U.S. House members criticized regulators yesterday for failing to detect JPMorgan Chase & Co. (JPM)’s loss of at least $2 billion on risky derivatives trades and pressed for additional measures to ensure similar losses don’t occur in other banks.
The heads of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Securities and Exchange Commission and Commodity Futures Trading Commission, along with a senior Federal Reserve official offered testimony about the loss at a House Financial Services Committee hearing in Washington.
JPMorgan Chief Executive Officer Jamie Dimon, who began his testimony later, described the loss as “embarrassing.”
Lawmakers pressed regulators to explain how they monitored activities U.S. banks conduct overseas. The trades that triggered JPMorgan’s loss were conducted in London, potentially beyond the reach of U.S. derivatives regulators.
Dimon defended the company’s disclosures of a $2 billion trading loss as regulators and lawmakers questioned whether the largest U.S. bank misled investors.
“We disclosed what we knew when we knew it,” Dimon, making his second appearance on Capitol Hill in less than a week, said yesterday at a House Financial Services Committee hearing in Washington that exceeded four hours.
Comptroller Thomas J. Curry said his agency is reviewing its staffing inside JPMorgan’s London operations in the wake of the loss. SEC Chairman Mary Schapiro told lawmakers that JPMorgan could pay a penalty if the agency concludes that the bank improperly disclosed the risk that contributed to the loss. The SEC has a “wide panoply” of sanctions and penalties at its disposal in pursuing a case against JPMorgan and the bank could pay penalties if investigators find that it has violated disclosure or other rules, Schapiro said.
Scott Alvarez, the Fed’s general counsel, said the central bank is reviewing JPMorgan’s risk management practices.
Still, regulators didn’t provide new information about the loss and lawmakers used the hearing to reprise the broader debate over financial regulation. Committee Chairman Spencer Bachus pointed to the regulators bunched at the witness table as an example of the continued complexity of financial oversight.
Dimon’s opening statement was nearly identical to his remarks in front of the Senate Banking Committee last week. During that hearing, Dimon apologized for the losses and said he felt “terrible” that shareholders would lose money because of the chief investment office’s trading strategy.
Dimon also said that Congress should limit the international reach of Dodd-Frank Act swaps regulations. In addition, Dimon said that district banks of the Federal Reserve benefit by having industry leaders’ input. Dimon has been criticized by lawmakers for serving on the board of the Federal Reserve Bank of New York.
Yesterday’s hearing was the first held by the House on the trading losses, which have drawn inquiries from the SEC, CFTC and Department of Justice.
The SEC’s review of JPMorgan’s trading loss has focused on how JPMorgan disclosed a change to a complicated risk calculation. When companies disclose their “value at risk” or VaR, they “must speak truthfully and completely,” Schapiro said.
Lawmakers on the House committee, much like those on its Senate counterpart, have benefited from JPMorgan’s campaign donations.
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For part 1 of Dimon testimony video, click here.
For part 2 of Dimon testimony video, click here.
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JPMorgan Hedges Were Really Prop Trades, Whitney Says
JPMorgan Chase & Co.’s $2 billion trading loss stemmed from profit-seeking bets rather than hedges meant to mitigate loan losses, as Chief Executive Officer Jamie Dimon has described them, banking analyst Meredith Whitney said.
Whitney made the remarks yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt as the bank chief testified at a hearing of the House Financial Services Committee in Washington. “A credit hedge in banking should be a loan-loss provision, plain and simple. Anything else is a proprietary bet.”
Whitney, 42, also disputed Dimon’s claim that bank regulation may curb lending.
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Himes Asks Why No One Knew About JPMorgan Trading Loss
U.S. Representative James Himes, a Connecticut Democrat and a member of the House Financial Services Committee, talked about yesterday’s testimony to the panel by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon about the bank’s $2 billion trading loss.
Himes spoke with Betty Liu and Peter Cook on Bloomberg Television’s “In the Loop.”
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Schweikert Says Dimon Did ‘Pretty Good Job’ at Hearing
U.S. Representative David Schweikert, an Arizona Republican and member of the House Financial Services Committee, talked about JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s testimony before the panel yesterday about the bank’s $2 billion trading loss.
He talked with Peter Cook on Bloomberg Television’s “Bottom Line.”
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Arthur Levitt Says Dimon Hearing Only ‘Theater’
Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, talked about JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon ’s testimony before the Senate Banking Committee yesterday.
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House’s Frank Says JPMorgan Losses Show Need for Swaps Oversight
JPMorgan Chase & Co.’s trading loss of at least $2 billion strengthens the argument against Republican efforts to cut the budget of the U.S. derivatives regulator and ease Dodd-Frank Act swaps rules, said Representative Barney Frank.
Frank said that if a “very well-run bank” can sustain a loss of this size, “it’s an indication of the problems with derivatives.” Frank, a Massachusetts lawmaker, is the senior Democrat on the House Financial Services Committee. He made the remarks at a hearing yesterday looking into the bank’s trading.
