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Dimon Fires Back at ‘Complex’ System in U.S. Hearing

By Dawn Kopecki, Phil Mattingly & Clea Benson - 2012-06-13T17:33:17Z

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon spent much of his time at a hearing where U.S. senators aimed to put him on the defensive firing back at the federal regulatory system.

During more than two hours before the Senate Banking Committee, Dimon described a $2 billion loss in the bank’s chief investment office as a hedge that “morphed into something I can’t justify,” and largely blamed subordinates for a trading strategy gone wrong. The bank is looking at clawing back some of the compensation earned by those responsible, he said.

At the same time, Dimon, one of the most vocal bankers in challenging stricter regulation, said it would be hard for federal agencies to decide on a final version of the so-called Volcker rule, which bans proprietary trading for a bank’s own account.

“It’s going to be very hard to make a bright-line distinction between proprietary trading and hedging, because you can look at almost anything we do and call it one or the other,” Dimon said at the hearing in Washington.

‘Complex’ System

The regulatory system in the wake of the 2010 Dodd-Frank overhaul is “really complex,” he said. “No one can adjudicate between all the various regulatory agencies and it’s not clear to me who has regulatory authority.”

It was the first of two appearances Dimon will make on Capitol Hill to face lawmakers probing how the largest and most profitable U.S. bank, often praised for its “fortress” balance sheet, could have taken such risks after coming through the 2008 financial crisis largely unscathed.

The hearing didn’t answer some basic questions the Senate has about the details of the New York-based bank’s loss, Senator Richard Shelby, the ranking Republican on the committee, said afterward: “We’ll find that out in due time and we’ll be able to tell if they were managing risk or just seeking profits.”

Senator Tim Johnson, the panel’s chairman, a South Dakota Democrat, said the hearing “is a good reminder that we can’t let down our guard, and we must remain vigilant so we can continue to have a sound financial system.”

Amid chants from protesters, Dimon arrived shortly before 10 a.m. and began answering questions about the causes of the loss, which he described as part of a hedging strategy.

VaR Shift

Dimon said a new formula for estimating possible losses, implemented in January, failed to properly account for risk. On April 13, when he downplayed the risks of trades on a call with analysts, “we were still unaware that the model might have contributed to the problem,” Dimon said. “So when we found out later on, we went back to the old model.”

The switch -- and the timing of the firm’s disclosures -- are the focus of an inquiry by the Securities and Exchange Commission as the government examines how long senior executives knew about the CIO’s swelling bets and losses. Dimon said May 10 that the bank had reviewed the effectiveness of a new VaR model, deemed it “inadequate” and decided to return to the previous version. On that basis, the unit’s VaR doubled.

The bank’s board of directors is looking into events leading to the loss, Dimon said.

Clawbacks Expected

“When the board finishes its review, which is the appropriate time to make those decisions, you can expect that we will take proper corrective action and it is likely there will be clawbacks,” Dimon said.

As Dimon, 56, took his seat in the Senate hearing room, Tighe Barry, 50, a protester with activist group CodePink who works handling props on movie sets in Los Angeles, yelled, “This man is a crook and he needs to go to jail.” A few minutes later, several people rose out of the audience and started yelling, “Stop foreclosures now.” Senators delayed the hearing for a few minutes as Capitol police removed the protesters from the room.

Dimon told the committee that the bank let traders take risks they didn’t understand.

[To read Dimon’s prepared testimony, click here.]

He expressed regret over losses in the bank’s chief investment office, saying that its trading strategy was “poorly conceived and vetted” by senior managers who were “in transition” and not paying adequate attention.

“This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks,” Dimon said. “We have let a lot of people down, and we are sorry for it.”

Dimon said that the risk committee structures and processes were not as robust in the CIO as they should have been. The division’s London team built up a book of credit derivatives that became so large that employees couldn’t unwind it without roiling markets or incurring large losses.

London ‘Cowboys’

“I don’t want to see consumer lenders in Columbus losing their jobs because cowboys in London make too many risky bets,” said Senator Sherrod Brown, an Ohio Democrat, referring to 19,000 JPMorgan employees in his state.

Dimon defended the bank by saying lawmakers needed to put the losses “into perspective,” noting that no client, customer or taxpayer money was impacted. He said the second quarter would be “solidly profitable.”

Shares of JPMorgan advanced 2.3 percent to $34.55 at 11 a.m. in New York, the most in the 24-company KBW Bank Index, which climbed 0.7 percent. Shares of the bank have dropped 17 percent from May 10, when Dimon disclosed the losses, through yesterday, lopping about $26.5 billion from the firm’s market value.

Capital Rules

Dimon explained that the bank instructed the CIO in December to reduce its risk-weighted assets to prepare for new international capital rules. Instead, the office in mid-January “embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones,” Dimon said. The portfolio grew and the problem got worse.

U.S. Senator Jeff Merkley, the Oregon Democrat pushing for stronger restrictions on banks’ bets with their own money through proprietary trading, said JPMorgan’s hedges were too risky.

“Portfolio hedging is just a name for saying anything goes, and we’ll continue proprietary trading,” Merkley said in an interview on Bloomberg Television.

Merkley, who co-wrote the Volcker provision in the Dodd- Frank Act along with Senator Carl Levin of Michigan, has said that the draft rule released by regulators in 2011 had loopholes that would allow banks to maintain much of their proprietary trading operations.

Five U.S. agencies are working to complete the Volcker rule, which is named for former Fed Chairman Paul Volcker and is intended to reduce risky trading by banks with federally insured deposits and access to the central bank’s discount window.

To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net; Phil Mattingly in Washington at pmattingly@bloomberg.net; Clea Benson in Washington at cbenson20@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net; David Scheer at dscheer@bloomberg.net

Enlarge image

Dimon Fires Back at ‘Complex’ System in U.S. Senate Grilling

Andrew Harrer/Bloomberg

Jamie Dimon said a new formula for estimating possible losses, implemented in January, failed to properly account for risk.

Jamie Dimon said a new formula for estimating possible losses, implemented in January, failed to properly account for risk. Photographer: Andrew Harrer/Bloomberg

JPMorgan's Dimon Senate Banking Committee Statement