Former investment officer Ina Drew among those giving testimony on bank’s $6.2bn trading loss
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Former investment officer Ina Drew among those giving testimony on bank’s $6.2bn trading loss
Bank executives to testify Friday after report claims company misled public during $6.2bn London Whale trading debacle
JP Morgan’s $6.2bn London Whale trading debacle was born out of secretive trades and creative bookkeeping as the bank attempted to limit losses using a practice that one regulator called “make believe voodoo magic”, a Senate investigation has concluded.
The report by the Senate subcommittee on investigations, published on Thursday, detailed a series of failures in which accounts were hidden and trades were valued incorrectly to minimize losses. It also alleged that regulators were kept in the dark, a head trader’s concerns went unheeded and a $51bn trading portfolio ballooned to $157bn in three months.
The inquiry follows JP Morgan’s own internal investigation in January and provides the first look into the emails and internal discussions at the bank around the infamous Whale trade. It centers on the secretive JP Morgan chief investment office, which accounted for as much as one-sixth of the bank’s assets last year.
The 300-page report alleges that JP Morgan hid losses, did not share information with its regulators, and misled the public. The report also blames the bank’s regulator, the Office of the Comptroller of the Currency, and recommends reforming the way regulators oversee derivatives, the complicated financial instruments that played a role in the Whale trades and the financial crisis.
The report also concludes that JP Morgan CEO Jamie Dimon, whose bonus was cut in half to $11.5m last year, knew about the sustained trading losses when he dismissed the incident as a “tempest in a teapot” in April 2012.
The report precedes a Senate hearing on Friday in which key players will testify, including former JP Morgan chief investment officer Ina Drew. Dimon will not take the stand.
Surprisingly, the report presents Bruno Iksil, the head trader of JP Morgan’s chief investment office, in a sympathetic light. According to Iksil, a head trader who earned the title of the “London Whale” in media reports because he was thought to be in charge of large trades, he loudly objected to the directives of his bosses, including Achilles Macris and Javier Martin-Vartajo.
He called their instructions “idiotic”, predicted more losses as early as January 2012, and commiserated with a junior trader about how they were forced to put the wrong value on some of their trades. At one point, those wrong values caused JP Morgan’s trading partners to loudly object and call for $690m in collateral from the bank.
Iksil said he also encouraged the bank to unwind the trades, but he believed his bosses were still hoping the trades would be profitable and were unwilling to accept how much money that would cost.
As early as January 30, 2012, Iksil noted the failing trades and told his supervisor: “[W]e have to report a loss in the widening today,” and said “we have to let the book simply die,” implying that the portfolio of trades would fail. It would be three more months – in April – before press reports would unearth the growing losses, and at least June before JP Morgan put a stop to them according to the Senate.
“Mr Iksil sent Mr Martin-Artajo an email advising that they should just ‘take the pain fast’ and ‘let it go’,” the report said. “But according to Mr Iksil, his supervisor Mr Martin-Artajo disagreed and explicitly instructed him to stop losing money.”
JP Morgan promised regulators it would reduce the size of its bets, according to the Senate committee, which maintained that the bank instead created a portfolio of trades that metastasized from $4bn to $51bn in only three years, followed by a three-month “trading spree” that took it to $157bn.
The Senate’s inquiry focuses on something called the Synthetic Credit Portfolio, a shadowy group of trades that metastasized to $157bn. While the SCP, as it is called, was designed to protect the bank from the vicissitudes of the market, the report alleges that it encouraged gambling with the bank’s money, some of which consisted of federally insured deposits.
Many of the findings in the Senate report cover the same ground as JP Morgan’s own internal investigation released in January. That investigation summed up the bank’s own findings of its “flawed trading strategies, lapses in oversight, deficiencies in risk management, and other shortcomings.”
The Senate report is more heavily footnoted and researched, however, as well as twice the length.
“While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone,” a spokeswoman for JP Morgan said. “We cooperated fully with the Subcommittee’s staff and welcome the opportunity to respond to the Senate’s questions. We know we have made many mistakes related to the CIO matter, and we have already identified many of the issues cited in the report. We have taken significant steps to remediate these issues and to learn from them.”
Last year, according to a Vanity Fair profile, Dimon told employees, “The London Whale drama has been harpooned, beached, eviscerated, cremated, and killed. So help me God! It’s fish food.”
The investigators did not speak to some of the key players, including head trader Bruno Iksil or his supervisors, Achilles Macris and Javier Martin-Vartajo. But they subpoenaed their emails and taped phone conversations to piece together the narrative.
The investigation paints a picture of a growing debacle that started with the bank’s attempt to reduce the risk of its trades so that it would have a stronger capital cushion and look powerful to regulators. It started with the overconfidence of traders after a lucky bet made about $400m on the bankruptcy of American Airlines. Drew applauded the traders.
They suffered from that overconfidence when they bet incorrectly on the bankruptcy of Eastman Kodak in January 2012. That kicked off nine straight days of trading losses that cost the bank at least around $50 million. One trader in the CIO told the Senate committee that “they were told not to let an Eastman Kodak-type loss happen again.” As the traders scrambled to keep the trades – which were designed to benefit if there was a financial crisis – they found that the improving bond market worked against them. Between January and March 2012, it didn’t have one profitable day in its CIO portfolio, according to the report.
The Senate report uses JP Morgan to make an argument for financial reform, including requirements for more disclosure and Washington oversight of derivatives, the complex financial instruments that played a key role in increasing losses during the crisis.
The report also argues for the speedy adoption of the Volcker Rule, a key feature of the Dodd-Frank financial reform bill that is meant to prevent banks from taking gambles of their own. The Volcker Rule has been held up by lobbying efforts. Carl Levin, an author of the Senate report, was also the co-author of the Volcker Rule. He has signalled he will not run for re-election.
A week after appearing before a Senate committee, Dimon faces more heated questioning in the House over company’s losses
JP Morgan boss Jamie Dimon told Congress on Tuesday that his bank was “not too big to fail” as he fended off calls for tighter regulation following its $2bn-plus trading loss.
At a sometimes heated hearing, congressman Sean Duffy asked Dimon whether the bank was too big to regulate, too big to manage and too big to fail – charges Dimon denied. “Why should we allow you to be so big that if you go under, we are going to have to bail out your creditors?” asked representative Brad Sherman.
This was Dimon’s second appearance in as many weeks before a Washington panel. Last week a Senate committee quizzed the JP Morgan boss on the still mounting losses at the bank’s London offices. The House committee was far more combative in tone.
Congressman Barney Frank, co-author of the Dodd-Frank regulations brought in after the last financial crisis, asked Dimon if his wages would be subject to “clawback” following the disclosure of the losses. Last week Dimon said staff at the bank who were responsible for the London losses could have their pay reclaimed under the bank’s so-called clawback provisions. Dimon said that decision would be for the board to decide.
Dimon has been Wall Street’s fiercest critic of elements of the Dodd-Frank rules. Frank said Dimon had said the bank had a “fortress balance sheet” that would protect it from losses like those in London. “What about institutions that are less impregnable, maybe a chain link fence, a picket fence or two?” asked Frank. Dimon said “all American banks are better capitalized” after the financial crisis. “Don’t filibuster,” said Frank.
