JPMorgan Chase & Co. (JPM) and regulators may face increasing pressure to explain the lender’s $2 billion trading loss as the misstep becomes fodder for lawmakers still haggling over a regulatory overhaul enacted two years ago.
A day after JPMorgan Chairman and Chief Executive Officer Jamie Dimon told shareholders there was no justification for the “egregious mistakes” by the biggest and most profitable U.S. bank, Federal Reserve and Treasury Department officials faced lawmakers amid conflict over the meaning of the losses at a House hearing on systemically important financial firms.
“There is no doubt that this week’s news of JPMorgan’s trading losses has raised significant questions about the supervision of risk,” said Representative Shelley Moore Capito, the West Virginia Republican leading today’s hearing of her House Financial Services subcommittee.
The panel’s inquiry, scheduled before Dimon disclosed the loss on May 10, deals with a Dodd-Frank Act designation that will impose higher capital standards and more regulatory scrutiny on firms whose collapse could imperil the economy. It follows calls by lawmakers for formal review of JPMorgan’s trades, with Senator Richard Shelby of Alabama, the Senate Banking Committee’s top Republican, saying Dimon “absolutely” should be called to testify before his panel.
The politics underlying the debate have split lawmakers by party lines, with Democrats including Senator Carl Levin using the loss to bolster the case for tighter restrictions on banks. Representative Spencer Bachus, the Alabama Republican who leads the Financial Services panel, pushed back against that view.
“We are again hearing from some of our colleagues that we need a law which will essentially prevent a business from losing money or taking risk,” Bachus said. “No law can do that, nor should a law prevent a company from taking risks.”
Unless the “facts are diametrically different” from what lawmakers have been told, depositors and taxpayers aren’t at risk from the bank’s loss, Bachus said.
While neither house of Congress has set hearings dedicated to JPMorgan’s disclosure, today’s comments by lawmakers show the New York-based bank won’t escape the Washington spotlight. Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said he’s planning hearings on financial stability and Dodd-Frank implementation that will give lawmakers a chance to address the issue with regulators.
‘All the Facts’
Lawmakers from both parties and both chambers are calling for reviews and hearings. Representative Michael Capuano, a Massachusetts Democrat who sits on the House Financial Services Oversight and Investigations panel, requested a hearing on the issue last week. Bachus, in a statement yesterday, said he will set a hearing on the public-policy implications of the loss.
“I don’t think we know what all the facts are,” Senator John Cornyn, a Texas Republican and chairman of the National Republican Senatorial Committee, said yesterday. “Certainly I would support the call for an investigation to find out.”
As lawmakers question regulators, JPMorgan is responding by reaching out. The bank’s Washington operation has deployed representatives to brief House and Senate staff members on the strategy that led to the losses, according to three congressional aides familiar with the briefings.
The discussions have emphasized that the trades were meant to hedge risk -- not as proprietary trades targeted by Dodd-Frank’s Volcker rule -- and that JPMorgan is conducting an internal audit to identify failures and wrongdoing, according to the aides who participated in or were informed of the briefings.
JPMorgan has had a strong presence on Capitol Hill, spending $7.6 million on lobbying in 2011, almost $2 million in the first quarter of this year and distributing more than $340,000 in campaign contributions from its federal political action committee since the start of 2011. Much of that money is directed to House and Senate leadership and lawmakers on the Senate Banking and House Financial Services (HIG) panels, according to federal filings.
The bank’s Washington office has dedicated resources for responding to lawmakers’ inquiries, according to a person with knowledge of the bank’s strategy.
Treasury and Fed officials were the first to face lawmakers poised to probe JPMorgan as Lance Auer, Treasury’s deputy assistant secretary for financial institutions, and Michael Gibson, director of the Fed’s Division of Banking Supervision and Regulation, testified before Capito’s panel.
The full Financial Services Committee is scheduled to hear tomorrow from Securities and Exchange Commission Enforcement Director Robert Khuzami, Fed General Counsel Scott Alvarez and top lawyers from the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. Lawmakers said yesterday they were preparing questions specifically about the bank.
“I certainly expect that the losses at JPMorgan Chase will be something we talk about,” said Representative Brad Miller, a North Carolina Democrat who said he plans to use the bank’s disclosure to drive discussion over whether to force the break up of the largest financial institutions.
Dimon, who had his pay package of $23 million in salary and bonus for his 2011 performance approved yesterday by 91.5 percent of shareholders, told investors in Tampa yesterday that the bank has a “fortress balance sheet to manage surprises and setbacks like this.” Still, he said, the losses “never should have happened. I can’t justify it.”
Even with Dimon’s expressions of contrition and removal of executives responsible for the loss, lawmakers said scrutiny of JPMorgan is unlikely to let up any time soon.
“I have the greatest respect for Jamie Dimon, I like him, but this is a bad deal,” Senate Majority Leader Harry Reid said yesterday.
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