The House Agriculture Committee last month postponed a committee meeting to vote on measures limiting the international reach of the 2010 regulatory-overhaul law’s swaps regulations and allow more derivatives trading to occur in federally insured banks. Financial Services approved the same legislation in March, before JPMorgan’s derivatives losses were disclosed.
U.K. to Give Shareholders Votes on Top Pay, Boost Disclosure
Public companies in the U.K. will have to give shareholders binding votes on executive-pay structures every three years, Business Secretary Vince Cable told lawmakers.
Other measures in the package, to take effect in October 2013, will require companies to publish a single figure for what each director is paid in total, their pension entitlement and a chart comparing the company’s performance and the chief executive officer’s pay. When directors leave, the company will have to publish “promptly” a statement of their payoff.
A study last year by the High Pay Commission, a pressure group that pushes for curbs on top earners, found British directors’ salaries increased by 64 percent over the past decade, while the average year-end share price of FTSE 100 companies fell 71 percent. The average annual bonus for directors rose 187 percent, according to the panel.
“There is compelling evidence of a disconnect between pay and performance in large U.K.-listed companies,” Cable said in a statement to Parliament today. “It is right that the government acts to address this clear market failure.”
Cable said he hoped that having votes on pay structures every three years, rather than annually, will encourage longer- term thinking. If a company changes its structures, it’ll be forced to have a fresh vote.
The moves, which will be implemented through amendments to the Enterprise and Regulatory Reform Bill currently before Parliament, are aimed partly at ending “golden goodbye” packages for departing executives, often criticized as rewards for failure. The policy on exit payments will be part of the package that shareholders vote on, and companies won’t be able to go beyond it.
Developing Economies Warn of Damage From Basel, Volcker Rules
Global regulators are being urged by some developing countries to amend plans that would force banks to boost their capital and liquid assets, expressing concerns the measures may harm their economies.
A survey of developing and emerging economies conducted by the Financial Stability Board revealed concerns that the measures, drawn up in the wake of the 2008 collapse of Lehman Brothers Holdings Inc., “could have adverse consequences and may ultimately impact the development of domestic financial markets in those countries.”
The nations are also concerned that U.S. proposals to ban commercial banks from proprietary trading, known as the Volcker Rule, may damage their “government, corporate securities and derivatives markets,” the FSB said in the report, submitted yesterday to a meeting of the Group of 20 nations in Los Cabos, Mexico, and published on the FSB’s website. It didn’t name the countries included in the survey.
Regulators and lenders have clashed over how to implement the international bank-capital and liquidity standards, which are set to become fully effective in 2019.
Specific concerns named in the report include that the new rules might make it more expensive for lenders to provide so- called trade finance services, the FSB said. There is also a more general concern lenders will scale back activities outside their core markets, the board said.
EU Lawmakers Seek to Scrap Credit-Ratings Rotation Plan
European Union lawmakers voted to scrap most of a proposal to force businesses to rotate the credit-ratings company they hire to assess their debt, while backing tighter restrictions on sovereign-debt ratings.
The European Parliament’s economic and monetary affairs committee voted yesterday in Brussels to scale back the proposed rotation requirement so that it would apply only to securitizations and other kinds of so-called structured finance. The stance brings the Parliament’s position largely into line with that of EU national governments, which must also approve the new rules proposed by the bloc’s regulators last year.
The European Commission, the 27-nation EU’s regulatory arm, proposed the rotation rule last year as part of a draft law to toughen regulation of the ratings industry amid concerns that some of its decisions exacerbated the euro-area debt crisis. The commission said rotation would boost competition and solve potential conflicts of interest.
Under the commission’s original rotation proposal, companies would have been obliged to change the company that they pay to rate their credit every three years.
Parliament and national governments must now begin discussions on a final compromise bill before the legislation can become law.
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EU Nations Said to Be Split Over Lending Plan for Failing Banks
European Union nations are split over plans to force governments to lend to each other as a last resort to stabilize crisis-hit banks, according to two people familiar with the matter.
Germany and Sweden are among nations opposing the move, part of a broader proposal to take taxpayers off the hook for bank rescues, said the people, who couldn’t be identified because the talks are private. The plan, discussed by diplomats at a meeting in Brussels June 18, received support from other nations, including Italy and France. The U.K. has previously said that it was opposed to such funds as they could encourage lenders to take excessive risks.
Michel Barnier, the EU financial services chief, proposed setting up a network of national bank-financed funds to shore up crisis-hit lenders in a draft law this month. He said the measure was needed to prevent a repeat of the public bailouts that occurred in the 2008 financial crisis.
Preben Aaman, a spokesman for the Danish presidency of the EU, and Stefaan De-Rynck, spokesman for Barnier, declined to immediately comment. The proposals need to be approved by nations and by lawmakers in the European Parliament before they can enter into force.
Universal Gets EU Antitrust Complaint Citing EMI Bid Concerns
The European Commission has “provided us today with a statement of objections,” Adam White, a spokesman for Universal in London, said in an e-mail yesterday. “We will continue to work closely with the commission and look forward to securing regulatory clearance.” He said Universal is preparing a detailed response to regulators’ concerns.
