In reaction to rising capital requirements as well as changes to the relative risk of different types of assets, banks around the globe, including JP Morgan Chase, have been attempting to reduce their risk weighted assets.
The primary strategy to accomplish this is to sell assets that require larger capital cushions and acquire assets with lower capital requirements.
The CIO, according to the report, was a "major consumer" of risk weighted assets at the bank. The traders in the unit, however, believed that actually reducing assets by selling off their positions in early 2012 would result in significant losses.
In January they told managers that the cost of reducing risk weighted assets by $10 billion would be $500 million. Executives overseeing the unit responded with instructions to focus on profits and losses rather than reducing risk weighted assets.
The traders adopted a strategy of significantly increasing the size of their positions rather reducing or unwinding them.
As the mark-to-market losses on the deriviatves trades of the CIO—contained in what was known as their "Synthetic Credit Portfolio"—rose in early 2012, executives from the CIO unit met with the top executives of JP Morgan, including chief executive Jamie Dimon.
They didn't disclose problems with the portfolio or the strategy of increasing the portfolio's size, although the meeting did focus around reducing risk-weighted assets.
Shortly after this meeting, one of the unit's executives emailed one of the traders expressing concern that actually reducing the portfolio to reduce risk-weighted assets would not allow the unit to "defend" its positions. One worry was that any attempt to reduce the size of the portfolio would invite other market participants to make predatory trades that would increase the losses.
The proposed solution was to "win on the methodology" instead of selling assets.
"This phrase refers to the traders' goal, described above, to convince the Firm that it should change the methodology of the model used to calculate RWA for the Synthetic Credit Portfolio," the report explains.
In other words, they wanted to make their positions look smaller on the books by changing the accounting.
JPMorgan, to its credit, appears to have resisted the pressure to change the risk-weighting of the assets in the portfolio. At least, there is no indication in the report that the traders succeeded in changing the firm's calculation of risk-weighted assets.
