not make unilateral decisions about how to 
respond to risk limit excesses, but certainly it is part of my 
job.
    Senator McCain. Mr. Bacon, as early as March 30, you and 
your boss, Mr. Hogan, were notified that the international 
chief investment officer in London had ``lost confidence'' in 
his team, that the CIO needed help with the synthetic credit 
book, and that they were clearly ``in a crisis mode.'' Yet Mr. 
Hogan said that he was surprised by the April media reports 
about the losses.
    Doesn't this email indicate otherwise and suggest they 
should have acted sooner?
    Mr. Bacon. So I recall the email you are referring to. What 
I took it be referring to at the time--and I still stand by 
this--is that they had lost faith in their ability to manage 
their RWA number, that the technicals around the modeling 
techniques and the additional trades to add to the book and so 
on were something they were not handling well at all, and they 
had asked for modeling expertise to be inserted into their 
group. And I arranged for that to happen.
    Senator McCain. Ms. Drew, in January 2012, the CIO's chief 
financial officer, Mr. Wilmot, assured the OCC that you planned 
on reducing the portfolio's risk-weighted assets from $70 
billion to $40 billion, yet it tripled in size instead. Tell us 
what happened there. How does that transpire? You assure the 
OCC that you plan on reducing the portfolio, and yet in 
actuality it tripled in size. How does that happen? Or was the 
OCC misled?
    Ms. Drew. I do not think so, Senator. If you will allow me 
to explain, I was not in the meeting when Mr. Wilmot met with 
the OCC. However, the plan, as signed off by all senior 
management, including myself, was to reduce the RWA over the 
course of the total 2012. We had asked for, and received, 
permission to have a slightly higher capital number for the 
first quarter before then embarking on a rapid reduction from 
the second quarter forward. And things went terribly wrong, as 
we all know, and the very large purchases that were made at the 
end of March were not brought to my attention on time.
    Senator McCain. Was it your responsibility to fully 
disclose the true nature of the SCP and its increasing size to 
the OCC? And did you?
    Ms. Drew. It is always my responsibility----
    Senator McCain. Was it?
    Ms. Drew [continuing]. To be fully transparent, but it was 
not my responsibility to discuss information directly with the 
OCC, no, sir.
    Senator McCain. Mr. Weiland, you were warned in early 
2012--I think it is a matter of record--that risk measures 
predicted massive losses. After the bank lost over $6 billion, 
do you stand by your statement that the risk measures were 
``garbage'' and not ``sensible? ''
    Mr. Weiland. So you are referring to two different risk 
measures. The results of the testing, which I called 
``garbage''--which is not an appropriate word and not typical 
of my response to these things, which I take very seriously--
that was part of a process that we were working on to develop a 
model for the new CRM regulatory capital requirements, and that 
was a very first reaction to a number that, was 2 to 3 times 
what we had seen previously and after some changes that we had 
made. So my first reaction was it does not look right. Clearly, 
as we discussed a little earlier, it turned out to be 
predictive.
    With respect to the CS01, which is the second reference 
that you made, in fact, when that limit was first breached, it 
is true that the methodology we were using was not appropriate. 
It was decided to make a change. But a mistake was made in not 
making the change immediately. And that was a missed 
opportunity for us. The CS01 was a sign of something that we 
did not see at the time.
    Senator McCain. Back to a later email, you said, ``We are 
working on a new set of limits for synthetic credit, and the 
current CS01 will be replaced by something more sensible and 
granular.''
    Mr. Bacon, there are Firm-wide risk limits at JPMorgan. Is 
that true?
    Mr. Bacon. Yes.
    Senator McCain. Well, were those breaches ignored?
    Mr. Bacon. No, the breaches were not ignored. Specifically 
the one I expect you are referring to is the VaR breach in 
January at a Firm-wide level. It was not ignored. It caused 
action and escalation. It was a situation where we relied upon 
the explanation that turned out to be wrong about the new VaR 
model, an implementation that was agreed by the risk management 
in place at the time, by model review, all of which failed, but 
reliance was erroneously placed on that.
    Senator McCain. Well, let me tell you what is hard to 
explain to my constituents when their tax dollars are insuring 
their deposits. They are going to ask, How could we possibly 
balloon up to a $6 billion loss? And basically there was not 
only ignoring the facts but sort of endorsing the behavior. And 
it seemed that the traders seemed to have more responsibility 
and authority than the higher-up executives.
    I have to go to a town hall meeting in Arizona. You tell me 
what I am supposed to tell my constituents who with their tax 
dollars some of these deposits were insured, this kind of 
gambling went on, when, by the way, they are also having 
extreme difficulty in getting their home loan mortgages 
consummated and obtained. But tell me, Mr. bacon, what should I 
say?
    Mr. Bacon. I think, first of all, we should be clear that 
this whole thing is regrettable and unacceptable, and, we 
believe, isolated. But the onus of proof is on us now to 
demonstrate how this cannot happen in other places, how we 
weathered the financial crisis well everywhere else, and how we 
can make the entire Firm a safer place to the satisfaction of 
you, everybody else, and our regulators.
    This failed because the multiple things that should have 
caught it did not catch it. The two obvious ones, trading 
oversight and management oversight on the ground in London, 
failed completely. And second lines of defense, risk primarily 
and finance after that, also failed with the granularity of 
limits and the escalation and the pushback through risk 
committees. It would actually have been easy to catch this in 
many ways, and very regrettably, it did not happen. I believe 
we have taken corrective actions on all these counts.
    Senator McCain. Do you believe that JPMorgan is too big to 
fail?
    Mr. Bacon. I do not think it is too big to fail. I think 
there is further work that needs to be done to demonstrate and 
document that, and it is in process. I am not leading that 
process or deeply involved in it, but I think it is something 
that needs to be demonstrated to everybody's satisfaction.
    Senator McCain. Thank you. I thank the witnesses.
    Thank you, Mr. Chairman.
    Senator Levin. Thank you.
    Mr. Weiland, you indicated in response to a question that 
it was your job to enforce risk limits in cooperation with 
senior management, I believe. Is that correct?
    Mr. Weiland. Yes.
    Senator Levin. Now, the bank had five key risk limits for 
the synthetic portfolio. Those risk limits may be complicated, 
but the bottom line is that they sound alarms when it looks 
like an investment portfolio is putting a lot of money at risk 
or when it looks like projected losses could exceed a dollar 
limit that was set up ahead of time.
    Now, if you take a look at Exhibit No. 1d \1\ in your 
book--and it is up there--this chart is also up in front of 
you. There are Synthetic Credit Portfolio risk limit breaches.
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    \1\ See Exhibit No. 1d, which appears in the Appendix on page 514.
---------------------------------------------------------------------------
    Now, the VaR limit was breached starting in January, and it 
then was changed. A new model was put into place, and we have 
had a little conversation about that, and we are going to have 
a lot more later on. But the breach which occurred even before 
the VaR breach was the so-called CS01 breach, and that lasted 
longer. You can see that long red block there, the CS01 breach, 
and the CS01 stands for what?
    Mr. Weiland. Credit spread 01. It is the value of a one-
basis point move in credit spreads.
    Senator Levin. All right. So credit spread of one basis 
point is CS01.
    Mr. Weiland. Correct.
    Senator Levin. Now, take a look at Exhibit No. 39,\1\ if 
you would, Mr. Weiland. This exhibit lists the breaches from 
September 20, 2011, through April 30, 2012. It is page after 
page after page after page after page of breaches--by the way, 
most of them not VaR breaches because they changed the VaR 
model.
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    \1\ See Exhibit No. 39, which appears in the Appendix on page 748.
---------------------------------------------------------------------------
    If you look just at the breaches involving the SCP, in the 
last quarter of 2011 and the first quarter of 2012, you see a 
huge jump, 6 breaches in the Synthetic Credit Portfolio to over 
170 breaches. So from the last quarter of 2011 to the first 
quarter of 2012, the number of breaches jumped from 6 to 170.
    And then in April 2012, April alone, there were 160 
breaches. So almost as many in that 1 month of April as the 
three previous months combined, and those 3 months had 160--
excuse me, 170 breaches compared to the 6 breaches in the 
previous quarter.
    Now, would you agree that when you have that kind of a huge 
jump in risk limit breaches that is a worrisome pattern? Would 
you agree to that?
    Mr. Weiland. A large jump in risk limit breaches is a 
worrisome pattern.
    Senator Levin. OK.
    Mr. Weiland. But I would say that by April the action of 
halting trading had already occurred. Breaches and risk metrics 
can change. Even without making trades or changing positions, 
the markets move and the team was, at that point, as was 
written and mentioned somewhere else, in crisis mode trying to 
figure out what was the best way forward to escape from the 
position that we were in at that time.
    Senator Levin. Yes. And on what date had you stopped the 
trading?
    Mr. Weiland. My recollection is it was after March 28.
    Senator Levin. After March----
    Mr. Weiland. It is in the report somewhere. I cannot 
remember the date.
    Senator Levin. Late March?
    Mr. Weiland. Yes.
    Senator Levin. You stopped trading. When more than one risk 
limit is breached at a time, does that send a stronger signal 
that the portfolio is overly risky?
    Mr. Weiland. It may. It depends. If it is different types 
of measures, it certainly does. Sometimes an individual 
position can trigger several limits just because the way the 
portfolio is organized. So it depends on the situation.
    Senator Levin. Was the Synthetic Credit Portfolio a low-
risk investment portfolio?
    Mr. Weiland. No, it was not.
    Senator Levin. Now, you have these multiple breaches that 
are going on in huge numbers in the first quarter. It took 
until the end of March to act when those breaches were flowing 
in. Had you seen this many breaches before, by the way, in a 
portfolio?
    Mr. Weiland. No. What I would say was on the--there are a 
couple different circumstances. On the CS01, as I have already 
said, we missed an opportunity there to understand some changes 
early. And given that the plan was to change the limits, it 
continued to breach because we were working on the changes. And 
so it was understood there were active discussions on how to 
deal with it. So continuing to have the breaches, as long as 
everybody understands that those are happening, I actually 
thought it was a good thing which would help keep focus on the 
portfolio.
    Senator Levin. Understanding the breaches would be a good 
thing. The breaches themselves are not a good thing, are they?
    Mr. Weiland. Agreed.
    Senator Levin. All right. So now let us take a look at the 
CS01 limit. It sounds alarms when the value of derivatives in 
the portfolio drops by that specified amount; in technical 
terms, when the credit spreads widen for specified derivatives 
by one basis point, that is the reference to the 01 point. The 
Synthetic Credit Portfolio first breached the CS01 limit on 
January 6, 2012. It kept on breaching for more than 3 months.
    Then on April 19, Mr. Weiland, after the media storm hit, 
the OCC sent you an email. If you will take a look at Exhibit 
No. 65.\1\ It asked you about that CS01 risk limit which has 
been ``in excession by 1,074 percent'' for 71 days.
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    \1\ See Exhibit No. 65, which appears in the Appendix on page 829.
---------------------------------------------------------------------------
    Now, when the email says ``in excession by 1,074 percent,'' 
it means the Synthetic Credit Portfolio has breached the risk 
limit by more than 1,000 percent. Is that correct?
    Mr. Weiland. Correct.
    Senator Levin. So it was over 10 times the limit, and in 
that Exhibit No. 39,\2\ which we discussed earlier, which was 
the list of the breaches, it indicates that on April 19 the 
limit was $5 million, but the projected SCP losses, if the 
credit spreads widened one basis point, could be $59 million. 
Is that correct?
---------------------------------------------------------------------------
    \2\ See Exhibit No. 39, which appears in the Appendix on page 748.
---------------------------------------------------------------------------
    Mr. Weiland. Correct.
    Senator Levin. Do you see that?
    Mr. Weiland. Yes.
    Senator Levin. Now, you responded to the OCC inquiry by 
saying, ``We are working on a new set of limits for synthetic 
credit and the current CS01 will be replaced by something more 
sensible and granular.'' So you were ignoring the 1,000-percent 
breach limit for 71 days because the CS01 limit was not 
``sensible.'' So if the risk limit was outdated or not 
sensible, why did it take that long to update it when bank 
policy requires and the OCC requires that risk limits be 
updated every year? Why wasn't the CS01 limit updated?
    Mr. Weiland. Yes, I mean----
    Senator Levin. As a matter of fact, they had not been 
updated since 2009, had they?
    Mr. Weiland. The CS01 limit had been the same since 2009.
    Senator Levin. Even though the policy of the bank was it is 
supposed to be updated every year, this thing had been in 
breach now for 71 days and by 1,000 percent. So there it sat 
for 3 years when you got a rule in the bank and an OCC rule 
saying you update it every year, but 71 days go by looking like 
that. Now, how do you explain that?
    Mr. Weiland. We were in the midst of a limit re-evaluation 
at that time, at the same time----
    Senator Levin. For 3 years?
    Mr. Weiland. No, which was begun in the summer of 2011, but 
at the time, there were a lot of changes going on both in the 
regulatory environment and in the market. We were very focused 
on getting the regulatory capital models up to speed and 
working properly and adjusting the business to deal with those. 
Those things took priority. Again, this is another, mistake of 
ours, but it was all in good faith, and it was with, what we 
knew at the time to be the case that the change in that limit 
just did not take first priority at that time.
    Senator Levin. For 3 years you were supposed to have been 
looking at that risk limit every year. You did not revise it. 
Now, this tide hits you for 70 days, by 1,000 percent. That is 
10 times the limit breached for 70 straight days. It was 
outdated anyway. It happened despite the OCC regulation, which 
you ignore year after year.
    Now, Ms. Drew, were you aware of the 4-month-long breach?
    Ms. Drew. Yes.
    Senator Levin. Why didn't you fix it?
    Ms. Drew. My understanding was that it was in the process 
of being reviewed, and I was told by Risk that it was not a 
useful limit and that it was going to be replaced with a more 
useful limit which was being worked on in the risk group inside 
and outside CIO.
    Senator Levin. Now, if you look at Exhibit No. 54,\1\ Ms. 
Drew, here is what you said when the CIO's chief risk officer 
Irvin Goldman wrote to you about this breach in an email dated 
February 13, 2012. He said, ``We have a global credit csbpv 
limit.'' That is, as I understand it, the 01 limit. That is 
another name for the CS01 limit. So Mr. Goldman went on as 
follows: ``It was set up at the initiation of the credit book. 
Unfortunately we have been breaching for most of the year.''
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    \1\ See Exhibit No. 54, which appears in the Appendix on page 797.
---------------------------------------------------------------------------
    This is how you responded, Ms. Drew. You said, ``I have no 
memory of this limit.'' I think you just told us that you were 
aware of the breach of that limit, but you told him you did not 
have memory of the limit.
    Ms. Drew. That is correct. I did not know there was a 
global csbpv limit as well as a csbpv limit, and Mr. Goldman 
referred in the email to a global csbpv limit, and I probably 
simply misunderstood. And that is why I followed it by saying 
the limit needs to be recast with all the other limits, which 
was a review that I was assured was ongoing, had actually been 
started, and was making some progress.
    Senator Levin. Did you know that these limits were supposed 
to be reviewed every year?
    Ms. Drew. Yes.
    Senator Levin. Were you aware of the fact that it had not 
been reviewed every year?
    Ms. Drew. I do not recall.
    Senator Levin. Were you aware that it was 1,000 percent 
over the limit?
    Ms. Drew. No, I was not.
    Senator Levin. Senator McCain.
    Senator McCain. I have no further questions.
    Senator Levin. Thank you. Very quickly, and then we are 
going to take a break and add to our panel.
    There is a second risk limit on this chart, Exhibit No. 
1d.\1\ It is known as the value-at-risk, which sets a dollar 
limit on how much money is at risk for being lost over the 
course of a day in ordinary market conditions.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1d, which appears in the Appendix on page 514.
---------------------------------------------------------------------------
    A mathematical model is used to evaluate how much value an 
investment portfolio is putting at risk. If the value-at-risk 
exceeds the VaR limit established for the portfolio, notice 
then goes out to the risk managers.
    Now, here the Synthetic Credit Portfolio breached both the 
CIO and bank-wide VaR limits for several days starting on 
January 16, and then breached them again for 4 days starting on 
January 24. CEO Jamie Dimon personally approved a temporary 
increase in the VaR limit, as a matter of fact, until the CIO 
then rushed through approval of a new VaR model, which we 
referred to, which was effectively an end run around the risk 
limit.
    So now when it was activated on January 27, it resulted in 
an overnight drop. When the new VaR limit was activated, 
suddenly there was an overnight drop by 50 percent in the CIO's 
VaR results. The breach ended without the SCP having to get rid 
of a single risky investment.
    Now, under the old model, the CIO's VaR was $132 million. 
That is how much money was at risk of loss in a 1-day period. 
When the new model took effect, even though the portfolio had 
the same risky credit derivatives, its value at risk, its VaR, 
was suddenly cut in half. Now it is $66 million. And guess 
what? That new amount was way under the VaR limit.
    Now, Ms. Drew, how did you know the new VaR model was going 
to be more accurate?
    Ms. Drew. Well, Senator, the VaR model was a change and a 
review that had been ongoing for not 1, not 2, but 7 months by 
the independent risk modeling group, and my understanding was 
it had gone through quite a few iterations before it arrived in 
its final form as a correct measure, one that I relied on very 
heavily to manage the position.
    Senator Levin. Did you backtest the new model against the 
old data?
    Ms. Drew. That would have been done in Risk, sir.
    Senator Levin. Do you know whether it was done?
    Ms. Drew. I do not.
    Senator Levin. You saw the Model Review Group approved the 
new VaR model, but didn't they also say when they approved it 
that the CIO had to automate the data entry? Isn't that true?
    Ms. Drew. If they did, that would have been an order that 
would have gone to Risk.
    Senator Levin. Well, so you are not aware that they said 
that you had to automate the data entry when they approved this 
VaR model, right?
    Ms. Drew. At the time I was not. I am aware of that now.
    Senator Levin. OK. Now, you said there was no backtesting 
that was done. Is that correct?
    Ms. Drew. I do not believe I said that. I said I do not 
know whether----
    Senator Levin. You do not know. OK. Take a look at Exhibit 
No. 98,\1\ if you would. And it is page 104. This is what the 
review said about what happened when this new VaR was put in 
place: ``The Model Review Group required only limited 
backtesting of the new model. . . . That is No. 1. It was 
critical of that limited backtesting. ``And it insufficiently 
analyzed the results that were submitted.''
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    \1\ See Exhibit No. 98, which appears in the Appendix on page 963.
---------------------------------------------------------------------------
    So now you have a situation where you have a new VaR that 
is dropped in there. It cuts the VaR in half, suddenly, boom, 
there is no longer a breach. And the new VaR was approved, but 
when it was approved, it was approved with the requirement that 
there be only limited backtesting of the new model, instead of 
backtesting it to see whether or not it was workable. And it 
insufficiently analyzed the results that were submitted. So it 
produced lower VaRs. It was full of operational errors that the 
bank knew about--ordered corrected, by the way--and did not 
supply the funds despite multiple requests to deal with the 
operational errors.
    Mr. Bacon, what do you think of a VaR model that drops the 
CIO's VaR by 50 percent overnight? What do you think about 
that?
    Mr. Bacon. I think it is something which would require a 
lot of inquiry and explanation.
    Senator Levin. Like backtesting?
    Mr. Bacon. Yes.
    Senator Levin. It deserves backtesting?
    Mr. Bacon. Yes.
    Senator Levin. But it did not get it here.
    Mr. Bacon. I think it got insufficient----
    Senator Levin. Limited.
    Mr. Bacon. Correct, yes.
    Senator Levin. And then what it did provide, the 
insufficient data the limited backtesting did provide, was not 
even analyzed. Is that correct?
    Mr. Bacon. It is absolutely not the way to do it.
    Senator Levin. But it was not even analyzed. Is that 
correct?
    Mr. Bacon. I do not know if it was analyzed.
    Senator Levin. Well, that is what the report said.
    Mr. Bacon. OK. Then I am sure that was right.
    Senator Levin. The VaR model, the new one, depended on 
analyzing a daily stream of new trading data. Instead of 
constructing an automated database that automatically would 
feed the daily trading data into a VaR model, Mr. Hagan, the 
model designer, a Ph.D., was stuck with having to manually 
enter the trading data every night using spreadsheets which had 
calculation and formula errors.
    In other words, the new key value-at-risk model for the 
CIO's $350 billion portfolio, including the Synthetic Credit 
Portfolio, was being run manually using error-prone 
spreadsheets with operational flaws.
    Mr. Weiland, did you know that Mr. Hagan was doing nightly 
manual data entry and sometimes staying up into the wee hours 
of the night to get it done? Were you aware of that fact?
    Mr. Weiland. I was not aware of the details of the manual 
work he was doing. I did know there were spreadsheets involved, 
and I did know that Mr. Hagan often stayed late at night.
    Senator Levin. Mr. Bacon, the OCC told us that the 
operational problems--the spreadsheets, the lack of an 
automated database, the calculation and formula errors which 
lower these VaR results--were shocking and absolutely 
unacceptable. Do you agree?
    Mr. Bacon. I do.
    Senator Levin. Ms. Drew, why did the bank model review that 
approved the VaR knowing that there were problems and then 
allow it to operate in such a shoddy fashion? Why did the bank 
allow that to happen?
    Ms. Drew. It is very disappointing. I have no idea. The 
Risk Modeling Group is an independent group staffed by very 
well trained and educated Ph.D.s who run the models, and I am 
certainly very disappointed that it was not reviewed properly 
and that it was delivered to me in poor form.
    Senator Levin. Did Mr. Hagan work for your group?
    Ms. Drew. He did, in London.
    Senator Levin. What bothers me, if you will take a look at 
Chart 1d\1\, it is not just that the multiple risk limits were 
breached, and so frequently; they were not even really limits. 
Nobody was told to stop trading because of a risk limit breach. 
No one investigated the trading because of the breaches. Mr. 
Bacon, should someone have investigated risky trading 
activities that triggered all these breaches? Isn't that the 
point of breaches, that someone would investigate the breaches?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1d, which appears in the Appendix on page 514.
---------------------------------------------------------------------------
    Mr. Bacon. Yes, Senator.
    Senator Levin. Another thing that bothers me is that the 
bank's reaction has been to criticize the CIO's old risk limits 
as inadequate and add a bunch of new ones. So there used to be 
five big risk limits. OK? Now it has gone to 230 risk limits 
for the Synthetic Credit Portfolio.
    It misses the point. It was not that the Synthetic Credit 
Portfolio had too few risk limits. It was that risk management 
personnel did not enforce the ones they had. I do not see how 
piling on another 225 risk limits solves anything.
    Now, do you want to comment on that?
    Mr. Bacon. Yes. I very much agree with you that the first 
failure is not to escalate and remediate when the risk limits 
you have in place are already telling you something. So I do 
agree with that. And one of the changes is an alteration to our 
policies and procedures whereby automatically, if there is a 
Firm-wide or line of business limit breach for 3 days, it goes 
all the way to the Firm-wide Risk Committee containing Mr. 
Dimon, our CFO, myself, everybody. So that is now automatic.
    I think on the question of whether it is necessary to have 
more limits, although this particular egregious mistake was 
caught by a small number of limits, if you had followed up on 
them, there are other mistakes you could make that may not have 
been caught by a small set of limits, which is why we want to 
be safer than that.
    Senator Levin. Thank you. Senator McCain, do you have 
anything right now?
    Senator McCain. No.
    Senator Levin. We are going to take a 5-minute break here, 
and we are going to then widen our panel. It will give us an 
opportunity to use the restrooms, if anybody needs to do that. 
It is going to be very brief, though. We will be back in 5 
minutes. [Recess.]