Politicians on both sides of the House are currently working on legislation aimed at tackling fears that after the collapse of their rivals in the credit crisis some financial institutions have become so large that their collapse could cause enormous damage to the US economy.
Dimon was repeatedly asked about the too-big-to-fail concept. “We can not have too big to fail. We have to get rid of too big to fail so that a bank can fail without doing damage to the economy.” he said.
But he defended JP Morgan’s size. Dimon said a lot of banks were “the port in the storm” and the JP Morgan’s size and diversification had allowed it to pull through the credit crisis and “allowed us to do the things you wanted to do” including buying failing banks like Washington Mutual, lending money to California and investing in Chrysler.
The bank boss also fended off questions about the likely impact of the London losses or how big they would grow. He said JP Morgan would remain profitable after the loss. Asked if the losses could grow to $50m he said: “Not unless the moon strikes the Earth.”
Dimon and regulators were quizzed by the panel about the role of London and its regulation in the losses. “Every big trading disaster happens in London. I would like to know why,” representative Carolyn Maloney asked regulators earlier in the day. “It is a pattern.”
“Our problem has nothing to do with London or any loopholes,” Dimon said. But he said if regulation was tightened up for US banks operating overseas, US banks would lose business. “We will lose a lot of business. They will not move to London, but I assure they will be in Singapore, in other parts of the world,” he said.
Jamie Dimon faced a round of hostile questions from Congress over JP Morgan’s multi-billion dollar trading losses
4.45pm: And finally – from the always awesome Fox News website.
4.29pm: BuzzFeed Politics has a nice scoop about anti-Romney protesters being paid by a union campaign to turn up and heckle the Republican candidate today:
At the candidate’s afternoon stop outside a bakery in DeWitt, a group of about 15 protesters stood behind a police barricade, a few of them chanting in support of Obama. Asked why he was protesting, a man dressed in a grim reaper costume pointed a reporter to a pair of “designated representatives” standing in the shade.
“I can’t talk, you gotta get one of those people over there to talk to y’all,” he said. “They’re the ones who can talk to reporters.”
Neither of the representatives agreed to give their names, but two protesters said they were getting paid to stand outside of the rally, though their wage is unclear: one said she was getting $7.25 per hour, while another man said they were being paid $17 per hour.
The fauxtesters appear to have been paid by a union-backed group called Good Jobs Now, and not by the Obama campaign.
4.02pm: The speculation earlier today that Marco Rubio hasn’t been among those on the shortlist to be Mitt Romney’s vice presidential pick has set off a few ripples in the otherwise smooth Romney pond.
Romney himself is on Fox News tonight, saying:
I get a kick out of some of the speculation that goes on. I’m not going to comment on the process of course, but I can tell you this: only Beth Myers and I know who is being vetted.
That seems unlikely, unless Myers and Romney himself are doing all of the actual vetting.
But MSNBC have another choice quote, on the possibility of Romney picking a woman as VP candidate:
“I think unfortunately, Palin poisoned the well on that,” said one informal Romney adviser, fretting that any woman selected as VP would draw inevitable comparisons to the former Alaska governor. “I would guess if I were inside the Romney mind that they’re worried that any woman chosen will be subjected to a higher level of scrutiny. “
Meanwhile, a Rubio supporter publically blames an enemy within the Romney camp for the original anti-Rubio quote that he wasn’t in the running.
3.13pm: The New York Times has a fascinating scoop: the Obama campaign’s legal attempt to force a major Republican super pac – headed by Karl Rove – to disclose its donors:
The lawyer for President Obama demanded on Tuesday that Crossroads GPS disclose its donors, saying in a complaint to the Federal Election Commission that the group is plainly a “political committee” subject to federal reporting requirements.
In the complaint, obtained by The New York Times, Robert F Bauer, the campaign’s chief counsel, writes that the group – founded by Karl Rove, among others – can no longer shield the identity of its donors by defining itself as a “social welfare” organization.
That’s a shot across the bow of the anonymous donors pouring funds into super pac coffers – and could introduce a brief chill in their unstoppable rise since the Citizens United court ruling opened the floodgates.
But any legal action won’t come to fruition until well after the election, even if successful.
2.30pm: Mitt Romney, we learn via a snippet in the New York Times, writes off a big chunk of change in taxes involving his dressage horse Rafalca:
The Romneys declared a loss of $77,000 on their 2010 tax returns for the share in the care and feeding of Rafalca, which Mrs Romney owns with Mr. Ebeling’s wife, Amy, and a family friend, Beth Meyers.
Daily Kos has an image of the tax deduction itemised in Romney’s 2010 tax returns.
Quite. In fact it’s more than the median fulltime annual wage.
2.10pm: The most interesting segment of Jamie Dimon’s testimony came under questioning from Carolyn Maloney of New York, who pressed him on the bank’s response internally to the emergence of the losses via the “London whale”.
This is interesting because of Dimon’s hesitant reponse when Maloney aksed – in effect – if the bank still added to the positions after the size and risk of the position had been uncovered within the bank itself.
Today’s Wall Street Journal describes how such counter-intuitive trading was performed by the whale himself, Bruno Michel Iksil:
But as early as last year, Mr Iksil told the colleague that his positions had become so large they sometimes were hard to reduce. When trying to sell, he felt brokers moved the market lower to hurt him. In response, he sometimes bought at those lower prices to “punish” the broker, thereby adding to his positions, he told the colleague.
Here’s Dimon’s testimony from today’s transcript:
Maloney: And was the loss-making position increased in size after it began generating losses?
Dimon: What I recall is that [pause] is that they weren’t really increased in size after early April. That was the point I think they stopped taking positions. I think that was late March.
Maloney: And what was the delay between the start of the losses and senior management action?
Dimon: So, prior to April 13th, there had been some losses. Management was looking at it. People looked at stress testing. A lot of folks thought it was an aberrational thing that would come back, which happens sometimes.
The real losses started later in April, like late April, like the last week of April. At that point we brought in some top experts again. They dug deep. And we realized we had a much more severe problem and that we – so it was late April that we started to…
Maloney: And what was the delay between the start of the losses and disclosure of the losses to the office of the comptroller of the currency on site at JP Morgan Chase?
Dimon: I don’t believe there was a delay of the disclosure of the losses. We were on a regulatory – we try to run the company, there were what I call open [inaudible] with the regulators. We tell them what we know and when we know it. I don’t know exactly what all the reports they were looking at. But we don’t hide reports from them. They do see [profit and loss statements]. So they saw the losses.
I do know, at one point, our CO went to see them to explain what had happened, right prior to April 13th. We did not understand the seriousness of it until later in April. On April 13….
And there, sadly, Dimon was cut off by the chair to move on to the next questioner.
2pm: Once again Jamie Dimon escaped largely unscathed from Capitol Hill in today’s question and answer session, even if there were some more pointed questions, notably on the timing of what Dimon and the bank knew and what they did about it, and the possibility that Dimon’s own compensation might be clawed back by the bank itself.
The market seems to agree: JP Morgans share price is up above $35.50, albeit in a rising market overall.
We should note with sadness that neither Ron Paul nor Michele Bachmann – both members of this committee – didn’t show up.
1.50pm: A few more questions about “too big to fail” – at one point Dimon says he wants JP Morgan to be “too good to fail,” which is cute – and something about “too small to live off,” a point about poverty made by Al Green, a Democrat from Texas, and suddenly it’s all over.
