The London Whale, an oral history It's history, JPMorgan Task Force Report style. Or rather, it's a mostly oral history, lacking in technical detail, and it's not all independently verified. Oh, and heavily reliant on one guy. All of which is prominently outlined in this footnote (to which we apply our emphasis): 2 The description of "what happened" is not a technical analysis of the Synthetic Credit Portfolio or the price movements in the instruments held in the Synthetic Credit Portfolio. Instead, it focuses on the trading decision-making process and actions taken (or not taken) by various JPMorgan personnel. The description of activities described in this Report (including the trading strategies) is based in significant measure on the recollections of the traders (and in particular the trader who had day-to-day responsibility for the Synthetic Credit Portfolio and was the primary architect of the trades in question) and others. The Task Force has not been able to independently verify all of these recollections. Well, as remembered then, the higher-ups at JPMorgan wanted to reduce risk-weighted assets in the New Year and also they had a "more positive view of the economy." As such, there was a desire to rebalance the CIO's synthetic credit portfolio accordingly, which meant moving it from the net short position it had at the end of 2011 - which had been profitable with Dynegy and American Airlines" parent, AMR Corp, defaulting. Initially, implementing the shift meant taking trades off. But this was proving expensive so there was a change in tack: In response, Ms. Drew said that the team might have additional flexibility on the RWA reduction mandate, and that the team should be more sensitive to the profit-and-loss impact of their trading activities. Thereafter, that trader informed another of the traders who managed the Synthetic Credit Portfolio that he was not to worry as much about RWA reduction, and that he should instead focus on profits and losses. Around this same time, this latter trader was also directed to ensure that the Synthetic Credit Portfolio was well-positioned for future corporate defaults. It's a bit like playing Telephone! Thereafter the investment grade position was built up. The traders continued to add to the investment-grade long positions in February. The concept of "defending" their positions may have played a role in these transactions. The build-up (in the entire market, not just JPMorgan): The other side of the trade: The traders also at this time began to add substantial high-yield short positions. There had been talk of these being tranche positions, but they could also have been in indices. But why arrange the portfolio like this? The traders hoped that the combined effect of these additions would allow them, among other things, to earn premiums (from the addition of the long positions); position the Synthetic Credit Portfolio to earn revenues in the event of corporate defaults (from the short positions); and potentially prevent RWA from substantially increasing (from a combination of both). Spoiler alert*** -> It didn't work. By March 23, Ina Drew halted trading in the portfolio. By the end of the first quarter, losses stood at $718m. Analyses were given to senior management. The traders claimed... (drumroll) ... mean reversion! These analyses concluded, in broad terms, that the Synthetic Credit Portfolio was generally "balanced," that the market was currently dislocated, and that mark-to-market losses were temporary and manageable. One of the traders in particular expressed confidence that mark-to-market prices in the Synthetic Credit Portfolio would "mean revert."9 Sure, Shamu, yeah. Totes. Anyhow, from the property of "mean reversion" to the CEO Jamie Dimon's "tempest in a teapot" on the April 13th earnings call. Triumph of hope over experience? Footnote 9, just in case: 9 In this context, the phrase "mean revert" refers to the potential for the prices or correlations of certain instruments held in the Synthetic Credit Portfolio to return to their historic average relationships to other instruments. The losses mounted, but the marks on the portfolio were reviewed and: ...the Firm concluded that its marks at March 31 for the Synthetic Credit Portfolio complied with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). This conclusion was reached in consultation with the Firm's outside auditors, PricewaterhouseCoopers LLP ("PwC"). This didn't stick though. By mid-May the Task Force was set up to review the trades. At that point: In the course of the Task Force's ensuing work, it became aware of evidence - primarily in the form of electronic communications and taped conversations - that raised questions about the integrity of the marks in the Synthetic Credit Portfolio in March 2012. After consulting with PwC, the Firm concluded that it was no longer confident that the March 31 marks reflected good-faith estimates of the fair value of all the instruments in the Synthetic Credit Portfolio. Whoops. Related link: FT Alphaville's JPM Whale Watching Tour