    OK. We will be back in order.
    We will now add to our panel and call two additional 
witnesses to the hearing: Michael Cavanagh, the head of the 
JPMorgan Chase Management Task Force reviewing CIO losses and 
the Co-Chief Executive Officer of the Corporate and Investment 
Bank at JPMorgan Chase; and Douglas Braunstein, the current 
Vice Chairman and former Chief Financial Officer from 2010 to 
2012 at JPMorgan Chase.
    I appreciate very much both of you being with us this 
morning. We look forward to your testimony. And as you may have 
heard, pursuant to the rules of this Subcommittee, all 
witnesses who testify before us are required to be sworn, so I 
would ask that each of you rise and raise your right hand. Do 
you swear that the testimony that you are about to give to this 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Cavanagh. I do.
    Mr. Braunstein. I do.
    Senator Levin. Were you here and do you know about the 
timing system? If you have opening statements now--you do?
    Mr. Cavanagh. There we go. May I?
    Senator Levin. Yes.

 TESTIMONY OF MICHAEL J. CAVANAGH,\1\ HEAD OF JPMORGAN CHASE & 
   CO. MANAGEMENT TASK FORCE REVIEWING CIO LOSSES, CO-CHIEF 
  EXECUTIVE OFFICER, CORPORATE AND INVESTMENT BANK, JPMORGAN 
                CHASE & CO., NEW YORK, NEW YORK

    Mr. Cavanagh. Chairman Levin, Ranking Member McCain, and 
Members of this Committee, my name is Michael Cavanagh, and I 
am the co-CEO of the Corporate and Investment Bank at JPMorgan. 
As you know, I recently led a task force that conducted a 
review of the circumstances surrounding the 2012 losses in 
JPMorgan's Chief Investment Office. I appreciate the 
opportunity today to discuss the task force's work, to describe 
what we found, as well as the steps JPMorgan is taking in 
response.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cavanagh appears in the Appendix 
on page 117.
---------------------------------------------------------------------------
    Some of what we found was, frankly, very disappointing and 
does not reflect our institution at its best. That said, we 
have addressed the issues head-on and are determined to become 
a better company because of this experience. We have fully 
cooperated with the Subcommittee during the course of its 
inquiry, and as noted in my written statement, we respect the 
key role the Subcommittee has played in highlighting the 
importance of effective risk management and oversight of our 
Nation's financial institutions. We also appreciate the 
courtesies extended to us by your staff.
    As you know, earlier this year our task force issued a 
report which was the culmination of an extensive review. The 
work included interviews of many current and former JPMorgan 
employees and the examination of millions of pages of documents 
and tens of thousands of audiofiles. The work was overseen by 
an independent review committee of our board of directors. We 
have also been cooperating with ongoing inquiries by 
governmental authorities, both here and in the United Kingdom.
    Because our findings are already public and are set forth 
in my written testimony, I am not going to discuss them in 
detail now. Instead, I would like to briefly summarize our key 
conclusions and then describe the steps we have taken to 
address the problems we found.
    In short, the losses were the result of a number of acts 
and omissions, some involving personnel and some involving 
governance. Those responsible, in our view, include, to varying 
degrees: The traders who designed and implemented the flawed 
trades, the managers who failed to properly vet the strategy 
and ensure that it was sound, the risk managers who failed to 
serve as a robust check on the trading activity, and the senior 
management of the Firm who failed to ensure that CIO was 
subject to the same type of rigorous oversight as other parts 
of the Firm.
    In light of what we found, the Firm has taken wide-ranging 
remedial actions, both within CIO and throughout the Firm, to 
prevent incidents similar to this from occurring in the future. 
These are described in detail in the task force report, but I 
would like to briefly highlight for the Subcommittee some of 
the more significant steps we have taken.
    First, the Firm has terminated the employment or accepted 
the resignations of the responsible CIO personnel and pursued 
clawbacks of compensation.
    Second, JPMorgan has appointed a new CIO leadership team 
which has refocused CIO on its basic mandate.
    Third, the Firm has increased resources for the key risk 
and finance control functions within CIO.
    Fourth, CIO has implemented new or restructured limits 
covering a broad and granular set of risk parameters.
    And, fifth, the Firm has adopted a variety of governance 
measures to improve its oversight and control of CIO.
    The Firm's remedial efforts, though, have not been limited 
to CIO. The Firm has, among other things, conducted a 
comprehensive self-assessment of its entire risk organization 
and, as a result, is implementing a series of improvements 
across the entire Firm. Where there is room to improve, we can 
and will do so.
    With respect to the trading itself, we have learned many 
hard lessons, in particular, that any future portfolio hedging 
will be subject to appropriate monitoring requirements with 
documentation linking the hedge to the risk it is designed to 
offset.
    So, in conclusion, I want to assure you that this 
experience has caused substantial and healthy introspection at 
the senior management level of our Firm and recognition of the 
need for continued improvement.
    Thank you, and I look forward to taking your questions.
    Senator Levin. Thank you, Mr. Cavanagh. Mr. Braunstein.

  TESTIMONY OF DOUGLAS L. BRAUNSTEIN, CURRENT VICE CHAIRMAN, 
 FORMER CHIEF FINANCIAL OFFICER (2010-2012), JPMORGAN CHASE & 
                    CO., NEW YORK, NEW YORK

    Mr. Braunstein. Thank you, Chairman Levin, Ranking Member 
McCain, and Members of this Committee. My name is Doug 
Braunstein, and I serve as a Vice Chairman of JPMorgan Chase. 
From 2010 to 2012, I served as Executive Vice President and 
Chief Financial Officer of JPMorgan. Thank you for the 
opportunity to participate in today's hearing. Mr. Cavanagh has 
already made a statement on behalf of the Firm. I look forward 
to answering your questions today.
    Senator Levin. Thank you very much.
    During our investigation we came across a number of 
examples of the bank giving the OCC examiners a hard time. In 
2010, according to an OCC email of May 2012, when the OCC 
concluded an exam of the CIO and told you, Ms. Drew, that the 
CIO needed to do a better job documenting its risk and 
investment decisions, you sternly told the OCC that they were 
being overly intrusive and that there was little need for more 
documentation since Jamie Dimon was aware of the CIO's 
investment activities. A record of your reaction is at Exhibit 
No. 71,\1\ and that is a May 2012 email.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 71, which appears in the Appendix on page 843.
---------------------------------------------------------------------------
    When Mr. Waterhouse, the OCC Examiner-In-Charge (EIC), 
recounted that 2010 incident, the first paragraph, this is what 
he wrote: ``Just for your information (FYI). We did an 
examination of the CIO at the end of 2010 and have a followup 
planned soon. Now, this email is May of 2012. ``We had some 
concerns about overall governance and transparency of the 
activities. We received a lot of pushback from the bank, Ina 
Drew in particular, regarding our comments. In fact, she called 
OCC examiner Fred Crumlish in London and sternly' discussed our 
conclusion with him for 45 minutes. Basically, she said that 
investment decisions are made with the full understanding of 
executive management including Jamie Dimon. She said that 
everyone knows what is going on and there is little need for 
more limits, controls, or reports.''
    So, Ms. Drew, according to this email, you said that CIO's 
investment decisions were made with the full understanding of 
the executive management. Is that true?
    Ms. Drew. Yes, that is true.
    Senator Levin. Now, according to OCC Examiner-in-Charge 
Scott Waterhouse, in January or February 2012, the bank stopped 
sending the Investment Bank's daily profit and loss (P&L) data 
to the OCC. Just plain stopped sending those documents. No 
notice, no explanation, no profit or loss data for the 
investment bank, one of the Nation's largest. This is the 
investment bank we are talking about.
    According to Mr. Waterhouse, the OCC had to escalate the 
issue to you, Mr. Braunstein, Chief Financial Officer of the 
bank, to reverse the decision, which you did. During a meeting 
between you, Mr. Braunstein, Mr. Dimon, and Mr. Waterhouse, it 
became clear that it was Mr. Dimon who was responsible for 
directing the data cutoff. Is that correct, Mr. Braunstein?
    Mr. Braunstein. Yes, sir.
    Senator Levin. Now, did the bank stop sending the OCC daily 
profit and loss data for the Investment Bank for a period of 
time? Was it a week, or how long was it?
    Mr. Braunstein. I think, Senator, it was approximately 2 
weeks.
    Senator Levin. Two weeks. Then did you restore that data to 
the OCC?
    Mr. Braunstein. Yes, sir, I did.
    Senator Levin. And did Mr. Dimon say why he had ordered the 
data stopped?
    Mr. Braunstein. Prior to stopping the data, a number of 
regulators had breaches in some of the information that we had 
shared with them. There had been mistaken losses of 
information, and so we wanted to ensure that prior to 
restarting the data that we had adequate controls in place to 
ensure that the data got to the regulators and only to the 
regulators.
    Senator Levin. And did you notify them that was your 
reason?
    Mr. Braunstein. I did speak to them during the course of 
that period of time.
    Senator Levin. And you told them that was the reason that 
information was not coming to them?
    Mr. Braunstein. During that----
    Senator Levin. That January-February time, during that 2-
week period when you were not delivering the data and you 
ordered it restored--apparently there was some heat in the 
conversation, allegedly. But in any event, you ordered that 
data restored. Did you during that period tell the OCC why you 
were stopping that data? That is my question.
    Mr. Braunstein. Senator, I believe actually the time period 
was earlier, but I do recall somewhere in that period of time 
having a conversation to explain why we had turned the data 
off.
    Senator Levin. And who did you talk to?
    Mr. Braunstein. I cannot recall if it was Mr. Waterhouse or 
Mr. Crumlish.
    Senator Levin. And what you gave as the explanation for 
suddenly cutting that data off is the same explanation you gave 
to them. Is that what you are saying?
    Mr. Braunstein. I expressed that concern and then told them 
that I would turn the data back on.
    Senator Levin. Was Mr. Dimon unhappy when the data was 
turned back on?
    Mr. Braunstein. I do not recall the specifics of his 
reaction, sir.
    Senator Levin. You do not recall that there was some very 
deep unhappiness there when it was restored, despite his order?
    Mr. Braunstein. I do not recall the specifics of that 
interaction, sir.
    Senator Levin. How about the generalities of it?
    Mr. Braunstein. As I said, I do not recollect the specifics 
of that meeting.
    Senator Levin. Now, sometimes the bank went further and 
gave wrong information to the OCC. We showed already today that 
in the January 30 quarterly meeting, CIO said that it was 
reducing the size of the Synthetic Credit Portfolio when, in 
fact, it was not. But here are some more examples of wrong 
information from JPMorgan, and these come after the media 
exposed the whale trades and the OCC starting asking the bank 
for some hard numbers.
    The Synthetic Credit Portfolio was a mark-to-market 
portfolio, which means again that the value of the portfolio 
was measured and recorded internally every day. On April 16--
again, this is after the media storm hit--the bank met with the 
OCC and provided its first presentation on the Synthetic Credit 
Portfolio.
    Ms. Drew, you were present for the briefing to the OCC, and 
at that briefing the bank told the OCC that the first quarter 
losses were $580 million, and that is in Exhibit No. 60.\1\ 
But, actually, the losses at the end of the first quarter, on 
March 31, had been reported inside the bank as $719 million. 
And there, if you will take a look at Exhibit No. 1g,\2\ this 
is a list that was provided, I believe in May, of all of the 
internal profit and loss reports. And if you will look there, 
you can see that on March 30 it was $719 million, according to 
the bank's internal reports, but what was reported to the OCC 
was $580 million.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 60, which appears in the Appendix on page 809.
    \2\ See Exhibit No. 1g, which appears in the Appendix on page 517.
---------------------------------------------------------------------------
    Now, not only that, but on the Friday before the Monday, 
April 16 public report that I think you were involved in, Mr. 
Braunstein, the bank met with the OCC, and losses by then had 
more than doubled to $1.2 billion.
    So before the April 16 conference call, two things had 
happened here:
    One is that the report to the OCC that the first quarter 
losses were $580 million was wrong; according to the bank's own 
records, it was $719 million.
    And then, the Friday before April 16, the losses had more 
than doubled to $1.2 billion.
    So, first, Ms. Drew, why did you tell the OCC that the 
first quarter losses were $580 million when the losses were 
$719 million?
    Ms. Drew. Senator, the number I reported was the number 
that I believed was accurate. Finance added, as it always does 
after the quarter end, reserves on top of mark-to-market 
losses. The aggregate of the two is the correct number that was 
given to the OCC.
    Senator Levin. I think this is separate from the reserve. I 
think the losses as reported here on this chart were $719 
million----
    Ms. Drew. The number I reported was the number that was 
given to me as calculated by central Risk and Finance, and that 
is the number I reported----
    Senator Levin. So whatever number was given to you. So you 
do not know whether that number was accurate or not. You just 
used the number that was given to you.
    Ms. Drew. No. That number agreed with the total 
consolidated profit and loss statement that was given to me the 
day I met with the regulators, and it was reviewed by my chief 
financial officer. I knew that number to be the correct number.
    Senator Levin. OK. Then when you met with the OCC on April 
16, that was the number you gave them. Is that correct?
    Ms. Drew. I gave them whatever number was confirmed to me 
by Finance.
    Senator Levin. Well, I want you to look at Exhibit 1g.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1g, which appears in the Appendix on page 517.
---------------------------------------------------------------------------
    Ms. Drew. Yes, I am looking at the exhibit.
    Senator Levin. The first quarter was March 30, right? And 
do you see that $719 million? Is that correct? And then take a 
look at April 13. Do you see that number on April 13?
    Ms. Drew. Yes.
    Senator Levin. One point 2 billion dollars, do you see 
that?
    Ms. Drew. Yes.
    Senator Levin. So the number you gave to OCC on April 16 
was $580 million, but your internal report shows $1.2 billion. 
So the Friday before you met with the OCC, your internal report 
showed a $1.2 billion loss, according to your records, but you 
told the OCC that the losses were $580 million. Why not give 
them the loss as of April 13, the Friday before you met with 
them?
    Ms. Drew. The OCC, to the best of my knowledge--and I asked 
this question--had profit and loss daily reports. The number I 
gave to the OCC was----
    Senator Levin. Say that again?
    Ms. Drew. To the best of my knowledge, the OCC was given 
daily mark-to-market reports of the CIO's activities.
    Senator Levin. So you are saying that all during this 
period, January, February, March, and April, the OCC had your 
daily profit and loss reports?
    Ms. Drew. That is my understanding.
    Senator Levin. For the Synthetic Credit Portfolio?
    Ms. Drew. For the total CIO mark-to-market activities of 
which the Synthetic Credit Portfolio was included.
    Senator Levin. Was that identified, by the way, separately? 
The dailies?
    Ms. Drew. I am sorry.
    Senator Levin. Was the SCP identified separately on those 
reports that----
    Ms. Drew. That I do not know.
    Senator Levin. I think you are inaccurate about this, but 
we will find out from the OCC. Senator McCain.
    Senator McCain. Well, thank you, Mr. Chairman----
    Ms. Drew. This is all to the best of my knowledge. Thank 
you.
    Senator McCain. Mr. Braunstein, let me be clear for the 
record. By regulation, regular reports are required to go to 
the OCC. Is that correct?
    Mr. Braunstein. I believe so, sir.
    Senator McCain. And yet Mr. Dimon then made the decision 
for 2 weeks at a very critical time not to send reports to the 
OCC. Is that correct?
    Mr. Braunstein. That is correct, sir, based on a concern 
about the confidentiality of those reports.
    Senator McCain. Well, with normal citizens, normal 
enterprises, if by regulation you are required to do something, 
and you do not want to do it, then you seek avenues to avoid 
it. Do we live in a world, Mr. Braunstein, that government 
regulations of our business and our lives, we just decide, 
well, we are not--because we are concerned about something, we 
are not going to comply with regulations? Is that how JPMorgan 
works?
    Mr. Braunstein. No, sir, it does not.
    Senator McCain. Did it work that way in this case?
    Mr. Braunstein. Senator, the report in question, I am not 
certain, but I am not aware that was a report required to be 
provided to the regulators. We also were concerned about the 
loss of some confidential information. We wanted to ensure that 
we had procedures in place to avoid that going forward.
    Senator McCain. Well, I guess we can find out whether those 
reports are required or not, although I believe they are, but I 
will have our staff check. But was there any other time where 
an executive decision was made, we will not send these reports 
to the OCC?
    Mr. Braunstein. Not that I am aware of, sir.
    Senator McCain. It seems to me it is remarkable that if you 
are required to make reports or have been, even, making reports 
regularly to regulators on a routine basis, the timing is very 
interesting of this, just decides not to give a report. I am 
not sure that there are many organizations, companies, and 
corporations in America that could get away with such a thing, 
and, frankly, it is kind of a testimony to the lack of action 
on the part of the regulators if they expected those reports.
    I would like to go back to this email from Scott Waterhouse 
to Mike Brosnan. It says, ``We did an examination of the CIO at 
the end of 2010 and have a followup planned soon. We had some 
concerns about overall governance and transparency of the 
activities. We received a lot of pushback from the bank, Ina 
Drew in particular, regarding our comments. In fact, Ina called 
Crumlish when he was in London and `sternly' discussed our 
conclusions with him for 45 minutes. Basically she said that 
investment decisions are made with the full understanding of 
executive management including Jamie Dimon.''
    Did that include you, those decisions that you were fully--
had full understanding of the investments that were made?
    Mr. Braunstein. Senator, I am not familiar with what 
specifically Ina was referring to in that statement. I was 
certainly aware----
    Senator McCain. Well, let me try and help you out. She was 
referring to their concerns about overall governance and 
transparency of the activities.
    Mr. Braunstein. I would say, Senator, we endeavored to be 
fully transparent with the regulators, and I would certainly 
have supported that transparency. As to the specific investment 
decisions, I was certainly aware of the synthetic credit 
product.
    Senator McCain. You said on the April 13 call that the Firm 
was ``very comfortable'' with the positions in the SCP. As Mr. 
Cavanagh pointed out, that statement was wrong, of course.
    When did you learn that your statement was false? And did 
you take any efforts to correct the record?
    Mr. Braunstein. Senator, based on the benefit of hindsight, 
the bank and I were both misinformed and incorrect when I said 
that we were ``very comfortable.''
    Based on the information that I had available to me at the 
time, from a whole range of sources--CIO, Risk, independent 
work done--I believed that to be true. As soon as I discovered 
that there were behavior patterns inconsistent, subsequent to 
April 13, in the portfolio's performance, myself, Mr. Dimon, 
and John Hogan, began a much deeper inquiry.
    Senator McCain. Besides the traders who mismarked the book, 
who should be held accountable or has anyone been held 
accountable aside from the traders for breaching JPMorgan's own 
internal risk limits and adjusting the risk models?
    Mr. Braunstein. Is that a question for me, Senator?
    Senator McCain. Yes. Besides the traders who mismarked the 
book, who should be held accountable for breaching JPMorgan's 
own internal risk limits and adjusting the risk models?
    Mr. Braunstein. Senator, in the aggregate, I concur with 
the task force's report that there were a number of mistakes 
made--in CIO, in the Risk organization, in the Finance 
organization, which I ran, and as senior management. And I 
deeply regret those mistakes.
    Senator McCain. Well, when you are ``held accountable,'' 
what penalty is there that is imposed when you are held 
accountable at JPMorgan?
    Mr. Braunstein. The Firm has taken a number of actions. 
They have terminated the employment of a number of employees. 
They have clawed back compensation----
    Senator McCain. Besides traders?
    Mr. Braunstein. Yes, sir. They have clawed back 
compensation, and they have reduced compensation for selected 
individuals.
    Senator McCain. So we have reduced compensation. For 
example, your compensation was reduced?
    Mr. Braunstein. Yes, Senator.
    Senator McCain. From what to what?
    Mr. Braunstein. Approximately 50 percent, consistent with 
the Board's actions for Mr. Dimon.
    Senator McCain. And that translated into dollars?
    Mr. Braunstein. I moved from $9.5 million in compensation 
in 2011 to $5 million in 2012.
    Senator McCain. Mr. Cavanagh, once the SCP was correctly 
valued, what was the final amount the CIO lost as a result of 
the whale trades?
    Mr. Cavanagh. $5.8 billion through June 30 of last year and 
some modest losses that followed.
    Senator McCain. Besides this Subcommittee's investigation, 
what are JPMorgan's ongoing legal and financial exposures, 
including penalties already paid by the Firm stemming from the 
whale trades, Mr. Cavanagh?
    Mr. Cavanagh. I do not have a number for you, Senator. We 
are in the middle of ongoing regulatory work and examination 
authorities, and there will be litigation. But we do not have 
any estimates yet for exposure financially on that side.
    Senator McCain. Well, I guess I do not have any other 
questions, but it is hard for me to accept that serious 
responsibility was assumed by the top management of JPMorgan, 
especially in light of emails that say that these decisions 
were, at least according to Ms. Drew, fully discussed and 
vetted by the top management of JPMorgan.
    No more questions, Mr. Chairman.
    Senator Levin. Thank you very much, Senator McCain.
    Let me pursue this issue about the figures that were given 
to the OCC. I have talked to Ms. Drew about the figure that she 
gave. What happened then is that the bank on May 4, Mr. 
Braunstein, you and Mr. Hogan called the OCC Examiner-In-
Charge, Scott Waterhouse. And if you will look at Exhibit No. 
68,\1\ do you see down where it says, about five lines down 
from the top, ``Doug Braunstein and John Hogan called to 
provide me an update on the CIO position.'' Then jump down a 
couple lines. It says, ``Current losses are approximately $1.6 
billion.'' Do you see that?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 68, which appears in the Appendix on page 838.
---------------------------------------------------------------------------
    Mr. Braunstein. Yes, Senator.
    Senator Levin. And that is dated May 4, correct?
    Mr. Braunstein. Yes, Senator.
    Senator Levin. Now, take a look at Exhibit No. 1g.\2\ The 
day before May 4, the losses had already accumulated to $2.3 
billion. Isn't that correct, according to your chart? That is 
Exhibit No. 1g. Do you see that way over on the right? It goes 
day by day, May 1, May 2, May 3, and May 4. Excuse me. It is 
our chart using our data. I stand corrected. But using your 
data, we put a chart together. These were internal numbers, but 
you supplied us your data as part of our investigation. We go 
day by day, starting January 3. Your data shows $2.3 billion. 
Do you see that?
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    \2\ See Exhibit No. 1g, which appears in the Appendix on page 517.
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    Mr. Braunstein. I do, Senator.
    Senator Levin. OK. If that data is correct that you gave 
us, you told Scott Waterhouse, the OCC Examiner-In-Charge, that 
the Synthetic Credit Portfolio had lost $1.6 billion, but 
internally your books showed that the losses had already 
reached $2.3 billion. Is that correct?
    Mr. Braunstein. Senator, the difference between these two 
charts is that the first is a year-to-date, so it would have 
included all the results from the first quarter through that 
date. The 1.6, I believe, referred to the second quarter 
losses, and I am certain that when I spoke about the losses, I 
would have made clear that they were second-quarter-to-date 
losses. I cannot speak to the note itself, but I am certain I 
would have drawn that distinction.
    Senator Levin. Well, in other words, you are saying you did 
not use the words ``current losses.'' Is that correct?
    Mr. Braunstein. I do not recall the specifics of a 
conversation on May 4, but when relating the specific numbers, 
I am certain I would have been clear that those were quarter-
to-date or second-quarter-to-date losses, and those would have 
had to have been added to the first quarter numbers that the 
OCC was aware of at that time. I am not sure if I repeated 
those numbers during the course of that conversation.
    Senator Levin. The second quarter losses to the date of 
that were how much?
