Jp Morgan Chase & Co. · NYSE:JPM
Jp Morgan Chase & — Corporate Update (July 2012)
24 slides from Jp Morgan Chase &'s corporate update, Jul 13, 2012
Slide 1: CIO Task Force Update
July 13, 2012 C I O T A S K F O R C E U P D A T E
Slide 2: Task force scope
Task force scope Management review and assessment of circumstances surrounding CIO losses Assisted by outside counsel Comprehensive fact-gathering effort Conducted numerous interviews with JPMC personnel, including Firm Management, CIO Management, other CIO personnel, Risk and other corporat
Slide 3: Summary observations
Summary observations CIO judgment, execution and escalation in 1Q12 were poor Level of scrutiny did not evolve commensurate with increasing complexity of CIO activities CIO Risk Management was ineffective in dealing with Synthetic Credit Portfolio Risk limits for CIO were not sufficiently gr
Slide 4: Historical context of Synthetic Credit Portfolio
Principal objective of Synthetic Credit Portfolio was to provide benefit in a stressed credit environment Intended to provide a partial hedge to credit exposures Included long positions to reduce costs of credit protection Adjusted over time to reflect changes in macro views Synthetic Cred
Slide 5: 1Q12 strategy and resulting exposures
In late 2011, Firm Management instructed CIO to reduce Risk Weighted Assets (RWA) as part of annual budgeting process 1Q12: CIO intended to reduce short credit position and lower RWA, while maintaining benefit from individual corporate defaults and optimizing P&L Increased net long position on
Slide 6: Rapid growth in portfolio size and complexity increased risk
Rapid growth in portfolio size and complexity increased risk Facts Gross long positions Increase in portfolio size (notional) Dec 30 Mar 30 3x Net notionals Gross short positions Size: Complexity: Increase in tranche positions (notional) Increase in off-the-run indices (notional) 2x 3x Net notionals
Slide 7: Key events through the build-up of positions
Certain CIO-level risk limits exceeded during 1Q12 Related to credit spread widening Addressed within CIO New Synthetic Credit VaR model approved by independent Model Review Group in late January In response to VaR limit excessions, Firm Management approved temporary increase of firmwide V
Slide 8: Key events between position build-up and 1Q12 earnings release
Losses increased in late March Heightened external market visibility of CIO positions including news reports in early April Firm Management requested review of Synthetic Credit Portfolio Head of CIO conducted review with regular updates to CFO and CRO CIO estimated 2Q12 probable P&L range
Slide 9: Key events leading up to new CIO leadership and Management Review
Late April: Increase in losses prompts detailed review by Corporate Risk Management Senior Corporate Risk Management team began on site, bottom-up engagement on April 27 and provides daily updates to Firm Management Corporate Risk Management assumes control of Synthetic Credit Portfolio on Apr
Slide 10: Facts leading to observations
Facts leading to observations Observations CIO judgment, execution and escalation in 1Q12 were poor Level of scrutiny did not evolve commensurate with increasing complexity of CIO activities CIO Risk Management was ineffective in dealing with Synthetic Credit Portfolio Risk limits for CIO we
Slide 11: CIO judgment, execution and escalation in 1Q12 were poor
CIO judgment, execution and escalation in 1Q12 were poor Observations Trading approach was poorly designed, vetted and executed Poor trading judgment in 1Q12 CIO Management did not set clear objectives, properly vet the trading strategy or sufficiently examine underlying positions and correlat
Slide 12: Level of scrutiny did not evolve with CIO complexity
Level of scrutiny did not evolve commensurate with increasing complexity of CIO activities Observations CIO’s mandate and historical performance may have contributed to less rigorous scrutiny of CIO Perception that CIO risks were primarily related to managing Firm’s investment portfolio Track
Slide 13: CIO Risk Management was ineffective
CIO Risk Management was ineffective in dealing with Synthetic Credit Portfolio Observations CIO Risk Management group faced challenges Transitions in key roles and lack of adequate resources Lack of robust Risk Committee structure Nonetheless, CIO Risk Management failed to meet expectations
Slide 14: Risk limits in CIO were not sufficiently granular
Risk limits in CIO were not sufficiently granular Observations No specific risk limits for Synthetic Credit Portfolio Portfolio was subsumed within more aggregated CIO limits No limits by size, asset type or risk factor for Synthetic Credit Portfolio Credit derivatives desk in IB operated un
Slide 15: Approval and implementation of Synthetic Credit VaR model were inadequate
Approval and implementation of Synthetic Credit VaR model were inadequate Facts and observations Between August and November 2011, CIO developed a new Synthetic Credit VaR model to prepare for implementation of Basel 2.5 Independent Model Review Group (MRG) review between November 2011 and Janua
Slide 16: Observations leading to remedial actions
Observations leading to remedial actions CIO leadership, governance, mandate and processes revamped Observations Remedial Actions CIO judgment, execution, and escalation in 1Q12 were poor 2 Risk Management findings addressed CIO Risk Management strengthened Risk committees enhanced Ensur
Slide 17: CIO leadership, governance, mandate and processes revamped
CIO leadership, governance, mandate and processes revamped Remediation Team New CIO management team appointed on May 14, 2012 Established stronger linkages across regional CIOs Enhancing talent and resourcing of key support functions Governance Instituted robust committees to improve governa
Slide 18: Risk Management observations addressed
Risk Management observations addressed Remediation Risk governance Launched Joint Treasury-CIO-Corporate Risk Committee Detailed portfolio reviews conducted for sub-portfolios in CIO Enhanced firmwide oversight Risk limits Introduced granular limits across CIO Reaffirmed market risk limits
Slide 19: Enhancements to model approval and monitoring
Enhancements to model approval and monitoring Remediation MRG to approve models based on an evaluation of: The integrity of the analytical framework Independent analysis of results Soundness of operational environment Enhanced MRG oversight of implemented models Formed new team to review
Slide 20: We believe the losses in CIO are an isolated failure
We believe the losses in CIO are an isolated failure Circumstances in CIO were unique CIO’s mandate is to offset firmwide balance sheet risk Preponderance of activity was managing the Firm’s investment portfolio Management focus on risks taken in client-facing business has been, and continues to
Slide 21: Q & A
Q & A CIO valuation matters Compensation 20 C I O T A S K F O R C E U P D A T E
Slide 22: CIO valuation matters
CIO valuation matters CIO valuation processes related to quarter-end CIO traders marked their positions at end of Q1 CIO’s Valuation Control Group (VCG), which is part of Finance, verified that trader marks were within pre-established thresholds that considered market bid/offer spreads; marks
Slide 23: Employment-related actions for responsible CIO managers
To date, all CIO managers based in London with responsibility for Synthetic Credit Portfolio have been separated from the Firm No severance No 2012 incentive compensation Decision to claw back compensation from each individual Maximum permitted clawbacks invoked Represents approximately
Slide 24: Board statement on other compensation determinations
For all other individuals, 2012 performance-year compensation and clawbacks, if appropriate, will be determined in the ordinary course considering, among other things, the following factors: Company, unit and individual performance both on absolute and relative basis Achievement of non-financi