Green says he wants to talk further with Dimon about “too small to live off,” but things dissolve into uncertainty.
That’s it then. What did we learn? Other than one congressman thinks Basel is pronounced “Basil”.
1.43pm: David Scott, a Democrat from Georgia, actually has some praise for how JP Morgan helped handle mortgage foreclosures, which makes a change:
I want to start off by paying you and your operation down in Georgia a tremendous compliment. You know, Georgia’s number one in home foreclosures, and we had a great home foreclosure event down there. And I want to say a good word for your folks down there in Georgia.
1.37pm: Here’s Dimon’s ennui-tinged exchange with Democrat Michael Capuno from earlier:
Capuno: Do you really think it’s a smart idea to be cutting the legs out of one of those major regulators? Do you think that’s good for America?
Dimon: I have enough problems. I’m going to leave that to you.
Capuno: Well, Mr Dimon, the only reason I ask is because you have had no hesitancy whatsoever in expressing opinions on other matters. I thought you might want to take an opportunity to express…
Dimon: I know nothing about their budget. I don’t know how many employees they have. I really don’t know. So it would be – I try not to have a comment if I know nothing.
Capuno: Well, I’d like you to learn it and maybe get back to us on the answer.
1.33pm: Jamie Dimon appears to be getting bored with being asked the same question over and over about financial regulation, and replies “I’ll leave that to you” when asked what he’d like to see for the umpteenth time.
An interesting question about the risk managemrnt policies of the CIO, the unit that cost the bank a bundle. Dimon certified that its policies were sound in 2011 – but they weren’t.
Dimon looks mildly annoyed for a change and replies that he thought they were at the time, end of story. Which raises the question, why bother with such declarations?
1.22pm: Did you support Dodd-Frank? Dimon is asked by Patrick McHenry, a reference to the post-financial crisis package of legislation. “Parts of Dodd-Frank we supported, parts of Dodd-Frank we didn’t support,” says Dimon unhelpfully, having explained that the financial crisis brought out a lot of flaws in the current system.
Some grandstanding going on here, as a committee member gets into some heavy semantics over what constitutes bankruptcy and what should happen to banks that really do fail.
Boorishly, McHenry says Dimon should be able to easily define the difference between trading and hedging after 30 years in the business. But Dimon’s right: it’s not so easy to do in modern financial markets.
1.18pm: The Guardian’s Dominc Rushe is watching Jamie Dimon give testimony to the House financial services committee – and thinks the House is posing some tougher questions than its Senate colleagues did last week:
Jamie Dimon is getting a far harder time from the congressional financial services committee today than he did in the Senate last week. Not that that would be hard, as readers may remember that one ended with them lobbing softball questions about his views on Europe.
Brad Sherman pretty much sums up the tone of today’s hearing: “Why should we allow you to be so big that if you go under, we are going to have to bail out your creditors?”
Dimon is on the defense but he looks pretty comfortable. He said a lot of banks were “the port in the storm” and the JP Morgan’s size and diversification had allowed it to pull through the credit crisis and “allowed us to do the things you wanted to do” including buying failing banks like Washington Mutual, lending money to California and investing in Chrysler. He looks like the captain of the football team waiting for the end of a detention for some jape he knows will have no long-term impact on his life.
1.04pm: On this subject, today’s Wall Street Journal has an examination of the so-called “London Whale” trader at the centre of the losses:
JP Morgan Chase & Co trader Bruno Michel Iksil at times resisted sharing some details of his positions with superiors, while trading executive Achilles Macris had a history of clashing with co-workers, according to current and former colleagues.
Mr Iksil, a Frenchman known as “the London whale” for his outsize positions, and the Greek-born Mr Macris are at the center of at least $2bn of losses at the nation’s biggest bank by assets. Each remains at the bank but is expected to leave, according to people at the bank.
What’s that Skippy? A couple of “rogue traders” threw the bank down the well?
More damning details:
Mr Iksil attended École Centrale Paris, one of France’s most prestigious engineering schools, where he played tennis before graduating in 1991.
12.55pm: Here’s a question for Jamie Dimon: would the proposed Volcker Rule – a bar on proprietary trading and hedge fund ownership – actually increase risk? It’s meant to be a softball, I think, but Dimon treats it like a grenade. After a pause Dimon says he can’t answer because, hey, there are lots of rules and regulations out there.
This time, though, Dimon says that he doesn’t think the Volker Rule would have made any difference to the bank’s losses at question here. That’s a slight from Dimon’s “probably” from last week.
12.44pm: Next question, from California Democrat Brad Sherman – well, a statement really: If you’d have invested all that money you lost in London in American businesses, you wouldn’t have lost it all would you?
Jamie Dimon says all those profits and assets overseas are invested in America.
When Sherman points out an IMF report about JP Morgan’s implied support from the US government via “too big to fail”-style policies, Dimon gets fiesty, pointing that JP Morgan bought up the smoking ruins of Bear Stearns and WaMu, at the government’s behest:
Banks should take risks relative to their size and capability. So you can’t compare all the banks. And I would venture – and I’m not going to change what you believe – but a lot of banks were a port in the storm.
I know it’s convenient to blame them all for everything. But JP Morgan’s size and capability and diversification in 08, 09 and 2010 allowed us to continue to do the things that you wanted us to do. We never stopped making loans. We bought Bear Stearns at the request of the United States government. We helped the FDIC fund by buying Wamu. We lent money to California, New Jersey. It allowed us to do it.
So we try to be a conservative company that does the right thing. Every now and then we make mistakes.
He also argues that if investors really believed that JP Morgan was too big to fail, its bonds would trade about the same price as US Treasuries.
After the losses in London, I doubt that, says Sherman, contradicting himself.
12.42pm: More argy-bargy about whether or not the committee should have put Jamie Dimon under oath. Because people love arcane procedural arguments.
12.40pm: Now here’s a good question: why should you, Jamie Dimon, sit on the board of the New York federal reserve?
You guys make the rules, says Dimon. We basically sit around talking about the economy and that’s a good thing, he says.
12.34pm: OK, I spoke too soon about the quality of the questions. After a question about reimposing Glass-Steagal – which Jamie Dimon bats away easily – here’s one about what Dimon thinks about gambling.
Dimon nows runs through all the magnificent things that JP Morgan does that aren’t gambling, slightly in the manner of Jack Nicholson’s rant in A Few Good Men:
The last quarter we did $40bn in mortgages. I assume you want us to do that. We’re the biggest or one of the biggest small business lenders in the United States. We raised $400bn or $500bn for the biggest American corporations. We bank some of those corporations in 20 countries around the world. Our main mission is serving those clients, investors, capital issuers, small businesses and consumers. That’s what we do. We lost $2bn on Chrysler. I assume you’d want us to continue to lend to Chrysler.
You can’t handle the truth, congressman.
“What is the purpose of hedging?” wonders Gary Ackerman, another Democrat from New York. Sadly time is over before Dimon can gives his Econ 101 answer.
12.24pm: Surprisingly, the questioning seems to be a bit sharper today rather than last week. Is that because JP Morgan, er, invests fewer contributions in House members than Senate members?
12.20pm: Hum. Off her Londonophobia, Maloney asks a tricky question to Dimon about the timing of JP Morgan’s disclosure of its losses and what it hedged when. Something must be up because Dimon pauses – possibily for the first time in either hearing – and seeks advice from someone behind him.