    Mr. Braunstein. There were approximately $700 million in 
the first quarter, so subtracting that $700 million from the 
2.3 from your chart, $1.6 billion is the second-quarter-to-date 
losses.
    Senator Levin. So when he said in his email that you said 
that the current losses are 1.6, what you are saying is you 
told him that the 1.6 was current in the second-quarter-to-
date.
    Mr. Braunstein. Yes, sir, because that is what the math 
would have suggested.
    Senator Levin. Well, the math may work out for you, but the 
question is whether or not that is what you said, and we will 
find out more about that.
    Ms. Drew, let me go back just for a minute to ask you again 
about these daily P&Ls. This was a letter inside the OCC, an 
email from Fred Crumlish to Scott Waterhouse. And he also says 
that--and this is in May--this is Exhibit No. 69,\1\ by the 
way. Do you see at the bottom of the last paragraph there, 
``Given CIO's role, we haven't historically gotten daily P&L 
from them as we do the [Investment Bank] given the nature of 
its operations.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 69, which appears in the Appendix on page 839.
---------------------------------------------------------------------------
    Do you disagree with that? That is what you said before, 
that you did provide the daily P&L.
    Ms. Drew. I did not provide them, Senator. My understanding 
is that they were provided.
    Senator Levin. From whom?
    Ms. Drew. They should have been provided by Finance or 
Risk. And, in fact, I confirmed with my CFO at the regulatory 
meeting on April 16 that they were actually being sent daily 
for the overall mark-to-market position of the CIO, which 
included the Synthetic Credit Portfolio.
    Senator Levin. All right. So that this is wrong, this email 
is wrong. Is that correct?
    Ms. Drew. I do not know if it is wrong. My understanding 
was that profit and loss statements were sent daily.
    Senator Levin. And that was during January, February, 
March, right? That is historically.
    Ms. Drew. I asked that question in April, and the answer I 
was given by Finance was yes.
    Senator Levin. All right. Do you know who at Finance?
    Ms. Drew. My CFO at the time confirmed to me that the P&Ls 
were sent daily.
    Senator Levin. Who was that at the time, your CEO at the 
time?
    Ms. Drew. CFO.
    Senator Levin. CFO. Who was that?
    Ms. Drew. Mr. Wilmot.
    Senator Levin. OK. Now let us take a look at the issue of 
mismarking of the Synthetic Credit Portfolio book. The 
portfolio traded derivatives every day. It was a mark-to-market 
portfolio, which meant that under Generally Accepted Accounting 
Principles (GAAP), its value was measured every day. Every day 
the CIO had the report internally--that is, within the bank--a 
profit and loss figure for the Synthetic Credit Portfolio 
reflecting the actual value of the book on that day. So over 
the first quarter, the London traders assigned inflated values 
to the derivatives in the Synthetic Credit Book to minimize its 
loss. But that wrongdoing was not made public for months. There 
were red flags signaling a problem in the books. One red flag 
was on March 30, an audit by the bank's own Internal Audit 
department, which rated the Chief Investment Office as ``needs 
improvement.''
    Exhibit No. 82,\1\ if you would take a look at that. It 
criticized the CIO's Valuation Group, which is supposed to 
validate the values assigned to derivatives for using models 
that had not been reviewed, not giving adequate attention to 
taking reserves and lacking ``formally documented/consistently 
applied price testing thresholds.'' So that is what Exhibit No. 
82 says.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 82, which appears in the Appendix on page 882.
---------------------------------------------------------------------------
    Now, another red flag was the sudden rise of the huge 
disputes between the CIO and its counterparties over the 
inflated values that were assigned by the CIO to derivatives in 
the synthetic book. At their peak, these disputes between the 
CIO and its counterparties, called ``collateral disputes,'' 
were $690 million.
    Now, after the media reports of the whale trades, 
JPMorgan's head accountant, the bank's Controller, Shannon 
Warren, reviewed the Synthetic Credit Portfolio from January to 
April 2012. Her report was released on May 10, and it said the 
values that were applied to the credit derivatives--and that is 
the marks--were ``consistent with industry practice.'' That was 
the conclusion of the Controller, but the facts described in 
the report actually painted a picture of the derivatives 
valuation process that was imprecise, was manipulated, and 
produced inflated values.
    Here is the background: A trader in London was tasked with 
valuing the SCP derivatives each day. Under accounting rules he 
had to record a fair value for each derivative from the range 
of prices in the marketplace as indicated by trades or offers 
for trades that day. Accounting rules say that when picking a 
fair value, using the midpoint price in the daily price range 
is a practical expedient for fair value, although they do not 
require using it.
    Recorded telephone and instant messaging conversations show 
that the junior trader, Julien Grout, and his immediate 
supervisor, Bruno Iksil, were pressured to use favorable prices 
and were upset about doing that. On March 16, Mr. Iksil called 
the marks that they were recording ``idiotic'' and said the 
Synthetic Credit book was growing ``more and more monstrous.'' 
That is Exhibit No. 32a.\2\
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    \2\ See Exhibit No. 32a, which appears in the Appendix on page 651.
---------------------------------------------------------------------------
    At about the same time, Mr. Grout kept a spreadsheet 
showing that by using inflated prices, in just 5 days the 
Synthetic Credit book failed to report $432 million in losses 
that would have been reported using the midpoint prices. So he 
went through this exercise for 5 days, and this is Exhibit No. 
28,\3\ where you can see the result of what he did. He went 
back and he analyzed what the difference is between the marks 
that they were now using and the marks which they would have 
used had they used the mids.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 28, which appears in the Appendix on page 647.
---------------------------------------------------------------------------
    And if you look at Exhibit No. 28, that is the 5-day 
report, and you can see where the $432 million figure is 
arrived at by the folks in London.
    Now, the May 10 review evaluated the marks for 18 credit 
derivatives that were in the portfolio from January through 
April, and it looked at the values assigned to those 
derivatives on the last day of each month.
    In January--and this is now according to the May 10 review. 
The May 10 review found that in January, the CIO marks were 
generally close to the midpoint in the daily price ranges 
except in two instances. In February, it found that five of the 
marks deviated from the midpoint. In March, it found that all 
18 not only deviated from the midpoint, but 16 were at the 
extremes of the price ranges, and in every case the bank was 
benefiting by understating the Synthetic Credit Portfolio 
losses.
    Mr. Braunstein, the May 10 review was prepared by the 
controller in your shop. It said the pricing practices were 
``consistent with industry practices.'' Is it common for 
JPMorgan to change its pricing practices when losses start to 
pile up in order to minimize the losses? Is that common 
practice at JPMorgan?
    Mr. Braunstein. Senator, the work that led to that May 10 
report involved our Controller, our Chief Accounting Offices, 
our investment bank valuation practices, internal counsel, 
external counsel, and was done in consultation with 
PricewaterhouseCoopers (PwC). And the conclusions that we 
reached on May 10, related to the marks being consistent with 
U.S. GAAP, were based on all that work.
    Senator Levin. That is not my question.
    Mr. Braunstein. The answer is that we believed at the time 
that the marks were done consistent with U.S. GAAP.
    Senator Levin. I understand that, but my question is: Here 
you have a situation where you were using a particular 
approach. You were taking the mids, basically, and in a few 
instances there was a deviation from the midpoint. In January, 
in two instances, there was a deviation from the mids. 
February, five deviated from the midpoints. In March, now all 
18 not only deviated from the midpoints, 16 were at the extreme 
of the price ranges, bids and asks. And in every case, the bank 
benefited, looked better, had its losses look better and less 
than they otherwise would by understating the Synthetic Credit 
Portfolio's losses.
    Now, my question is--we will find out whether doing that, 
making a shift in how you mark, is consistent with anything, 
whether that is consistent with good accounting practices to 
make the losses either disappear or look better, whether that 
practice is consistent with any accounting principle. That is 
not my question.
    Is it common inside JPMorgan to change your pricing 
practices when the losses start piling up in order to minimize 
the losses? That is my question.
    Mr. Braunstein. No, that is not acceptable practice.
    Senator Levin. All right. Now, a senior executive, Mr. 
Webster, working on the May 10 review, telephoned the CIO head 
of credit trading, Javier Martin-Artajo, and confronted him 
about using aggressive pricing on the credit derivatives. And 
this is Exhibit No. 32d,\1\ and it is page 2. And Mr. Webster 
said that in March, the ``marks had migrated . . . to the 
aggressive side . . . from either mid to somewhere close to 
being at the . . . bounds of the bid or offer.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 32d, which appears in the Appendix on page 662.
---------------------------------------------------------------------------
    Mr. Martin-Artajo responded that the extreme prices 
reflected the prices that the CIO was actually trading at in 
March. But when the Subcommittee checked the available trades, 
it found that the actual trades were at different prices than 
the booked trades, the booked prices, and would have resulted 
in bigger losses if they had actually been used.
    Now, an email from one person working on the May 10 review 
put it this way. This is Exhibit No. 34a.\2\ ``At March month 
end the CIO [Front Office] marked their book at the most 
advantageous levels based on the positions they held in 
specific indices and tranches.''
---------------------------------------------------------------------------
    \2\ See Exhibit No. 34a, which appears in the Appendix on page 675.
---------------------------------------------------------------------------
    Different prices than the booked prices which would have 
resulted in bigger losses if they had actually been used.
    Is it proper, Mr. Braunstein, to change the marks and the 
way in which the marks are registered in order to reduce on the 
books the losses? Is that proper?
    Mr. Braunstein. No, that is not proper, Senator.
    Senator Levin. Now, Mr. Cavanagh, given the shift in 
pricing practices that increasingly deviated from the midpoint, 
but the bias being in favor of the bank, why didn't your 
Management Task Force report find that the CIO's pricing 
practices were unacceptable on that basis? Given the deviation 
from the midpoint, the change in the procedure which was used 
to make these marks, why didn't your task force find that an 
unacceptable practice?
    Mr. Cavanagh. I understand the concern. The work that was 
done, as Mr. Braunstein said, was with full visibility of the 
issue you describe and, again, our outside-the-CIO line of 
business, the investment bank valuation team, the top people in 
accounting at the company, and our outside auditors all went 
through a very diligent process, looked at that issue. The 
marks at that time were shaded by the understanding of the 
influence that the trading in the marketplace was having as an 
effect.
    And so we looked at the work that was done in the period 
leading up to May 10 and all the folks were involved and felt 
it was and continue to feel the work done was very sound and 
reasonable work.
    Subsequently is when we learned the information from 
listening to the tapes during the course of the task force's 
review.
    Senator Levin. I am not talking about what is on the tapes. 
I am talking about the shift in the way these marks are made. 
You go this way, midpoint, midpoint, midpoint, midpoint. 
Suddenly, boom, the losses are piling up, and you are now 
shifting the way those marks are made. You are no longer 
looking at the midpoint. You are shifting your process to make 
the losses look better. And you are saying that is an 
acceptable accounting practice.
    Mr. Cavanagh. We looked at that----
    Senator Levin. Were you aware of that?
    Mr. Cavanagh. Yes.
    Senator Levin. I am not talking about the tapes which show 
that your traders said that this was terrible. I am saying 
looking at what happened there, how do you possibly justify 
changing your process of making marks in order to make your 
losses go away or be less? How do you justify that?
    Mr. Cavanagh. The process was the process of looking at the 
marketplace. The marketplace was affected by--the belief that 
the market was more volatile given all the visibility and the 
press articles around the--or the knowledge of the positions. 
So that affected the analysis on May 10 and got people 
comfortable despite the movement, as you described. The shift 
was not a change in policy. It was a change in the outcome of 
that policy. There was definitely a movement inside the bid/ask 
spread to the outer limits from more toward the mid, just as a 
result of what was going on in the marketplace. That is what 
the May 10 review work looked at. The Task Force did not do 
that work. We looked at the work that was done prior to May 10 
and think it is reasonable work.
    Senator Levin. Did your investment bank stay at the mids?
    Mr. Cavanagh. Typically, yes. And so----
    Senator Levin. But this did not. This shifted. This had 
losses, and so it shifts to reduce the amount of those losses. 
Your investment bank stayed with the same approach. Is that 
correct, staying at the mids?
    Mr. Cavanagh. The investment bank had a tighter tolerance 
band around its valuations from the midpoints in their 
valuation control practice. That is better practice, and we 
have subsequently--one of the remediations of the task force is 
to bolster and, I think as your report calls for, taking away 
that variability. But that is what we have done subsequently.
    Senator Levin. Was it a coincidence that the way in which 
these marks were made the losses look better and less as the 
losses were piling up? Was it a coincidence that you changed 
the practice from marking at the mids to marking at a broader 
band? Was that a coincidence? At the time. I am not talking 
about on May 10. Was it a coincidence when those marks were 
changed, the way in which those marks were made, is that a 
coincidence that it just happened to come when losses were 
piling up?
    Mr. Cavanagh. I would not say it is a coincidence. It is 
what happened. It was the same factor----
    Senator Levin. Was it a coincidence that it was done at 
that time? Did you inquire as to whether it was a coincidence 
or not?
    Mr. Cavanagh. We inquired as to--we looked at----
    Senator Levin. I am not saying whether or not it--look, you 
can argue that this is consistent with accounting practice. It 
is not consistent with the accounting practice that changed the 
way you marked these things in order to make your losses go 
away, and we will talk to accountants about that, by the way, 
if you want to maintain that position. I am just asking you: 
Was it a coincidence that the way in which those marks were 
made changed to reduce the losses on the books at the time 
those losses were piling up? That is all I am asking.
    Mr. Cavanagh. Yes. I am not going to debate words with you.
    Senator Levin. There was no relationship between the fact 
that the losses were piling up and that there was a way in 
which the marks were made to reduce the impact of those losses 
on the books. You are saying that is a coincidence.
    Mr. Cavanagh. Yes, absolutely no intent on the part of 
anyone that we did the work to review what went on. There was 
no intent on the part of the people that were involved in the 
May 10 review that were outside CIO----
    Senator Levin. I am not talking about the May 10 review. I 
am talking about the marks when they were changed. When the 
marks were changed, the way in which the marks were made. When 
was that done? What date?
    Mr. Cavanagh. That was over the course of the first 
quarter.
    Senator Levin. Do you remember the date? Wasn't it January?
    Mr. Cavanagh. I am not sure.
    Senator Levin. When the review was made on May 10, you 
looked back as to when that change was made, right?
    Mr. Cavanagh. Yes. I am just not recalling as we sit here. 
Can you repeat the January point?
    Senator Levin. Well, when did they change the way in which 
the marks were made?
    Mr. Cavanagh. My understanding, over the course of the 
quarter the marks----
    Senator Levin. But it started at some point. It started a 
shift from the mids to a broader band. When did that shift 
start taking----
    Mr. Cavanagh. I believe, right, from January as the 
portfolio was building over the course of the quarter, the 
marks, became wider relative to the calculated midpoint.
    Senator Levin. And because those marks became wider, the 
losses were less than they otherwise would have been if they 
had stayed at the mid, right?
    Mr. Cavanagh. Yes.
    Senator Levin. And you are saying you believe, you are 
telling us that you--and you are under oath, that was----
    Mr. Cavanagh. I understand.
    Senator Levin. That that was a coincidence?
    Mr. Cavanagh. I was answering the question about the May 10 
review----
    Senator Levin. No, I am not asking----
    Mr. Cavanagh. So now you are asking--I understand the 
question you are asking. I clearly know now, having done the 
review, that the people ultimately were mismarking--were not 
properly marking their books during the course--at least during 
the course of the middle of March to the end of March, and that 
is what we came to know during the course of the review, 
absolutely.
    Senator Levin. And that those marks, the way in which the 
marks were made was changed in order to reduce the loss on the 
books?
    Mr. Cavanagh. Yes.
    Senator Levin. That was the purpose?
    Mr. Cavanagh. It seems to our review that, absolutely, 
the----
    Senator Levin. No, I am just talking--I understand. That 
became your conclusion. That is the reason it was done.
    Mr. Cavanagh. Yes.
    Senator Levin. OK. A minute ago you said it was a 
coincidence. Now you are saying it was not, that was the 
purpose.
    Mr. Cavanagh. The purpose of the traders.
    Senator Levin. Yes.
    Mr. Cavanagh. Correct.
    Senator Levin. OK. Now let me get to----
    Mr. Cavanagh. I was misunderstood. The purpose of the 
trader----
    Senator Levin. No, I do not think you were misunderstood. I 
think I understood it accurately. I think your answer was 
inaccurate.
    Mr. Cavanagh. I was answering with respect to from the 
perspective of the people looking at it from the outside during 
the May 10 review.
    Senator Levin. Who is your auditor?
    Mr. Cavanagh. Pricewaterhouse.
    Senator Levin. I am not talking about tapes, after 
reviewing the tapes. They accept the idea that when losses are 
piling up, it is OK at that time to shift the way in which you 
mark these derivatives to reduce the amount of the loss.
    Mr. Cavanagh. They were involved in the review, yes.
    Senator Levin. And they approved this.
    Mr. Cavanagh. They were consulted and assented to the 
accounting reviews on May 10.
    Senator Levin. OK. I think we can agree on one thing, that 
shifting the pricing practices to minimize losses is not 
acceptable.
    Mr. Cavanagh. Correct. Absolutely.
    Senator Levin. Take a look, if you would, Mr. Cavanagh, at 
Exhibit No. 98,\1\ and this is that Task Force Report. This is 
where you State that you consulted with auditors and that the 
marks complied with U.S. Generally Accepted Accounting 
Principles. You have just told us that you agree that shifting 
pricing practices to minimize losses is not acceptable. Did you 
say that in your report? Did you say that is what happened?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 98, which appears in the Appendix on page 963.
---------------------------------------------------------------------------
    Mr. Cavanagh. We said separate from the report----
    Senator Levin. No. In the report.
    Mr. Cavanagh. I do not believe we called that out in the 
report. It was aside from the report when we restated the 
financial results.
    Senator Levin. That is pretty significant, though, isn't 
it?
    Mr. Cavanagh. Yes.
    Senator Levin. But it was left out of your report.
    Mr. Cavanagh. Yes.
    Senator Levin. Ms. Drew, please look at Exhibit No. 32c,\2\ 
if you would. This is a transcript of a telephone call between 
you and the head of the CIO's credit trading operation, Javier 
Martin-Artajo, who sat in the London office and directly 
influenced the marks. It is undated, but it likely took place 
in April, and they are talking about what marks to show for the 
SCP on that day. Exhibit 32c, do you see that?
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    \2\ See Exhibit No. 32c, which appears in the Appendix on page 659.
---------------------------------------------------------------------------
    Ms. Drew. Yes.
    Senator Levin. OK. On page 1, near the bottom, Ms. Drew, 
this is what you say: ``. . . I just wanted to get a really 
brief update on, what the P&L might look like.''
    Mr. Martin-Artajo answers: ``Yes. We are going to be 
showing a slight positive today . . . I think we are going to 
be up like somewhere around $20 million today, ok? So this is 
the first, this is a big event for us, because we are starting 
to get money back.''
    Then a bit later on page 2 near the bottom, Mr. Martin-
Artajo says: ``So the instruction to you that we have here is 
probably around $100 million, ok? So I don't want them to show 
$100 million today if they are not sure, ok? So just for you to 
know that, it's about . . . we need to have a real, sort of 3 
[basis points] move to . . . recognize that. I hope it happens 
and, if it happens between now and the end of the day or, or, 
whenever it happens, I'll show you.''
    This is your response: ``Here's my guidance. It's 
absolutely fine to stay conservative, but''--and this is the 
big ``but''--``it would be helpful, if appropriate, to get, to 
start getting a little bit of that mark back.''
    ``If appropriate, so you know, an extra basis point you can 
tweak at whatever it is I'm trying to show, with demonstrable 
data . . .''
    You are suggesting pretty clearly that he tweak the marks. 
Is that correct? You used the word ``tweak.''
    Ms. Drew. I used the word ``tweak.'' The suggestion was 
that he prove--I had been told for a long period of time that 
the marks were very conservative. He says in his email that 
there was P&L upside that day of $100 to $150 million, which is 
possible. Markets move around a lot. And I was challenging him 
to show with data that if he can possibly and wants to show--
and he has been telling me that the position is turning--that 
it is appropriate to mark it up with data.
    Senator Levin. And it would help if he did that.
    Ms. Drew. It would be correct if he did that with data.
    Senator Levin. You said ``help,'' didn't you? You used the 
word ``help.''
    Ms. Drew. Yes. Only with demonstrable data.
    Senator Levin. I understand. But you told him it would be 
helpful, right?
    Ms. Drew. Because he had been saying that the marks were 
conservative and the position had been losing money, and he was 
not marking the position----
    Senator Levin. Helpful to tweak, start getting a bit of 
that mark back. Tweaking is not a prediction or a hope, by the 
way. Tweaking is changing something. And I would hope that the 
guidance that you and other folks would give would be against 
tweaking, but being whatever is accurate. And there was a clear 
suggestion here that it would be helpful if he tweaked 
something to make things look a little bit better.
    Now, the rules allow derivative values to be set anywhere 
within a daily price range, and that is a range that can be 
influenced by the banks involved in this conversation. Mr. 
Martin-Artajo indicates the SCP derivative values could end up 
anywhere between $20 and $100 million for the day. That is the 
kind of conversation and analysis going on in our largest 
banks, apparently, and that is something which you have said 
now, I believe, Mr. Cavanagh, that is going to end at your 
bank. Is that correct?
    Mr. Cavanagh. We believe that the marks on all positions 
should be spot on.
    Senator Levin. And not tweaked.
    Mr. Cavanagh. Correct.
    Senator Levin. For some purpose.
    Now, mismarks were not just an internal bank issue. The 
mismarking tainted the bank's public SEC filings. In May 2012, 
the bank filed a 10-Q report with its first quarter financial 
results that went out to the public. One of the factors in that 
report was that the Synthetic Credit Portfolio had lost $719 
million, but that understated the SCP losses. It was wrong, 
which meant that the SEC filing was wrong.
    In July 2012, after acknowledging the mismarking of the SCP 
book, the bank restated its first quarter financial results, 
hiking the SCP losses by $660 million. In other words, the 
SEC's first quarter losses were not $719 million but closer to 
$1.4 billion.
    Mr. Cavanagh, I take it you would agree that it matters 
when a bank gets its public filings wrong.
    Mr. Cavanagh. Yes, we take it very seriously.
    Senator Levin. And that a $660 million error is material.
    Mr. Cavanagh. Yes, and as soon as we discovered it and 
understood the causes, we immediately restated our results.
    Senator Levin. OK. And, by the way, one of our 
recommendations in our report is that the OCC get banks to use 
independent pricing services to remove the temptation from a 
bank's employees to tweak marks. And we also recommend that 
banks have to disclose when their derivative values deviate 
from midpoint prices and explain why.
    Now, I want to get to the earnings call on April 13 because 
we have disclosure problems here as well.
    Mr. Bacon, before April 13, did you or your boss, John 
Hogan, the Firm's chief risk officer, approve positions for the 
Synthetic Credit Portfolio?
    Mr. Bacon. No.
    Senator Levin. Two days before the earnings call--in other 
words, on April 11--the bank's chief risk officer, John Hogan, 
sent an email, Exhibit No. 87 \1\ He sent it to you, Mr. 
Braunstein, among others, including Mr. Dimon. He said: ``This 
is the governance used in the investment bank to control what 
is currently going on in the CIO. We obviously need to 
implement this in CIO as soon as possible.'' So that is 
something that you received, Mr. Braunstein, on April 11.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 87, which appears in the Appendix on page 900.
---------------------------------------------------------------------------
    Now, you have a call, an earnings call, on April 13. That 
is 2 days later. You did not tell investors that the bank's 
Chief Risk Officer wanted an immediate overhaul of the CIO risk 
management during that call, did you, Mr. Braunstein?
