The Senate report indicates that the $400 million American Airlines gain may have propelled JPMorgan's CIO unit from a hedging strategy to one that represented directional bets of the banks capital. without an underlying hedge.
"[It] produced a favorable view within the CIO of the [structured credit portfolio's] complex trading strategy that involved combining investment grade and non-investment grade credit index trades, accumulating massive tranche positions, and sustaining a period of losses in anticipation of a large payoff," according to the report.
As the portfolio grew to $157 billion in notional value, the Senate investigators conclude JPMorgan was making the kind of proprietary trade that the unfinished Volcker Rule explicitly seeks to ban.
Throughout their investigation, Senate investigators said JPMorgan was unable to explain how the American Airlines default hedged the bank from any specific loan or credit.Losses on the long and short side of the structured credit portfolio as it grew in 2012 are also used in the Senate's report to further assert claims CIO had morphed into a proprietary trading unit. Dimon won't face the Senate on Friday's subcommittee hearing investigating the bank's trading loss, however, former CIO unit head Ina Drew is making her first public appearance since the trading loss, while key individuals such as then CFO Braunstein are also likely to face considerable scrutiny. The New York Times reports that a Federal Bureau of Investigations inquiry is ongoing, as authorities and regulators search for criminal activity in the trading loss, which stands at $6.2 billion. As was the case for many of Wall Street's worst trades during the financial crisis, JPMorgan's 'London Whale' loss appears to have been fed from early successes such as the timely bankruptcy filing of American Airlines. For more on Wall Street's ties to American Airlines, see why the carrier's merger with US Airways (LCC) may aid Citigroup's credit card risk. Also see how Berkshire Hathaway's (BRK.A) Warren Buffett survived an Omaha Whale trade. -- Written by Antoine Gara in New York Follow @antoinegara
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