Dimon appears to default to an answer about JP Morgan’s next quarterly announcement, when the losses will be explained, on 13 July.
I’m not exactly sure what this is all about but Dimon seemed unsure of himself for the first time, uncharacteristically.
12.18pm: As mentioned earlier, New York congresswoman Carolyn Maloney has something against London as a financial centre. Pointing out that Dimon actually lives in her district – hello local voter! – she demands to know why he’s shipping overseas to those ungrateful British (who don’t live in her district).
“I always thought you loved New York. Why is all this business in London?” wonders Maloney. Why do you hate America Jamie Dimon?
And this on the anniversary of the start of the War of 1812, which was started by a horse futures contract gone awry.
12.12pm: Former reality TV “star” Sean Duffy – turned Tea Party favourite – is mildly hostile, asking if JP Morgan is too big to fail. When Dimon boasts about how big JP Morgan’s balance sheet is, Duffy asks if JP Morgan could sustain a $50bn loss? “Not unless the moon strikes this earth,” replies Dimon. That’s factored into the VaR model, is it?
Tell that to AIG investors, mister.
“I’m pretty sure somewhere in Dodd-Frank there’s a prohibition on the moon striking the Earth,” notes Bachus dryly.
12.05pm: Democrat Maxine Waters is asking some searching questions about why JP Morgan lobbys against overseas regulations, given that what happens in London can hurt banks in the US. Dimon slithers out of the question, defending his bank’s general right to lobby for whatever it sees fit, and that regulations overseas impacts JP Morgan’s operations there.
12.02pm: Here’s Barney Frank, and he wants to know Dimon’s views about regulation of derivatives. But Dimon’s not giving an answer, and Frank says he’s “disappointed”.
Frank also wants to know if Dimon’s own pay will be subject to “claw-back” after what’s happened. Dimon says that’s 100% up to the JP Morgan board.
Now there’s some issue about who speaks next, a dispute between the two parties.
11.56am: A member wants to know Jamie Dimon’s view on the crisis in Europe, which is interesting if hardly relevent. Anyway, Dimon thinks that the “smart people” he talks to expect a fiscal treaty to be signed, which would be something.
11.52am: Now the committee is having some question about if Jamie Dimon should be testifying under oath.
It seems that the committee chair, the committee chair Spencer Bachus says: “I see no evidence this is a criminal proceeding.” Oh well. Another high point for congressional committees there.
11.48am: And Jamie Dimon kicks off his House testimony by repeating, seemingly word for word, his opening statement to the Senate banking committee last week.
He closes with:
I would also like to speak directly for a moment to our 260,000 employees, many of whom are watching this hearing today. I want all of you to know how proud I am of JP Morgan Chase, the company and how proud I am of what you do every day for your clients and communities around the world. Thank you.
11.40am: Not long to go now before Jamie Dimon starts speaking at the House committee on financial services. If the usual trends apply, then this committee will make last week’s Senate committee hearing seem like a symposium of Nobel Prize winners in physics.
11.31am: So you can criticise the White House for not acting, and then when it does act, criticise it for a “power grab”? Smooth move there Senator Marco Rubio, who is taking his ball home after the Obama administration’s move on immigration last week:
Rubio’s decision comes in the wake of President Obama’s announcement last week that his administration would halt deportations of certain undocumented youth, a policy that essentially undercut the GOP senator’s proposal. In multiple interviews Monday, Rubio faulted Obama for derailing his effort, which he had worked on for three months.
“People are going to say to me, ‘Why are we going to need to do anything on this now. It has been dealt with. We can wait until after the election,’”Rubio told the Wall Street Journal. “And it is going to be hard to argue against that.”
Of course if Senaor Rubio had actually published a bill or something, he’d have a case. But he didn’t.
11.12am: Democratic party congresswoman Carolyn Maloney of New York asks the big question:
Good question Representative Maloney. One answer is that perfidious British bankers want to steal away your precious American gold.
11am: In case you were wondering, before Jamie Dimon takes the hot seat, the House committee is hearing from a variety of financial regulator rock stars, including SEC chair Mary Schapiro, the Comptroller of the Currency Thomas Curry and the Commodity Futures Trading Commission chair Gary Gensler, among others. It’s basically a Woodstock ’69 line-up for Wall Street regulation.
10.50am: Guys, Mitt Romney sometimes tells awkward jokes, and the New York Times is ON IT:
At the breakfast, Mr Romney introduced two of his sons, Matt and Craig, in a slightly unusual fashion. “I love them,” Mr Romney said. “I love them like they’re my own. And they are! Craig!”
With that, Craig Romney rescued the microphone from his father.
Embarrassing Dad or Weirdo? You decide.
By the way, this is where that formulation comes from.
10.40am: While we’re waiting on Dimon to appear – you know it’s a slow news day when this is the lead item on the Drudge Report:
A Massachusetts man has pleaded not guilty to attacking a bicyclist with sausage links and a wrench before making off with jewelry and the bike.
10.30am: It’s round two of Jamie Dimon versus Congress, as the JP Morgan chief executive faces his second session of testimony on the subject of the bank’s huge “London Whale” trading losses.
Last week Dimon was given a largely generous ride by the Senate banking committee, and today he’s even less likely to have much trouble before the Republican-dominated House committee on financial services.
The wild card is that House committees tend to be more flaky and erratic than Senate committees – with members prone to grandstanding since they get fewer chances in the spotlight, so who knows what questions Dimon may face out of left-field?
But based on last week’s performance, Dimon will handle this circus – pardon me, I mean members of the House of Representatives – with ease.
In the meantime, here’s a summary of other news from Ryan Devereaux:
• Marco Rubio, the Florida senator thought to be a top contender as Mitt Romney’s running mate, has not been vetted for the position, ABC News reports. Jonathan Karl says “reliable sources” have told him Rubio “has not been asked to complete any questionnaires or been asked to turn over any financial documents typically required of potential vice presidential candidates.”
• A new poll from Bloomberg finds a majority of voters support president Obama’s recent decision to stop deporting certain undocumented young people. According to the survey, 64% of likely voters said they agreed with the president’s decision. Broken down by party, 86% of Democrats and 66% of independents supported the decision, and 56% of Republicans opposed it.
• Mitt Romney is returning to New York City next week to drum up money for his campaign efforts. The former Massachusetts governor will attend a major event in New Jersey with governor Chris Christie, as well as a fundraiser at the $70m apartment of wealthy couple Martin and Barbara Zweig.
• The president has a new debate practice partner: Senator John Kerry. As Obama prepares to face Romney in at least three crucial contests of rhetorical nimbleness this fall, Kerry has assumed the role of the former Massachusetts governor. Kerry has a reputation as a strong debater and, like the GOP candidate, he is also very wealthy, owns multiple homes and has been known to flip-flop on issues, essentially he is already inside Romney’s mind.
• Obama’s nominee for consideration as ambassador to Iraq, Brett McGurk, has withdrawn his nomination for the position. Members of the senate had resisted McGurk’s nomination, and an anonymous source leaked intimate emails exchanged in 2008 between McGurk, who was then working for the state department in Iraq, and a reporter for the Wall Street Journal covering the conflict there. The pair later married.