    Mr. Braunstein. No, sir.
    Senator Levin. Now, the SCP had breached all five of its 
key risk limits by then, and there had been more than 250 risk 
limit breaches since the beginning of the year. You did not 
tell investors during that call about those breaches, did you?
    Mr. Braunstein. No, sir. I was not aware of all of that at 
the time.
    Senator Levin. You did volunteer a number of statements 
about the Synthetic Credit Portfolio--and I want to go through 
those with you--during that April 13 earnings call.
    First, this is Exhibit No. 94,\1\ and that is a transcript 
of the earnings call. Your statements about the Synthetic 
Credit Portfolio are on page 6 and 7. And so to make it easier 
to discuss them with you, we have listed the key statements on 
Exhibit No. 1f,\2\ which is in your book.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 94, which appears in the Appendix on page 927.
    \2\ See Exhibit No. 1f, which appears in the Appendix on page 516.
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    One of the things that you said there is that all--this is 
now your public statements on April 13: ``All of those 
positions are put on pursuant to the risk management at the 
Firm-wide level.'' I think we have already heard today that Mr. 
Weiland did not approve individual positions, Mr. Bacon, the 
risk managers did not approve the positions. So what you said 
to the public is that all of these positions ``are put on 
pursuant to the risk management at the Firm-wide level.'' That 
was not really accurate, was it?
    Mr. Braunstein. Senator, it was accurate.
    Senator Levin. That the positions----
    Mr. Braunstein. That the aggregate positions were put on 
pursuant to a risk management organization. There was a Chief 
Risk Officer in CIO. There were limits in CIO. At the time I 
was not aware of the breaches of a number of those limits, and 
I certainly was not aware of some of the deficiencies that we 
uncovered pursuant to the task force report. But, based on what 
I knew at the time, that was an accurate statement.
    Senator Levin. But Mr. Bacon says the risk managers did not 
approve the positions.
    Mr. Braunstein. What that statement actually refers to is 
pursuant to a risk management organization, so risk----
    Senator Levin. Oh, to an organization. All the positions 
are put on by an organization.
    Mr. Braunstein. Pursuant to a risk management organization 
and its control center.
    Senator Levin. Boy, that is a lot different than saying 
that ``those positions''--``those positions,'' this was an 
explosion in the media. You are saying, ``All of those 
positions are put on pursuant to the risk management.'' That 
creates an impression which is not true. That is not saying 
that our organization put all these positions on. Of course 
they do. As a matter of fact, Mr. Hogan said he learned of the 
trades from the paper, from the newspaper.
    Let us go to the next one, the next statement that you made 
during that call. You said that, ``[A]ll those positions are 
fully transparent to the regulators. They ``get information on 
those positions''--we are talking about the positions the whale 
trades--``on a regular and recurring basis as part of our 
normalized reporting.'' That is the next statement that you 
made during that call. In fact, the longstanding practice of 
the bank is not to give individual position data to the OCC 
unless there is a specific request. There was no regular report 
of the SCP's positions to OCC. Is that correct? There was not a 
regular report of that position.
    Mr. Braunstein. I am not aware that there was a regular 
report. I am aware, prior to making that call, that statement, 
that on the 9th, Ms. Drew met with regulators and then on May 
10 provided them with specific position reports.
    Senator Levin. That was on May 10 to the regulators?
    Mr. Braunstein. Yes, Senator.
    Senator Levin. That is not when these trades were made? 
That is the issue.
    Mr. Braunstein. Senator, they also received a number of 
other reports on a regular basis.
    Senator Levin. Are you saying that the information on these 
positions was provided on a regular basis to the OCC?
    Mr. Braunstein. No, Senator. I am saying there are a number 
of other reports that they received that had components of 
these positions in them.
    Senator Levin. OK. So what you said is not exactly accurate 
on that day. Is that correct?
    Mr. Braunstein. On April 13, I believed it to be accurate 
based on----
    Senator Levin. I understand that you believed it to be----
    Mr. Braunstein [continuing]. The information that I had 
received from Ms. Drew, the risk organization, and from the 
traders, and from John Wilmot, CIO's CFO.
    Senator Levin. OK. There are also reports here, by the way, 
which were never even received by the OCC, and you heard 
earlier about that this morning. Do you know why those reports 
were suddenly not sent January through April, these Executive 
Management Reports? Do you know why?
    Mr. Braunstein. Yes, Senator, I do.
    Senator Levin. You do.
    Mr. Braunstein. Yes. I was not aware of that at the time, 
but----
    Senator Levin. You explained earlier today as to why it 
was.
    Mr. Braunstein. We changed our reports, and, unfortunately, 
an error was made. The reports were only forwarded in the new 
format to the Fed and the FDIC, and we were not aware that the 
OCC was not getting it. They identified that as an issue, and 
we corrected that error. On April 13, I was not aware of any of 
that.
    Senator Levin. OK. So you thought you were saying something 
accurate on April 13, but it turned out not to be accurate.
    Mr. Braunstein. I believe that we, on April 13, were being 
fully transparent with our regulators.
    Senator Levin. Did you believe that they got information on 
these positions on a regular basis as part of your normalized 
reporting? Did you believe that on April 13?
    Mr. Braunstein. I believed that they got information 
related to----
    Senator Levin. ``On a regular, recurring basis'' that they 
got this information--you know it is not true now, right?
    Mr. Braunstein. Senator, there is information that I know 
today----
    Senator Levin. Not information. I am talking about 
information on these positions. That is the positions. This 
thing was blowing up in the newspaper. You have these whale 
trades. You lost billions of dollars. You are representing to 
the public that the regulators got information on those 
positions on a regular basis.
    Mr. Braunstein. Senator, they did----
    Senator Levin. It turned out that was not true.
    Mr. Braunstein. Senator, they received information----
    Senator Levin. On those positions on a regular basis?
    Mr. Braunstein. On the portfolio, they received daily VaR 
reports. They received CIO weekly summary information.
    Senator Levin. I am just asking you, did they get a regular 
report of the SCP's positions? I am asking you that question.
    Mr. Braunstein. The specific positions they received, I was 
aware they had received the positions on the specifics on April 
10.
    Senator Levin. OK. So what you said on April 13 was that 
the OCC--information on those positions was part of your 
``normalized reporting,'' that is what you said, and that the 
regulators got them ``on a regular, recurring basis.'' Now you 
are saying they got the information 3 days before your public 
statements. Is that right?
    Mr. Braunstein. The statement says that they could--they 
would have access to them at any time, get the information on 
these positions----
    Senator Levin. I understand. They could have accessed, we 
understand, if they asked for it, they got it.
    Mr. Braunstein. And I believe based on what I knew at the 
time, including material sent to me from Ms. Drew and Mr. 
Wilmot, that they were being fully transparent and the 
regulators were aware of the positions, I believed that to be a 
true statement at that time.
    Senator Levin. Which is a little different from what you 
said, which is that they ``get the information on those 
positions on a regular and recurring basis.'' That was not 
accurate, and I am asking you, did they get--I am just saying 
whether it is--I am not asking you now what you believed. I am 
asking you whether or not it is accurate, that the OCC got 
``the information on those positions on a regular and recurring 
basis as part of [y]our normalized reporting.'' I am asking you 
that. Is that accurate?
    Mr. Braunstein. They got information----
    Senator Levin. Not information. I am going to read this to 
you. I am going to keep reading it to you until you give me the 
answer. Did they ``get the information on those positions on a 
regular and recurring basis? '' You know what ``those 
positions'' are. That is the positions in the whale trades. As 
part of a ``normalized reporting,'' did they?
    Mr. Braunstein. They did not get the detailed positions 
regularly.
    Senator Levin. OK.
    Mr. Braunstein. They got summary information----
    Senator Levin. I will settle for that. I am happy to settle 
for that. They did not get information on those positions 
regularly. That is fine.
    Now, the impression is pretty clear as to what you said on 
that day, which is they ``get the information on those 
positions on a regular, recurring basis as part of our 
normalized reporting.'' So what you say here today I think is, 
finally, more accurate, and that what you said on that day was 
a very inaccurate impression.
    Now, next, the third statement that you made was that ``all 
of those decisions are made on a very long-term basis.'' Now, 
Ms. Drew told us earlier that when she made a presentation in 
March 2012 to the directors' Risk Policy Committee, which is 
Exhibit No. 81\1\ again, she prepared a chart of all the CIO 
portfolios, and on that chart she showed whether the investment 
horizon was long term or short term. We are looking now at 
Exhibit No. 81.
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    \1\ See Exhibit No. 81, which appears in the Appendix on page 877.
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    The Synthetic Credit Portfolio, which was part of the Mark-
to-Market Overlay International, she identified that for us. If 
you will look at Exhibit No. 81, it is at the far right-hand 
corner, and it is part of the International reference way over 
to the right, as short as you can get on the investment 
horizon, as far right as you can get.
    Now, would you agree, Mr. Braunstein, that the Synthetic 
Credit Portfolio was traded on a daily basis and that the 
decisions to buy and sell credit derivatives were made on a 
short-term basis?
    Mr. Braunstein. Senator, I would agree that these positions 
in the portfolio were traded on a daily basis. However, they 
were part, as you see at the top of this same chart, of a 
longer-term perspective. Some of those are shorter in duration 
than others. And as Ms. Drew said previously, the hedge 
position on the high yield was a long-term position, but we 
moderated it over time.
    Senator Levin. So when you said that ``all of those 
decisions were made on a very long-term basis,'' what you are 
saying now is--you are arguing that some were made on a long-
term basis and some on a short-term basis?
    Mr. Braunstein. No, Senator. All I said is trades were made 
daily. That is a tactical implementation of a longer-term 
decision.
    Senator Levin. And the tactical implication or the tactical 
actions, which were the day-to-day actions and which during the 
first quarter of 2012 were what we are talking about, because 
those are the whale trades which cost $6 billion, you think 
that when you told the public that ``all of those decisions are 
made on a very long-term basis,'' that you think that the 
average person listening to that phone call would think that 
you were talking about some long-term strategy and not what you 
are actually buying and selling day-to-day during those 3 
months? Do you think that is the reasonable way that someone 
would hear the words ``all of those decisions were made on a 
very long-term basis? ''
    Mr. Braunstein. I think my statement that they were made on 
a long-term basis reflected my understanding of the position at 
the time as accurately as I could.
    Senator Levin. But you knew that these trades were being 
made day-to-day. You knew that the portfolio had dramatically 
increased from January to March so that most of them had been 
bought in the last couple months, those positions. You 
characterized this, ``all the decisions were made on a very 
long-term basis.'' And you think the average listener to that 
statement would think that what you were referring to was some 
strategy that was adopted, I do not know, months before or a 
year before? Do you think that is a fair understanding of those 
words to someone listening to you?
    Mr. Braunstein. Senator, I believe what I said is accurate.
    Senator Levin. Technically. You can find a way to make 
those accurate. That is not my question--to make them sound 
accurate. That is not my real question. I am trying to figure 
out what you are really thinking about here. You are talking to 
people now publicly. You have had this blowup, this huge loss, 
and now you are telling--you are trying, obviously, to reassure 
people. You are saying ``all these positions are put on 
pursuant to risk management at the Firm-wide level.'' Not 
accurate. ``All those positions,'' you said--the regulators 
know all about these positions. Not accurate. ``All those 
decisions are made on a very long-term basis.'' You think that 
the average listener, that average investor, is going to say 
that he was technically accurate, they had a long-term strategy 
here? You think the average person listening to this would not 
think you were referring to the trades that were at issue that 
blew up? Is that your statement under oath, that is what you 
think reasonable people would take from that statement here? 
That is what you say.
    Mr. Braunstein. Senator, my obligation on the call and the 
only thing I was thinking about was reporting based on what I 
knew at the time, the information as accurately as I could----
    Senator Levin. Did it turn out to be wrong? Were ``all 
those decisions made on a very long-term basis'' relative to 
those positions?
    Mr. Braunstein. In hindsight, Senator, the positions and 
the portfolio did not act as a hedge. It changed dramatically. 
We misunderstood the risks. We misunderstood the complication 
in it. We ultimately misunderstood what the estimated 
performance of it would be. So, in hindsight, we got that 
wrong. The statements as I made them on April 13 were my very 
best effort, best good-faith effort, to accurately describe 
based on the information I knew available to me at the time 
what the portfolio was.
    Senator Levin. I have a lot of trouble, I've got to tell 
you, Mr. Braunstein, believing that those statements were 
anything other than an effort to calm the seas, because they 
all were exaggerations or inaccurate. You can say ``in 
hindsight.'' You can say ``as it turned out.'' But at the time 
there was all kinds of evidence, which we have shown here 
today, that those positions were not, as a matter of fact, 
``put on pursuant to risk management at the Firm-wide level;'' 
the regulator did not receive regular reports, as you indicated 
they did; that the decisions--and you are referring to 
decisions relative to the positions--``were made on a long-term 
basis,'' when they obviously were--as you put it, tactically, 
done on a very short-term basis, and that the size of that 
inventory tripled during those 3 months.
    Now let us go to hedging. You say that it turned out not to 
be a hedge. But what you said on April 13 was that ``we have 
put on positions to manage for a significant stress event in 
credit.'' That is what you said on April 13.
    When you said that the portfolio put on positions to 
protect against ``a significant stress event,'' I take it that 
you meant by that, Mr. Braunstein, that is a new financial 
crisis. Is that correct?
    Mr. Braunstein. No, sir.
    Senator Levin. No? It was aimed at protecting against what? 
What is the significant stress event if it was not a new 
financial crisis?
    Mr. Braunstein. As I understood the position on April 13, 
again, based on reports from the CIO traders, Ms. Drew, Mr. 
Wilmot, review by Mr. Hogan and the risk organization, I 
understood the position to be balanced, and I understood that 
the position still had jump loss default protection, i.e., 
bankruptcies. In the event of bankruptcies, the portfolio would 
perform as gains for the bank.
    Senator Levin. OK. Now, let us take a look then at Exhibit 
No. 90,\1\ if you would. This is an email that was provided to 
you and other senior bank executives before that earnings call. 
It provided you with detailed information about the Synthetic 
Credit book. And this was prepared by two of the bank's 
quantitative analysts, Mr. Venkatakrishnan and Mr. Vigneron. I 
assume you had confidence in those folks. Is that true?
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    \1\ See Exhibit No. 90, which appears in the Appendix on page 905.
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    Mr. Braunstein. Yes, sir.
    Senator Levin. So if you will turn to page 3 of Exhibit No. 
90, this was a presentation labeled, ``Synthetic Credit 
Summary: Risk and P/L Scenarios.'' The title indicates that 
this describes scenarios for the Synthetic Credit Portfolio as 
to when it would earn money and when it would lose money. And 
if you look at the table on the left side of the page, it has 
three columns labeled ``Spr01,'' ``Spr+10 percent,'' and ``Up50 
percent.'' So each of those, as I understand it, denotes a 
situation in which credit gets worse. Is that accurate?
    Mr. Braunstein. Yes, Senator, that denotes credit spreads 
widening.
    Senator Levin. And that would mean that credit is getting 
worse?
    Mr. Braunstein. That is correct.
    Senator Levin. In all three now, the Synthetic Credit 
Portfolio is projected as losing money. Is that correct?
    Mr. Braunstein. Yes, Senator.
    Senator Levin. That is what you call a hedge.
    Now, the first scenario, when the credit spreads widen one 
basis point, the portfolio loses $46 million. In the second, 
where credit spreads widen by 10 percent, it loses $163 
million. In the third scenario, where credit spreads widen 50 
percent, which is a severe credit crisis, it loses $918 
million. In all three scenarios, the Synthetic Credit Portfolio 
loses money and loses more and more money as credit quality in 
the economy progressively gets worse.
    Now, those results show that the SCP is not providing any 
credit loss protection. Would you agree to that? In those three 
scenarios, that gets worse, but in all three it loses money. 
Would you agree to that?
    Mr. Braunstein. I would agree. If that is the only thing 
that happens in those scenarios, then the portfolio would lose 
money. Credit scenarios are much more complicated than that, 
Senator, and so in addition to this, in those types of 
circumstances, there is default risk, and the portfolio would 
have gains in the event of defaults.
    So, again, my understanding at the time was that the 
portfolio still provided positive gains in a jump to default 
scenario.
    Senator Levin. That would have been one 1 of 10 scenarios? 
Is that it? Take a look at page 7--do you see page 7?
    Mr. Braunstein. Yes.
    Senator Levin. Where it has 10 different scenarios?
    Mr. Braunstein. Yes.
    Senator Levin. The one you are talking about is the last 
one, many defaults? Is that correct?
    Mr. Braunstein. That is a scenario, yes.
    Senator Levin. OK. But Jamie Dimon testified to the Senate 
that the SCP was to protect against a financial crisis--that is 
Scenario No. 4--or bad development in Europe, and that is 
number 2. That is what he said. And in both of those, the 
portfolio would lose money, correct? I am not asking you 
whether you agree with Mr. Dimon or not. I am just simply 
asking you whether or not in those two scenarios, number 2 and 
4, it loses money.
    Mr. Braunstein. Yes, it loses money.
    Senator Levin. And when he testified that the SCP was to 
protect against Scenarios 2 and 4, you go all the way over to 
number 10 to try to find some scenario in which it might be 
helpful. But in Scenarios 2 and 4, it loses money. Is that 
correct?
    Mr. Braunstein. Yes.
    Senator Levin. Now, did you disclose in that April 13 
statement the portfolio's current status?
    Mr. Braunstein. Senator, I am not sure exactly what you 
mean by ``current status.''
    Senator Levin. The current status of the portfolio.
    Mr. Braunstein. I am not, again, sure exactly what you mean 
by the ``current status.''
    Senator Levin. All right. Go to, if you would, Exhibit No. 
97.\1\ This was a letter that you wrote to the Subcommittee. 
You said that when you saw this document--and we are talking 
here about that same document we have been discussing--last 
April, that you relied on the ``central scenarios included on 
that page describing an 80 [percent] likelihood . . .'' Now, 
the central scenarios with the 80-percent likelihood were a New 
Financial Crisis, Status Quo, and a Central Scenario, those 
three. That is what you told the Subcommittee, that you relied 
on those. You did not talk about Scenario No. 10. That is not 
one of those. It is not one of the four scenarios that even 
have a 10-percent likelihood.
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    \1\ See Exhibit No. 97, which appears in the Appendix on page 962.
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    No, I am sorry. It is one of the four scenarios, with a 10-
percent likelihood, but what you told the Committee in your 
letter is that you relied on the central scenarios, which are 
Scenarios 4, 5, and 6, not Scenario No. 10. How come? How come 
the change?
    Mr. Braunstein. Senator, there is no change.
    Senator Levin. OK.
    Mr. Braunstein. What I was speaking about was the comment I 
made related to being ``very comfortable'' with the position. 
And as I said to your staff, ``very comfortable'' was derived 
from those 80-percent likely scenarios, so a loss of $250 
million to a gain of $350 million.
    In addition, I also relied on for the ``very comfortable'' 
statement, the independent work that was done through the risk 
organization. And as I spoke to your staff, that is what I was 
referring to; those scenarios helped me to communicate the 
position of the bank as being very comfortable based on our 
anticipated future losses from the position.
    Senator Levin. So you were very comfortable with the 
position you were in under those three central scenarios, 
showing you losing money under a New Financial Crisis--right?--
of $250 million. Is that correct?
    Mr. Braunstein. Senator, while that is a big number----
    Senator Levin. That helped make you comfortable.
    Mr. Braunstein. Senator, while that is a large number for 
anyone, for JPMorgan, to put that in perspective, it was less 
than 1 percent of the full-year profits for the company. So, 
yes, as a P&L matter, we were very comfortable. Again, based on 
what I know today, that information was inaccurate.
    Senator Levin. Shouldn't investors have known during that 
call that the current status of the SCP was not great, it was 
losing a lot of money, huge positions that it had were hard to 
exit, it had been violating all five risk limits? Don't you 
think you should have disclosed that? You said, what do I mean 
by the shape of the SCP. Well, that is what I mean by the 
shape. You give this very glowing call: These have all been 
approved by central, the risk managers have all approved this, 
all of our regulators know all about it. This is what you are 
telling investors on April 13 instead of telling them what you 
also knew, which is that SCP is losing money and had been 
violating risk limits.
    A pretty one-sided presentation, isn't it?
    Mr. Braunstein. Senator, based on what I knew at the time, 
I believe it to be the most accurate depiction of the position. 
All of those----
    Senator Levin. You thought that was a balanced 
presentation?
    Mr. Braunstein. All of those----
    Senator Levin. You thought that was a balanced presentation 
of the SCP on April 13?
    Mr. Braunstein. It was an accurate presentation.
    Senator Levin. You thought it was a balanced presentation, 
not disclosing it was losing money, not disclosing that it 
violated all five risk limits regularly, in some cases for 
months? You think it is accurate to just tell them you are 
comfortable, that the regulators know all about this, that your 
top risk people approved all these positions? You think that is 
a balanced--honestly, now, you think that is a balanced 
presentation to investors?
    Mr. Braunstein. Senator, in hindsight, there is lots more 
information that we learned.
    Senator Levin. That you had at the time----
    Mr. Braunstein. Based on what I----
    Senator Levin. No. Not that you learned. You had that at 
the time.
    Mr. Braunstein. Senator, this financial analysis 
incorporated all of those factors that we had at the time, so, 
yes, based on all that information at the time, we were very 
comfortable based on the predicted outcomes.
    Senator Levin. Well, we have already covered some of the 
matters involving hidden financial risks, mismarking, breaches 
of risk limits, and public disclosure problems. But there is 
another problem or two which I want to go into now, and that is 
the issue of and the evidence of model manipulation.
    In December 2011, the bank ordered the CIO to reduce its 
risk-weighted assets, assets that were assigned certain weights 
by the OCC according to how risky they were. The usual way to 
reduce risk-weighted assets is to sell off some of the risky 
assets. But in December 2011, CIO personnel proposed a 
different solution, one that instead involved manipulating the 
mathematical models that were used to calculate risk-weighted 
assets to produce lower results. So this is the solution that 
was proposed by some CIO personnel in December 2011.
    So if you all would turn to Exhibit No. 46.\1\ This is an 
email dated December 22, 2011, which was sent to you, Ms. Drew, 
by the head of the CIO's equity and credit trading operation, 
Javier Martin-Artajo.
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    \1\ See Exhibit No. 46, which appears in the Appendix on page 778.
---------------------------------------------------------------------------
    In this email, Mr. Martin-Artajo suggests reducing the 
Synthetic Credit Portfolio's risk-weighted assets by $13 
billion using several tactics. One was achieving a $2 billion 
book reduction through a trading reduction--in other words, 
selling off assets. But he also suggests achieving a much 
larger reduction, a $7 billion reduction, half of the $13 
billion goal, through so-called ``model reductions.''
    Now, here is what the estimates of the reductions would be, 
and one was CRM, which has already been acknowledged, the model 
reduction of the VaR, and the model reduction of the stress 
VaR.
    So here is the issue, though. The email identifies three 
mathematical models used to calculate various components of 
risk-weighted assets. Now, that is a model, again, used to 
calculate the CRM that calculates the dollar amount of possible 
losses over a year; the VaR, which calculates the dollar value 
at risk of loss in a day under ordinary market conditions; and 
stress, which calculates stress VaR results, the dollar value 
at risk of loss in a day under severe economic conditions.
    Quantitative Research is the bank outfit that develops the 
models. And, again, I was reading from the exhibit. The 
reference to Pat is Pat Hagan, who is the CIO's quantitative 
analyst who is working to develop the three models listed in 
the email.
