Whale of a Trade at Biggest U.S. Bank With "Best Control"

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As Iksil's portfolio ballooned, the market for junk bonds he was betting against rallied on the easing of Europe's debt crisis. That caused a spike in an internal measure called value-at-risk, or VaR, which estimates the maximum amount a trade can lose most days. The VaR for Iksil's book jumped to $93 million on Jan. 10 from $76 million on Dec. 21, bumping against the CIO's limit of $95 million.

Rather than alter its trading, the London office changed the model. In a Jan. 12 e-mail to CIO market-risk head Pete Weiland, Martin-Artajo said Patrick Hagan, a quantitative analyst for the CIO who has a doctorate in applied mathematics from the California Institute of Technology, was working on a new VaR model.

Hagan's model, which the company later said had spreadsheet errors that produced volatility estimates about half of what they should have been, resulted in a VaR of about $70 million, well under the limit.

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Dimon would tell reporters in April 2012 that the bank's regulators "see everything and anything we do whenever they want." What Senate investigators found is that JPMorgan temporarily cut the flow of information to the Office of the Comptroller of the Currency as Iksil increased his position.

The CIO stopped sending monthly executive-management reports to the OCC in January. The next month, it suspended delivery of reports from its valuation-control group, which verified Iksil's daily profits and losses, according to the Senate report. Evangelisti, the JPMorgan spokesman, says the suspension was inadvertent and promptly corrected when found.

When John Wilmot, the CIO's finance chief, met with the OCC on Jan. 31, 2012, he told examiner Jaymin Berg that the credit-derivatives portfolio was "decreasing in size" that year. Instead, the gross notional value soon topped $1 trillion. Wilmot, who has announced his resignation, declined to comment.

"One of the public statements they made was that this is all transparent to regulators," says Levin, the Senate subcommittee chairman. "Well, this is about as murky and opaque as it gets."

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By mid-March, Iksil and Martin-Artajo had more than $150 million in losses, according to a document later sent to the OCC. The loss was closer to $350 million, Senate investigators found. Although the CIO typically marked its derivatives books in line with the midpoint of market prices, Iksil and Martin-Artajo had started using more favorable prices in January. Their values, still within the range of prices offered by the market, were at the higher end, making Iksil's losses look smaller.

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Even with the loss, JPMorgan reported a record $21.3 billion in profit last year, more than any other U.S. lender. The bank, which has incorporated the remaining position into its investment bank's results, still hasn't disclosed the exact amount it lost on the trades.