• Jamie Dimon apologises for $2bn losses at JP Morgan
• ‘I’m absolutely responsible,’ bank chief tells senators
• Volker Rule may have stopped bad trades, he concedes
• Senior bank executives face having pay docked
• Dimon says he was ‘misinformed’ about size of losses
1.30pm: Jamie Dimon will probably be happy with the way today’s hearing went – apart from a few snippy responses to Jeff Merkley, the questioning was benign and in most cases the senators involved failed to probe Dimon on any weaknesses.
On the possibility of further regulation via the Volker Rule, Dimon insisted that there was no case to answer, and intertwined his response with paens to America’s deep capital markets, implying that anything that detracted from them would be a bad thing.
Here’s highlights from the hearing and Dimon’s testimony today:
• JP Morgan Chase chief executive Jamie Dimon offered an apology for the estimated $2bn in trading losses by his bank’s Chief Investment Office, saying “we feel terrible” for losing shareholders’ money.
• Dimon also apologised for his earlier description of the losses as a “tempest in a teapot,” saying “I was dead wrong” but maintained that he was misinformed about the scale of losses at the time.
• Senior executives responsible for the CIO’s $2bn trading loss face having their bonuses and share options deducted, Dimon told the committee: “It’s likely that there will be clawbacks.”
• Describing his own role in establishing the bank’s unit that caused the losses, Dimon said: “We made a mistake. I’m absolutely responsible. The buck stops with me.”
• Questioned on the role the proposed Volker Rule would have played in stopping JP Morgan from the loss-making trades, Dimon conceded that it was “possible” such a rule may have helped.
• Dimon sparred with democratic senators Robert Menendez and Jeff Merkley over his past opposition to financial regulation and the bank’s decision to receive funds from the government bailout in the wake of the financial crisis.
• Dimon later admitted that he had been informed of the change to the risk management model in the loss-making unit: “I was copied on a memo that said there was a change in the VAR model. I paid no attention to it.”
• Senator Sherrod Brown of Ohio released a strongly-worded statement calling on JP Morgan to penalise those involved in the bank’s trading losses:
The way for Jamie Dimon to demonstrate his seriousness about the mistakes that led to JP Morgan’s $2bn trading loss is to take back the bonuses and incentive compensation from those who were involved in the failed London trades, including himself as CEO. The only way to change the culture on Wall Street is to hit people where it hurts – in the wallet. Perhaps then the big banks will think twice about taking unnecessary risks that undermine public confidence in our financial system.
1.15pm: Here’s the transcript of the hottest part of today’s hearing, the exchange between Democratic senator Jeff Merkley and Jamie Dimon:
Merkley: In 2008 and 2009, your company benefited from half a trillion in low-cost federal loans, $25 billion in Tarp loans, of Tarp funds. Untold billions indirectly through the bailout of AIG that helped address your massive exposure in repurchase agreements and derivatives. With all of that in mind, wouldn’t JP Morgan have gone down without the massive federal intervention, both directly and indirectly in 2008 or 2009?
Dimon: I think you were misinformed and I think that misinformation is leading to a lot of the problems we’re having today. JP Morgan took Tarp because we were asked to by the Secretary of Treasury of the United States of America with the FDIC in the room, head of the New York Fed, Tim Geithner, Chairman of the Federal Reserve, Ben Bernanke. We did not at that point need Tarp. We were asked to because we were told, I think correctly so that if the nine banks there, and some may have needed it, take this Tarp we can get it to all these other banks and stop the system from going down.
Merkley: I’m going to cut you…
Dimon: It is not that we did not borrow from the Federal Reserve, except when they asked us to. They said please use these facilities to make it easier for other…
Merkley: We would all like to be asked…
Dimon: And we were not bailed out by AIG, OK? If AIG itself – we would have had a direct loss of maybe $1bn or $2bn when AIG went down. And we would have been OK.
Merkley: Then you have a difference of opinion with many analysts in the situation who felt that AIG bailout did benefit you enormously. And I’m not [going to go] through that argument with you now, sir.
Dimon: They’re factually wrong.
Merkley: This is not your hearing. I’m asking you to respond to questions and I also only have five minutes. So, let’s agree to disagree. But I think that many analysts have reached the conclusion that if you had applied that Old Testament justice in 2008-2009, JP Morgan would have gone down and you would have been out of a job. And it goes to the enormous frustration on how many companies in the history of the planet have been offered a half a trillion dollars in low interest loans? Not many.
But the basic concept behind the Volcker firewall is that banks are in the lending business, not in the hedge fund business. And do you share that kind of basic philosophical orientation?
Dimon: We are not in the hedge fund business.
Merkley: OK. Well, I wanted to turn to the Bloomberg report of a few days ago and it reports that Jamie Dimon created the CIO, elevated Drew from treasurer to chief investment officer, had her report directly to him. Encouraged her department, which had invested mostly previously in government backed securities to seek profit by speculating on higher yielding assets such as credit derivatives, according to half a dozen former executives of the company.
That sounds like operating a hedge fund. And doing so at your direction with government insured deposits?
Dimon: Here are the facts. We have $350bn of assets in CIO. The average rating is AA-plus. The average maturity has a duration of three years, not 20 or 30. The average yield is 2.7%. Those characteristics are of a very conservative portfolio. One of the other Senators mentioned … in addition to that, we have $150bn sitting in central banks around the world. The other Senator just pointed out that we don’t make enough loans, less loans to deposits is considered conservative, not aggressive.
Merkley: So you would disagree…
Dimon: In this other area, yes I – there’s a legitimate complaint.
Merkley: OK. So David Olsen, former head of credit trading said, “We want to ramp up the ability to generate profit for the firm. This is Jamie’s new vision for the company.” But you would fundamentally disagree that that was your instruction in building the CIO unit?
Dimon: I don’t believe everything I read. I hope you don’t either.
Merkley: You disagree?
Dimon: I don’t know what he means.
12.48pm: Some excitement over Jamie Dimon’s admission on CNBC just now that he did know about the abrupt change to the CIO value at risk model:
I was copied on a memo that said there was a change in the VAR model. I paid no attention to it.
Does that change anything?
12.46pm: On the Volker Rule: “We should stop talking about it as binary. It’s not binary,” says Dimon. Reading between the lines here, Dimon’s view is unitary: he’s against it.
12.37pm: Jamie Dimon’s now talking to CNBC about his testimony. “No excuses but people make mistakes,” says Dimon, making an excuse.
And that “tempest in a teapot” remark, did you lie or did you not know? Dimon takes it placidly, given that someone on TV has just asked if he was lying: “You think I would lie? I obviously believed it, I obviously didn’t know.”
Did he place too much trust in Ira Drew, the head of the CIO? “She’d earned the trust we’d placed in her… She’d done an exceptional job for a long period of time,” says Dimon, but adds that “this portfolio” was somehow different and needed different risk management.
“Did you become complacent because the group was making so much money?” – an example of the incisive questioning here on CNBC. Jamie Dimon, are you too awesome?
How bad could it get? “I’m not going to tell you,” says Dimon. Wait till 13 July, when we will tell the shareholders about the last quarter.
Give this to Dimon: he doesn’t hesitate at all, even when coming out with “I’m not going to tell you.”