    Mr. Hagan told our Subcommittee staff that he, in fact, 
provided the three estimates attributed to him in the email for 
the model used to produce the CRM--and, again, that is the 
comprehensive risk measure that calculates the dollar amount of 
possible losses over the year. He predicted he could achieve a 
$5 billion reduction in CRM results, a $500 million reduction 
in VaR results, and a $1.5 billion reduction in stress VaR 
results, for a total of $7 billion. The plan was that all those 
reductions would, in turn, produce a lower RWA result as well 
as lower capital requirements.
    Now, Ms. Drew, what did you think when you got this 
proposal, in particular the idea of reducing the SCP's RWA by 
$7 billion through model reductions, which is triple the $2 
billion to be achieved through trading reductions? What was 
your reaction?
    Ms. Drew. My reaction when I had an estimate from a front 
office that was dependent on QR was always that QR as an 
independent review section of the bank was responsible for 
making the determination, irrespective of Mr. Hagan's or 
anybody else's estimates.
    Going forward, also this was early in the process, the 
amount of RWA that had to be reduced was increased by Mr. 
Braunstein, and I delivered the message that it had to come 
from position reduction over the course of the year to the 
group directly.
    Senator Levin. You did deliver that message?
    Ms. Drew. Correct.
    Senator Levin. So, Mr. Cavanagh, in other words, your 
message was it has to come from reduction of sales and the----
    Ms. Drew. Not all of it, no. Some of it.
    Senator Levin. Some of it.
    Ms. Drew. Whatever----
    Senator Levin. How much of it? Most of it?
    Ms. Drew. My directive was that whatever the independent 
risk group, QR, approved, they could include in their reduction 
the same--models are updated all the time, and if QR confirmed 
that the reduction was appropriate, then they could use the 
reduction proportionally for whatever QR told them would be 
accurate.
    Senator Levin. All right. So let me ask you, Mr. Cavanagh: 
Is it appropriate to set goals to achieve RWA reductions by 
affecting how the models calculate the results?
    Mr. Cavanagh. If the intention is to take on more risk and 
be deceptive about it, absolutely not. The models need to be 
accurate and properly measure under the--we are putting in new 
capital rules across the Firm, and so some of the targets were 
in full contemplation of the improvements that were needed to 
get RWA calculations correct.
    Senator Levin. So now my question. Is it appropriate to set 
goals to achieve RWA reductions by affecting how the models 
calculate the results? Is that appropriate?
    Mr. Cavanagh. I think it is appropriate if there are 
controls around making sure that there is independent oversight 
of the model approvals themselves and there is visibility into 
what the sources are of actual change.
    Senator Levin. So where the models are changed in order to 
achieve that reduction, is that appropriate?
    Mr. Cavanagh. Again, if the models are being----
    Senator Levin. I am saying if the purpose of changing the--
--
    Mr. Cavanagh. I do not agree that the purpose----
    Senator Levin. I am not saying you agree with what happened 
here. I am saying if the purpose of changing the models is to 
achieve an RWA reduction, is that appropriate?
    Mr. Cavanagh. If we understand--it can be appropriate, yes, 
sir.
    Senator Levin. If that is the purpose?
    Mr. Cavanagh. Yes, if there is transparency around the fact 
that there is an expectation that is going to change and the 
Firm through its risk governance processes is comfortable with 
the level of risk-weighted assets that would be used under a 
new model, that would be fine.
    Senator Levin. OK. Do you see anything in this memo that I 
referred to about accuracy, Exhibit 46?\1\
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    \1\ See Exhibit No. 46, which appears in the Appendix on page 778.
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    Mr. Cavanagh. No.
    Senator Levin. OK. So much for accuracy.
    Now, I misspoke before when I said what the CRM was, but we 
did talk about the CRM or the comprehensive risk measurement 
that the OCC requires all the national banks to calculate. It 
measures the amount of expected loss over the course of a year. 
In a worst-case scenario, it is used to calculate a bank's 
overall risk-weighted assets and in turn its capital 
requirements.
    Now, the RWA has other components, too, including a risk 
measure called the ``incremental risk charge'' (IRC)--which 
applies only to certain types of assets. And the total RWA will 
depend upon whether particular positions are categorized as CRM 
or IRC since the resulting CRM and IRC totals are going to be 
incorporated into the RWA calculation.
    So now, Mr. Weiland, if you would take a look at Exhibit 
No. 50.\2\
---------------------------------------------------------------------------
    \2\ See Exhibit No. 50, which appears in the Appendix on page 788.
---------------------------------------------------------------------------
    Mr. Weiland. Yes.
    Senator Levin. That is an email dated March 21 that you 
received from Pat Hagan, and he is the CIO's quantitative 
analyst in London. Here is the subject line of the email: 
``Optimizing regulatory capital.''
    In his email Mr. Hagan proposes categorizing synthetic 
credit positions based on what would create the lowest possible 
capital charge to the bank. And if you look at the top of page 
2, he says the following: ``. . . we should treat the 
regulatory capital calculation as an exercise of automatically 
finding the best results of an immensely arbitrary and 
complicated formula.''
    So a few hours later, Mr. Hagan received a call from Anil 
Bangia, who worked in the bank's Model Risk and Development 
Group. Exhibit No. 51a\3\ is a transcript of an excerpt of this 
call now between Mr. Bangia and Mr. Hagan.
---------------------------------------------------------------------------
    \3\ See Exhibit No. 51a, which appears in the Appendix on page 790.
---------------------------------------------------------------------------
    ``Mr. Bangia: I think . . . the email that you sent out, I 
think there is a, just FYI, there is a bit of sensitivity 
around this topic. So--''
    ``Mr. Hagan: There, there is a lot of sensitivity.
    ``Mr. Bangia: Exactly, so I think what I would do is not 
put these things in email.''
    While Mr. Bangia made it clear in his email that 
``optimizing regulatory capital'' was not safe to put in 
writing--in other words, they discuss it on the phone.
    So later that day, Mr. Hagan and Mr. Bangia spoke again. 
This is now Exhibit No. 51b.\4\
---------------------------------------------------------------------------
    \4\ See Exhibit No. 51b, which appears in the Appendix on page 791.
---------------------------------------------------------------------------
    ``Mr. Hagan: Um, that email that I should not have sent? ''
    ``Mr. Bangia: Um hum.'' ``Yes,'' in other words.
    ``Mr. Hagan: Have you read it? Is that a feasible thing to 
do or is that impossible? ''
    ``Mr. Bangia: Well it's, in some ways it's somewhat 
feasible,'' and then they go on to discuss Mr. Hagan's 
proposal.
    Mr. Weiland, despite the sensitivity, this email indicates 
that Mr. Hagan continued to pursue his efforts to produce the 
lowest possible RWA and to ``optimize regulatory capital.'' 
Right? Do you agree with that, what I read? Did I read that 
accurately?
    Mr. Weiland. Mr. Hagan was doing calculations to estimate 
what he thought the regulatory capital should be. He was not 
responsible for the official calculation of the regulatory 
capital.
    Senator Levin. Yes, but the question is whether or not is 
there some reason you should not put that in an email. Why is 
this the subject of a phone call, optimizing regulatory 
capital?
    Mr. Weiland. I was aware----
    Senator Levin. Why hide it?
    Mr. Weiland. Because it was not the business purpose, it 
was not what we were trying to achieve. Mr. Hagan had a 
misunderstanding as to what we were trying to achieve and was 
treating this regulatory capital exercise as a mathematical 
problem rather than understanding the actual rules in the 
process.
    Senator Levin. That is why you do not put it in writing?
    Mr. Weiland. Well, we did not want anyone to misconstrue or 
misunderstand what it was we were trying to achieve, and when 
Pat sent around those emails, people were misunderstanding.
    Senator Levin. They thought you were doing what it said you 
were doing, which is----
    Mr. Weiland. What Pat was doing.
    Senator Levin [continuing]. Optimizing regulatory capital.
    Mr. Weiland. That is what Pat was trying to do.
    Senator Levin. Yes.
    Mr. Weiland. And what we were doing is telling him that 
this is not the objective of the exercise.
    Senator Levin. Therefore, do not say things like that in 
writing.
    Mr. Weiland. Do not do it, and do not say it.
    Senator Levin. Yes, but he continued to do it in another 
phone call.
    Take a look at Exhibit No. 51c.\1\ That is a transcript of 
a phone conversation the next day between Mr. Hagan and you. 
This is what you say to Mr. Hagan: ``I keep getting banged up . 
. . I know you've had some emails back and forth with Venkat 
and Anil or whoever on the optimization of the IRC and CRM and 
everything else. I told this to Javier''--in other words, 
Hagan's boss--``the other day but maybe he didn't mention it to 
you--everyone is very sensitive about the idea--writing emails 
about the idea of optimizing.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 51c, which appears in the Appendix on page 793.
---------------------------------------------------------------------------
    Why is optimizing such a sensitive issue?
    Mr. Weiland. Because at that point in time, we were making 
a separation in the portfolios, trying to understand and define 
which part of the portfolios should be subject, according to 
the new regulatory rules, to IRC calculation and which part of 
the portfolios should be subject to CRM calculation. It was not 
and it is not something that is meant to be recalculated on a 
daily basis to optimize it. It is meant to be done based on a 
business purpose of the two portfolios.
    Mr. Hagan, in his role as a mathematician and a 
quantitative specialist, was focused too much on his own 
mathematical interest in optimizing it and not enough on what 
the actual rules and objectives of the exercise were.
    Senator Levin. He was just pursuing a mathematical 
interest. He was not operating in furtherance of the bank's 
goals?
    Mr. Weiland. In fact, we were instructing him that it was 
not the goal, that we had to do a one-time split of the 
portfolios according to the regulatory rules, and that we were 
not intending to continue optimizing the portfolio. And it was 
his, continued--he had an opinion, and he wanted people to hear 
it, and he continued to send emails about it, and, it was not 
consistent with what we were trying to achieve that we told him 
to stop doing it.
    Senator Levin. He thought he was carrying out a purpose, 
right?
    Mr. Weiland. He did.
    Senator Levin. But it was a violation of the bank's policy.
    Mr. Weiland. Right.
    Senator Levin. Do not put it in emails.
    Mr. Weiland. Well, primarily----
    Senator Levin. You said, ``Do not put it in emails.'' You 
did not say, ``Hey, you are on the wrong track.''
    Mr. Weiland. I told him both things.
    Senator Levin. You said, ``Do not put it in emails.''
    Mr. Weiland. I did not want him to put it in an email 
because it was misconstruing what it was we were trying to 
achieve.
    Senator Levin. Where do you see that?
    Mr. Weiland. I am not sure I see it in the transcript, but 
I had many conversations with Pat about this.
    Senator Levin. So in this transcript, saying, ``Do not 
write emails about this,'' because----
    Mr. Weiland. This phone call----
    Senator Levin [continuing]. This is the wrong policy.
    Mr. Weiland. This phone call was to tell him not to write 
these emails.
    Senator Levin. Telling him, ``Do not write emails.'' You 
did not say, ``It is the wrong policy. That is not what we are 
trying to do at this bank.'' You say, ``This is a sensitive 
subject. Do not put it in emails.'' Right?
    Mr. Weiland. Correct.
    Senator Levin. Mr. Cavanagh, in your prepared statement, 
you say that, ``Future synthetic credit positions in CIO will 
be subject to appropriate reporting and monitoring requirements 
and linked with appropriate documentation to a particular risk 
or set of risks that they are designed to offset.''
    You also said in your prepared testimony that, ``We believe 
that the changes that we have made appropriately reflect the 
approach to hedging outlined in the proposed Volcker Rule and 
that they impose strong internal controls over hedging, 
including that all hedged transactions be properly documented 
and monitored.''
    Are you saying that the bank from now on is going to 
require contemporaneous hedging documentation for all hedges? 
Is that what you are saying?
    Mr. Cavanagh. For all portfolio hedging, we will require 
contemporaneous documentation that links the risk that is to be 
hedged with what the hedge is constructed to be and require 
ongoing monitoring from the time a hedge goes on.
    Senator Levin. Now, you say in your statement that the 
documentation is going to identify a particular risk or set of 
risks that they--I presume you mean the hedging positions--are 
designed to offset. Right?
    Mr. Cavanagh. Yes.
    Senator Levin. Now, rather than identifying risks to be 
offset, are you also going to identify the assets to be offset?
    Mr. Cavanagh. Yes. [Pause.]
    Senator Levin. Let me go back and just clarify one thing. 
Mr. Weiland, I think that you testified that optimizing RWA was 
done once. Is that correct? It was allowed on a one-time basis?
    Mr. Weiland. The intention was split the book into a 
portfolio that included only index positions and no tranches 
and would receive an IRC charge, and a separate book which 
would include a mixture of index positions and tranches, which 
would be, the hedge ratios, and trades would be actively 
managed; and that going forward after that had been done, 
trades either needed to be assigned to the IRC book or the CRM 
book, and that there was not meant to be an ongoing process of 
optimization that would potentially blur the lines between the 
two.
    Senator Levin. All right. So there intention--was not an 
intention, you said, on an ongoing basis to optimize the book. 
And my question is this: On that one-time basis, it was going 
to be allowed. Is that correct, but on a one-time basis?
    Mr. Weiland. Yes. The objective was within the rules to 
achieve the best RWA, of course.
    Senator Levin. On that one time.
    Mr. Weiland. Yes. And then move forward assigning trades on 
a business----
    Senator Levin. But not on an ongoing basis?
    Mr. Weiland. There was not meant to be any further cross-
fertilization between one of the books and the other book for 
the purpose of optimizing capital.
    Senator Levin. Now, why should it be allowed on a one-time 
basis?
    Mr. Weiland. Well, by the rules, if you are using index 
positions and not tranches--in other words, you are not 
correlation trading, you are----
    Senator Levin. Why is it that something not allowed on an 
ongoing basis is allowed on a one-time basis? That is what I am 
trying to understand.
    Mr. Weiland. Well, I am not a regulatory policy expert, but 
my understanding----
    Senator Levin. You think the regulators allow that 
optimization for once, but do not allow it on an ongoing basis?
    Mr. Weiland. So I am not clear on what exactly the language 
in the rule is, but my understanding was that you are allowed 
to separate the portfolios based on instrumentation and 
business purpose. But what we understood to be prohibited was 
ongoing optimization that would include moving trades back and 
forth between the books not for a business purpose but for 
optimization purposes.
    Senator Levin. You think that the regulators say it is OK 
to do it once but do not keep on doing it?
    Mr. Weiland. That is my understanding.
    Senator Levin. OK. We will find out later this afternoon.
    What we have seen during this investigation is the evidence 
that JPMorgan piled on risk, broke risk limits, hid losses, 
manipulated models, dodged oversight, misinformed the public. 
That is not what a leading bank should be doing. You folks have 
testified here that you have taken some steps to clean up that 
act. I hope that is true. The public deserves it. The economy 
requires it. We have to have confidence in our banks, and 
particularly the major banks, which have such an impact should 
there be a major problem with those banks.
    And so I want to end with a thank you to you folks for 
being here without requiring subpoenas and also for your 
cooperation with the investigation. You have done that, and we 
are highly critical of these activities, and appropriately so, 
but at least the bank has been cooperative with our 
investigation, and for that we are grateful. You are excused.
    We are going to take a 5-minute break. [Recess.]
    OK. We will come back to order.
    I now want to call our final panel of witnesses: Tom Curry, 
the Comptroller of the Currency; Scott Waterhouse, OCC's 
Examiner-in-Charge at JPMorgan Chase; and, finally, Michael 
Sullivan, a Deputy Comptroller for Risk Analysis at the OCC.
    Mr. Curry, you testified before the Subcommittee last 
summer, I believe, at our HSBC hearing, and I know that you 
made a special effort to get here today, and we very much 
appreciate that. We welcome you back here and look forward to 
your testimony. And, Mr. Waterhouse and Mr. Sullivan, I think 
this is the first time that you have appeared before our 
Subcommittee. We welcome you both, and I appreciate your being 
here today.
    As you know, under our rules all witnesses who testify 
before the Subcommittee are sworn in. At this time I would ask 
each of you then to please stand and raise your right hand. Do 
you swear that the testimony you are about to give before this 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Curry. I do.
    Mr. Waterhouse. I do.
    Mr. Sullivan. I do.
    Senator Levin. We will use again this afternoon the same 
timing system. One minute before the red light comes on, you 
will see the light change from green to yellow, and that gives 
you an opportunity to conclude your remarks. The written 
testimony will be printed in the record in its entirety, so if 
you can, please limit your oral testimony to no more than 10 
minutes.
    I think, Mr. Curry, you will be presenting testimony, I 
believe, for the OCC. Will that be the only testimony that we 
will get?
    Mr. Curry. My colleagues will introduce themselves briefly 
after I conclude, Senator.
    Senator Levin. That is fine. Thank you very much.
    So let me call on you with, again, our thanks, Mr. Curry.

   TESTIMONY OF HON. THOMAS J. CURRY,\1\ COMPTROLLER OF THE 
           CURRENCY, U.S. DEPARTMENT OF THE TREASURY

    Mr. Curry. Thank you, Chairman Levin, Ranking Member 
McCain, and Members of the Subcommittee. We appreciate this 
opportunity to discuss the OCC's oversight of JPMorgan Chase as 
it relates to the bank's more than $6 billion loss from credit 
derivatives trades in the Chief Investment Office. The OCC has 
supported the Subcommittee's investigation into this incident, 
and we look forward to continuing to cooperate on this matter.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Curry appears in the Appendix on 
page 129.
---------------------------------------------------------------------------
    The risk management culture and processes at the bank that 
allowed these significant trading losses to occur are 
completely unacceptable to the OCC. A strong culture of 
corporate governance and oversight was clearly lacking and, 
thus, internal controls failed to identify and manage the 
mounting risks in the CIO. Equally troubling was the failure of 
the bank to provide timely and complete information to the OCC 
as events unfolded. This is a serious breach in the conduct 
that we demand from bank management when dealing with our 
supervisory staff.
    The OCC takes these matters very seriously. In January, we 
issued a comprehensive cease-and-desist order that directed the 
bank to correct the unsafe and unsound practices and legal 
violations related to the CIO's derivatives trading.
    As more fully described in our cease-and-desist order, we 
found deficiencies in a number of core functions, mainly 
oversight and governance; risk management processes and 
procedures; controls over trade valuation; development and 
implementation of models; and internal audit processes. We are 
closely monitoring the bank's compliance with our order and 
evaluating what additional actions might be necessary.
    Had the bank's risk management and audit processed worked 
as intended, this activity should have been highlighted to us. 
Nonetheless, there were red flags that we failed to notice and 
act upon. However, once we became aware of the potential scope 
of the problem, we quickly took actions.
    First, we directed the bank to provide us with granular 
information about its trading activities in the Synthetic 
Credit Portfolio of the CIO so that we could fully assess the 
risks being taken.
    We also launched a full-scale, comprehensive review of the 
activities and oversight of the CIO and Synthetic Credit 
Portfolio. The review had two components: The first was a 
comprehensive review to assess the quality of management and 
the risk management processes in the CIO function. We looked at 
the effectiveness of board oversight, including whether the 
Risk Committee members were appropriately informed and engaged, 
the types and reasonableness of risk metrics and limits; the 
model governance review process; the valuation control process; 
and the quality of work by the independent risk management 
team, as well as internal audit.
    We closely monitored the bank's wind-down of the SCP on a 
daily basis. In addition, we assessed the adequacy of the 
information reported within the holding company and the bank. 
We wanted to know, first, whether they had adequate information 
to monitor their own risk; and, second, whether the information 
provided to the OCC was sufficient for us to evaluate the risks 
and risk controls associated with the positions undertaken by 
the CIO.
    The second prong was an internal review to assess the 
quality of our supervision and lessons we could learn to 
strengthen our supervision at the bank and across the large 
bank population that we oversee. Our goal here is to ensure 
that we focus our resources efficiently and effectively to 
identify risks, assess banks' governance and risk management, 
and ensure that weaknesses are addressed promptly.
    As a result of this review, we are taking a number of steps 
to strengthen our supervision of large banks. For instance, we 
are working to ensure that we receive and act upon timely and 
complete information, that we regularly review models and 
reports banks use for regulatory capital purposes, and that we 
treat as red flags any sudden changes in key risk areas. Our 
lessons learned are more fully described in my written 
statement.
    The Subcommittee's report contains thoughtful 
recommendations that will further enhance our supervision of 
derivatives activities. Although we are carefully studying the 
details in the recommendation, we fully agree with the 
principles they embody. Indeed, several of the recommendations 
reinforce requirements in our cease-and-desist order.
    We will continue to investigate this matter and the new 
information provided in the Subcommittee's report. Be assured 
that I will not hesitate to take additional actions, if 
warranted, in response to any new information we learn from the 
report.
    I am joined today by Scott Waterhouse and Michael Sullivan. 
Scott is the OCC's examiner-in-charge of JPMorgan's national 
bank, and Michael is a Ph.D. economist with a background in 
quantitative analysis and risk modeling who led the OCC's 
internal review.
    I would like to now turn to Scott and Michael to introduce 
themselves to the Subcommittee, and then we will be pleased to 
answer any questions.
    Senator Levin. Thank you so much, Mr. Curry. Please 
proceed, Mr. Waterhouse.

   TESTIMONY OF SCOTT WATERHOUSE,\1\ EXAMINER-IN-CHARGE, OCC 
NATIONAL BANK EXAMINERS--JPMORGAN CHASE, OFFICE OF COMPTROLLER 
                        OF THE CURRENCY

    Mr. Waterhouse. Chairman Levin and Ranking Member McCain, 
my name is Scott Waterhouse, and I am the OCC's examiner-in-
charge at JPMorgan Chase's national bank subsidiaries. I have 
been with the OCC for 30 years.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Waterhouse appears in the 
Appendix on page 129.
---------------------------------------------------------------------------
    I started as a career bank examiner out in San Francisco, 
where I spent my first 7 years examining community, mid-sized, 
and multinational banks on the west coast and internationally. 
In 1990, I transferred to London where I spent 7 years 
examining major activities of U.S. banks and then becoming the 
EIC for the OCC's lending operation.
    I have been a team leader of capital markets and an EIC of 
a large bank. I assumed the role of EIC OF JPMC in 2008. At 
JPMC, I supervised a staff of 65 examiners who provide 
oversight of the bank's activities. I and several members of my 
staff have been pleased to assist the Subcommittee in its 
investigation, and I am happy to answer any questions you have 
today.
    Senator Levin. Thank you so much, Mr. Waterhouse. Mr. 
Sullivan.

 TESTIMONY OF MICHAEL SULLIVAN,\1\ DEPUTY COMPTROLLER FOR RISK 
 ANALYSIS, RISK ANALYSIS DEPARTMENT, OFFICE OF THE COMPTROLLER 
                        OF THE CURRENCY

    Mr. Sullivan. Chairman Levin, my name is Michael Sullivan. 
I am the Deputy Comptroller for Risk Analysis at the OCC.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Sullivan appears in the Appendix 
on page 129.
---------------------------------------------------------------------------
    As Deputy Comptroller, I provide executive oversight for 
the three Risk Analysis Divisions that provide expertise for 
the agency on modeling of credit risk, market risk, and 
enterprise-wide risk.
    I also serve as a key adviser and technical expert for the 
OCC Economics Department and the OCC on practical and policy 
issues related to the use of quantitative models by banks and 
the oversight of banks' model risk in supervision.
    I joined the OCC in 1999 as a financial economist and was 
appointed Deputy Director for Market Risk Modeling in 2004. In 
2008, I was appointed the Director of the Market Risk Analysis 
Division.