A statement of objections sets out regulators’ case for blocking a deal. Companies may seek an oral hearing and can offer to sell assets to resolve any concerns.
Regulators have a Sept. 6 deadline to rule on the bid by Universal, which they have said would create a company “almost twice the size of the next largest player” in Europe.
Antoine Colombani, a spokesman for the European Commission in Brussels, declined to comment on the statement of objections.
Blue Index Founder Sanders Gets 4 Years for Insider Trading
The co-owners of the now-defunct spread-betting firm Blue Index Ltd. and one of their wives were sentenced to a total of 68 months in prison for insider trading.
James Sanders was sentenced to four years in prison while another owner, James Swallow, was sentenced to 10 months. Sanders wife, Miranda, also received a 10-month term.
Sanders pleaded guilty to 10 charges, according to the U.K. Financial Services Authority. He faced as long as six years in prison if he hadn’t pleaded guilty, Justice Peregrine Simon said at the hearing in London today.
Sanders’s wife, Miranda, pleaded guilty to five counts of insider trading, and Swallow to three charges before the trial, according to the FSA.
A former senior trader at the brokerage, Christopher Hossain, and another man, Adam Buck, were cleared of similar charges last month after a five-week trial.
Profits generated by the defendants from the inside information were about 1.9 million pounds ($2.99 million), while Blue Index clients reaped about 10.2 million pounds, the FSA has said.
High-Frequency Definition Needed for New Rules, O’Malia Says
High-frequency trading should be defined before the U.S. Commodity Futures Trading Commission sets rules for what amounts to about half of the volume of futures markets, said Scott O’Malia, a member of the panel.
The CFTC needs a better understanding of the practices as it debates new testing and supervision rules for high-frequency and automated trading, O’Malia said in a speech prepared for a Securities Industry and Financial Markets Association conference yesterday in New York.
The CFTC, with the Securities and Exchange Commission, has scrutinized such trading since May 6, 2010, when $862 billion was erased from stock values in 20 minutes in the so-called “flash crash.” The agency has been drafting a release on new rules, a regulatory step prior to proposed rules.
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Comings and Goings
RBS to Cut 618 Financial-Planning Jobs, Charge for Advice
Royal Bank of Scotland Group Plc, the U.K.’s biggest taxpayer-controlled lender, is eliminating 618 branch-based financial advisers as regulators force lenders to charge clients for the service.
RBS is also creating 351 financial-planning jobs as a result of the rule changes, the Edinburgh-based bank said in a statement today.
The Financial Services Authority’s Retail Distribution Review will from the end of 2012 prevent the payment of commissions to advisers, and lenders are preparing to charge for the service. HSBC Holdings Plc (HSBA) said in June last year it was cutting 700 employees offering face-to-face advice in branches while Barclays Plc (BARC), Britain’s second-largest bank, said in January last year it would cut 1,000 employees as a result of the regulations.
RBS Chief Executive Officer Stephen Hester has shrunk assets by more than 700 billion pounds ($1.1 trillion) and cut about 36,000 jobs since he took over from Fred Goodwin in 2008 at the bank. RBS said in January it would cut about 3,500 jobs at its investment bank, citing volatile markets and the cost of new U.K. regulation.
Indonesia Central Bank’s Hadad to Head Financial Regulator
Indonesia’s parliament approved Bank Indonesia Deputy Governor Muliaman Hadad to head the board of a national financial regulator due to start operating in January.
The central bank may allow banks to own as much as 90 percent of commercial lenders, Hadad said in Jakarta today in response to a question from reporters.
Approval would be “very selective,” he said. New ownership rules will be announced before July, Hadad added.
Lawmakers chose Hadad over Achjar Iljas, who held a similar position at the central bank a decade ago, after conducting so- called fit-and-proper tests this month on the 14 people nominated by President Susilo Bambang Yudhoyono for the seven positions at the regulator. Hadad was chosen by acclamation, rather than by vote, according to a notice posted in the meeting room of Commission XI, which oversees financial institutions.
The new regulator, known in the Indonesian language as Otoritas Jasa Keuangan, or OJK, will supervise capital markets, insurers, pension funds and other non-bank institutions next year and oversee commercial lenders starting from January 2014.
The OJK will take over regulation of capital markets, insurers and pension funds from the Capital Market and Financial Institution Supervisory Board, and assume responsibility for bank supervision, currently handled by the central bank.
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U.S. Consumer Bureau Aide Said to Be Tapped for General Counsel
Meredith Fuchs, chief of staff to Consumer Financial Protection Bureau Director Richard Cordray, will be named general counsel of the agency, replacing Leonard J. Kennedy, according to a person briefed on the change.
Kennedy, a former general counsel of Sprint Nextel Corp. (S) who joined the consumer bureau in January 2011, will become an adviser to Cordray, said the person, speaking on condition of anonymity because the decision isn’t public.
Jen Howard, a spokeswoman for the consumer bureau, declined to comment.
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