JPMorgan Chase London Whale B: Derivatives Valuation

Yale Program on Financial Stability Case Study 2014-2B-V1

14 Pages Posted: 18 Mar 2015 Last revised: 24 Apr 2018

See all articles by Arwin G Zeissler

Arwin G Zeissler

Yale University - Yale Program on Financial Stability

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: December 1, 2014

Abstract

After consistently producing positive results through 2011, the JPMorgan Chase (JPM) traders who oversaw the bank’s Synthetic Credit Portfolio (SCP) grew alarmed by a consistent string of losses beginning in January 2012. (The SCP was maintained by JPM to help hedge default risk and was the source of the 2012 London Whale trading loss.) To minimize the losses reported to their superiors until such time that market prices hopefully turned in their favor, the SCP traders began valuing their largest derivative positions in a manner that was not consistent with Generally Accepted Accounting Principles (GAAP) and JPM policy. The fair values recorded by the SCP traders were reviewed by the Valuation Control Group, as required by banking regulators, and by JPM’s Controller, but neither review raised any objection. However, after the JPM Task Force that investigated the 2012 London Whale incident uncovered evidence that the SCP traders had not estimated fair values in good faith, the bank restated its 1st quarter 2012 earnings on July 13, reducing consolidated total net revenue by $660 million (2.5%), which in turn reduced after-tax net income by $459 million (8.5%).

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Zeissler, Arwin G and Metrick, Andrew, JPMorgan Chase London Whale B: Derivatives Valuation (December 1, 2014). Yale Program on Financial Stability Case Study 2014-2B-V1. Available at SSRN: https://ssrn.com/abstract=2577854 or http://dx.doi.org/10.2139/ssrn.2577854

Arwin G Zeissler

Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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