    In May 2012, I was asked by the Comptroller and our 
Executive Committee to do an internal report on JPMC CIO 
losses. In particular, the report would include a chronology of 
events associated with the bank's trading loss in order to 
identify gaps in bank business and risk management.
    As important, if not more important, I was asked to provide 
an objective review of the OCC's supervisory response to the 
trading loss in order to identify lessons we can learn from 
this event. I chronicled my findings and report to the 
Comptroller last October, and the OCC's executive management 
team agreed with the findings and recommendations and has 
formulated plans to address them.
    I look forward to answering any questions you might have. 
Thank you.
    Senator Levin. Thank you all.
    Let me start off by kind of summarizing what happened here 
because one of the mysteries of this investigation is how it is 
possible that a huge and high-risk derivative trading portfolio 
could be operated for years at JPMorgan Chase without the OCC's 
full knowledge and oversight.
    The Synthetic Credit Portfolio started out small in 2006, 
but in 2011 it increased tenfold, and in early 2012 it tripled 
again to $157 billion, as shown in Exhibit No. 1a,\2\ which is 
in the exhibit book in front of you, and there is a chart there 
which I think you are probably familiar with as well.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 1a, which appears in the Appendix on page 511.
---------------------------------------------------------------------------
    In 2011 and 2012, CIO traders engaged in massive trades, 
sometimes involving hundreds of millions of dollars, and by 
March 2012, it compiled a high-risk mix of over 100 credit 
derivatives that referenced both investment and non-investment 
grade companies, had multiple maturity dates, and included both 
short and long positions that offset each other in very complex 
ways. The bank did not tell the OCC all about that portfolio, 
and we will hear more about that from the OCC itself.
    Now, let me start off with you, Mr. Waterhouse. As the 
OCC's head examiner at JPMorgan, what did you think when you 
saw or heard about the whale trades on April 6, 2012? Tell us 
what your reaction was. How much did you know about this whole 
SCP portfolio?
    Mr. Waterhouse. Well, at that point of time, I knew very 
little. We had an understanding that the SCP portfolio had been 
in place for a number of years, and it had operated as 
management has intended, I think, over a number of years. And 
having said that, we spent most of our time--given that, and 
given that it did not surface to our attention, we spent our 
time focusing on what we considered to be the higher-risk 
activities. When the London----
    Senator Levin. The higher-risk activities where?
    Mr. Waterhouse. All across the bank.
    Senator Levin. OK. So you did not consider that to be a 
high-risk activity.
    Mr. Waterhouse. I did not.
    Senator Levin. You had no reason to believe it until April 
2012?
    Mr. Waterhouse. And in April 2012, when the London whale 
article came out, I was surprised by that, and we set about 
from there a series of meetings with the bank to try to figure 
out what it all meant. So my initial response was to go to the 
bank and try to figure out what was going on.
    Senator Levin. Prior to that time, had you received regular 
information about the SCP portfolio?
    Mr. Waterhouse. No, we did not.
    Senator Levin. Now, when the OCC asked about the whale 
trades, you apparently got such reassuring answers from the 
bank that the OCC considered the matter closed on April 30. Is 
that correct?
    Mr. Waterhouse. I would not quite characterize it that way. 
We did get assurances. Management gave us information about 
what they felt the trade had been doing or the portfolio--how 
the portfolio was behaving. We were reassured a bit at the 
time, to be honest, and yet we asked for followup meetings and 
had a meeting the week after that where we got more information 
on that.
    So as we went through the month of April, we were following 
it up, but as we look back, we were not following up as 
aggressively as we ought to at that time. Clearly, we should 
have been more aggressive in looking at the portfolio.
    Senator Levin. In Exhibit No. 66,\1\ this is an email, from 
one OCC examiner to another OCC examiner. If you will look at 
Exhibit No. 66.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 66, which appears in the Appendix on page 831.
---------------------------------------------------------------------------
    Mr. Waterhouse. Yes.
    Senator Levin. At the bottom of the third page, it says, 
``The Whale Trade issue is considered closed--email went out to 
Senior Management yesterday.'' So is that just one examiner 
telling another examiner something that was just not exactly 
accurate? Or what does that reference?
    Mr. Waterhouse. I do think--actually, I focused so much on 
the first half of that sentence; I do not know about the second 
half. But on the first half, as I discussed with my team 
leader, who said that, I think it is a poor choice of words 
right there. We had--and, in fact, just above that, ``Follow-Up 
Items,'' refers to Fred's email of 4/17 which included a to-do 
list while he is out. At that point in time, we brought in some 
trading experts that we have that work primarily on the 
investment bank, and they were beginning to delve into the SCP 
portfolio. Those individuals are very aggressive, and I think 
Fred's comment here was, ``Hey, wait, we just had a meeting 
with the bank. The bank is going to gather some information and 
come back to us. Let us wait and see what their response is.''
    Again, it was not as aggressive as it should have been.
    Senator Levin. All right. The ``Meeting Minutes (4/18)'' 
are the place where those words are located. Do you see that 
right at the top of that? About one-third up the page it says, 
``Meeting Minutes (4/18).''
    Mr. Waterhouse. Yes.
    Senator Levin. So it is right in the minutes that it made 
that reference, but you are saying it is just an inaccurate 
description.
    Mr. Waterhouse. Down at the bottom, the London whale issue 
being closed, we did not consider it closed.
    Senator Levin. OK. Now, what should the bank have told the 
OCC about the SCP? For instance, when it grew tenfold in 2011 
to $51 billion, should the OCC have been informed of that?
    Mr. Waterhouse. I think we should have been informed, yes, 
sir.
    Senator Levin. And what about in the first quarter of 2012 
when the portfolio tripled in 3 months to $157 billion? Should 
the OCC have been informed about that?
    Mr. Waterhouse. Absolutely.
    Senator Levin. Is it not true that when a derivatives 
portfolio gets to be that big that there is a special danger 
because even a small drop in price can result in massive 
losses?
    Mr. Waterhouse. Yes, particularly when it is as complex as 
this one was.
    Senator Levin. This was described, this portfolio, as being 
a ``perilous size,'' I think by Mr. Cavanagh, actually, in one 
of his emails or at one point. Is that an accurate description, 
when it gets to be this size it has got some real dangers?
    Mr. Waterhouse. I think that is one of many adjectives that 
would fit.
    Senator Levin. And if a portfolio consists of synthetic 
derivatives--maybe I will ask this of you, Mr. Curry--does it 
pose special risk because there is no tangible asset or revenue 
stream to stop losses and derivative prices are often subject 
to split second trading and price changes?
    Mr. Curry. Yes, Senator.
    Senator Levin. Now, the bank has represented to the SEC 
that the portfolio served as a key tool for offsetting credit 
risks in their $350 billion portfolio and maybe for the rest of 
the bank as well. Should the bank have told you about the 
hedging strategy along the way? Maybe I will ask you again, Mr. 
Waterhouse.
    Mr. Waterhouse. I think there were all aspects of the 
portfolio that we should have been informed about.
    Senator Levin. All right. What is the regulatory standard--
maybe I will ask you again, either you, Mr. Curry, or anyone 
who you wish to designate. What is the regulatory standard for 
when a bank is required to alert the OCC to new derivatives 
information?
    Mr. Curry. Senator, generally speaking, we do not view the 
disclosure requirements of institutions to be very narrow. We 
view them as being broad. A bank should flag or highlight to us 
any significant change in their business activities, 
particularly those that could pose additional risk. We do not 
base it on specific regulatory or other requirements. We need 
to have full knowledge of the bank's activities.
    Mr. Waterhouse. Senator, if I may just jump in there?
    Senator Levin. Sure, please.
    Mr. Waterhouse. My expectation of the bank is if they are 
going to enter any new business, any new activity, we ought to 
be informed, and they ought to have some type of risk 
management control system designed ahead of time before they 
implement it and have thought through the management reporting 
and the limit structure and the whole governance process. And 
whether that is codified or not, it is certainly my expectation 
for safe and sound operation.
    Senator Levin. We had a $157 billion high-risk derivatives 
portfolio here that OCC hardly knew existed, and that strikes 
me as being a hidden financial risk. Is that the way the OCC 
views it?
    Mr. Waterhouse. I would view it that way, yes, sir.
    Senator Levin. Now, is this something that OCC has to or is 
expected to have to ferret out? Or is this something that the 
banks are supposed to disclose? You sort of answered that 
before, but where does the responsibility lie here?
    Mr. Waterhouse. The responsibility would lie first and 
foremost with management, to have the proper risk systems and 
controls, proper reporting. And then for us as the primary 
regulator of the national bank, we ought to be informed, 
receive the regular reports, and understand the risks as they 
transpire.
    Senator Levin. During our investigation we came across a 
number of incidents where it appeared that JPMorgan Chase was 
not being straight with the OCC, and here are a couple:
    On January 30, 2012, the CIO met with the OCC at a standard 
quarterly meeting that the OCC requires to discuss upcoming 
plans. The CIO's chief financial officer, John Wilmot, attended 
that meeting with the OCC. So take a look, if you would, at 
Exhibit No. 58.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 58, which appears in the Appendix on page 807.
---------------------------------------------------------------------------
    Exhibit No. 58 is an OCC summary of this meeting of January 
30, 2012. In interviews, both the OCC examiner, Jaymin Berg, 
who attended the meeting and who wrote this summary, and Mr. 
Wilmot, who is, again, the CIO's Chief Financial Officer, 
confirmed to this Subcommittee that the notes were an accurate 
summary.
    About two-thirds down the page, the OCC States that they 
were told the following by Mr. Wilmot--and you can see this. It 
is near the bottom. ``The MTM Book''--mark-to-market book--``is 
decreasing in size in 2012.''
    Now, this is a January 31 summary of a meeting, again, 
between OCC and the bank. Did the SCP decrease in size in 2012? 
That is question one.
    Mr. Waterhouse. Absolutely not. It mushroomed or ballooned.
    Senator Levin. Now, on April 16, 2012, the bank met with 
the OCC and provided its first written presentation on the 
Synthetic Credit Portfolio since the media turned the spotlight 
on the whale trades. At that April 16, 2012, meeting, the bank 
gave the OCC a presentation which stated that the SCP's first 
quarter losses were $580 million. Internally, the CIO had 
reported that at the end of the first quarter SCP losses were 
$719 million. And that is laid out in a chart which is Exhibit 
No. 1g,\1\ but I think you can just assume that I am stating 
that accurately--for the moment, at least.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1g, which appears in the Appendix on page 517.
---------------------------------------------------------------------------
    By April 16, the day of the meeting, the losses had already 
climbed to $1.25 billion, and, again, that is on Exhibit No. 
1g, and this data came to us from the bank. We put together the 
chart.
    So the bank gave the OCC a number on April 16, $580 
million, that was 20 percent less than it had reported 
internally for the quarter end, which was $719 million, and it 
was half of what was on the bank's books for the day of the 
meeting, or the day before the meeting, $1.2 billion.
    So was that an understatement of SCP losses to the OCC?
    Mr. Waterhouse. Absolutely.
    Senator Levin. Is that acceptable? And what do you do when 
you find out about that?
    Mr. Waterhouse. Well, in the first instance, it is not 
acceptable, and in the second instance, as we find out about 
this and, honestly, as we go through your report, there is a 
lot of interesting information that we have to digest still. So 
I think we are still in the process of determining.
    Mr. Curry. Senator, it is wholly unacceptable for an 
institution, its officers, or employees to provide false or 
misleading information to the OCC and its examiners.
    Senator Levin. A couple weeks later, on May 4, the bank was 
working to finalize its first quarter financials, which it had 
to report publicly on its SEC filings. On that day, Mr. 
Waterhouse, you received a call from two senior bank 
executives, the Chief Financial Officer, Mr. Braunstein, and 
the Chief Risk Officer, Mr. Hogan. You summarized that call in 
Exhibit No. 68.\2\ If you turn to Exhibit No. 68, you 
summarized that call you had with Mr. Braunstein and Mr. Hogan.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 68, which appears in the Appendix on page 838.
---------------------------------------------------------------------------
    Halfway down the page, this is what you wrote. You wrote 
that the bank said that the Synthetic Credit Portfolio had lost 
approximately $1.6 billion. But internally, the bank reported 
as of the end of the previous day, the SCP loss was about $91 
million for the day and had cumulative losses of $2.2 billion.
    So did the bank give the OCC inaccurate information on May 
4?
    Mr. Waterhouse. In respect to the $1.6 billion, I thought 
that was a cumulative number at the time. But, I heard the 
testimony earlier today that----
    Senator Levin. That is OK. No, that is good. If you heard 
that testimony--I was going to ask you about that.
    Mr. Waterhouse. Because whether----
    Senator Levin. They said it was intended to be the second 
quarter loss up to that point and did not include the first 
quarter losses. Did you hear that?
    Mr. Waterhouse. I did hear that, yes, sir.
    Senator Levin. And does that resonate?
    Mr. Waterhouse. I do not know. I thought that this was the 
all-in number, but it could have been that way.
    Senator Levin. All right. Now, you also wrote in the email 
that the bank said, quote, that if you--referring to the OCC--
``have been watching the position reports and the P&Ls,'' do 
you know what position reports and P&Ls you could have been 
watching?
    Mr. Waterhouse. We were not getting daily P&L reports on 
the SCP portfolio at that point in time. We started getting 
them mid-May through today.
    Senator Levin. After the whole thing blew up.
    Mr. Waterhouse. After it all blew up. But we were not 
getting SCP daily reports at that time.
    Senator Levin. All right. So when Ms. Drew said you were, 
or she thought you were, she was wrong. You were not.
    Mr. Waterhouse. We were not getting specific detailed SCP 
reports.
    Senator Levin. All right. And you were not getting the 
position reports or the P&L data for the synthetic credit book. 
Is that right?
    Mr. Waterhouse. That would be correct. To the best of my 
knowledge.
    Senator Levin. All right. Now, on January 31, they said 
that the SCP is decreasing when it is increasing. They then 
kind of take a little jab at you by saying you guys would 
have--if you would have been following our position reports and 
our P&Ls, then you would have been able to know what was going 
on, when you were not even getting the position reports and the 
P&Ls. So far are you with me?
    Mr. Waterhouse. Yes. To the best of my knowledge, yes.
    Senator Levin. OK. Now, that kind of tone I am afraid went 
to the top. There were a number of occasions when that kind of 
a tone about the OCC coming too much into the bank's business 
and so forth is, I am afraid, carried on with another 
conversation. Here is what happened, as far as we can tell, in 
late 2011 or maybe early 2012. The bank stopped sending the 
investment bank's daily profit and loss data to the OCC. Does 
anyone remember that, when that happened?
    Mr. Waterhouse. Yes, that would be me, and, in fact, it was 
in 2011 that actually occurred.
    Senator Levin. Do you know the month?
    Mr. Waterhouse. August.
    Senator Levin. OK. So in August 2011, the bank just stopped 
sending its investment bank's daily profit and loss data to the 
OCC. Was there an explanation given to you?
    Mr. Waterhouse. There was--after we inquired, day two--we 
found it day one, thought it was a systems error. Day two, when 
it did not come again, we inquired with the regulatory liaison, 
and then ultimately it went up to Mr. Braunstein, and later on 
I had a conversation with Mr. Braunstein and Mr. Dimon. I am 
sorry. The second part of your question, yes, I was given an 
explanation at the time that said that there had been some 
leaks of information and lost data, and I would say none of 
which were attributed to the OCC, but that the bank was 
concerned about who was getting what and that it was rethinking 
its distribution of certain reports.
    Senator Levin. They were not accusing you then of leaking.
    Mr. Waterhouse. They did not accuse me.
    Senator Levin. No, I do not mean you. They did not accuse 
the OCC of leaking?
    Mr. Waterhouse. I do not think so. But I think at that 
point in time, they were unsure where they were coming from. It 
could have been internal bank, could have been a regulator, 
could have been anywhere.
    Senator Levin. All right. And then, as you just pointed 
out, you escalated the issue to the senior bank executives 
urging a reversal of the decision. Is that correct?
    Mr. Waterhouse. I did.
    Senator Levin. And did Mr. Braunstein agree to restore that 
report?
    Mr. Waterhouse. Yes he did.
    Senator Levin. Did he mention he was going to do that in 
front of Mr. Dimon? Is it true--or how did Mr. Dimon react?
    Mr. Waterhouse. Well, we had the discussion of why the 
information was turned off, which parallels what I just 
mentioned here. And when Mr. Dimon was saying why we were not 
going to get it, Mr. Braunstein basically said, ``Well, I 
actually already started giving it to them again.'' To which 
Mr. Dimon expressed his dismay and, said that it was his 
decision to be able to make that.
    Senator Levin. As to whether to return to----
    Mr. Waterhouse. Whether to turn the reports back on to the 
OCC.
    Senator Levin. So apparently he had decided to stop the 
reports and----
    Mr. Waterhouse. It sounded--I took it that way, yes, sir.
    Senator Levin. And so he would be the one to restore the 
flow.
    Mr. Waterhouse. Yes, sir.
    Senator Levin. And did he raise his voice?
    Mr. Waterhouse. He did.
    Senator Levin. Did he say the OCC did not need the 
information? Or what did he say?
    Mr. Waterhouse. Not in that part of the conversation. 
Earlier in the conversation, he was pressing me as to, ``Why 
would you need this information? What good is it? What do you 
use it for? '' And he said, ``I do not think you need this 
amount of detail. You can still do your supervision without 
it.''
    Senator Levin. OK. So that was earlier in the conversation.
    Mr. Waterhouse. That was earlier in the conversation.
    Senator Levin. And then later in the conversation, when Mr. 
Braunstein said that he had agreed to restore this report, that 
is when Mr. Dimon reacted angrily and said that it is his 
decision, not Mr. Braunstein's decision, to do that.
    Mr. Waterhouse. That is correct. To the best of my 
recollection, that is----
    Senator Levin. All right. That is correct to the best of 
your----
    Mr. Waterhouse. That is correct.
    Senator Levin. OK. Now, there is another incident, which 
was referred to, in May 2012 in an email, Exhibit No. 71,\1\ 
where, Mr. Waterhouse, you recounted something that had 
happened 2 years before, so it obviously had an impression on 
you. It was in 2010, the OCC was doing a direct examination of 
the CIO's investment portfolios and said that the CIO should do 
a better job documenting the investment decisions. In this 
Exhibit No. 71, you were saying the following: ``. . . we did 
an examination of the CIO at the end of 2010 and have a 
followup planned soon. We had some concerns about overall 
governance and transparency of the activities.'' Now, that was 
back in 2010. Is that correct? Is that right?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 71, which appears in the Appendix on page 843.
---------------------------------------------------------------------------
    Mr. Waterhouse. That is correct.
    Senator Levin. And you were referring to the CIO investment 
portfolios, which I gather unbeknownst to you included the SCP. 
Is that correct?
    Mr. Waterhouse. Correct.
    Senator Levin. So you went on to write, ``We received a lot 
of pushback from the bank, Ina Drew in particular, regarding 
our comments. In fact, Ina called [OCC Examiner Fred] Crumlish 
. . . in London and `sternly' discussed our conclusions with 
him for 45 minutes. Basically she said that investment 
decisions are made with the full understanding of executive 
management including Jamie Dimon. She said that everyone knows 
what is going on and there is little need for more limits, 
controls, or reports.''
    So, now, you wrote that 2 years after the event. Is that 
right?
    Mr. Waterhouse. That is correct.
    Senator Levin. How did it happen that the incident stayed 
with you?
    Mr. Waterhouse. Actually, to be clear on this, that is 
written--that is actually Mr. Crumlish's comments that I have 
paraphrased. He and I recounted that as this thing was 
unfolding. So I guess it was ingrained on Mr. Crumlish's mind, 
and he brought it back up to me.
    Senator Levin. He shared it with you and you remembered it?
    Mr. Waterhouse. Yes.
    Senator Levin. Now, the OCC issued what is called ``a 
Matter Requiring Attention'' after the 2010 exam, about 
documenting the investment decisions and positions. But it did 
not followup for 2 years.
    So, Mr. Waterhouse, if the OCC had required the CIO to 
document its investment decisions, is it possible that OCC 
would have learned of SCP earlier?
    Mr. Waterhouse. Yes, it is possible.
    Senator Levin. Now, Mr. Curry, let me ask you, is it up to 
the bank and should it be up to the bank to decide what is 
appropriate to give a regulator and what information can be 
withheld?
    Mr. Curry. Absolutely not. It is not the role of the bank 
to determine what information or records we have access to. As 
Commissioner of Banks in Massachusetts, I had on the wall the 
charter for the Bank of Massachusetts, 1784, signed by John 
Hancock, and the very last provision of it says that, 
``Examiners appointed by the Commonwealth shall have full and 
free access to all the books and records of an institution.'' 
That is the fundamental cornerstone of our system of bank 
supervision in this country for over 200 years, and that is an 
unacceptable premise that the bank decides what information is 
provided to the OCC and to our examiners.
    Senator Levin. So when Mr. Dimon is giving a hard time to 
his own staff and to you, Mr. Waterhouse, saying you, ``Do not 
need this, why do you need this?'' that is not up to him to 
decide. If you ask for that--even if you do not ask for that, 
if it has an effect on the bank's books and the bank's 
solidity, then you have a right to it and should get it even 
without asking. Is that correct?
    Mr. Waterhouse. That is correct.
    Senator Levin. Now, Mr. Curry, when a senior executive at a 
bank is engaging in kind of stopping the transmission of key 
data, is that a message to the rest of the bank which is not 
very helpful, to put it mildly?
    Mr. Curry. I think the institution's attitude or 
relationship with our examiners starts from the top. We want 
and expect, particularly from large institutions, an openness 
of communication between the supervisors and the institution.
    Senator Levin. Now, the bank stopped including key CIO data 
in the bank's Executive Management Report. It failed to tell 
the OCC that the CIO had started issuing its own Executive 
Management Report in January 2012. It did not send copies of 
the new reports for months. That is Exhibit No. 64.\1\ And the 
bank also failed to send regular reports providing verified 
price data for the CIO's synthetic credit derivatives for 
February and March. That just suddenly stopped. That is Exhibit 
No. 61.\2\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 64, which appears in the Appendix on page 828.
    \2\ See Exhibit No. 61, which appears in the Appendix on page 822.
---------------------------------------------------------------------------
    And, by the way, these are the same months that the SCP 
tripled in size and the value manipulation intensified.
    I will ask you, Mr. Waterhouse. Why didn't the OCC 
examiners that oversaw the CIO--why didn't you ask the bank for 
missing reports until mid-April, after the media storm hit on 
the whale trades?
    Mr. Waterhouse. Senator, this is something we should have 
been all over from day one, and we did not followup promptly, 
and I am not exactly sure what happened in these instances. I 
would say, though, that given our understanding of the nature 
of the risk in the SCP and in the CIO in general, we were 
looking in different areas, examining different parts of the 
bank that we perceived to have higher risk. So this was an 
area, this was one of those red flags that you point out in 
your report and that we point out in our report that we should 
have seen and we should have done better at.
    Senator Levin. OK. Now, Mr. Sullivan, I think you have 
looked into the question of how the OCC missed these flags. I 
believe that was part of your investigation?
    Mr. Sullivan. That is correct.
    Senator Levin. Can you tell us what you found?
    Mr. Sullivan. I guess what I found was that SCP was obscure 
but not hidden--obscure to the extent that, as I went through 
looking, at the historical reports the OCC had received, then 
there were little pieces that might be of it, but no definitive 
reporting.