12.35pm: In New York, the Guardian’s Dominic Rushe gives his reaction to Jamie Dimon’s testimony today:
So in summary JP is great, regulators smegulators, Volcker is rubbish, it was all my fault but, hey what ya gonna do?
Dimon appeared to be truly rattled only once, by senator Jeff Merkley, who really stood on his corns. Specifically – and we’ve seen this time and again with
Dimon – the idea that they were bailed out by the US taxpayer and JPM would have collapsed if the government hadn’t propped it up. That sent Dimon into a lather and probably explains why we should all be worried.
It’s hard to see how Dimon believes JPM would have made it if the US hadn’t propped up the entire financial system. The way things were going, we’d be swapping chickens for cans of gas if the US government hadn’t stepped in. But Dimon clearly thinks the bank was above saving and he did us all a favour by taking the money. Scary.
12.25pm: Meanwhile, JP Morgan’s share price is up by a dollar today, to $34.80. So someone liked it, given that the rest of the market is down.
12.13pm: We are approaching the finishing line now. One final piece of Delphic grandstanding from the committee leaders, and that’s it.
In conclusion, Dimon may have given an apology and given a mea culpa or two, but didn’t give an impression that anything fundamental had changed. Mistakes were made, they couldn’t have been helped – somehow, although he wouldn’t detail why – but everything is now fixed.
The highlight of the whole thing was Dimon’s brief, unhappy tangling over the banking sector bailout with Jef Merkley and his insistence that JP Morgan didn’t “need” Tarp funds. What’s that about biting the hand that feeds you?
The newspoints will be the “clawbacks” that Dimon mentioned for errant employees, and the round-and-round on the Volker Rule, although Dimon wasn’t giving any ground there.
Still, Dimon’s repeated remarks about the impossibility of catching the London Whale make very depressing listening. This wasn’t rogue trading, this was a bank operating on its own account – and Dimon admitted that the CIO didn’t understand what they were doing. And its own internal risk committee and models still couldn’t sniff out a $2bn loss.
12.10pm: Dear Jamie Dimon, would you like to agree with my talking points about the fiscal condition of the United States and use up more valuable time, asks Michael Bennet, the Democratic senator from Colorado.
12.03pm: Responding to Senator Kay Hagen about the London Whale, Jamie Dimon says he won’t go into detail because he doesn’t want to reveal confidential trading information. “Some of the information that was published was accurate and some was not,” says Dimon, which explains nothing.
Lots of talk about Basel one, two and three, and probably four, which doesn’t even exist.
11.51am: This is more excititng: Senator Jeff Merkley is quoting Dimon’s words back at him and saying that if Dimon was right, then JP Morgan itself would have failed in 2009 and Dimon would have lost his job but for the government bailout known as Tarp.
Dimon claims that his bank didn’t Tarp funds and only took it because the government wanted it to. Merkley charges that may not be true, citing analysts.
Dimon gets heated, telling Merkley: “They are factually wrong.” Senator Merkley then slaps him down: “Sir, this is not your hearing, I am asking you to respond to questions.”
Merkley is pressing Dimon on the bank’s hedging via its CIO. “We are not in the hedge fund business,” Dimon says tartly.
Now we are seeing a different side to Jamie Dimon: prickly, waspish, sniffy: “I have already sadi about synthetic credit, that’s why I’m here. The buck stops with me,” he asserts although buck stopping isn’t much in evidence. “I have already confessed to the sins on the synthetic credit side,” he repeats later – really upping the passive-aggressive tone here – as he repeats that JP Morgan’s $350bn funds are conservatively managed.
When Merkley quotes an expert’s criticism, the now remarkably thin-skinned Dimon retorts: “I don’t believe everything I read and I hope you don’t either.” Merkley doesn’t let him off and Dimon turns around and says he doesn’t understand the critic.
Sadly, this exchange is too short.
11.45am: Another question about the Volker Rule and how it would have stopped this London Whale situation comes from Roger Wicker from that financial hotspot Mississippi.
Dimon goes off on what is obviously prepared rant about how fantastic the US capital markets are and – by implication – the Volker Rule would some how affect that. “Don’t throw the baby out with the bathwater,” says Dimon, in another helping from the big book of CEO cliches. (But what about throwing the devil out with the detail-bathwater?)
As part of his rant, Dimon takes about America’s greatness, mom, apple pie and surely comes within an inch of mentioning baseball. “The cost of doing a corporate bond is a tenth of what it was 10 years ago,” states Dimon. Yes but 10 years ago the credit markets weren’t in the toilet and the US economy had something know as “inflation”.
11.42am: Herb Kohl of Wisconsin wonders why JP Morgan doesn’t act as quickly on mortgage issues as it does when its CIO gets into trouble. Send your constituents’ problems along to me and I’ll fix them says Dimon. How helpful.
11.40am: The air is going out of this hearing somewhat, after Senator Jon Tester ignored the business at hand and instead asked a string of questions about the failed MF Global bank.
11.35am: Akshat Tewary, one of the founders of Occupy the SEC, has thoughts on Sherrod Brown’s point regarding the size and complexity of JP Morgan:
Senator Brown raises a good point re: that Too Big to Fail banks are Too Big to Regulate.
Forgetting the CIO office’s activities for a minute, it’s important to consider that JP Morgan may be an antitrust violator due to its inordinate size and influence in the banking industry, which is essentially an oligopoloy.
Occupy the SEC has some remarkably good pre-buttal of Dimon’s testimony, here [pdf]:
[We] need hard-and-fast rules, like a strictly-defined Volcker firewall that would definitely separate commercial banking from proprietary trading (along the lines of the similar Vickers ring-fencing regime that is gaining traction in Europe). In Macbeth, Shakespeare warned of “Vaulting ambition, which o’erleaps itself and falls on the other.” We need a simple structural wall, like the one potentially erected by the Volcker Rule, to serve as a check on bankers’ vaulting ambitions.
11.28am: The Guardian’s Dominic Rushe is watching Dimon’s performance:
As you’d expect from Dimon, he’s contrite but hasn’t changed his views. He’s still against the Volcker Rule’s attempts to stop “portfolio hedging”. Volcker wants to restrict hedging in systemically important banks like JPM by limiting so that they have to match hedges to specific risks they take. So if they make a bet on the Euro going down they can hedge against it with a bet that would soften the blow if they are wrong. Dimon wants “portfolio hedging” where they can make a series of hedges meant to protect against a portfolio of risks.
Dominic points to a letter sent to regulators by senators Carl Levin and Jeff Merkley, some of Dimon’s sharpest critics, on portfolio hedging:
We again urge you to remove ill-advised loopholes and implement a strong Volcker Rule without further delay… In recent days, we’ve seen exactly what ‘portfolio hedging’ might mean. This ‘JP Morgan Loophole’ is big enough to drive a ‘London Whale’ through.
11.20am: Sherrod Brown suggests that regulators and JP Morgan itself simply couldn’t keep a handle on the bank’s CIO – which he claims would be one of the biggest banks in America if it stood alone. Which has some scary implications.
Mike Johanns of Nebraska appears to be making a pitch for JP Morgan to move some business to his home state. “You’re just huge,” he says, admiringly.
Otherwise Johanns appears to be reading off the back of a cereal packet.
11.15am: Now it’s Democratic senator Sherrod Brown – your 2016 or 2020 Democratic presidential nominee, maybe – who has a voice like a knife scraped across a dinner plate.
