Milwaukee demonstration outside Chase Bank demanding a moratorium on foreclosures. The event was organized by the Bail Out the People Movement in Wisconsin. (Photo: Abayomi Azikiwe), a photo by Pan-African News Wire File Photos on Flickr.
Senate grills JPMorgan execs on risky trading
Kevin McCoy, USA TODAY
7:07p.m. EDT March 15, 2013
Current and former JPMorgan executives testify on trades that led to $6.2B loss
Nation's largest bank accused of hiding losses and misinforming the public
Federal regulators concede they missed red flags.
Leaders of a Senate subcommittee grilled present and former executives of JPMorgan Chase Friday over risky practices, mistakes, overly reassuring public statements and other problems involving the so-called London Whale derivatives trades that culminated in losses of more than $6.2 billion.
In a more than five-hour Capitol Hill hearing, the Senate Permanent Subcommittee on Investigations also pressed federal banking regulators over their failure to spot alarming red flags about the trading and rein in the nation's largest bank until after media reports brought the losses to light in April 2012.
The hearing came the day after the panel issued a scathing 301-page report that Sen. Carl Levin, the Michigan Democrat who chairs the subcommittee, said exposed "a derivative trading culture at JPMorgan that piled on risk, that hid losses, that disregarded risk limits, that manipulated risk models, that dodged oversight and that misinformed the public."
Levin said the findings showed that a complex investment strategy JPMorgan Chase claimed was a hedge against risk instead morphed into proprietary trading partly funded with federally-insured deposits.
He called for a swift completion of final federal regulations for the Volcker Rule — the section of the 2010 Dodd-Frank financial reform law that would largely ban such trading at many banks.
JP Morgan Chase issued a statement Thursday saying "while we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone." But that mea culpa didn't spare the past and present bank executives from a public hammering over complex trading practices similar to some of those that led to the 2008 national recession.
In his testimony, Douglas Braunstein, the bank's vice chairman and former chief financial officer, sought to defend statements he made during an April 2012 conference call with investors after the disastrous trades became public.
Braunstein said during the call that the bank had given federal regulators regular reports on the trading positions and also told investors the trades were part of a long-term strategy. Recounting details of the call during Friday's hearing, he insisted he had made the statements in good faith, based on the information available at the time.
But Levin in response highlighted point after point from the subcommittee report that seemingly contradicted Braunstein's assertions.
"I have a lot of trouble, a lot of trouble, I've got to tell you, believing that those statements were anything but an effort to calm the seas, because all those statements were inaccurate," said Levin.
JPMorgan Chase CEO Jamie Dimon, who during the 2012 investor conference call characterized the trades as a "tempest in a teapot," was not called to testify at Friday's hearing. But Dimon, who has since withdrawn the teapot statement, drew criticism in absentia as Levin questioned Braunstein about JPMorgan Chase's decision to halt the required daily profit-and-loss statements from its investment banking wing to federal regulators.
Levin questioned whether the withholding was part of a calculated effort to hide the ballooning size of the derivatives trading losses.
Braunstein confirmed that Dimon ordered the report stoppage, which federal regulators later in the hearing said lasted roughly two weeks. But he said the bank took the action solely over concerns that some confidential information had gone missing.
Sen. John McCain, R-Ariz., the subcommittee's ranking minority member, stressed that U.S. banks can't unilaterally withhold required information from regulators. "I'm not sure there are many companies and corporations in America that could get away with such a thing," he said.
Ina Drew, the banking star who previously served as JPMorgan's chief investment officer and oversaw the London-based unit that made the risky derivatives trades, similarly found herself on the defensive as she answered subcommittee questions in her first public comments on the financial debacle. Levin focused on a comment in which she asked a bank employee involved in the trades to "tweak" the financial marks used to assign valuations to the trading outcome.
"Tweaking is changing something," said Levin. "There was a clear suggestion that he tweak something to make the trades look better."
Drew, however, said she raised the issue because the trading results had been conservatively valued. Any changes, she added, had to be supported by "demonstrable data."
Earlier in her testimony, Drew said traders and supervisors and other executives under her supervision failed to control the London trading risks and didn't convey full details of the losses to her and other top bank officials. She resigned and repaid two years of salary after the debacle.
"I am greatly saddened by the entire episode, which has caused financial and reputational harm to JPMorgan Chase and a large number of people with whom I was honored to work, and I deeply regret that the losses occurred on my watch," Drew said in written testimony submitted to the subcommittee.
Although Drew and other bank executives voluntarily testified at the subcommittee hearing, four former employees involved in the trading ducked Senate subpoenas on grounds that they reside outside the U.S.
Officials of the Comptroller of the Currency, the federal regulatory agency that oversees JPMorgan Chase, joined bank officials as targets of subcommittee criticism. Levin said the bank hid information about the derivatives trading losses from the OCC, but stressed that the agency inexplicably failed to notice warning indications. Among others, he cited the profit-and-loss reports withheld at Dimon's instructions and the bank's failure to file other financial statements.
"Senator, this is something we should have been all over from day one," said Scott Waterhouse, the examiner-in-charge who supervised dozens of OCC regulators assigned to JPMorgan Chase. Waterhouse said the examiners had been more focused on high risk in other areas of the bank at the time.
"There were red flags that we failed to notice and act upon," said Comptroller of the Currency Thomas Curry. He testified that the regulatory agency has since issued cease-and-desist and other orders to JPMorgan Chase. And he agreed with subcommittee recommendations for strengthening oversight of major banks.
"At a time when too many in Washington are once again echoing the 'What's good for us is good for America' mantra of Wall Street lobbyists, the Senate's 'London whale' probe makes a compelling case for stronger and more effective financial regulation," said Americans for Financial Reform, a coalition of labor and government watchdog groups, in a statement responding to the subcommittee findings.
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