    I did note gaps, because I was looking through the history 
of OCC reports received, so I ran into gaps several times in 
terms of what was in the OCC's collected files. So that was one 
of them. I was looking through the EMR through--month by month, 
but then suddenly it, just dropped off in January. So I noted 
that among several other----
    Senator Levin. And those should have been picked up by the 
OCC?
    Mr. Sullivan. Yes, it was the standard practice, and in 
contrast, like in the investment bank, all the reports were 
there. So, yes, it was the expectation that these reports would 
be followed, and if they are not, I mean, people are supposed 
to followup on that.
    Senator Levin. So that was just a failure at the OCC.
    Mr. Sullivan. That was a mistake by the OCC.
    Senator Levin. Now, the bank is also obligated to send to 
the OCC regular reports about risk limit breaches, keep the 
agency informed about risk problems. The bank apparently did 
send those reports, and they reported hundreds of SCP risk 
limit breaches in the first 4 months of 2012.
    This Exhibit No. 39 \1\ is the list that was prepared by 
the bank in May 2012 after the media storm of all the CIO risk 
limit breaches from September 2011 through April 30, 2012. 
Those risk limit breaches jumped from 6 in the last quarter of 
2011 to 170 in the first quarter of 2012, and then in April, 
160 breaches in that 1 month alone.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 39, which appears in the Appendix on page 748.
---------------------------------------------------------------------------
    So I take it, Mr. Waterhouse, you would agree that this is 
a pretty big jump, a huge jump in risk limit breaches and a 
worrisome pattern.
    Mr. Waterhouse. Absolutely.
    Senator Levin. But were they caught at the OCC?
    Mr. Waterhouse. We were actually more focused on the 
investment bank at that time where we thought there was more 
risk to the bank and to the system. So we did not pursue those 
as we should have.
    Senator Levin. OK. Now, Mr. Sullivan, what did you find in 
your investigation?
    Mr. Sullivan. Certainly in terms of those 2012 exceptions, 
but one thing as part of our report, the first thing we tried 
to do is provide a detailed chronology of SCP, so we went back 
farther in history, back to 2006 in some cases, and I think 
another oversight, a mistake by the OCC, was in the early part 
of 2011. That was a time when the SCP portfolio was creating 
large and sustained limit excesses. So that was a year before 
the 2012 events.
    And so it was--indications are that it was brought up in a 
meeting that the OCC and other regulators had with the bank. 
The bank said it is hard to keep track of excesses, we are 
working on automating the system. But certainly I think even at 
the time then, people would agree we should have followed up on 
those because that was a chance to get a view into the 
portfolio, and I think it could have made a difference.
    Senator Levin. On the EMRs, there were no reports for 4 
months, no complaint from the OCC. Risk breach reports, no one 
acted. I am just wondering. Is this because there is not enough 
people at the OCC to read these reports? How does it happen?
    Mr. Waterhouse. I think our capital markets team, which is 
the team that is responsible for this--we have 10 folks on the 
team, and I think that is a comfortable level for us. We are 
actually going to go up by one. There are a number of 
examinations that we were doing during the first quarter of 
2001. There were a number of other activities that we were 
doing. But there is no excuse for not having somebody look at 
those, and I think we were focused on what we considered to be 
higher-risk activities, and that took our attention away from 
that. I think we have reinforced back-ups and line-ups of 
responsibility, and I think that would have helped even 
something as simple as that.
    Senator Levin. OK. Now the media blitz hits, on April 19, 
2012, after, again, the media broke the story of the whale 
trades, an OCC examiner finally contacts the bank about the 
SCP's many risk breaches, including CS01, if we take a look at 
Exhibit No. 1d.\1\ In an email dated April 19, which is Exhibit 
No. 65 \2\--this is an email from OCC Examiner James Hohl--an 
OCC examiner asked the CIO why it has been in excession by 
1,074 percent and had been in excession for 71 days. That is 
the email, Exhibit No. 65.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1d, which appears in the Appendix on page 514.
    \2\ See Exhibit No. 65, which appears in the Appendix on page 829.
---------------------------------------------------------------------------
    In response, Pete Weiland, senior CIO risk officer who 
testified earlier today, wrote the following: ``We are working 
on a new set of limits for synthetic credit and the current 
CS01 will be replaced by something more sensible and 
granular.''
    Now, this is a 1,000-percent breach for 71 days. Is that an 
adequate answer, to say that ``we are working on a new set of 
limits? ''
    Mr. Waterhouse. No, sir.
    Senator Levin. If the risk limit--and particularly here, by 
the way, the limit had been in place for 3 years, and they did 
not replace it for 3 years. Shouldn't that have been caught by 
the OCC? Shouldn't you have noticed that they did not review 
these limits for 3 years?
    Mr. Waterhouse. Yes, our expectation is that they ought to 
be reviewing limits on an ongoing basis. It does not 
necessarily have to be annually.
    Senator Levin. But it is supposed to be at least once a 
year, isn't it?
    Mr. Waterhouse. According to the bank policy. But our 
expectation is they are reviewed and updated as and when 
needed.
    Senator Levin. So that you do not have a requirement of 1 
year?
    Mr. Waterhouse. No, not that I know of, but our requirement 
would be they have to be appropriate throughout, any time.
    Senator Levin. I know that, but they do not have to be 
automatically reviewed every year under your policy, but it was 
under the bank policy that they would do so.
    Mr. Waterhouse. Not to my knowledge.
    Senator Levin. Not to your knowledge about OCC.
    Mr. Waterhouse. About OCC, correct.
    Senator Levin. OK. So you then were assuming that it was 
going to be updated as needed. Is that correct?
    Mr. Waterhouse. Yes, our expectation was that the limit 
process and approvals and escalation activities were happening 
as they were designed to do.
    Senator Levin. OK. Now, Mr. Sullivan, is this something you 
looked into as well?
    Mr. Sullivan. Sorry. Could you refresh my----
    Senator Levin. Yes, the question of the risk limits not 
being reviewed, is that something that you looked at? Do you 
agree with Mr. Waterhouse that this is something where the OCC 
properly could just rely on the bank to keep updated and that 
did not have to check the box that it would be reviewed every 
year or so, the limits?
    Mr. Sullivan. Yes, I would agree with Scott that our 
expectation is that risk limits are adjusted as necessary. I 
think it is helpful that many banks do have an annual cycle, 
just to make sure that happens. But they should be adequate at 
all times.
    Senator Levin. Now, the second risk limit on this chart is 
known as the value at risk which estimates how much money can 
be lost over the course of a day in ordinary market conditions. 
A mathematical model is used to evaluate how much value an 
investment portfolio is putting at risk, and if that amount 
exceeds the VaR, or the VaR limit established for the 
portfolio, a notice goes out to risk managers who are supposed 
to act.
    In this case, the Synthetic Credit Portfolio breached both 
the CIO and bank-wide VaR limits for several days starting on 
January 16, breached them again for 4 days starting January 24, 
and the breach ended when the CIO rushed through approval of a 
new VaR model.
    When the new CIO 10-Q VaR model was activated on January 
27, it resulted in an overnight 50-percent drop in the CIO's 
VaR results, and we have a chart up here Exhibit 1e\1\ showing 
that drop.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1e, which appears in the Appendix on page 515.
---------------------------------------------------------------------------
    Under the old model, the VaR was $132 million. Again, that 
is how much money was at risk of loss in a 1-day period. Under 
the new model, even though the portfolio had the same risky 
synthetic credit derivatives, its VaR dropped to $66 million, 
not coincidentally way under the VaR limit.
    So, in fact, it was so far under that the traders in London 
were immediately able to increase their risky activities 
without breaching the limit.
    In January, the bank notified the OCC that it was planning 
to change the CIO's VaR model, and the new model would 
immediately lower the CIO's VaR by 44 percent.
    Mr. Waterhouse, did any OCC examiner take note in January 
of the planned change in the VaR model?
    Mr. Waterhouse. We understood that the bank was 
implementing a new VaR model with the intention to bring the 
VaR into compliance with the percentage Basel 2.5 regulations. 
So we know that it was coming in.
    Senator Levin. OK. Now, shouldn't the model--and I will ask 
maybe Mr. Sullivan this question--that produces a 44-percent 
drop in VaR overnight raise a red flag, cause the OCC to 
investigate how that is possible?
    Mr. Sullivan. Yes, and so it is certainly, a gap on the 
part of the OCC and, I agree that it is not just the drop, but 
it is also the fact that it comes at a time when you are 
breaching limits.
    I would say that we have and sometimes do evaluate VaR 
model changes even within CIO. For example, the mortgage 
servicing rights VaR model, it was changed, had a big change, 
and the OCC put people on it, both an examiner and then a 
financial economist from the OCC. So it is frustrating to see 
the gap here. That was a good chance for the OCC to get some 
view of the portfolio.
    Senator Levin. OK. Now, when you mentioned Basel, that was 
supposed to require tougher risk controls, was it not?
    Mr. Sullivan. Basel 2.5, which was not yet finalized, has 
additional components for risk-weighted assets for market risk 
and also heightened expectations for model validation or, more 
generally, model risk management. It also has specific 
direction in terms of what positions are trading positions and 
so should properly go through that model.
    Senator Levin. But its general direction, its general theme 
is to lead to tougher risk controls, is it not?
    Mr. Sullivan. Yes. Higher capital and more stringent and 
direct direction to the banks in terms of their risk 
management, including model risk management.
    Senator Levin. All right. But here we have a case where the 
VaR was dropped by half. I mean, that is not only a red flag; 
that is a pretty bright red flag, is it not?
    Mr. Sullivan. I would say so, so it is something you would 
want to followup on.
    Senator Levin. Well, it would seem to me, given Basel, or 
Basel 2.5, it would be even stranger to see a 44-percent VaR 
drop, and if it were not for the coming of Basel II.
    Mr. Sullivan. Basel 2.5 was not yet in effect.
    Senator Levin. Right.
    Mr. Sullivan. The bank was kind of getting ready for it. We 
had planned--and actually later executed--a review of all 
models associated with Basel 2.5. We did that in the 
summertime. That had been planned already. I think you would 
need to investigate the source. And so sometimes when you see 
these large changes, that can be changes in input data, changes 
in the model calculations, etc. So, definitely we need to take 
a look, and I think that practices have changed at JPMC, and I 
think we hope that this will go across the system. So that now 
all significant, material VaR model changes are reported by the 
bank to the OCC in regular meetings, and that gives us the 
opportunity to pay attention to them.
    Senator Levin. Well, that is looking forward, but, again, 
analyzing what happened here, I will go back to you, Mr. 
Waterhouse. The 44-percent drop in the VaR cannot be explained 
by the fact that they were getting ready for Basel 2.5. That 
does not explain a drop in the VaR. If anything, you would 
expect no drop in the VaR at all as a general matter. Why would 
that take you off the hunt?
    Mr. Waterhouse. Well, in this instance, the drop in VaR, we 
saw it, but as Michael said, the intent was we were going to be 
looking at all the VaR models at a regularly scheduled review 
that we had planned for later on in the summer. So we did not 
act immediately.
    And the other thing, as to your earlier point, the bank did 
not calibrate its VaR limit alongside the drop in that, so that 
clearly does not go along with our expectation.
    Senator Levin. OK. Now, we also learned that the VaR model 
was developed by CIO's Pat Hagan to lower the VaR.
    Mr. Sullivan. If I may, Chairman Levin, one reason they had 
to change the model is because it was missing a key source of 
risk: correlation risk. And the VaR model that was in operation 
in the IB captured that risk because the OCC directed the bank 
to do that. We did not realize that the bank would not also 
apply it to CIO.
    So the change was for Basel 2.5 purposes, but it would not 
explain, the big drop.
    Senator Levin. And did you know that this was developed by 
Mr. Hagan at the CIO in order to lower the VaR? Were you aware 
of that?
    Mr. Sullivan. I knew it was developed by him----
    Senator Levin. No, with the purpose of lowering the VaR.
    Mr. Sullivan. For the purpose of lowering it, no, I have 
not seen that as the stated purpose of it.
    Senator Levin. If you had known that, or if you had known 
that, Mr. Waterhouse, would that have affected you?
    Mr. Waterhouse. Well, I think, at this point we agree that 
we should have looked at the VaR model and what--we are 
implementing changes to make sure that we look at any models 
that do result in a change in the VaR or the risk-weighted 
assets by a certain degree. We will be more forthright on that. 
But this is definitely something that we ought to have looked 
at.
    Senator Levin. Now, when the bank reviewed the new model 
for approval, at that time it said that implementation issues, 
certain issues, had to be worked out before the model was 
activated, and that included a couple things: Developing a 
database which would automatically input trading data into the 
model. The bank did not fix those problems before the model was 
activated, and the consequences we have seen or talked about, 
was that they had manual data entry into spreadsheets every 
trading day, input errors, formula and calculation errors, and 
erroneous VaR results.
    So we have a situation where they used a flawed VaR model 
for a $350 billion portfolio, forced the CIO's quantitative 
expert to do manual data entry into the wee hours of the night, 
used spreadsheets because the bank could not be bothered to 
fund development of an automated database.
    Did the OCC know any about that, what I have just 
described? Mr. Waterhouse, were you aware of any of that, what 
I just described, that they were told by the risk folks, OK, 
you can change your VaR, but you got to have automated data, 
and that, in fact, they did go to automated data? Were you 
aware of that?
    Mr. Waterhouse. No, that there were conditions for the 
approval of the VaR model, no, I did not, which is all the more 
disappointing there because we have been working with the bank 
for a number of years on upgrading its model governance 
processes, and we had been working on it. But this was clearly 
a failure on that, which is why we wound up putting this in our 
Consent Order.
    Senator Levin. Now, the new VaR model was activated on 
January 27, 2012. It produced VaR totals for the CIO that were 
substantially lower than would have been produced by the prior 
model, and I think you may have heard earlier today, as Exhibit 
No. 1e \1\ shows, there is a chart that shows the difference in 
the VaR totals produced by the two models.
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    \1\ See Exhibit No. 1e, which appears in the Appendix on page 515.
---------------------------------------------------------------------------
    Mr. Waterhouse, did any OCC examiner know about that 
difference in the model results at that time?
    Mr. Waterhouse. No, not at that time. I do not think.
    Senator Levin. As far as you know.
    Mr. Waterhouse. As far as I know, yes.
    Senator Levin. Did the OCC test the accuracy of the new 
model?
    Mr. Waterhouse. No, we did not test the accuracy at that 
time.
    Senator Levin. Now, in May 2012, after the media disclosure 
of the whale trades, the bank determined the new VaR model was 
not portraying the SCP's risk accurately. They discarded it, 
and they reinstated the old model, which immediately produced 
higher VaR results for the CIO.
    The story does not end there, though. Four months later, in 
September 2012, the bank switched VaR models a third time. The 
new model, once it was put in place, again substantially 
lowered the CIO's VaR results, this time not by 40 or 50 
percent, but by about 20 percent.
    So, Mr. Sullivan, maybe you can explain this to us. How is 
the same trading activity suddenly determined to be 20 percent 
less risky than the day before?
    Mr. Sullivan. In that particular circumstance, there was a 
change in the way in which they represented risk, and so what 
they had moved to in that summer period was to represent the 
risk at the index level as opposed to breaking it down into 
single-name exposures. They felt that the data at the index 
level was a better quality than they had at the single-name 
level.
    We took a look at that model and noted that it would lead 
to a difference in the treatment of the same instruments within 
the IB where SCP was located at that time. So we decided not to 
allow them to use that for the purposes of regulatory capital.
    Senator Levin. If you would, turn please to Exhibit No. 
46,\2\ and, Mr. Sullivan, this is an email dated 12/22/11. It 
was sent to Ina Drew by the head of the CIO's equity and credit 
trading operation, Mr. Martin-Artajo.
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    \2\ See Exhibit No. 46, which appears in the Appendix on page 778.
---------------------------------------------------------------------------
    In this email, Mr. Martin-Artajo suggests reducing the 
Synthetic Credit Portfolio's risk-weighted assets, by $13 
billion using different tactics. One was achieving a $2 billion 
book reduction through a trading reduction, which is selling 
off assets. But he also suggests something else: A $7 billion 
reduction, half of the $13 billion goal, through so-called 
model reductions. And my question is whether or not under bank 
capital rules, bank models such as what we have talked about 
before, CRM and VaR and stress VaR, are used to calculate the 
RWA. And the OCC has a role in making sure that RWA 
calculations are accurate because they in turn determine how 
much of a capital buffer banks have to maintain.
    Now, without getting into the OCC's evaluation of 
JPMorgan's models, without doing that, what is your reaction 
when you see a bank trying to reduce its RWA, not by selling 
off risky assets but by designing models to produce lower 
numbers?
    Mr. Sullivan. Anytime we see--well, banks would propose 
changes in models for us, and so we would evaluate the quality 
of the model, try to get a sense of how it relates to the risks 
and the business, etc. So we would have to look at the 
specifics of the situation.
    Senator Levin. Well, in general, let me ask you, Mr. Curry, 
what is your reaction to that activity, reducing the RWA not by 
selling risky assets but by designing models in order to 
produce lower numbers?
    Mr. Curry. I think we would have some--or I would have some 
hesitation if it was--the purpose was to subvert the risk-
weighting process.
    Senator Levin. Well, if its purpose is to do exactly what I 
said, would that trouble you?
    Mr. Curry. Initially, yes.
    Senator Levin. And then you mean that you would see where 
the review led to, but your first reaction would be this is a 
troublesome idea and we better look into it? Is that fair?
    Mr. Curry. Yes.
    Senator Levin. OK. Now, the portfolio traded derivatives 
every day. It was a mark-to-market portfolio so that its value 
had to be measured every day. The CIO had to report internally 
within the bank a profit or loss figure for the Synthetic 
Credit Portfolio reflecting the actual value of the book on 
that day compared to the day before.
    The bank now acknowledges that the books basically were 
cooked, that inflated values were assigned to the derivatives 
in the synthetic credit book to minimize its losses. But the 
bank did not catch or admit that wrongdoing for months despite 
many flags.
    Now, one of the flags was an increase in the so-called 
collateral disputes, counterparties saying the values were too 
high. At one point these collateral disputes hit $5690 million.
    The collateral disputes began in March 2012, and picked up 
steam in April. Mr. Waterhouse, did the CIO ever have such 
large disputes before?
    Mr. Waterhouse. Not that I am aware of.
    Senator Levin. And OCC examiners had, in fact, noticed the 
collateral disputes in May, Exhibit No. 73,\1\ went to the bank 
executives and asked about them. Exhibit No. 78 \2\ is an email 
dated June 29, 2012, from an OCC examiner, Michael Kirk, 
describing an earlier call. Here is what he said, and this is 
Exhibit No. 78:
---------------------------------------------------------------------------
    \1\ See Exhibit No. 73, which appears in the Appendix on page 845.
    \2\ See Exhibit No. 78, which appears in the Appendix on page 853.
---------------------------------------------------------------------------
    ``On that first daily call, Mr. Hogan''--that is the bank 
chief risk officer--``discussed that earlier there had been a 
large collateral dispute with their counterparties. I 
questioned him on how it was resolved and he said JPM 
eventually agreed to the counterparties' marks and then paid 
out the near $400 million amount. I then followed with a 
question relating to what I described as mismarked books to 
which Hogan forcefully stated JPM books were not mismarked; 
leaving both Elwyn and me left puzzled over how a collateral 
dispute could be resolved by agreeing to the counterparties' 
marks, without admitting your own marks were incorrect.''
    So as Mr. Kirk's email explains, either the bank's marks 
were right or the counterparties' marks were right, and when 
the bank decided to accept the counterparties' marks, it was 
clear the CIO marks were wrong. But the bank did not 
acknowledge that its marks were wrong until July.
    So, Mr. Sullivan, is it appropriate or a bank to hide its 
head in the sand after it pays its counterparties such a huge 
amount of money on these collateral disputes and insist against 
contrary evidence that it did not have a mismarking problem?
    Mr. Sullivan. Senator, I did not really follow the 
collateral dispute, but, having looked at some of the evidence 
here, then I would share the examiner's skepticism.
    Senator Levin. OK. The bank was concerned enough about the 
marks that its head accountant, the bank's Controller, 
conducted a special review of the SCP book from January through 
April 2012. The Controller released a report on May 10, finding 
that the SCP marks were ``consistent with industry practice,'' 
and that is Exhibit No. 36,\3\ and we had quite a conversation 
about that earlier today. So this is a report--we call it the 
May 10 report--where the bank says that what it did was 
consistent with industry practice.
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    \3\ See Exhibit No. 36, which appears in the Appendix on page 687.
---------------------------------------------------------------------------
    Now, the facts that were described in that report to me 
paint a very disturbing picture of a derivatives valuation 
process that was highly open to manipulation, resulted in some 
mighty hard to justify numbers that, in fact, were discredited 
the very next month when the bank acknowledged the mismarking.
    For instance, that May 10 report documented that SCP 
pricing practices changed dramatically over the course of the 
first quarter. In January 2012, prices were marked near the 
midpoint of the daily price range, which is how derivatives are 
usually valued.
    In January, only 2 of the 18 prices noticeably deviated 
from the midpoint. In February, 5 out of 18 prices noticeably 
deviated from the midpoint prices. And in March, 16 out of the 
18 prices were not even near the midpoint. They were at the 
extreme edge of the daily price range.
    The Controller collected and presented that data in the 
appendices of the report, but she made no mention of what had 
happened. She simply concluded that, ``The CIO valuation 
process is documented and consistently followed period to 
period.''
    Now, is it not relevant that in a period where there are 
growing problems and growing losses that suddenly there is a 
huge change in the way the prices are marked from being 
generally at the midpoint, as was true with the investment 
bank, and moved all the way over to the extremes in order to 
reduce the apparent loss on the books? Is that not a troubling 
set of facts? Mr. Curry.
    Mr. Curry. Yes, it is, Senator.
    Senator Levin. Now, there an industry practice on this 
question? I mean, shouldn't you stick to your process and, if 
you are going to change it, have some rationalization for 
changing it? Mr. Waterhouse?
    Mr. Waterhouse. I would say our expectation is that your 
re-valuation process has to be consistently applied day after 
day after day, and it should not be adjusted without going 
through a rigorous process to justify any changes.
    Senator Levin. Is it not obvious what was happening here, 
that these prices were being changed in order to reduce the 
loss on the books?
    Mr. Waterhouse. It appears so, yes, sir.
    Senator Levin. Their report noted that the SCP book had 
reported internally within the bank losses which, at the end of 
the first quarter, were $719 million. But if the midpoint 
prices had been used, the report noted that an additional $512 
million in losses would have been recorded. That is Exhibit No. 
36.
    If the $512 million were added to the $719 million, the 
reported losses would have totaled $1.2 billion, or 70 percent 
more than the actual--or the losses that were reported. Is it 
not that kind of a variance that leads to potential abuse, Mr. 
Waterhouse?
    Mr. Waterhouse. Yes, absolutely. And it is important for us 
as the regulator to know what the actual market is and be 
informed on a timely basis.
    Senator Levin. Do our largest banks generally go back and 
forth like that, do you know, Mr. Curry?
    Mr. Curry. I would have to defer to Mr. Waterhouse on that, 
but, that type of activity is cited an unsafe and unsound 
activity in our cease-and-desist order, and it is a focus of 
the affirmative provisions of the order that require corrective 
action.
    Senator Levin. Do you have any comment on that, Mr. 
Waterhouse?
    Mr. Waterhouse. Without speaking to the other banks, 
because I am not close to them anymore, but, again, the 
expectation is that they have a rigorous valuation process that 
is independent and provides credible prices to it. And, again, 
as the Comptroller just mentioned, as this collateral dispute 
became known, that is about when we started our evaluation work 
and our supervisory activities that culminated in a supervisory 
letter with a number of MRAs and the consent order that 
requires the bank to straighten this out.