Brown notes that he doesn’t want his constituents to lose their jobs because of some rogue trading in London. He is asking some detailed questions about how regulators reacted. Did the regulator, the OCC, know about the so-called London Whale trades before it was first reported. Dimon repeats his point that the bank gave the wrong information because they were misinformed themselves internally. But regulators were called immediately when the bank itself found out, Dimon says.
“Is five regulators in London enough?” asks Brown, mentioning the regulators based inside JP Morgan’s London trading operation. “I don’t know the answer,” says Dimon, “but in this day and age,” you know the internet and stuff, they could be anywhere.
11.11am: Now it’s time for Professor Mad McMad, or Senator Jim DeMint as he is also known, who really doesn’t care about the topic at hand except as an opportunity to push his own bandwagon.
DeMint bizarrely compares JP Morgan’s $2bn loss with the “loss” as he terms it that Washington’s federal government makes every day. Hold on, Jim DeMint, is spending on the US military, Medicare, and so on, a loss, in the same way as a derivatives trade?
DeMint invites Dimon to complain about over-regulation, although the senator also claims that Washington can’t really reproach JP Morgan for losses because of the deficit. Duh.
Mercifully, it quickly ends.
11.03am: Robert Menendez of New Jersey wants to know more about hedges. “Isn’t that really gambling,” he wonders, pondering Dimon’s remarks about how the CIO’s hedging morphed into something else.
“What did it morph into, Russian roulette?” asks Menendez acidly. “I don’t know, it morphed into something too risky for our company,” responds Dimon, giving Menendez an opportunity to go all Lady Bracknell. “Too risky?” he says archly.
Menendez is having a go at Dimon for his previous resistance to financial regulation and his public remarks on the subject in the past.
“Fortress Balance Sheet has a moat dug by taxpayers,” Menendez points out. “It seems to me the American people are a big part of helping to make your bank healthy,” he goes on. “Are you working against legitimate efforts to control the risk? Do you not think that’s a fair question for the American people?”
“We are entitled to tell you about the [regulations] that don’t make sense,” says Dimon, hotly.
This is all much better.
10.54am: Senator Jack Reed of Rhode Island appears to have a clue, and opens by saying that this is evidence that a very strong and clear Volcker Rule is needed.
Reed pushes Dimon harder than his colleagues, and gets Dimon to essentially throw his staff under the bus, as they say. Explaining the change to the bank’s value at risk model, Dimon says: “We don’t as of today believe it was done for nefarious purposes,” which is hardly reassuring.
Pushed by Reed, he goes on to describe the bank’s trades: “No matter what you call it, I will not defend it. It violates common sense in my opinion.”
There’s the headline: violates common sense.
Another intriguing remark from Dimon, when he said that “I have a hard time distinguishing” proprietary trades and hedges. Really? Hmm.
Reed finishes by asking Dimon directly about the Volker Rule saving JP Morgan from this type of loss. Dimon hedges (no pun intended) by saying oh well the Volker Rule hasn’t been formulted formally: “I don’t know what the Volcker Rule is. It hasn’t been written yet.” But finally he admits: “It’s possible, I just don’t know.”
So there’s another headline: Volker Rule may have saved JPM says Dimon.
10.51am: My Guardian colleague Dominic Rushe spots the big problem in these types of hearings – the politicians can ask tough questions but because they don’t understand either their own questions or the answers, they can’t respond. Hence a wily witness can get an easy ride:
Senator Schumer is asking the big question: “What’s to stop this happening again?” Were we just lucky to find out about this, what about non-banks that get in to trouble? Dimon dodges nicely with some stuff about how much better capitalised the banks are, a pat on the back for regulators “disseminating best practices” and examining the system and then he’s off the hook. No follow up.
10.47am: Senator Mike Crapo of Idaho is asking about the Volker Rule and how it should be implemented. “The devil is in the detail,” says Dimon, a blinding observation that has never been made in human history.
What sort of hedges should be allowed, wonders Crapo. Ones that protect the bank, replies Dimon. See previous comment about the devil being in the detail.
10.45am: On the subject of clawbacks – taking pay back from employees – Dimon tells Schumer that he’s a big fan: “We can clawback even for things like bad judgment.”
10.42am: Senator Schumer wants to know why the bank’s risk committee missed the London Whale.
Dimon says it isn’t fair for risk committee to be blamed for the losses. They couldn’t have caught it, he maintains, and they were so awesome during the financial crisis that basically it wasn’t humanly possible. (I paraphrase but only slightly.)
10.39am: Charles Schumer is now quizzing Dimon. He’s a far sharper knife but he’s also not nicknamed “the Senator for Wall Street” for nothing.
10.35am: Richard Shelby – sounding like a concerned family member – wonders if Jamie might be more comfortable talking to Uncle Richard behind closed doors. Dimon demurs but says he’ll be more open to the bank’s investors shortly.
The bank’s attempts to hedge “changed into something I cannot publicly defend,” is Dimon’s final word. Gently offered the chance to describe the lessons learned, Dimon says: “No matter how good you are, how good people are,” things can go wrong.
10.32am: Richard Shelby gets to ask questions in his rich Alabama accent. “What really happened?” asks Shelby. This allows Dimon to discuss how long a piece of string may or may not be.
JPM has around $150bn in cash today “invested in central banks around the world so we tend to be very conservative,” says Dimon, although that tells us far more about the state of the international capital markets right now than an insight into JP Morgan investment strategy.
10.29am: Senator Johnson asks asks about the changes made to JP Morgan’s vaunted risk model and oversight of the bank’s chief investment office responsible for making the botched investments.
“The CIO had done so well for so long that we got overconfident,” says Dimon, which doesn’t really answer the question except by saying “we were so awesome”.
The way people were paid didn’t “make the problem worse,” says Dimon.
10.26am: Tim Johnson is straight on to the London Whale “tempest in a teapot” remark of Dimon’s. What was he thinking?
“When I made that statement I was dead wrong,” says Dimon, “I was travelling, I was on the road”. Underlings told him it was a “small issue,” says Dimon. So there we are.
Dominic Rushe comments:
Dimon must be wishing that he’s never thrown out that “tempest in a teapot” comment. Johnson is asking some great questions about what he knew when and how he could be so blase about the risks being taken at the London office. He is pretty much sticking to the script, the bank was complacent, he didn’t have the full picture. Nothing new yet.
The new news is that he may clawback money from bankers after the bank works out exactly what went wrong. Ina Drew, who headed the unit that looked after London, was paid about $15m last year.
10.25am: The American Banker sums up the coverage of Dimon’s prepared remarks: “Dimon to Apologize, Blame Underlings, Tell Senators to Stuff It,” which sounds about right.
Now it’s question time.
10.20am: “Dimon under pressure” is the blazing headline on Bloomberg TV, which is running Dimon’s testimony live, alongside a tasteful live chart of JP Morgan’s share price.
10.18am: Richard Shelby, the ranking Republican member of the committee, uses his remarks to bash Freddie Mac and Fannie Mae, claiming that the government-sponsored enterprises lost $200bn, chicken feed compared to JPM’s $2bn. The Republicans like to blame the two GSE’s for somehow causing the housing market bubble and financial collapse, even though they didn’t.
Now Jamie Dimon takes centre-stage.
10.10am: Johnson’s prepared remarks were as mentioned below. Meanwhile, here’s my colleague Dominic Rushe‘s overview of today’s testimony by Jamie Dimon, with some background of why Dimon is such a formidable figure on Wall Street:
JP Morgan’s chief Jamie Dimon is probably the most remarkable banker of his generation. While rivals like Goldman Sach’s Lloyd Blankfein became public enemy number one, Dimon deftly steered JP through a storm as political as it was financial.
Dimon emerged as the acceptable face of Wall Street and has used his kudos to argue – often heavy handedly – against tighter regulation of the financial industry. He called the new Basel III international banking rules “anti-American.” He said Paul Volcker, former chairman of the Federal Reserve and author of a rule aimed at curbing bank risk, “doesn’t understand capital markets.”
Then his London office lost $2bn and counting on outsized risky bets on Europe and everything changed. Having successfully lobbied for the watering down of financial regulation, Dimon was now the prime example of why the rules needed to be beefed up.
In May President Obama told the hosts of The View that Dimon was “one of the smartest bankers we got.” If JP Morgan could lose money like this, what about the rest of them?
This hearing may be about the London losses in principle but as Dimon will point out $2bn isn’t a lot to JP Morgan. The bigger picture is about the regulation of Wall Street and what, if anything, has changed four years after the start of the worst financial crisis in living memory.
10.06am: Anyone wanting to follow Jamie Dimon‘s grilling from the comfort of their own computer can see the live stream here on the Senate committee’s site.
10.02am: A brief kerfuffle of protest as a few people wave small signs and chant “End foreclosures now” before they are shifted out of the room by Capitol Hill security.
The banking committee chairman Tim Johnson is now delivering his opening remarks. Those of you puzzled by Johnson’s speech should know he suffered a massive stroke in 2006 and has since made a remarkable recovery.
Johnson points out that it was just two months ago today that Dimon, on JP Morgan’s first-quarter conference call, referred to the “London Whale” derivatives trading position as a “tempest in a teapot,” a comment Dimon is going to take a long time to live down.
10am ET: JP Morgan’s chief executive Jamie Dimon faces congressional critics today when he appears before the Senate banking committee investigating the disastrous derivatives trading that led to billions of dollars of losses at the bank he has run since 2005.
According to his already-released prepared testimony, Dimon will give an apology of sorts before the committee, saying: “We have let a lot of people down, and we are sorry for it. We will not make light of these losses, but they should be put into perspective. We will lose some of our shareholders’ money – and for that, we feel terrible – but no client, customer or taxpayer money was impacted by this incident.”
Dimon’s appearance comes after JP Morgan last month revealed $2bn in losses from a string of high-risk trading in derivatives, the complex financial market. For a bank that has boasted of its stringent internal rules and safeguards, JP Morgan’s trading losses reopened the controversy of Wall Street regulation that has swirled since the calamities of 2007 and 2008 that led to the financial market turmoil and recession.
In particular, the bank’s failure of risk management raises serious questions about the financial regulations proposed and implemented since 2008, including the Dodd-Frank regulations put in place in 2010 and the “Volcker Rule” to restrict banks trading with their own funds, as was the case with JP Morgan.
In his written testimony, Dimon argues that the bank’s $350bn portfolio is managed appropriately managed by the bank’s chief investment office but he will the derivatives trades that caused the losses were “poorly conceived and vetted.”
The senators on the banking committee are likely to sniff blood. Tim Johnson, the Democrat who chairs the committee, says in his released remarks that JP Morgan’s losses show “an out-of-control trading strategy with little to no risk controls that cost the company billions of dollars.”
Johnson’s remarks indicate the questioning the committee is likely to follow:
So what went wrong? For a bank renowned for its risk management, where were the risk controls? How can a bank take on ‘far too much risk’ if the point of the trades was to reduce risk in the first place? Or was the goal really to make money? Should any hedge result in billions of dollars of net gains or losses, or should it be focused solely on reducing a bank’s risks? As the saying goes, you can’t have your cake and eat it, too.
What we’ll see is Dimon attempting to show contrition while defending his bank as reliable money managers and fending off calls for further regulation, especially the Volcker Rule.
Chief executive whose company lost $2bn showed how financial interests still hold the upper hand in Congress
The long shot big hope for Wall Street reformers Wednesday was that JP Morgan CEO Jamie Dimon would trip up before the Senate banking committee and expose the need for tighter rules governing big banks. His firm, after all, recently lost billions making risky bets with depositor funds on the line.
Instead, with some notable exceptions, the senators themselves turned the cross-examination into a coronation, and exposed the extent to which elected officials still feel compelled to genuflect to powerful financial interests.
“You’re obviously renowned, rightfully so I think, as being one of the most, you know, one of the best CEOs in the country for financial institutions,” crooned Senator Bob Corker (R-TN). “You missed this, it’s a blip on the radar screen.”
Most of the fawning came from GOP senators, who, in addition to relying on Wall Street largesse, remain engaged in a political campaign against President Obama’s 2010 financial reform law. But some Democrats also treated Dimon if not quite like royalty then perhaps as a trusted confidant.
Senator Michael Bennet (D-CO) asked Dimon to sound off on the country’s budget woes. “I think you’re well aware of my concern about the fiscal condition of this country,” Bennet said. “I wonder if you could take the last couple minutes of this time to talk about how you see our relative position with Europe and other places, the political risk of our not accomplishing what we need to do in the fiscal side, and the upside if we could actually come together in a comprehensive way to address the long-term fiscal condition of the United States.”
His exchanges with GOP senators were even more saccharine. Senator Jim DeMint (R-SC) – a Tea Party hero – gave Dimon a full pardon. “I really appreciate you voluntarily coming in to talk with us,” he said. “It is important that we talk about things happening in the industry. It helps us as we look forward and, hopefully, it will contribute to best practice scenarios in industry. I appreciate your emphasis on continuous quality improvement. We can hardly sit in judgment of your losing $2bn. We lose twice that every day in Washington.”
Senator Jerry Moran (R-KS) asked Dimon and his firm to be good corporate citizens, if only to avoid complicating conservative free market messaging. “How you managed JP Morgan is the business of your board of directors, your shareholders, but it does have consequences to those of us who believe in the free-market system, its value, its merit. I have the sense and I hope it’s the case that it is a responsibility you understand. [Your] behavior really matters in our ability to be an advocate for a free-market that creates jobs and economic opportunity and allows Americans to pursue the American dream.”
So concerned were the senators that increased regulations might burden Wall Street that in an exchange with Senator Roger Wicker (R-MS), Dimon even offered to get neighborly with the people charged with policing his firm’s actions, to keep them well informed about financial regulatory issues.
“Me and lots of other folks, we’ll do whatever you want, we’ll even get apartments down here,” Dimon offered.
For reformers, that adds up to an opportunity missed. But that came as no surprise to one of the Democrats with a stake in strong financial oversight – Volcker rule author Jeff Merkley (D-OR).
“I think that if Dimon came in and surprised everyone … if he came in and said there are systemic issues that have been raised here, that I think do need to be addressed, it would change the conversation to have a champion among one of the major banks,” Merkley told TPM this week in advance of Dimon’s appearance before the committee. “I would be very surprised if we saw that testimony.”
The original version of this story was published on Talking Points Memo.
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