    Senator Levin. Here is one of the differences that I had, 
one of the many differences that I had with the bank earlier 
today.
    An OCC capital markets examiner told us that it was clear 
from the numbers that the CIO was marking prices at the edge of 
``what they could get away with,'' and they were booking 
``fictitious profits.''
    Now, it seems to me that the numbers tell the story, just 
as the OCC examiner told us, and that you do not have to have 
subjective statements by the person making the marks he viewed 
them as bizarre. I mean, that is a subjective comment, and the 
bank was saying, well, until they heard the record of that 
person and their employee saying that, they could not tell 
anything from the marks themselves.
    And so I just want it real clear. Is it not true that the 
marks themselves, when you see that kind of a shift in the way 
they are made at the time they are made, when the losses are 
piling up, that those numbers themselves tell a story about 
possible mismarking? Mr. Waterhouse.
    Mr. Waterhouse. I would say that is something that is very 
troubling. On the face of it, I would have to perform our own 
investigation into that to make sure of that. But as you have 
prices that are being delivered that vary and are not 
consistently applied, that is very troubling.
    Senator Levin. And do you think that this kind of practice 
is allowed by the GAAP? Do you have any knowledge of that? Can 
you comment on that? Is it possible that the accounting 
principles allow this kind of a deviation to happen?
    Mr. Waterhouse. I actually cannot speak to GAAP, but I 
would expect that their standards would be that you have to 
have a consistent and rigorous and independent process.
    Senator Levin. Would you do this for the Subcommittee, Mr. 
Curry? Would you take this set of facts up with GAAP and what 
the bank said today about this is consistent with accounting 
practices, what happened here?
    Mr. Curry. Yes.
    Senator Levin. And what happened here is factually clear, 
and they acknowledge what happened here. But they just say it 
is consistent with accounting practices. I cannot believe that 
what happened here on the objective marks before they got to 
any of these subjective comments on record by their own people 
who did the marking, who raised questions but did not pass 
those problems along at the time, but the marks were there.
    Could you do something for this Subcommittee and raise with 
GAAP what happened here, objectively, before we had the records 
of the traders' comments from London? Objectively on these 
marks at this time, there were major losses occurring to reduce 
those losses on the books, differences on the books as to what 
happened in terms of the losses shown according to GAAP, are 
these consistent, is what they did is consistent with 
accounting practices? Would you do that?
    Mr. Curry. I would be happy to have our chief accountant 
look into it and report back to you, Mr. Chairman.
    Senator Levin. Thank you.
    Again, the CIO traders that were directly involved in 
marking this book called their marks ``idiotic,'' and that is 
surely true. But, you cannot wait for the person doing the 
marking to say that his marks are idiotic when the marks on 
their face show a real deviation from a normal practice--and, 
by the way, a total deviation from their own investment bank's 
practices--and at a time when the losses are piling up and just 
simply say this is consistent with accounting principles. And 
so we appreciate that very much, Mr. Curry.
    Mr. Curry. I would just add, we would view the GAAP 
accounting standards as a baseline. We are looking for a much 
higher standard with our institutions, particularly larger 
institutions. So merely meeting a regulatory or accounting 
standard is not always sufficient.
    Senator Levin. I welcome that and I am glad to hear that, 
but I say even if you take a low baseline, I cannot believe 
general accounting practices allow this to happen. I just have 
a lot of trouble--I am not an accountant. I just have a lot of 
trouble believing that you have to get a smoking gun of the guy 
doing the markings saying, hey, I cooked the books--when you 
have a situation that is this clear, with this kind of a record 
of marks suddenly deviating from a median, from the mid, at a 
time when losses are piling up, and where the purpose is 
clearly to reduce the amount of those losses, that can be 
accepted as a general accounting principle. So I am glad that 
you have a higher standard, but I cannot believe this meets 
even a lower standard.
    Mr. Curry. We will be happy to look into that.
    Senator Levin. Thank you.
    If you take a look at Exhibit No. 32c,\1\ this is a 
transcript of a telephone call between Ina Drew and the head of 
the CIO's credit trading operation, Javier Martin-Artajo. And 
he was in the London office. He directly influenced the marks. 
It is not dated, but it probably took place in April.
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    \1\ See Exhibit No. 32c, which appears in the Appendix on page 659.
---------------------------------------------------------------------------
    I do not know if you heard this part of our conversation 
with Ms. Drew about this transcript, and they are talking about 
what marks to show for the SCP that day, and she says at one 
point--did you hear this earlier this morning? Did you three 
happen to hear this conversation about tweaking?
    Mr. Curry. I did not hear it personally.
    Senator Levin. Did you hear this, Mr. Waterhouse?
    Mr. Waterhouse. No.
    Senator Levin. Then let me ask you: Ms. Drew is giving 
guidance to Mr. Martin-Artajo, and he is basically saying it 
would be helpful--telling Mr. Martin-Artajo, it ``would be 
helpful . . . to start getting a little bit of that mark 
back.''
    ``If appropriate, so you know, an extra basis point you can 
tweak at whatever it is I'm trying to show, with demonstrable 
data . . .''
    She said before that it is all fine to be conservative, but 
it would be ``helpful . . . to start getting a little bit of 
that mark back,'' to ``tweak'' the mark.
    What do you think of that, Mr. Waterhouse?
    Mr. Waterhouse. I think the bank needs to provide true, 
accurate, independent marks every day.
    Senator Levin. And the person doing the marks gets the hint 
from the head of the department, it would sure be ``helpful'' 
if you could ``tweak'' that mark, that is inconsistent with 
what the bank is required to do?
    Mr. Waterhouse. Yes, I think that is something that we 
would definitely not condone.
    Senator Levin. Now, the rules--I think you have already 
commented on this, Mr. Curry, but let me make sure. We have 
shown a derivative valuation process which is to open to 
manipulation. It tempts bankers to manipulate derivative values 
to increase their profits or at least minimize the losses. And 
so that is something which is intolerable, and I think we have 
shown that is what happened here. But this is our 
recommendation:
    We recommend that the OCC tell banks to use independent 
pricing services to remove the temptation from their own 
employees to tweak marks. We also recommend that banks have to 
disclose when their derivative values deviate from midpoint 
prices and explain why.
    What is your reaction to that recommendation?
    Mr. Curry. As I stated in my opening remarks, we support 
this recommendation, and we are looking at how to best 
implement it at the OCC and with our other Federal banking 
agencies as well.
    Senator Levin. Thank you. Now, after these whale trades 
became known to regulators and the public, and the media 
started to report on April 6, JPMorgan had an earnings call. It 
was Mr. Braunstein who made a number of statements about the 
Synthetic Credit Portfolio, and I would like to ask you about 
two of those statements. This is Exhibit No. 94,\1\ and this is 
a transcript of the April 13 earnings call, and his statements 
about the Synthetic Credit Portfolio are on page 7, and we have 
made it easier to discuss them, so we have listed the key 
statements in Exhibit No. 1f \2\ in your exhibit book, and that 
is what is up here, and that is what is up here to my right.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 94, which appears in the Appendix on page 927.
    \2\ See Exhibit No. 1f, which appears in the Appendix on page 516.
---------------------------------------------------------------------------
    Mr. Braunstein said--now, he is talking about the whale 
trades, and he is saying, ``I would add that all of those 
positions are fully transparent to the regulators. They review 
them, have access to them at any point in time, get the 
information on those positions, and on a regular and recurring 
basis as part of our normalized reporting.''
    Mr. Waterhouse, is that true?
    Mr. Waterhouse. That is not true.
    Senator Levin. Regulators did not ``get the information'' 
on those positions on a regular basis, did they?
    Mr. Waterhouse. No, we did not; not until May after they 
started reporting daily did we get the information.
    Senator Levin. All right. In fact, wasn't it a longstanding 
practice for the bank not to give individual position data to 
the OCC unless there was a special request?
    Mr. Waterhouse. We would ask for position data only in 
certain instances. What we wanted to do is get more aggregated 
risk information that would be by desk and by portfolio.
    Senator Levin. All right. So it had to be a special 
request.
    Mr. Waterhouse. For position data, yes.
    Senator Levin. Right. It would not come on a routine basis.
    Mr. Waterhouse. No. Way too detailed.
    Senator Levin. Well, too detailed but you did not get it. 
He was telling the public you did get it, and you are saying 
you did not get it, it would be too detailed for you.
    Mr. Waterhouse. We did not get it on a----
    Senator Levin. A regular, routine basis----
    Mr. Waterhouse [continuing]. Regular basis.
    Senator Levin. Is that right? I did not mean to interrupt 
you. Is that right?
    Mr. Waterhouse. Yes, sir.
    Senator Levin. The second statement by Mr. Braunstein 
involves the issue of whether the SCP was a risk-reducing 
hedge. I think today they acknowledged it was not a hedge. 
Would you agree, Mr. Waterhouse, it was not a risk-reducing 
hedge?
    Mr. Waterhouse. I think particularly when you look at 2012, 
it was not a hedge at all.
    Senator Levin. And so on April 13, Mr. Braunstein said, 
``We also need to manage the stress loss associated with the 
portfolio, so we have put on positions to manage for a 
significant stress event in Credit. We have had that position 
for many years.'' And would you agree that they sure as heck 
did not have it in 2012?
    Mr. Waterhouse. They did not have it in 2012.
    Senator Levin. And the bank here was making decisions about 
how to invest depositors' funds, right?
    Mr. Waterhouse. Yes, sir.
    Senator Levin. The excess depositors' funds.
    Mr. Waterhouse. Yes.
    Senator Levin. The words ``to manage a significant stress 
event in Credit,'' does that in effect mean that they put on 
positions to hedge? Is that what that means?
    Mr. Waterhouse. I would interpret that to mean to put that 
position on with the expectation that there may be an economic 
recession and the bank would take credit losses over the course 
of time. It would be supposedly designed to offset those credit 
losses.
    Senator Levin. And, therefore, would be a hedge against 
those credit losses.
    Mr. Waterhouse. In that construct, yes, sir.
    Senator Levin. And so when he said that on that day, when 
you read that, is that the way you interpret it, that he was 
saying that this was a hedge against a significant stress 
event? ``We have put on positions to manage for a significant 
stress event in Credit.'' Is that what you would understand him 
to be saying in common parlance?
    Mr. Waterhouse. In just reading the words on the board up 
there, that is the way I would interpret it.
    Senator Levin. That was in a public call that was made, 
that Mr. Braunstein made on April 13. That was a misstatement, 
misrepresentation, and flat out falsity, as far as I am 
concerned. But we are going to let others judge that.
    If you look at Exhibit No. 1c,\1\ this chart tracks the 
SCP's cumulative profits and losses from January through April 
2012 as the bank reported them at the time. Those profits and 
losses were reported internally. They were not disclosed 
publicly, so this is information known only to the bank. And I 
think you have already said that the OCC did not receive daily 
CIO profit and loss data. Right, Mr. Waterhouse, you said that?
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    \1\ See Exhibit No. 1c, which appears in the Appendix on page 513.
---------------------------------------------------------------------------
    Mr. Waterhouse. Yes, specifically we did not receive daily 
SCP, detailed daily SCP information from the bank.
    Senator Levin. And how about CIO? Did you get the daily 
profit/loss on CIO?
    Mr. Waterhouse. We did not get from the CIO daily P&L, 
detailed daily P&Ls. There was some risk limit reports that we 
got elsewhere in the bank that had some information on the CIO 
in aggregate.
    Senator Levin. Was that daily?
    Mr. Waterhouse. Yes, we did get the daily risk limit 
reports, yes, sir.
    Senator Levin. Did you get the profit/loss data on the CIO 
daily?
    Mr. Waterhouse. In aggregate, there was a stop-loss 
utilization limit that contained a line item that showed, I 
believe, the current utilization against that limit.
    Senator Levin. OK. Is that the same as profit and loss 
data, do you know?
    Mr. Waterhouse. That was coming off----
    Senator Levin. Was that the same, what you just described, 
the same as profit/loss data?
    Mr. Waterhouse. It would not be the standard P&L data that 
we would be looking for such as what we got out of the IB. But 
from my understanding, it was an aggregate mark-to-market of 
the CIO, so that would be everything that was in the CIO that 
was marked to market going against the limit.
    Senator Levin. All right. So it was not what would be 
generally described as profit/loss data.
    Mr. Waterhouse. No.
    Senator Levin. And the OCC in any event did not get daily 
profit and loss data for the SCP.
    Mr. Waterhouse. That is correct.
    Senator Levin. Now, I kind of interrupted my own flow here. 
Exhibit No. 1c,\1\ it tracks the SCP's cumulative profits and 
losses from January to April 2012. Those profits and losses 
were reported internally. They were not disclosed publicly. So 
this was information known only to the bank, and it was not 
disclosed to the OCC either. The downward-sloping line 
represents increasing losses, and would you agree that this 
shows as a matter of fact that the Synthetic Credit Portfolio 
was not reducing the bank's risks but was increasing them?
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    \1\ See Exhibit No. 1c, which appears in the Appendix on page 513.
---------------------------------------------------------------------------
    Mr. Waterhouse. It was a very rapid increase in losses.
    Senator Levin. OK. And Exhibit No. 1a \2\ shows how the SCP 
tripled in size in the first quarter in 2012 from $51 billion 
to $157 billion. In March, the CIO traders went on a buying 
spree engaging in several huge transactions that added $40 
billion in long positions to the portfolio, which the OCC has 
characterized as ``doubling down'' in Exhibit 78.\3\ Is that 
correct?
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    \2\ See Exhibit No. 1a, which appears in the Appendix on page 511.
    \3\ See Exhibit No. 78, which appears in the Appendix on page 853.
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    Mr. Waterhouse. That is correct.
    Senator Levin. Do you know why your examiner would have 
said it was doubling down? That is a gambling term, isn't it?
    Mr. Waterhouse. That is a gambling term, and as our 
examiner looked at in here, it was position data. We made a 
request. We got some position data. And as we saw what happened 
over that period of time, we did see this rapid increase in 
positions. And I think the examiner who made that comment, his 
thinking there was that based on the information that he had, 
that rather than try to just get out of the positions, the 
trader was trying to take advantage of price anomalies so that 
he could profit from it.
    Senator Levin. Would you call that a high-risk approach?
    Mr. Waterhouse. This is definitely a high-risk approach.
    Senator Levin. OK. So, Mr. Waterhouse, take a look, if you 
would, at Exhibit No. 50.\1\ Now, that is an email from Pat 
Hagan, the top quantitative analyst at the CIO, and it is a 
March 21, 2012, email. The subject line is ``Optimizing 
regulatory capital,'' and on the top of page 2, Mr. Hagan 
writes, ``. . . we should treat the regulatory capital 
calculation as an exercise of automatically finding the best 
results of an immensely arbitrary and complicated formula.'' 
``Optimizing'' here means to produce the lowest possible RWA.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 50, which appears in the Appendix on page 788.
---------------------------------------------------------------------------
    Now, does the OCC intend that its regulatory capital rules 
be implemented by the banks that it regulates in that way?
    Mr. Waterhouse. No. I think the objective here is to have 
clear and consistent calculations on the RWA without 
optimizing, but having pure clear numbers that are consistent 
with the rule.
    Senator Levin. To arrange things, in other words, to 
produce the most accurate RWA.
    Mr. Waterhouse. Yes, absolutely. Consistent with the rule. 
The Basel rule provides the framework for calculations, and 
this work has to be consistent with that.
    Senator Levin. OK. Now, Mr. Hagan proposed distributing the 
CIO synthetic credit derivatives into a couple books to 
``optimize regulatory capital.'' You have indicated that this 
is not appropriate. The bank testified that ultimately they did 
not agree to Hagan's proposal to divide the portfolio in that 
way. The bank only agreed to let him do it once. Is that OK? Is 
that like a one-bite rule for a dog?
    Mr. Waterhouse. It has to be a consistent process applied 
consistently.
    Senator Levin. But if you allow them to use the optimizing 
approach once, that is OK with you?
    Mr. Waterhouse. I did not allow that.
    Senator Levin. No, I am not saying--well, let me ask Mr. 
Curry. Does the OCC allow optimization one time and then from 
there on, hey, quit it?
    Mr. Sullivan. What I would say is that Basel 2.5 rules are 
fairly clear about the distinction between the Incremental Risk 
Charge and the Comprehensive Risk Measure. And so it has strict 
requirements for banks to identify what are called correlation 
trading portfolios, and then the CRM should be applied 
consistently to that. So in the rule, both in its actual 
wording and I think within the spirit of the rule, you look at 
the business purpose of that portfolio. So if it qualifies as a 
correlation trading portfolio, then it would go into CRM. It is 
not that you would pick what goes into CRM based on other 
purposes. The regulation is very clear about the requirements 
that need to be met, and they do not include optimization.
    Senator Levin. And optimization is not authorized by the 
OCC even once.
    Mr. Sullivan. That is not a legitimate purpose for 
designing a risk-weighted assets calculator.
    Senator Levin. All right. So you are not allowed to do it 
once and then quit it. You are told, ``Do not do that at all.''
    Mr. Sullivan. The rule tells you----
    Senator Levin. Follow the rule----
    Mr. Sullivan [continuing]. Follow the rules----
    Senator Levin [continuing]. The first time.
    Mr. Sullivan. Yes. You follow the rules.
    Senator Levin. You are not allowed to not follow the rule 
once and then follow the rule from the second time on.
    Mr. Sullivan. No.
    Senator Levin. You are supposed to follow the rule right at 
the beginning.
    Mr. Sullivan. Definitely, yes.
    Senator Levin. OK. Now, these regulatory capital 
requirements are one of the most important tools that we have 
to ensure the safety and soundness of our financial system. Is 
that not true? Mr Curry, would you say that regulatory capital 
requirements are one of the most important tools that we have 
to ensure the safety of our institutions?
    Mr. Curry. Absolutely, and I think that has been more than 
borne out by our experience during the global financial crisis.
    Senator Levin. Now, Mr. Curry, let me go over the 
recommendations that we have made in our report, our so-called 
Levin-McCain recommendations, and get your reaction to the ones 
that you have not reacted to already.
    The first recommendation is to make it clear that when it 
comes to high-risk derivatives, Federal regulators need to know 
what the major banks are up to. We recommend requiring banks to 
identify all internal investment portfolios that include 
derivatives over a specified notional size, required periodic 
reporting on derivative performance, and conduct regular 
reviews to detect undisclosed derivatives trading.
    What is your reaction to that?
    Mr. Curry. We would agree generally with the recommendation 
that better data is necessary to monitor compliance and 
potential risk exposure.
    Senator Levin. OK. The next recommendation is: In order to 
try to stop any games that might be played by banks trying to 
recast proprietary bets as hedges, we recommend that banks be 
required to create contemporaneous documentation that 
identifies the assets being hedged, how the derivatives trade 
reduces the risk associate with those assets, and how the bank 
tested the effectiveness of its hedging strategy in reducing 
risk.
    What is your reaction to that one?
    Mr. Curry. Again, we agree in general principle with the 
recommendation, and actually this is an area of focus in our 
interagency rulemaking with the Volcker Rule.
    Senator Levin. OK. Now, we have already asked you about 
independent pricing services and requiring banks to disclose 
valuation disputes with counterparties. I think we have already 
covered that recommendation.
    Next, when risk alarms go off, we recommend that banks and 
your agency investigate the breaches and take action to reduce 
risky activities. Would you agree with that?
    Mr. Curry. Yes, Senator.
    Senator Levin. On the issue of model manipulation, we 
recommend that regulators require banks to disclose to you when 
their models produce substantially lower numbers than the prior 
model, investigate the new model for evidence of model 
manipulation, and impose heavy penalties for any misconduct.
    What is your reaction to that?
    Mr. Curry. We believe that would be a sound supervisory 
response, and it would be something that we would look to 
incorporate in our examination procedures as well as our 
training for personnel.
    Senator Levin. Thank you.
    Now, 3 years ago, Congress enacted a law to shut down high-
risk proprietary betting that uses federally insured deposits 
or by systemically important financial institutions. We 
recommend that regulators finally issue the long-delayed final 
rule implementing Merkley-levin provisions of Dodd-Frank, which 
are known as the Volcker Rule.
    Would you agree? And I am not going to ask you about what 
the final words would be, but do you agree with what I said, 
that it is time to get that done? And can you give us a 
prediction as to when the rule is going to be finalized?
    Mr. Curry. I think it is imperative that we adopt an 
interagency rule on the Levin-Merkley provision, or the Volcker 
Rule. It is something that the OCC and I are committed to doing 
as quickly as possible, and I believe that our experience with 
JPMorgan's CIO office has proven to be an invaluable resource 
to that effort.
    Senator Levin. Thank you.
    And, finally we recommend that regulators finalize the 
pending rules to impose stronger capital requirements for 
banks, especially in the area of derivatives trading. And when 
do you think that rule is going to be finalized on the capital 
requirement?
    Mr. Curry. To the extent that it is not addressed by the 
higher capital requirements to the market risk rules, we would 
look to see that as part of the Basel III rulemaking that is 
pending.
    Senator Levin. Mr. Curry, you took office at Comptroller 
not even a year ago, just as these whale trade stories broke, 
and since then the OCC has conducted an intensive review of the 
whale trades. Were you surprised at the level of the problems 
uncovered?
    Mr. Curry. I was certainly taken aback by the press stories 
and, as we delved into it, how complex and serious the 
situation was.
    Senator Levin. Have you given thought as to how to tackle 
the problem of detecting 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 that these do not 
create a major problem down the line?
    Mr. Curry. I think this is an area where we need to do 
considerably more work. I think we have already learned through 
some of the work 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.
    Senator Levin. We have gone into the concerns which we have 
had 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 would like to ask 
whether you found safety and soundness problems in the 
following areas during your inquiries?
    First, have you found safety and soundness problem in the 
CIO's derivative valuation controls?
    Mr. Curry. Yes, and that is a provision of our order as 
well.
    Senator Levin. Have you found safety and soundness problems 
in the CIO risk management?
    Mr. Curry. Yes.
    Senator Levin. Have you found safety and soundness concerns 
in the VaR model risk management?
    Mr. Curry. Yes.
    Senator Levin. Have you found safety and soundness problems 
in the model approvals and the RWA?
    Mr. Curry. Yes.
    Senator Levin. And have you found them in JPMorgan's 
management?
    Mr. Curry. Yes, we have.
    Senator Levin. Would you agree that the whale trades were 
not just a problem caused by rogue traders but were a problem 
of management weaknesses at the bank?
    Mr. Curry. We identified serious risk management weaknesses 
throughout the entire Firm, and they became particularly 
evident in the CIO office.
    Senator Levin. Am I correct that the next step relative to 
the cease-and-desist order is to evaluate compliance when the 
time comes and to then make decisions as to any penalties?
    Mr. Curry. That is an accurate statement, Senator.
    Senator Levin. Well, we thank our witnesses here, and we 
have seen today a very disturbing picture which raises 
questions not just about JPMorgan but about derivatives in 
general, how they are valued, disclosed, how they are disclosed 
or not disclosed, how they are managed to limit risk or not 
managed to limit risk.
    The OCC has already lowered JPMorgan's management rating. 
They have issued a supervisory letter--more than one. The OCC 
has issued a cease-and-desist order, but I believe, Mr. Curry, 
that you and your colleagues have a challenge to get America's 
biggest bank back on the straight and narrow and to 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.
    And so we thank you for your work. We again want to express 
our appreciation to you, Mr. Curry, for making the effort you 
did to get back here for this hearing. And we stand adjourned.
    [Whereupon, at 3:41 p.m., the Subcommittee was adjourned.]



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